9911796707
TMI Blog2023 (9) TMI 973X X X X Extracts X X X X X X X X Extracts X X X X ..... RE] - thus we remand these comparables to the Ld.AO/TPO to reconsider them in the light of the annual reports that will be filed by assessee. In the event they are found to be functionally similar with that of assessee, the same may be included in the final list. SSIPL Lifestyle Pvt. Ltd. - On perusal of the annual report of this company the business profile is revealed to be primarily engaged in business of trading of footwear and apparels etc. also submission of the assessee that the parent company of this comparable is into manufacturing activity whereas this company perse engaged in trading activity. In our considered opinion, this needs to be verified and in the event it is found that this comparable is carrying out trading activity, the same may be included. Accordingly, we remand this comparable back to the Ld.AO/TPO for verification as directed above. Aditya Birla Fashion and Retail Ltd. - We note that the annual reports has not been looked upon by the revenue authorities before rejecting this comparable. In the interest of justice, we remand this comparable to the Ld.AO/TPO for reconsidering the plea of assessee in the light of the annual reports. Accordingly we remand thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s afresh in accordance with law. Working capital adjustment not granted - We are of the opinion that this issue is no longer resintegra as this issue is covered by the decision of Coordinate Bench of this Tribunal in case of Huawei Technologies India (P.) Ltd [ 2018 (10) TMI 1796 - ITAT BANGALORE] as held n keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the assessee should be allowed. Refusing the risk adjustment by the Ld.TPO - The same has been rejected as relevant data in respect of the comparables were not provided by the assessee. in the event the assessee is able to establish the risks undertaken by the outstanding comparables, the same may be considered in accordance with Rule 10B by the Ld.TPO. Necessary verification may be carried out in respect of the same by the Ld.TPO. TP Adjustment only to the gross income earned by assessee on sales made to AE. - We direct the Ld.AO to verify the computation of the international transaction to the total operating cost as provided by the assessee hereinabove. In any event, the transfer pricing adjustme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, the assessee had filed its return of income on 30.11.2018 declaring a total income of Rs. 25,67,48,230/- which was revised on 22.02.2019 declaring total income of Rs. 25,67,48,230/-. The case was selected for scrutiny and statutory notices were issued to the assessee calling for various details. The Ld.AO noted that the assessee had international transactions with its associated enterprise for the year under consideration. 2.1 The case of the assessee was referred to the transfer pricing officer to compute arms length price of the international transaction. The Ld.TPO upon receipt of the reference, called upon the assessee to furnish economic details of the international transaction in form 3CEB. It was noted by the Ld.TPO that following were the international transaction undertaken by the assessee. Particular Received/Receivable Paid/ Payable Method Purchase of sample Products 260,71,253 TNMM Import of finished goods from AEs 27789,71,974 TNMM Import of finished goods from AEs 167,08,106 TNMM Payment towards local sourcing support 2128,16,303 TNMM Receipt of fee towards procurement support services 757,87,134 TNMM Receipt of services fees towards providing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that assessee has not clearly established the services received by it, from the third party local manufacturers and thus, these transactions was separated from the distribution segment as against the aggregate approach adopted by the assessee. The Ld.TPO thus proposed an adjustment by disallowing the payment towards local sourcing support services at Rs. 21,28,16,303/-. 2.9 Upon receipt of the transfer pricing order, the Ld.TPO passed the draft assessment order on 17.09.2021 by proposing an addition of Rs. 1,22,75,09,750/-. On receipt of the draft assessment order, the assessee filed objections before the DRP. 2.10 The DRP after considering the objections of the assessee did not appreciate the comparables that was sought for exclusion by assessee. In respect of certain liabilities that were treated as operating in nature by the Ld.TPO under the distribution segment, the DRP directed that liabilities no longer required to be returned back, miscellaneous income and interest income on vendor advances do not form part of day-to-day business activities of the assessee and therefore should be considered as non-operating in nature while computing the margin of assessee. 2.11 As rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eting strategy and other related matters. These strategies are percolated down to various PUMA Group entities across the globe. India specific budgets are determined by PUMA Sports India in consultation with and approval of PUMA SE and PUMA Austria. PUMA Sports India is advised of new product launches on a regular basis so that this can be incorporated into its budgeting and planning process. No strategic functions are performed by PUMA Sports India. PUMA Sports India primarily performs the tactical managerial functions regarding day to day management of its business viz. human resources, financial management, routine administration etc. Having said the above, PUMA Sports India receives regular support from PUMA Austria in areas such as strategy formulation, auditing, procurement and centralized buying, IT, budgeting, etc. 4.2.10.2 Product creation (design and development), manufacturing and procurement functions Product creation and related research and development/engineering activities are performed by PUMA SE with the assistance from other affiliated entities engaging in product creation and research and development/engineering activities. PUMA SE supports PIT in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... previous sourcing structure, all the PUMA sales entities (including PUMA Sports India) placed their product requirements to the third party vendors and also negotiated the final pricing of the products. PUMA Sports India procured products from PUMA Austria and other AEs as well. Purchase orders from Asian vendors was handled by WCL. WCL carried out buying agency functions for PUMA sales entities as well as for third party licensees/distributors. As a buying agent, WCL only negotiated, but never concluded any purchase contracts with third party vendors on behalf of PUMA sales entities. Accordingly, there were weaknesses observed in the old sourcing structure as there was consistency and transparency in price resulting in PUMA sales entities exposed to foreign exchange risks. Also the sourcing structure was more complex in nature, making it difficult for PUMA group to administer the procurement functions of the PUMA sales entities. Owing to the above difficulties, PUMA group implemented a new sourcing structure whereby sourcing of products would be the responsibility of PIT. PIT sources products from unrelated third party vendors in its own name and for its own account and for fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ized SAP ERP solution which has been in use for many years. The system was designed/customized in accordance with PUMA Austria's specifications. PUMA Sports India's local merchandisers are responsible for reporting product requirements to PUMA Austria via SAP after having received their customer orders. PUMA Austria's sourcing team consolidates all purchase orders received (including purchase orders from third party distributors) and places them with PIT. PUMA Austria handles the communication with PIT to arrange delivery of the manufactured products according to the Incoterms stipulated in the relevant purchase orders. In the case of PUMA Sports India, products are usually shipped directly from vendors into its own warehouse. In this case, customs clearance is managed by PUMA Sports India itself. Due to its intermediate role in the purchase process, PUMA Austria is particularly exposed to foreign exchange risks. Although PUMA Sports India is responsible for determining and reporting their purchase exposures to PUMA Austria, PUMA Austria has the overall responsibility for the reports from the EEMEA region and may adjust the reports accordingly with respect to e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as decisions regarding the major campaigns that will be operated globally, including the ideation, creative and specific themes around which the campaigns will operate. Sales subsidiaries are required to adapt these standards and marketing themes in their market, with necessary alterations that are market specific, without diluting the theme of the communication. Local Marketing: PUMA Sports India PUMA Sports India carries out local marketing and sponsoring activities, which comprise e.g. local advertisements (by the use of radio, television, cinemas, internet, publications, magazines, in sports arenas, etc.). The marketing and sponsoring activities include payments to athletes, clubs, and federations with national rather than international recognition as well as for products given away. In particular, the local advertising and sponsoring activities refer to national assets, i.e. the primary focus is to promote PUMA brand in the local market place, and not to generate worldwide awareness, which is the remit of PUMA SE. PUMA SE has entered into agreement with PUMA Sports India on 01st January 2017 wherein PUMA Sports India will make use of the international marketing activiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia's sales territory. The functions performed by the field sales team inter alia include: * Presentation and sales of PUMA products (apparel, footwear, accessories); * Regular customer visits and development of customer relationships; * Responsibility for sales and implementation of sales targets; * Operational implementation of sales strategies; or * Market observation and competition analysis. The sales team is supported by staff in the area of customer services, credit control, administration and visual merchandising. For the most part, PUMA Sports India operates at the wholesale level. Further, with respect to retail sales, PUMA Sports India is responsible for the overall operations of retail stores, the general vision/direction and the related pricing of the products. However PUMA Sports India and its franchisees also operate: * PUMA Outlet Stores; * PUMA Concept Stores; and * E-commerce Stores. PUMA Sports India provides guidelines with regard to general vision/direction relating to operations and pricing. With a view of building a consistent brand positioning, PUMA Sports India undertakes responsibility for the marketing and brand com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rising at the time of production process, the sourcing team tries to resolve the same and ensures that the order is delivered within agreed time. 4.2.10.6 Sales price to customers Pricing of the product is an important function. Determination of a suitable price for the product includes various aspects which needs to be considered like fluctuation in the market, prices of the competitor products etc. PUMA Sports India is involved in the determination of the MRP of the PUMA branded products in India. PUMA Sports India fixes the maximum recommended price for the sale of PUMA products in India. 