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TMI Blog2022 (10) TMI 390X X X X Extracts X X X X X X X X Extracts X X X X ..... nses, the same cannot be regarded as an international transaction at all. Thus we delete the transfer pricing adjustment made by the TPO on account of AMP expenses incurred by the assessee. Payment of outsourcing commission - additional evidences filed are certain email correspondence to explain the nature of services rendered by NGTPS to the assessee - HELD THAT:- In view of the above order of the Tribunal [ 2022 (7) TMI 1329 - ITAT BANGALORE] for the assessment year 2015-2016, we restore the matter back to the files of the TPO to consider the issue de novo. The TPO shall analyse the evidence on record and the additional evidence which is now filed by the assessee before the Tribunal to determine whether NGPTS had rendered services to the assessee for receipt of sourcing commission. Reimbursement of expenses - HELD THAT:- As decided in own case for AY 2013-2014 . [ 2021 (6) TMI 1120 - ITAT BANGALORE] and 2015-2016 [ 2022 (7) TMI 1329 - ITAT BANGALORE] on the issue of payment of cross charges of expats costs and contractor charges claimed as reimbursements to the parent compan we are of the considered opinion that the TPO has been right in holding thatthe nature of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment was selected for scrutiny and notice u/s 143(2) of the I.T.Act was served. During the course of assessment proceedings, the matter was referred to the Transfer Pricing Officer (TPO) to determine the Arm s Length Price (ALP) of the international transaction undertaken by the assessee with its Associate Enterprises (AEs). The TPO vide order dated 31.10.2019, passed u/s 92CA of the I.T.Act, proposed the TP adjustment totaling to Rs.63,27,41,494 under various segments. The details of the same are as follows:- Segment Adjustment (Rs.) Issue of sourcing commission 30,57,35,722 Reimbursement of expenses 17,77,95,683 Third party royalty 2,00,08,967 AMP expenses 12,92,01,122 Total 63,27,41,494 3. Pursuant to the TPO s order, draft assessment order was passed on 26.12.2019 incorporating the above TP adjustments. The Assessing Officer also made certain corporate tax additions / disallowances. 4. Aggrieved, the assessee filed objections bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the appellant and ignoring the fact that the Appellant, being a licensed distributor assuming normal business risk, was required to incur the AMP expenses in the ordinary course of business to boost sales of products and not to increase the brand value, and the benefit resulting from such expenditure were attributable to its own account (in the form of increased product sales and market share) and any benefit to the overseas AE's if at all, was purely ancillary and incidental which does not require any separate compensation. 6. The Learned AO / Learned TPO / Hon'ble DRP erred on facts and in law by not considering the detailed analysis in relation to the Development, Enhancement, Maintenance, Protection and Exploitation ( DEMPE function ) furnished by the Appellant which demonstrates that Appellant is not contributing to the development or enhancement of the NIKE brand. 7. The Learned AO / Learned TPO / Hon'ble DRP erred in not considering the fact that the AMP expenses are incurred for promoting popular sports (such as cricket) which are purely for the benefit of the Appellant. 8. The learned AO / Learned TPO / Hon ble DRP erred in selecting companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ethods. 15. The Learned AO / Learned TPO / Hon'ble DRP erred in not taking cognizance of the Form 16 submitted by the Appellant detailing the Tax Deducted at Source deducted on such salary payments to expatriates. Further, the Learned AO / Learned TPO / Hon'ble DRP has erred in placing reliance on Hon'ble Bangalore Tribunal's order of A Y 2005-06 and A Y 2006-07 in Appellant's own case, without appreciating that in A Y 2005-06 and A Y 2006-07 the Appellant was erroneously categorized as a service provider rather than a licensed distributor assuming normal business risk. 16. The Learned AO / Learned TPO / Hon'ble DRP erred in not considering the commercial expediency of the Appellant in making such reimbursements 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. 17. 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 wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business. - commercial expediency for incurring such expense. 4. The learned AO/ Hon'ble DRP has erred in holding that the distributor cannot be burdened with the cost of samples and incidental expenses especially when royalty is being charged for the new designs without appreciating that the appellant runs its business on entrepreneur model and it was Appellant's responsibility to create demand, market and advertise the products. 5. The Hon'ble DRP has erred in placing reliance on Hon'ble Bangalore Tribunal's order for earlier years without appreciating that in those orders the Appellant was erroneously categorized as a service provider rather than a licensed distributor assuming normal business risk. 6. Notwithstanding and without prejudice to the above, the Hon'ble DRP erred in not deleting the double di allowance of the aforesaid expense, since the same has been considered by the TPO under TP adjustment. Promotion for sales return 7. The learned AO/ Hon'ble DRP erred in not appreciating the submissions placed on record and disallowing provision for sales returns under section 37 of the Act contending that the same i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justment 7. Ground 1 raised by the assessee is general in nature and does not call for any specific adjudication. Hence, the same is dismissed. Advertisement Marketing and Promotional Expenses (AMP) : Ground 2 to 8 8. The assessee had incurred certain advertisement, marketing and promotion (AMP) expenses. The assessee did not consider incurring of AMP expenses as an international transaction and did not file any transfer pricing analysis benchmarking the AMP expenses. The TPO held that there has been an agreement to incur AMP expenses, and therefore, incurring of AMP expenses was an international transaction. The TPO made TP adjustment of Rs.12,92,01,122 on account of AMP expenses incurred by the assessee. The DRP confirmed the view of the TPO. Aggrieved, the assessee has raised this issue before the Tribunal. The learned AR submitted that the issue in question is squarely covered in favour of the assessee by the order of the Tribunal for assessment year 2015-2016 (supra). The learned DR was duly heard. 9. We have heard rival submissions and perused the material on record. The Tribunal in assessee s own case for assessment year 2015-2016 (supra) had held that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mere acknowledgement by NEON that the Assessee incurs marketing expenses, cannot be construed to be as an arrangement between Assessee and NEON for incurring such expenses. Further, the agreement states that the licensor acknowledges that licensee incurs significant marketing expenses which directly impacts licensee's net operating margin the same further strengthens the fact that the assessee is a full fledged distributor requiring to incur marketing related expenses to operate in a competitive market and does not in any way indicate a mandate from 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. 