M/s. Adidas India Marketing Pvt. Ltd. Vs ITO (ITAT Delhi)
Conclusion: Consideration paid by assessee for services rendered by non-resident were purely in the nature of procurement services and could not be characterized as ‘managerial’, ‘technical’ or ‘consultancy’ services and thus, could not be classified as fee for technical services and accordingly, not liable for deduction of tax at source under section 195.
Held: Assessee made payment of commission to ITBV on account of procurement of goods from outside India and for that purpose it had entered in a ‘buying agency agreement’ with said associated concern. AO held that the expenditure on buying agency services were in the nature of “fee for technical services” in terms of section 9(1)(vii) and therefore, assessee was required to deduct tax at source under section 195 on such payment and failure to do so resulted in disallowance under section 40(a)(i). It was held an identical issue of buying commission paid in response to buying agency agreement for activities of coordination with the manufacture for procurement of goods by assessee was involved in the case of sister concern of assessee, respectfully following the finding of Tribunal in the same , it was held that consideration paid by assessee for services rendered by non-resident were purely in the nature of procurement services and could not be characterized as ‘managerial’, ‘technical’ or ‘consultancy’ services and thus, could not be classified as fee for technical services and accordingly, not liable for deduction of tax at source under section 195.
FULL TEXT OF THE ITAT JUDGEMENT
These two appeals by the assessee are directed against two separate orders dated 29/01/2016 and 26/12/2016 passed by the Income Tax Officer, Ward -1(3), New Delhi [in short ‘the Assessing Officer’] for assessment years 2011-12 and 2012-13 respectively in pursuant to the direction issued by the Ld. Dispute Resolution Panel (DRP) for the relevant assessment years. As the issues-in-dispute involved in these appeals are identical under common set of facts, these appeals were heard together and disposed off by way of this consolidated order for convenience.
ITA No. 953/Del/2016 for AY:2011-12
2. First, we take up the appeal having ITA No. 953/Del/2016 for assessment year 2011-12, grounds of which are reproduced as under:
1. On the facts, in law and in the peculiar circumstances of the present case, the Learned Dispute Resolution Panel (‘Ld. DRP’) has grossly erred in making certain observations by exceeding its powers as detailed under section 144C(8) of the Act, by directing certain new additions on issues which neither arose out of the assessment proceedings, nor were in relation to the proposed variations as made by the Ld. AO at the draft order stage and hence, for this reason alone, it is prayed that such additions so made, may be ordered to be deleted.
Transfer Pricing Grounds
2. On the facts, in law, and in the circumstances of the case, the Panel erred in sustaining the basis of addition of INR 8,87,80,971/- on account of import of finished goods proposed by the Ld. TPO.
2.1. On the facts, in law, and in the circumstances of the case, the Ld. AO/TPO and the Panel erred in selecting the Transactional Net Margin Method (‘TNMM’) as the most appropriate method (‘MAM’) as against the Comparable Uncontrolled Price (‘CUP’) method, which is direct and most 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 not be regarded as a ‘transaction’, much less than an international transaction under section 92B of the Act, in the absence of any understanding/ arrangement / agreement between the Appellant and its associated enterprises (‘AEs’) thereby making the transfer pricing provisions inapplicable.
4. On the facts, in law, and in the circumstances of the case, the Ld. AO/TPO and the Panel erred in applying the bright line test (AMP/Sales), for establishing the existence of international transaction and computing the value of adjustment on account AMP adjustment completely disregarding the binding decisions of the Jurisdictional High Court in the case of Maruti Suzuki India Ltd. v. CIT [ITA 710/2015] and Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT [2015] 374 ITR 118 (Delhi).
5. On the facts, and in the circumstances of the case, the Ld. AO/TPO and the Panel erred in not appreciating that the AMP expenses were incurred by the Appellant for its own benefits for which no compensation was required from the AE’s.
6. On the facts, and in the circumstances of the case, the Ld. AO/TPO and the Panel erred in proceeding with an incorrect understanding of the functional profile of the Appellant, thereby characterizing it as a distributor of finished goods and not as manufacturer.
7. Without prejudice to the above, on the facts, in law, and in the circumstances of the case, the Ld. AO/TPO and the Panel erred in imputing mark-up of 32.25% on the alleged excessive AMP expenses which represents the Gross profit on sales earned by the applicant from its manufacturing and distribution activities.