4.2.10.7 Warehousing the products PUMA Sports India is responsible for arranging for an adequate storage space for warehousing PUMA products. With respect to stocking of products for retail stores, PUMA Sports India would be responsible for maintenance of the finished goods to ensure that they are not damaged or spoilt until they are sold. Given the nature of products being traded, the risk on account of damages to the products is limited and the same is covered by an insurance. The table below shows the functions performed by the transacting entities in relation to the trading a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profitability. Generally, both PUMA Austria and PUMA Sports India rely on PUMA SE to maintain the desirability of the brand, and to launch product ranges that meet market needs. Further, PUMA Sports India is responsible for marketing the finished goods to ensure that the targeted sales volume results in recovery of purchase price, related expenses and a reasonable margin. Hence, market risk is borne by PUMA Sports India with regard to Indian market. 4.2.11.2 Product liability risk Product liability risk arises when a corporate provides a particular product, which fails to perform at accepted standards due to which the corporate is held liable for such risk (patent infringement, defective quality, etc.). PUMA Sports India does not assume product liability risk. However, the third party manufacturing entities are responsible for undertaking repairs and provide new products to the sales entities. Further, the manufacturing entities provide sales entities with reduction in the sale price by offering a certain percentage of the price as a defect allowance and hence the sales entities are protected by any small re-work/repair job which they may undertake on their ow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the customer will fail to make payment. With respect of wholesale sales, PUMA Sports India negotiates the price and the other terms of the contract with its customers (i.e. wholesalers/distributors etc.), such as payment terms, delivery scheduling and pricing. PUMA Sports India filtimAtPly concludes the contract with the wholesalers/distributors etc. As PUMA Sports India directly transacts with its customers, it bears the risks arising from the contracts with the customers i.e. credit and collection risks in relation to late or non- receipt of payments from customers. With respect to goods sold through retail stores and online sales channels, as the goods are directly sold to customers, on cash basis, PUMA Sports India is not exposed to credit risks. 4.2.11.5 Foreign exchange risk Exchange rate risk relates to the potential variability of profits that can arise because of changes in foreign exchange rates. At PUMA, FX management is centralized to the greatest possible extent, i.e. FX hedging is centrally performed by Group Treasury with the exposed entities in their name and on their behalf. Due to PIT's and PUMA Austria's intermediate roles in the purchasi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se and right to use its brand and trademarks, as well as international marketing concepts and campaigns. In view of the above, PUMA Sports India does not own any non-routine product or marketing intangibles. * Sourcing related intangibles Procurement/ sourcing intangible assets may arise from informational advantages provided by the location and personnel. Procurement companies in a particular geographic location may have specialized knowledge of the capabilities of the vendors in that region that is not discernible to prospective purchasers outside the region. WCL has been a central sourcing agent for PUMA Group for several years and has developed a master list of vendors across the globe. This has enabled PUMA Group to transact with some of the best manufacturers who can supply PUMA products at desirable quality and standards. While, WCL has been assisted by local PUMA sales affiliate in order to provide its sourcing services, the support received has been routine and has not enabled developing any significant local sourcing intangibles. Further, with the modification in sourcing structure and concentration of some of the core activities at PIT, PUMA group would be ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rket. 4.4 Characterization of entity Based on the facts as presented in the above analysis of functions performed, assets employed and risks assumed by PUMA and its AEs, PUMA Sports India as a licensed distributor/ sales entity bearing risks similar to other distributors operating in this industry." 3.3 Based on the above FAR analysis, we shall undertake the comparability of the comparables sought for inclusion / exclusion by the assessee. 3.4 In the transfer pricing study, regarding payment of local sourcing support fees paid by assessee to the AE, it is mentioned that a sum of Rs. 21,28,16,303/- has been paid towards availing R&D and sourcing support services for the locally procured goods from third parties. It has been submitted in the transfer pricing study that the assessee is responsible for global sourcing activities and in performing such services, the assessee is assisted by the group AEs. 3.5 The AE has entered into a local sourcing support agreement with assessee on 01.04.2015 to grant assessee a non-exclusive and non-transferable sub-license to manufacture or have manufactured and to use, offer for sale and sale the licensed products bearing the licensed trad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent Support Services PITS performs the support activities in Hong Kong under the oversight of PIT. Support service will cover order management and supply chain management. PIT provides following assistance to PUMA Sports India: * Determining of the overall capacities of purchase volumes of the Licensed Products; * Seeking the commitment of manufacturers on capacity production volume and schedules requested by PUMA Sports India; * Placement of purchase orders to manufacturers thorough PIT's sourcing system; * Monitoring and following up among different suppliers on production schedules and buffering capacities in order to minimize production delays, etc.; * Following up with PUMA Sports India on claims by PUMA Sports India against suppliers and from suppliers against PUMA Sports India; * Monitoring and following up with PUMA Sports India and suppliers on application of special labels on products, changing packing requirements, delay in shipment, size run, and/or increase or decrease in the order quantity; * Monitoring and following up with the logistic departments of suppliers to arrange on time delivery of the manufactured products; and * Perform ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er pricing policy for sourcing activities at a global level, the service fee payable by PUMA Sports India to PIT for the local sourcing support services has been increased from 2 percent of the FOB price to 7 percent of the FOB price. It is to be noted that PIT being PUMA Group Company has charged lower rate of 2 percent in the initial period, to support PUMA Sports India on account of weak Indian market conditions and its thin profitability situation during the said period." 4. Ground no. 11 raised by assessee is challenging the application of persistent loss filter to reject the comparable Arvind Lifestyle Brands Limited which was the comparable suggested by assessee during the transfer pricing proceedings. 4.1 The Ld.AR submitted that, this Tribunal has held in a large number of cases that, in order for a comparable to be held to satisfy this filter, the comparable must have incurred losses consequently, for three years and that if it has incurred profit in event one of the three years, it cannot be held that this comparable has to be rejected by applying persistent loss filter. 4.2 It is submitted by the Ld.AR that the annual reports of this comparable which is filed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Ld.TPO and is functionally similar to the assessee. 5.1 On the contrary, the Ld.DR has submitted as under: "1. The appellant seeks inclusion of following three comparables : i. M/s K D Trend Wear Ltd ii. M/s Sohum Shoppe Ltd iii. M/s Major Brands Private Limited 2. The Hon'ble DRP in it's Order has rejected the request of appellant stating that these three companies don't figure in the search matrix of TPO. When the TPO is in the process of passing of Transfer Pricing Order u/s 92CA(3) after rejecting the TP study report prepared by the assessee, for various reasons mentioned in his order, he is bound to do a fresh search of the comparables. For this purpose, certain filters are adopted. These filters have almost been standardised and are being used all over India. This fresh search gives us a list of comparable companies which have passed the filter test. This constitutes the search matrix of the assessee company. For example, in this case, it is related to AY 2018-19 for which the order by TPO has been passed on 19.03.2021. Therefore a search would have been made around September 2020 in Prowess and Capitalline database which is extensively used by TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de these 3 comparables cited in the submission of the appellant, but may give some more comparables which has not been discussed so far. It will tantamount to a fresh assessment order denovo which will give rise to many more comparables and a fresh round of litigation will start. The same appellant will again argue against many more comparables which are now part of the search matrix. This fresh search may help in the inclusion of these comparables considered favourable to the assessee but will also give some comparables which will not be favourable to the appellant. 5. The assessee can participate in the proceeding before the TPO and he can point out if any such company has not been captured. The TPO can consider only those comparables which are available in Province or Capitalline database. If the assessee asked for inclusion of any comparable then TPO will have to do a fresh search in these two databases to include these comparables if available in the database and passes all the filters as a corollary it may throw up some new comparables which were not available on the date of previous search. Therefore, entire exercise will be repeated once more and we may arrive with a new ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er them in the light of the annual reports that will be filed by assessee. In the event they are found to be functionally similar with that of assessee, the same may be included in the final list. Accordingly, this ground raised by the assessee stands allowed for statistical purposes. 5.3 The Ld.AR also submitted that the following comparables were rejected by the Ld.TPO due to functional dissimilarities as alleged in the 92CA order. a) SSIPL Lifestyle Pvt. Ltd. b) Aditya Birla Fashion and Retail Ltd. SSIPL Lifestyle Pvt. Ltd. 5.4 The Ld.AR submitted that these companies was rejected by the Ld.TPO, primarily for the reason that it is mainly into manufacturing and fails the core function filter. Before the DRP, the assessee had sought for their inclusion but DRP upheld the observation of the Ld.TPO. 5.5 The Ld.AR emphasized that though this comparable is engaged in manufacturing, it also has a trading segment and is engaged in trading lifestyle products like footwears, apparels and accessories etc. The Ld.AR referring to page 527 of paper book Vol 2 submitted that this company is primarily engaged in the business of trading of footwear and accessories through its retail a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or trading and manufacturing activities and that it is comparable with that of assessee in respect of the trading activity. The DRP rejected this comparable as the panel erroneously noted that this company is engaged in manufacturing of branded apparels and therefore held that it is functionally not similar with assessee which is mainly engaged in distribution sector. 5.11 The Ld.TPO also has held that this company is into manufacturing activity without verifying the annual reports. The Ld.AR submitted that the annual reports placed at page 157 of paper book clearly reveals the segmental details of the trading and manufacturing activity carried on by this company. He thus prayed for its inclusion. 5.12 The Ld.DR on the contrary relied on the orders passed by authorities below. 5.13 We have perused the submissions advanced by both sides in the light of records placed before us. We note that the annual reports has not been looked upon by the revenue authorities before rejecting this comparable. In the interest of justice, we remand this comparable to the Ld.AO/TPO for reconsidering the plea of assessee in the light of the annual reports. Accordingly we remand this comparable bac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e filter of 75% while selecting fresh comparable companies and according to the above working the company fails the trade filter of more than 75%. We further notice from the financials of Metro Shoes Ltd., that the company has paid customs duty. We do not see any merit in the contention of the DRP that Metro Shoes is also primarily engaged in trading of footwear similar to the business of the assessee while rejecting the plea of the assessee on the application of trade filters. In view of this discussion we hold that Metro Shoes fails the trade filter of more than 75% and therefore should be excluded from the comparable companies." 6.4 The Ld.DR relied on the orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 6.5 As this comparable has been held to be functionally not similar with that of assessee in assessee's own case by the Coordinate Bench of this Tribunal, in the preceding assessment year, we direct the exclusion of this comparable for the relevant year under consideration. Adidas India Mktg. Pvt. Ltd. 6.6 The Ld.AR submitted that this company is engaged in wholesale business as per the ann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s comparable by observing as under: "13. With regard to the exclusion of Sreeleather Ltd: the learned A.R. contended that Sreeleather Ltd. is engaged in both wholesale and retail trading of footwear and leather articles. The learned A.R. drew our attention to the financials of the company for FY 2014-15 (page 1973 of the paper book III) wherein out of the total turnover of the company 66.76% is derived from retail trading activity and only 12.78% is derived from wholesale trading activity. The learned A.R. therefore contended that the assessee who is into wholesale trading business cannot be compared with Sreeleather Ltd. whose major income is from retail trading. 14. We heard the rival contentions and perused the material on record. We notice that Rule 10B(2)(d) of the Act, the relevant extract is reproduced below provide that the company is in the wholesale trading and retail trading have to be considered separately for the purpose of comparison: - (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:-- (a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regarding the business activity carried on by this comparable. It was also submitted before the DRP that there is no information of this comparable even available on the public domain. The DRP however affirmed the observations of the TPO by observing as under: "6.7 Having considered the submissions of the assessee, it is noted that page 06 of the annual report for FY 2017-18 the principal business activity of the company is distribution of the textiles. Thus, the contention of the assessee doesn't hold any ground and hence is rejected." 6.18 We have verified the annual report of this comparable that is placed at page 2937 / 2982 of the paper book. We note that this company has earned revenue from sale of products being traded goods - fabric at Rs. 12,12,59,996/-. Schedule 2.14 of the profit and loss account at page 2962 provides the details. The revenue recognition has been stated to be from sale of goods under the significant accounting policies at page 2975. 6.19 We note that this company is into the trading of textiles (fabrics) for which all the relevant details are available in the annual report. On functionality, in our view this comparable is similar with the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the assessee and a copy of the same is at page 173 & 192 of the assessee's paper book. No defect whatsoever has been pointed out in these working by the CIT(A). We may also further add that in terms of Rule 10B(1) (e)(iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is not the case of the CIT(A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT(A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O is provided in Section 19 of the TP order. 