Nike India Private Limited Vs ACIT (ITAT Bengalore)
There is no dispute that the parent company Nike Inc., has 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, 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 expenditure is that of parent company and is not related to the business activities of the assessee. Accordingly, we confirm the disallowance made by the AO.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
The assessee has filed this appeal challenging the order dated 28.12.2016 passed by the A.O. for assessment year 2013-14 u/s 143(3) r.w.s. 144 C of the Act in pursuance to the directions given by Ld. Dispute Resolution Panel (DRP).
2. The assessee company is engaged in the business of wholesale trading of footwear, apparel and sports equipment in India of NIKE Brand. The assessee is a wholly owned subsidiary of NIKE Holding B.V. Netherlands, which in turn is held by M/s. NIKE Inc., USA.
3. The first issue urged by the assessee relates to transfer pricing adjustment made in respect of sourcing commission. The assessee had claimed Rs.14.06 crores as payment of commission for sourcing of materials. The assessee paid commission of 7% on the value of products sourced. The assessee bench marked the same under CUP method and in this regard, it had selected 12 companies which had paid commission ranging from 5% to 12%. Accordingly, the assessee claimed that the payment of commission is at arm’s length. The TPO however, determined the ALP of commission payment as Nil and accordingly made transfer adjustment of entire claim of Rs.14.06 crores. Ld DRP also confirmed the same.
3.1 The Ld A.R submitted that an identical issue was examined by the coordinate bench in the assessee’s case in IT(TP)A No.3321/Bang/2018 relating to assessment year 2014-15 and the coordinate bench, vide its order dated 14.10.2020, has restored the issue to the file of the TPO for examining it afresh.
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 being urged in AY 2014-15.
19.1 During the year relevant to the assessment year 2014-15, the assessee has paid sourcing commission of Rs.22.24 crores to its Associated Enterprise named M/s Nike Global Trading Pte., Singapore (NGTPS). The rate of commission paid by the assessee was 7% of the value of products sourced. The assessee benchmarked the same under CUP method by selecting certain comparable companies, which had paid sourcing commission in the range of 5% to 12%. Accordingly, the assessee claimed the payment to be at arms length.
19.2 The TPO observed that the comparable companies selected by the assessee has not been proved to be really comparable. The TPO has also analysed the agreements entered by the comparable companies with their respective agents and took the view that they are materially different. Accordingly, the TPO took the view that the CUP method adopted by the assessee is not suitable to the assessee. Hence he called for various details from the assessee. After considering those details, the TPO came to the conclusion that the assessee has not been able to show that NGTPS did all those activities as mentioned in the agreements. Accordingly he came to the conclusion that that the agreements are nothing but make belief arrangements. The TPO reinforced his views by observing that the assessee did not pay any commission till AY 2013-14 and did not mention about any sourcing agent till that year. In the absence of evidences proving that the services were provided by the sourcing agents, the TPO determined the ALP at NIL. Accordingly he made transfer pricing adjustment of Rs.22.24crores. The Ld DRP also confirmed the same.
19.3 The Ld A.R submitted that the assessee has furnished various evidences to prove that the sourcing agent has provided services to the assessee. He submitted that the assessee has utilized services of one USA entity and one Singapore entity. However, the assessee has paid commission only to the Singapore entity. He submitted that the assessee has furnished copies of agreements entered with the agents, confirmation letter obtained from the agents, e-mail communications, summary of e-mail communications etc., before the TPO in this regard. He submitted that the TPO, however, did not examine these important evidences, but came to the conclusion that the agent has not provided services to the assessee. Accordingly 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.
4. The next issue relates to transfer pricing adjustment made in respect of payment of interest on debentures. It is also a recurring issue. The assessee has claimed a sum of Rs.65.18 crores as expenditure on payment of interest on debentures. The TPO, by relying on certain rulings/RBI Circular, took the view that the CCDs are in the nature of equity capital and accordingly, held that the arm’s length price of interest payment on CCDs is Nil. Accordingly, he made transfer pricing adjustment of entire amount of interest claim of Rs.64.18 crores.
4.1 We heard the parties on this issue and perused the record. It was brought to our notice that an identical issue was examined by the coordinate bench in the assessee’s own case in assessment year 2014-15 referred (supra) and also in assessment year 2012-13. We notice that the coordinate bench has restored this issue to the file of the AO/The TPO for examining it afresh. The Ld. A.R. submitted that this issue may be restored to the file of the AO/TPO for examining the same afresh along with assessment year 2012-13 & 2014-15.
4.2 We notice that the coordinate bench has restored this issue to the file of AO/TPO for examining it afresh with the following observations:-
“18. The next issue relates to transfer pricing adjustment made in respect of interest paid on Compulsorily Convertible Debentures (CCD). This issue is being contested by the assessee in AY 2012-13 and 2014-15.