8. That on the Ld. Panel gravely erred in directing the Ld. AO/ TPO to apply a mark-up of 32.25% which is excessive, arbitrary and devoid of economic and commercial realities of business.
Corporate Tax Grounds
9. On the facts and circumstances of the case and in law, the Panel 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. 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-Nether lands Double Taxation Avoidance Agreement (“the DTAA)”.
9.1 On the facts and circumstances of the case 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 grounds are without prejudice to each other.
3. Briefly stated facts of the case are that the assessee, i.e., Adidas India Marketing Private Limited, is a domestic company engaged in the business of trading of sports goods, i.e., footwear, apparel, accessories, equipment etc. The products are sold mostly under the brand name of “Adidas”. Those goods are manufactured for the assessee by the third party contract manufacturers. During the year under consideration, apart from the trading operations, the assessee also imported finished goods from Associated Enterprises (AEs) for resale in India. For the year under consideration, the assessee filed return of income on 30/11/2011, declaring Nil income under the normal provisions of the Income-tax Act, 1961 (in short ‘the Act’) and book profit of Rs.7,26,83,681/- under the provisions of section 115JB of the Act (minimum alternative tax). The book profit declared under section 115JB of the Act, was subsequently revised to Rs.75,94,096/- in the revised return of income filed. The assessee bench marked its international transaction of import of finished goods using Comparable Uncontrolled Price (CUP) method taking price charged by the third-party manufacturer from the AEs as CUP to the price charged by the AE from the assessee. The case of the assessee was selected for scrutiny and the Assessing Officer referred the matter for bench marking of the International transaction to the learned Transfer Pricing Officer (TPO). Learned TPO, however, rejected the CUP method for bench marking adopted by the assessee. According to the learned TPO the assessee was also engaged in providing Advertising, Marketing and sales Promotion (AMP) for the brand of the AE and thus, international transaction of the AMP existed in the case of the assessee. The learned TPO bench marked both the International transaction of import of the finished goods and AMP expenses on aggregated basis applying Transactional Net Margin Method (TNMM) accepting five companies engaged in promotion of the brand owned by AEs or by themselves as comparable companies and made an adjustment of Rs.8,87,80,971/- to the purchase of the finished goods.
3.1 Pursuant to the order of the learned TPO, the Assessing Officer issued draft assessment order confirming the adjustment proposed by the learned TPO. In the draft assessment order, the learned Assessing Officer also proposed disallowance of buying commission expenses in terms of section 40(a)(i) for non-deduction 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 Rs.38,97,45,132/-. The adjustment on account of purchase of finished goods was retained at Rs.8,87,80,971/-. In this manner total adjustment of Rs.47,85,26, 103/- was proposed pursuant to the direction of the learned DRP. The Assessing Officer, in the impugned final assessment order passed, made addition of Rs.47,85,26,103/- as transfer pricing adjustment and disallowance of Rs.3,84,52,472/-in terms of section 40(a)(ia) of the Act.
4. The ground No. 1 of the appeal was specifically not pressed before us and accordingly, same is dismissed as infructuous.
5. The grounds No.2 to 2.3 of the appeal relates to transfer pricing adjustment of Rs.8,87,80,971/- to the International transaction of import of finished products.
5.1 The learned counsel of the assessee before submitted that in the final assessment order, the learned Assessing Officer was required to compute the adjustment in view of the direction of the learned DRP, however, the learned TPO/Assessing Officer has not followed the direction of the learned DRP for making fresh search of the comparable. The learned counsel submitted that even the rectification application filed by the assessee has been rejected by the Assessing Officer and therefore there was no alternative with assessee except to make request before the Tribunal by way of raising this ground. The learned counsel submitted that matter may be restored to the file of the Assessing Officer with the direction to follow the finding of the learned DRP.
5.2 The learned DR could not controvert the above submission of the learned counsel of the assessee.
5.3 We have heard the submission of the parties on the issue in dispute in the light of the order of the lower authorities. We find that the learned DRP directed the Ld. AO/TPO on the choice of comparables for TNMM analysis of distribution function as under:
“DRP’s findings
The TPO has discussed the issue in regard to selection of comparables on page 4 & 12 on the order. The Comparables that were selected by the TPO were from the ones that were suggested by the assessee to benchmark its distribution function. As the functions/segment’ that was being benchmarked was primarily the distribution function therefore, the-TPO held the comparables proposed by the assessee as valid comparables. The TPO out of 30 comparables of the assessee selected 5 comparables, on the basis that