10.1 The Ld.AR provided the computation of the ratio of disputed international transactions to the total operating cost and the subsequent computation of the TP adjustment which is as under: International transaction under dispute Value of international transaction for FY 2017-18 (INR) Purchase of materials and consumables 2,778,971,972 Cost of samples 26,071,254 Payment of local sourcing support fees 212,816,303 Total disputed expenses (A) 3,017,859,529 Total operating cost as per TP order (B) 9,362,086,132 Ratio of cost of disputed international transaction / Total operating cost (C)=(A)/(B) 32.23% 10.2 The Ld.AR has relied on the following decisions in support of its contention that the transfer pricing adjustment must be restricted to the international transactions alone. * Hon'ble Supreme Court in the case of Hindustan Unilever Limited (S.L.P. (C) No. 28540/2018 (IX)) * Hon'ble Delhi High Court in the case of Keihin Panalfa Limited [ITA No. 11/2015 and 12/2015] * Hon'ble Bombay High Court in the case of Phoenix Mecano (India) Private Limited (I.T.A. No. 1182 of 2014] * Hon'ble Bombay High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2 The Ld.AR submitted that it is WCL's responsibility to identify appropriate vendors, support in quality standards, and ensure vendors' compliance with PUMA's Social Accountability & Fundamental Environmental Standards ("SAFE"). 11.3 In addition, the Ld.AR submitted that PITS, Hongkong and WCL, Hongkong are further supported by the AEs located in various countries (e.g. Guangzhou World Cat Information Consulting Services Company Limited in China, and World Cat Vietnam Sourcing & Development Services Company Limited in Vietnam etc.) in the course of providing sourcing and procurement agency services respectively to the PIT (PUMA International Trading GmbH). 11.4 The Ld.AR submitted that PIT engages WCL as its procurement agent to identify new vendors, communicate with the current vendors, and conduct on-site audits to ensure that vendors adhere to PUMA Group's SAFE standards. The detailed functions performed by PIT, PITS, Hongkong and WCL, Hongkong are part of the global sourcing support services and that these details has been submitted before the DRP. 11.5 The Ld.AR submitted that the assessee determined the ALP of local sourcing support fees under the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er outside India [Kindly refer Annexure 12] 12.2 The Learned TPO/A0 have erred, in law and in facts, by separately testing the arm's length nature of the transaction of payment of local sourcing support fees to the AE, without appreciating the fact that the said transaction is to be considered as closely linked to the international transaction of purchase of materials and consumables, being integral and germane to the distribution business of the Assessee 12.1 Panel: Having considered the submissions of the assessee, it is observed that finished goods are procured by the assessee from third party sources outside India and from local third-party sources. 12.2 For products procured from outside India PIT, PITS, WCL, and PUMA Austria are compensated for their roles in souring from third party manufacturers. In local sourcing the third-party manufacturers directly sell products to the assessee and a sourcing fee is paid to the PIT. 12.3 During the relevant assessment year, the assessee has paid INR 21,28,16,303/- to PIT towards availing R&D and sourcing support services for the locally procured goods from the third parties. 12.4 In addition, the assessee itself acts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from local third party manufacturers. The products that are procured by assessee from outside India being PIT, PITS, Hongkong, WCL, Hongkong and PUMA, Austria are compensated for their roles in the sourcing from the third party manufacturers. 11.8.1 In the circumstances where the local sourcing third party manufacturers are involved, the sale of products directly happens with assessee and the sourcing fees is paid to PIT by the assessee. For the year under consideration, the assessee has paid Rs. 21,28,16,303/- to PIT towards availing R&D and sourcing support services for the locally procured goods from third parties in India. Such services are rendered by PIT to the assessee with the help of PITS, Hongkong and WCL, Hongkong. 11.8.2 To sum it up, PIT provides assessee with all knowhow and information related to the development of the product design and related specification that are relevant for the manufacture of licensed products that are manufactured by assessee through the local third party manufacturers in India. 11.8.3 PIT also provides support services to assessee by determining the overall capacity of the purchase volumes of the licensed products and other support servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t one cannot survive without other. 11.14 In the present facts as has been observed in the preceding paragraphs, the assessee is into wholesale and retail sales of PUMA products. The common sourcing entity globally is the PIT to all PUMA sales entities, who is assisted by PITS and WCL. PIT assists the assessee with the sourcing services, to get the products manufactured from the local third party manufacturers. The products so manufactured by the third party local manufacturers, are restricted to Indian market only. 11.15 On a detailed analysis of the transfer pricing study, we note that the assessee is one of the PUMA sales entity to sell PUMA products. PIT is a medium who sources by either to manufacture or have manufactured PUMA products, which is sold to PUMA sales entities like assessee before us. There is a contractual agreement between PIT and PUMA SE(an AE who owns and provides necessary rights to use trade mark and brand name to PUMA sales entities), as per which PIT is allowed to collect R&D fees from PUMA sales entities to compensate PUMA SE for its global product creation efforts. 11.16 This in our considered opinion cannot be aggregated with the trading activity of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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