10. In view of the above order of the Tribunal, we delete the transfer pricing adjustment made by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso 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 touchstone of Arm s length price, will have to be carried out in accordance with the requirements of Sec.92 of the Act. We are therefore of the view that in tune with the decision of the Tribunal in assessee s own case for Assessment Year 2013-14, the issue should be remanded to the TPO for consideration denovo. We hold and direct accordingly. 13. In view of the above order of the Tribunal, we restore the matter back to the files of the TPO to consider the issue de novo. The TPO shall analyse the evidence on record and the additional evidence which is now filed by the assessee before the Tribunal to determine whether NGPTS had rendered s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn case in IT(TP)A Nos.653 654/Bang/2011 relating to AY 2005-06 2006-07 - Order dated 10-05- 2013. We further notice that this issue has been decided against the assessee with the following observations:- 5.5.1 We have heard both the 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 assessee. It is the contention of the assessee that these expenses incurred towards cross payment charges in the relevant period amounting to Rs.4,79,96,697 are solely related to the business of the assessee in India. Per Contra, revenue's view is that the assessee has failed to establish and demonstrate that these expenses are to be attributed to the business operations of the assessee. 5.5.2 To understand and appreciate the role and business of the assessee and the interplay it has with its parent company, Nike Inc., USA, in respect of its operations, an examination of the Transfer Pricing Study/Report submitted by the assessee is bot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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 the market. The submissions made by the assessee before us and before the authorities below have been contradictory to what is stated in the assessee's Transfer Pricing Study and this is not acceptable. Further, as pointed out by the TPO, the assessee has separately booked substantial expenses amounting to approx. Rs.2.42 Crores towards advertising, marketing and sales promotion which is approx.. 8% of sales turnover and these have been allowed as expenses incurred towards promotion of product sales. The onus for proving that the expense! incurred by the parent, Nike Inc, USA, are towards the sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the nature of expenses, the purpose for which they were expended etc. has been forthcoming from the assessee. The assessee has also not furnished any evidence to establish that these expenses were indeed incurred for and on behalf of the assessee. In the absence of these details, the claims put forth by the assessee remain unsubstantiated. 5.5.7 Another contention of the assessee is that since the same set of expenses has been held to be at arm's length in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 dismiss the grounds raised by the assessee. Accordingly, following the decision rendered by the co-ordinate bench referred above, we decide this issue against the assessee and confirm the Transfer Pricing adjustment made by the TPO. 5.4 Consistent with the view taken by the coordinate bench on this issue in the other years, we decide his issue against the assessee and confirm the transfer pricing adjustment made by TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the agreement entered by it with M/s NEON, an Associated Enterprises, which manages endorsement contracts with world class athletes. Accordingly, the TPO took the view that the payment of third party royalty would amount to duplication of payment. The TPO also noticed that the assessee has not obtained approval from RBI for making this payment. Accordingly, he took the view that the third party royalty is not an expenditure related to the assessee. Accordingly the TPO determined the ALP of this expenditure at NIL. 16.2 The Ld A.R submitted that there is no duplication of royalty payment as presumed by the TPO. He submitted that the assessee is paying royalty of 1% for using the brand name NIKE in its products. In addition to that, the Associated Enterprise NEON enters into contracts with celebrities for promotion of the product, which would in turn would increase the sales. The third party royalty simply represents 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 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 samples and incidental expenses are not related to the business activities of the assessee. Accordingly he disallowed the same. The Ld DRP also confirmed the same. 20.3 The Ld A.R submitted that the assessing officer cannot sit in the arm chair of the assessee and decide the mode of conducting business. He submitted that the assessee has incurred expenditure on samples on commercial c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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, in trade circles also, it is known fact that the expenditure on samples are borne by the manufacturers only. Hence this claim of expenditure is against the trade practice and the assessee appears to have borne the expenses only on the reasoning that the same was charged upon it by its parent company. Hence, we are of the view that the AO was justified in holding that the burden to incur this expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of showroom to make it attractive for customers to visit and purchase assessee s products is revenue expenditure. The relevant finding of the Tribunal for assessment year 2015-2016 (supra), reads as follows:- 35. We have given a careful consideration to the rival submissions. The decision rendered by the ITAT Delhi in the case of Carrier Air-conditioning (supra) was a case of renovation to a leased premises and the finding was that it was a complete replacement of the existing premises. In this case we are concerned with refurbishing a show room to make it attractive for customers to visit and purchase assessee s products. In the given circumstances, we are of the view that the decision in the case of Emdee Apparels (supra) is applicable. Consequently, the claim made by the assessee is directed to be accepted and the relevant grounds of appeal are allowed. 24. In view of the above order of the Tribunal, we hold that since the facts are identical and the expenditure incurred are with reference to refurbishment of the showroom, we hold that the expenditure claimed by the assessee is on the revenue front. It is ordered accordingly. Therefore, grounds 10 and 11 are allowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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