18.1 During the year relevant to AY 2012-13, the assessee had issued debentures to the tune of Rs.527.54 crores to M/s Nike India Holding B V (Netherlands). The Debentures carried interest rate @ 12% p.a. The TPO noticed that the average Base rate of interest determined by State Bank of India during the financial year 2011-12 worked out to 9.31%. Accordingly he proposed to make transfer pricing adjustment by adopting the rate of interest @ 9.31% under CUP method by taking the base lending rate determined by State Bank of India. The assessee submitted that the base rate is the minimum rate set by Reserve Bank of India and the bank is free to charge higher rate of interest depending upon credit risk of the customer. It also submitted that the bank lending rate cannot be considered to be comparable with the rate charged on debentures. The TPO did not accept the contentions of the assessee and accordingly made transfer pricing adjustment of Rs.4,09,95,719/- by adopting the rate of interest @ 9.31%. 18.2 In AY 2014-15, the TPO took the view that the Compulsorily convertible Debentures is a controversial financial product called “hybrid instrument”. He further observed that the CCD suffer different tax treatment in different jurisdictions,, i.e., it is treated as loan in one country and dividend receipts in another country. Such hybrid instruments are criticized strongly by Organisation for Economic Cooperation and Development. The TPO referred to certain case laws and held that the CCD is in the nature of equity. Accordingly he held that the ALP of interest payable on CCD at NIL.
18.3 The Ld DRP upheld both the views taken by TPO in the above said years.
18.4 The Ld A.R submitted that the TPO has considered the interest payment made in the year relevant to AY 2015-16 and held it to be at arms length. In this regard, the TPO has made enquiries with foreign authorities and it was ascertained that the interest paid by the assessee has been offered as income by the AE in its hands.
18.5 We notice that the TPO has been taking different stand in different years. While he accepted the CCD as debentures in AY 2012-13 and reduced the rate of interest only, the TPO treated CCD as equity in AY 2014-15. However, in AY 2015-16, the TPO has accepted the rate of interest of 12% to be at arms length. We notice that the TPO has made certain enquiries in AY 2015-16 and accordingly came to the conclusion that the interest payment is at arms length. The benefit of those enquiries was not available with the TPO in the two years under consideration. Since the issue is the same in all the years and further, in view of the conflicting stands taken by TPO, we are of the view that this issue requires fresh examination at the end of TPO. Accordingly, we restore this issue in both the years under consideration to the file of AO/TPO for examining it afresh.”
4.3 Consistent with the view taken by the coordinate bench in the assessee’s own case for assessment year 2012-13 & 2014-15, we restore this issue to the file of AO/TPO with similar directions.
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 & 2006-07 has decided this issue against the assessee. The relevant observations made by the Tribunal in 2014-15 are extracted below:
“15.2 However, we notice that an identical issue has been examined by the coordinate bench in the assessee’s own 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 both informative and useful. In the Transfer Pricing report, under the heading “Brief on the Business”, it is mentioned that –
“1.2.3 Nike India, a wholly owned subsidiary of NIKE Holdings Inc., is responsible for distribution of footwear, sports apparel and equipment. In addition, NIKE India Provides administrative support in relation to the marketing and brand promotion initiatives of NIKE Group in India.
1.2.4 The development of arm’s length price in this analysis recognizes that NIKE India acts as a wholesale distributor and is primarily engaged in the business of providing value added services, acting as an intermediary between entrepreneurs and customers. This analysis reflects the provisions of the OECD Guidelines concluding that, at arm’s length, companies engaged in providing such value added services are entitled to receive compensation appropriate to the services performed and the capital invested in their 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.”
5.5.3What 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 and the ultimate customer. It is only a service provider, is compensated for its services and has absolutely no stake in the marketing and commercial intangibles, which belong only to the parent company.
iii)- The business risk of product acceptability and 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 sales of the products and not for the purpose of creating brand awareness is on the assessee, which onus is not discharged by the assessee. Also considering that the assessee itself has admitted that the parent, Nike Inc. USA has brand marketing and promotion initiatives in India, it is but natural to conclude that the expenses incurred by Nike Inc., USA are towards creation of brand awareness, for which the parent has the responsibility. In this view of the matter, the expenses on cost of samples, etc., have to be attributed to the parent, Nike Inc., USA and therefore it is not correct to conclude that these expenses have to be borne by the assessee.
5.5.5 As regards the expenses related to employees, of the parent company who have been deputed to the assessee, the FAR analysis in the Transfer Pricing Study/Report related to the employees states as under:
