TP adjustment deleted in absence of written agreement to incur expense between assessee and AE

Nike India Private Limited Vs DCIT (ITAT Bangalore)

ITAT Bangalore held that in the absence of no written agreement exists between the assessee and its AE requiring the assessee to incur advertisement, marketing and promotion (AMP) expenses, the same cannot be regarded as an international transaction at all and hence TP adjustment not sustainable

Facts-

During the course of assessment proceedings, the matter was referred to TOP to determine the ALP of the international transaction undertaken by the assessee with its associates. TPO passed the order u/s 92CA proposing adjustment of Rs. 63,27,41,494/-.

Thereafter, draft assessment order was passed incorporating TP adjustments. Being aggrieved, assessee filed objections before Dispute Resolution Panel (DRP). DRP provided partial relief to the assessee.

Being aggrieved, the assessee preferred the present appeal.

Further, 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 assessee had paid outsourcing commission of RS.30,57,35,722 to NIKE Global Trading Private Limited, Singapore (NGTPS). The outsourcing commission was calculated at 7% of FOB value of products sourced by the assessee from NGTPS. The TPO held that there is no evidence for substantiating the claim of receipt of services and the entire outsourcing commission paid to NGTPS was treated as an addition on determination of ALP. The DRP confirmed the order of the TPO. Aggrieved, the assessee has raised this issue before the Tribunal.

Conclusion-

With regard to AMP expenses it is held that the Tribunal in assessee’s own case for assessment year 2015-2016 (supra) had held that the assessee is a full-fledged distributor of NIKE product and on examination of royalty agreement, it was held by the Tribunal for assessment year 2015-2016 that there is no clause which mandated incurring of any AMP expenses. It was held by the Tribunal that in the absence of no written agreement exists between the assessee and its AE requiring the assessee to incur AMP expenses, the same cannot be regarded as an international transaction at all.

With regard to outsourcing commission it is held that 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 amounting to Rs.30,57,35,722.

FULL TEXT OF THE ORDER OF ITAT BANGALORE 

This appeal at the instance of the assessee is directed against final assessment order dated 27.03.2021 passed u/s 143(3) r.w.s. 144C(13) of the I.T.Act. The relevant assessment year is 2016-2017.

2. The brief facts of the case are as follows:

The assessee is a wholesale distributor of Nike brand products in India. For the assessment year 2016-2017, the return of income was filed on 30.11.2016 declaring total loss of Rs.164,42,63,191. The 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 before the Dispute Resolution Panel (DRP). The DRP vide its order dated 05.02.2021, disposed of the objections raised by the assessee. The DRP partially granted relief to the assessee. Pursuant to the draft assessment order, the impugned final assessment order was passed on 27.03.2021.

5. Aggrieved, the assessee has filed the present appeal before the Tribunal. Both the parties agreed that revised grounds submitted on 01.10.2021 may be adjudicated. The revised grounds raised read as follows:-

“The grounds mentioned hereinafter are without prejudice to one another.

A. Transfer Pricing

1. The Learned Assessing Officer (“Learned AO”), Learned Transfer Pricing Officer (“Learned TPO”) and the Honourable Dispute Resolution Panel (“Hon’ble DRP”) grossly erred in rejecting the transfer pricing documentation maintained by the Appellant by invoking provisions of sub­section (3) of92C of the Income-tax Act, 1961 (“the Act”), thereby proposing a transfer pricing adjustment of INR 63,27,41,494 under section 92CA of the Act.

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 12,92,01,122. 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 IT AT in its own case for A Y 2009-10 as well as the combined order of A Y 2007-08, A Y 2010-11, to A Y 2014-15, wherein it was held that absence of an agreement, AMP expenses cannot be characterised as an international transaction which is applicable in Appellant’s case for AY 2016-17.

4. The Learned AO / Learned TPO / Hon’ble DRP has grossly erred in not appreciating the fact that there was no agreement” or “arrangement” or “understanding” between the Appellant and AE for incurring AMP expenses on behalf of the latter.

5. The Learned AO / Learned TPO / Hon’ble DRP erred on facts and in law in not appreciating the business model 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 which are not engaged in distribution activities for determining the mark-up on the AMP expenses.

Adjustment pertaining to payment of sourcing commission

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 30,57,35,722 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 despite the evidences furnished to the contrary .

11. The Learned AO / Learned TPO / Hon’ble DRP erred in rejecting the Comparable Uncontrolled Price “CUP”) method adopted by the Appellant and the comparable agreements furnished by the Appellant without appreciating that the same was obtained from reliable database i.e. KtMine.

12. The Learned AO / Learned TPO / Hon’ble DRP erred in concluding that companies selected as comparable don’t pay sourcing commission on the basis that there is no disclosure of sourcing commission paid in the audited financial statement thereby disregarding the following:

• There is no statutory requirement to disclose payment of sourcing commission separately in the audited financial statements;
• The business model of companies are different and the companies may have in-house sourcing team, details of which are not available in the audited financial statement.

13. Without prejudice, the Learned AO / Learned TPO / Hon’ble DRP has, erred in rejecting certain companies having disclosure of sourcing commission, on functional dissimilarity (without providing detailed reasons of functional dissimilarity) even though such companies were engaged in the same product! service category as that of the other selected comparable companies.

Adjustment pertaining to reimbursement of expenses

14. The Learned AO / Learned TPO / Hon ‘ble DRP erred in making an adjustment towards salary paid, expenses incurred on behalf of expatriates, cost of trade samples and other miscellaneous expenses for an amount of INR 17,77,95,683 and erred in merely determining the arm’s length price at nil, without adopting one of the prescribed methods.

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 whether the transaction was required to be entered into or whether the Company derived any benefit from the transaction and accordingly, !be .commercial expediency of the Appellant cannot be questioned by the Learned TPO.

18. The Learned AO / Learned TPO / Hon ‘ble DRP erred in disallowing reimbursement of third party royalty transaction for an amount of INR 2,00,08,967 and determining the arm’s length price to be nil without adopting one of the prescribed methods. Further, it erred in failing to appreciate that the royalty payable to third parties were paid by the AE and then cross-charged to NIKE entities all over the world depending on the sale of products that were subject to third party royalty since the entities benefit from such licensing arrangements through sale of the products bearing licensed rights.

19. The Learned AO / Learned TPO / Hon’ble DRP erred in not considering the commercial expediency of the Appellant 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.

B. Corporate tax

Purchase of trade samples

1. The learned AO/ Hon’ble DRP erred in disallowing expenses incurred towards purchase of trade samples from Nike Inc. and Nike USA Inc.

2. The learned AO/ Hon’ble DRP ought to have appreciated the fact that the Appellant has incurred such expenses for the purpose of its business and hence, allowable under section 37 of the Act.

3. The learned AO/ Hon’ble DRP erred in failing to appreciate the following:

–   it is not open to the Revenue to question the necessity of an expense which the management believes is necessary to run the 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 is not an ascertained liability.

8. The learned AO/Hon’ble DRP failed to appreciating that the Appellant has recognized provision for sales return based on principles laid down by the Hon’ble Supreme Court in the case of Rotork Controls India (P)Ltd ([2009] 180 TAXMAN 422 [SCD and Accounting Standard [“AS”] 29 and hence, ought to be allowed under section 37 of the Act.

9. The learned AO, despite concluding that the provision was based on historical data, has erred in not allowing the expense which is contrary to the position upheld by the Hon’ble Supreme Court in the case of Rotork (supra) and Hon’ble Karnataka High Court in the case of Wipro GE Medical Systems (ITA Nos. 438, 44412002).

Retail fixtures for stores

10. 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.

11. 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.

Short grant of interest under section 244A of the Act

12. The learned AO has erred in short granting interest under section 244A of the Act on the refund determined despite the directions of the Hon’ble DRP to examine the same and grant interest as per law.

The Appellant craves to leave / to add to / to alter / to amend / to rescind / to modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing this appeal.

6. The learned AR submitted that all the issues raised, both under the TP adjustment and Corporate Tax were decided by the Tribunal in assessee’s own case for assessment year 2015-2016 in IT(TP)A No.202/Bang/2021 (order dated 26.07.2022) and A.Y. 2013-2014 in IT(TP)A No.2809/Bang/2017 (order dated 30.06.2021). The assessee has filed a chart depicting the issues raised ground-wise and how the issues are covered / decided by the order of the Tribunal in assessee’s own case for assessment year 2013­2014 and 2015-2016 (supra).

We shall adjudicate the grounds / issues are as under:-

A Transfer Pricing Adjustment

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 assessee is a full-fledged distributor of NIKE product and on examination of royalty agreement, it was held by the Tribunal for assessment year 2015-2016 that there is no clause which mandated incurring of any AMP expenses. It was held by the Tribunal that in the absence of no written agreement exists between the assessee and its AE requiring the assessee to incur AMP expenses, the same cannot be regarded as an international transaction at all. The relevant finding of the Tribunal reads as follows:-

“13. The sum and substance of the same is that there should be existence of an agreement to incur AMP expense between the assessee and the foreign AE either expressed or there must be circumstances indicating compulsion to incur AMP expenses. On this aspect, the TPO in his order has made reference to Intellectual Property License and Exclusive Distribution Agreement dated 01.06.2008 and the terms of the said agreement referred to the order of the AO can be no basis to conclude existence of any understanding between the assessee and the foreign AE for incurring of AMP expenses. As rightly contended by the assessee, this agreement cannot be construed as an arrangement for incurring AMP expenses for the following reasons:

“a.  The agreement pertains to sale of licensed products in Indian Territory for which the Assessee pays a royalty of 10 percent of its sales;

b. The agreement defines the terms “actual net sales revenues” and “forecasted net sales revenues” and the agreement mentions that in the event the actual net sales revenues of Assessee is less than 70 percent of the forecasted net sales revenues, then 1 percent of such shortfall, subject to the discretion of NEON, will either be reimbursed to Assessee or reduced from the royalty payable by Assessee to NEON;

c. The clause merely is a computation mechanism for determination of royalty payable by Assessee and does not in any way construe a mandate from NEON to incur marketing expenses;

d. Further, the agreement mentions the NEON “at its discretion” shall reimburse or adjust the shortfall- the same cannot be interpreted as a mandate that NEON will reimburse or adjust the shortfall. Further, the reimbursement is on account of the differences between the actual net sales revenue and the forecasted net sales revenue and is not an explicit reimbursement of AMP expenses of Assessee.

e. A 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 TPO on account of AMP expenses incurred by the assessee.

Source Commission (Grounds 9 to 11)

11. The assessee had paid outsourcing commission of RS.30,57,35,722 to NIKE Global Trading Private Limited, Singapore (NGTPS). The outsourcing commission was calculated at 7% of FOB value of products sourced by the assessee from NGTPS. The TPO held that there is no evidence for substantiating the claim of receipt of services and the entire outsourcing commission paid to NGTPS was treated as an addition on determination of ALP. The DRP confirmed the order of the TPO. Aggrieved, the assessee has raised this issue before the Tribunal. The assessee has filed an additional evidence (dated 22.03.2022) in the form of emails explaining the nature of services rendered by NGTPS Singapore, just like as it has been done in the earlier assessment year, namely, assessment year 2015-2016. The learned AR submitted that the additional evidence for assessment year 2015-2016 was taken on record and the matter was remitted back to the files of the TPO for de novo The Tribunal directed the TPO to examine the claim of assessee that it was in receipt of services from NGTPS based on evidence on record and the additional evidence filed before the Tribunal. The learned DR supported the orders of the TPO and DRP.

12. We have heard rival submissions and perused the material on record. The additional evidences filed are certain email correspondence to explain the nature of services rendered by NGTPS to the assessee. Similar additional evidences were taken on record by the Tribunal for the assessment year 2015-2016 (supra). The Tribunal had restored the issue to the files of the A.O. to examine the proof of rendering of services by taking into consideration the evidences already on record as well as the additional evidences that was filed. The relevant finding of the Tribunal, reads as follows:-

“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 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 services to the assessee for receipt of sourcing commission amounting to Rs.30,57,35,722. The TPO shall follow the directions of the Tribunal rendered in the assessment year 2013-2014 in IT(TP)A No.2809/Bang/2017 (order dated 30.06.2021) and assessment year 2015-2016. It is ordered accordingly.

14. Therefore, grounds 9 to 11 are allowed for statistical purposes.

Reimbursement of expenses (Grounds 14 to 16)

15. The learned AR fairly submitted that the above issue is decided against the assessee by the order of the Tribunal for the assessment year 2013-2014 and 2015-2016 (supra). The relevant finding of the Tribunal for assessment year 2015­2016, reads as follows:-

“24. 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 5 to 5.4 of its order, which reads as follows:

“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 co- ordinate 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 10-05­2013. 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:

Risk      Category    and Description	Exposure to NIKE India	Exposure     to NIKE Group
Manpower Risk:	NIKE India has to	NIKE    Group
	hireand          retain	bears a greater
Any enterprise, which	goodpersonnel.	degree of this
is largely dependent	However,recruitment	risk as it needs
for its success, upon	of keyemployees at	to   retain   key
quality personnel with	higher    levels     are	employees and
superior         technical	guided     by      Bike	trained
knowledge is       faced	Group	technical
with        this         risk.		people.
Competitive market forces expose such an enterprise to the risk of losing     its trained personnel

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 forth to justify why a mere service provider, who is only an intermediary between the entrepreneur viz. Nike Inc., USA and the customer should incur costs related to manufacturing leader, category business director, etc. Also it is inconceivable why a third party 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 the assessee’s own case for Assessment Year 2008-09, therefore, they should be treated as arm’s length in the year under consideration. We are unable to accept the contention that the transfer pricing adjustment made in the two years under consideration has to be negated only on the ground that such an adjustment was not made in the subsequent year. It is a well settled position in law that the assessment of every year stands on its own legs and the ‘principle of res judicata’ does not apply to income tax assessment proceedings. The ALP for each year is determined based on the set of facts applicable to each of the individual years and no common proposition can be propounded for all the years. As mentioned earlier, for the two years under consideration before us, the assessee has not furnished any evidence to substantiate its claim that these persons work onlyfor the distribution activity undertaken by the 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, averments, admissions made in the Transfer Pricing Study submitted by the assessee does not support the stand urged by the assessee before us.

5.5.8 In view of the facts and circumstances of the case, as discussed above, on the issue of payment of cross charges 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/AO.”

Respectfully following the aforesaid decision of the Tribunal rendered in assessee ’s own case, we dismiss Ground Nos. 14 to 17.

16. In view of the above orders of the Tribunal, we uphold the order of the TPO / DRP. Therefore, grounds 14 to 16 are dismissed.

Royalty (Grounds 18 and 19)

17. The learned AR fairly submitted that the above issue is decided against the assessee by the order of the Tribunal for assessment year 2013-2014 and 2015-2016 (supra). The relevant finding of the Tribunal for assessment year 2015­2016, reads as follows:-

“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.12.02 crores.

6.1 The ld. A.R. fairly admitted that an identical issue has been decided against the assessee by the coordinate bench in other years.

6.2 The assessee has paid royalty of Rs.2.02 crores. The TPO noticed that the ITAT has confirmed the transfer pricing adjustment made in respect of royalty payment in A.Y. 2005-06 & 2006-07. Following the same, TPO determined the ALP of royalty payment as Nil and accordingly, made transfer pricing adjustment of Rs.2.02 crores.

6.3 We notice that an identical issue has been examined by the coordinate bench in A.Y. 2014-15 and this issue has been decided against the assessee by following the decision rendered by the coordinate bench in A.Y. 2005-06. The observations made in this regard by the Tribunal in AY 2014-15 are extracted below:-

“16. The next issue relates to the T.P adjustment made in respect of third party royalty. This issue is being contested by the assessee in AY 2010-11, 2012-13 and 2014-15.

16.1 The TPO noticed that the assessee was paying royalty on goods endorsed by celebrity sports persons around the world on the basis its sales turnover in India. The TPO noticed that the assessee has not furnished any agreement in respect of this arrangement. The assessee could not also furnish workings as to how it is allocated to it. Further, the assessee was seen paying royalty @ 1% on the sales, in addition to the payment of third party royalty, in accordance with 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 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 2005­06, 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 Assessee ’s own case, we dismiss grounds 18 to 20.”

18. In view of the order of the Tribunal for assessment years 2013-2014 and 2015-2016 (supra), we dismiss grounds 18 and 19.

B. Corporate Tax

Trade Samples (Grounds 1 to 6)

19. The learned AR fairly submitted that the issue raised by the assessee in grounds 1 to 6 for corporate tax, namely, trade samples has already been decided against the assessee by the Tribunal in assessee’s own case for assessment year 2013-2014 (supra). The relevant finding of the Tribunal for assessment year 2013-2014 (para 8 and 8.1), reads as follows:-

“8. The next issue relates to the disallowance of claim of purchase of samples. An identical issue has been decided against the assessee in assessment year 2012-13 & 2014-15. For the sake of convenience, we extract below the decision rendered by the coordinate bench on this issue:-

“20. The remaining issues are corporate issues and the additions have been made by the assessing officer. The first corporate issue urged by the assessee relates to the “disallowance of 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 2014­15, 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 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 considerations and hence the same should be allowed. The Ld A.R placed his reliance on the decision rendered by Hon’ble Supreme Court in the case of  CIT vs. Dhanrajgirji Raja Narasingirji (1973)(94 ITR 544), wherein the Hon’ble Apex Court has observed as under:- “It is not open to the department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. Every businessman knows his interest best. So far as the apportionment is concerned we are not told why we should not consider the same as a reasonable estimate.”

20.4 We heard Ld D.R and perused the record. We have noticed earlier that this expenditure was a matter of transfer pricing adjustment in AY 2010-11 and 2011-12, wherein we have confirmed the transfer pricing adjustment by following the decision rendered by the co-ordinate bench in the assessee’s own case in AY 2005-06 & 2006-07. In those years, the Tribunal has decided the issue against the assessee with the following observations:-

“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.”

In our view, the view expressed by the co-ordinate bench can be taken as guidance for deciding the issue in the years under consideration also. 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.”

8.1 Consistent with the view taken in the above said years, we decide this issue against the assessee and accordingly, confirm the disallowance made by the A.O. on this issue.”

20. Respectfully following the aforesaid order of the Tribunal rendered in assessee’s own case for assessment year 2013­2014 (supra), we reject grounds 1 to 6. The learned AR, however, submitted that disallowance on purchase of trade samples was also subject matter of TP adjustment by the TPO and to that extent there should be direction to ensure that there is no double taxation of the same income. We accept the prayer of the learned AR and direct the AO / TPO to consider the plea of the learned AR in this regard and allow necessary relief in the event the same income gets doubly taxed. It is ordered accordingly.

Sales Return (Grounds 7 to 9)

21. The learned AR fairly submitted that the issue raised by the assessee in the aforesaid grounds has already been decided against the assessee by the Tribunal in assessee’s own case for assessment year 2013-2014 (supra). Respectfully following the order of the Tribunal in assessee’s own case for assessment year 2013-2014, we reject grounds 7 to 9.

Retail Fixtures for Stores (Grounds 10 and 11 & Additional ground 31A)

22. The facts pertaining the above grounds are that the assessee had claimed Rs.11,95,37,386 as a revenue expenditure. These expenditure were incurred by the assessee for furnishing retail showroom where the assessee’s products are sold by the retailers, i.e., franchisees. The A.O. held the expenditure is capital expenditure and accordingly disallowed the claim of the assessee for deduction. The DRP confirmed the view of the A.O. Aggrieved, the assessee has raised this issue before the Tribunal. The learned AR submitted that the issue whether it is a capital expenditure or revenue expenditure, is decided on identical facts, in favour of the assessee by the order of the Tribunal in assessee’s own case for assessment year 2015-2016 (supra). The learned DR was duly heard.

23. We have heard rival submissions and perused the material on record. On identical facts, the Tribunal in assessee’s own case have held that the expenditure incurred for refurbishment 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 ITA T 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.

25. In the additional ground 31A, the assessee is for claiming the benefit of depreciation in the event the expenses claimed as revenue is disallowed as capital expenditure. Since we have already allowed grounds 10 and 11 and held that the expenditure incurred is revenue expenditure, the additional ground for claiming the benefit of depreciation is dismissed as infructuous.

Interest u/s 244A of the I.T.Act (Ground 12)

26. In the above ground, the assessee contends that the A.O. has not granted interest u/s 244A of the I.T.Act on the refund determined despite the directions of the DRP to examine the same and grant interest as per law.

27. We have heard rival submissions and perused the material on record. We direct the A.O. to examine the issue and follow the directions of the DRP. It is ordered accordingly. Therefore, ground 12 is allowed for statistical purposes.

28. In the result, the appeal filed by the assessee is partly allowed.

Order pronounced on this 24^th day of August, 2022.