TMI Blog2013 (11) TMI 355X X X X Extracts X X X X X X X X Extracts X X X X ..... usively 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. - T.P. Adjustments made by the lower authorities sustained. - Decided against the assessee. - IT (T.P) Appeal Nos. 653 & 654 (Bang.) of 2011 - - - Dated:- 10-5-2013 - George George K And Jason P. Boaz, JJ. For the Appellant : K.R. Sekhar. For the Respondent : S.K. Ambastha. ORDER:- Per: Jason P. Boaz These appeals by the assessee are directed against the common orders of the Commissioner of Income Tax (Appeals)-IV, Bangalore in ITA No.34 75/DC-12(2)/CIT(A)-IV/08-09 dt.15.3.2011 for Assessment Year 2005-06 and 2006-07. Since common issues are involved, these appeals are heard together and are being disposed off by way of this common order. 2. The facts of the case, in brief, are as under : 2.1 The assessee-company, Nike India Pvt. Ltd. ('NIPL' in short) is a wholly owned subsidiary of Nike Holdings B.V. Netherlands; which in turn is held b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ology TPO's Observation Share of BCCI Costs (Received) 3,32,87,693 Comparable Uncontrolled Price Method ("CUP") Concluded to be at arm's length. Payment towards acquisition of business of NIKE Inc., USA. 45,54,749 CUP Concluded to be at arm's length. Payment towards reimbursement of expenses. 5,77,02,222 CUP Adjusted. In this year, since the aggregate of international transactions were not in excess of Rs.15 Crores, the Assessing Officer did not make a reference to the TPO, but made a Transfer Pricing adjustment of the ALP at Rs.5,77,00,232 on the issue of payment of cross charges in respect of export cost and contractor charges on the same lines as adopted by the TPO for Assessment Year 2005-06 which was incorporated in the order of assessment passed under section 143(3) of the Act on 23.12.2008, the detailed break up of which are as under : S.No. International Transaction Amount Rs. 1. Travel, accommodation and conveyance 3,87,53,079 2. Salary Payments 1,25,84,768 3. Cost of Samples (Sports goods, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsequently evaluating the same by inappropriately applying the Organisation for Economic Co-operation and Development ("OECD") Guidelines on the issue of inter-group services without assigning any cogent reasons. 1.6 The Hon'ble CIT (Appeals) erred in not considering the fact that the learned Assessing Officer/ learned TPO have accepted the above reimbursement of expenses paid by the appellant to its AEs at arm's length for the assessment year 2007-08. 2. The Hon'ble CIT (Appeals) erred in holding that he is in total agreement with the learned Assessing Officer/learned TPO's view that the amounts were essentially spent towards brand promotion of its AEs not towards the business interest of the appellant. 3. The Hon'ble CIT (Appeals) has erred in stating that the computing interest under section234B of the Act is mandatory in nature. It is important to note that the learned Assessing Officer has computed the interest under section 234B of the Act to the proposed adjustment is consequential in nature." For Assessment Year 2006-07 the grounds raised are :- "1. The Hon'ble CIT (Appeals) grossly erred in law and facts of the case in determining the arm's length price ("ALP" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f expenses as intra-group services and consequently evaluating the same by inappropriately applying the Organisation for Economic Co-operation and Development ("OECD") Guidelines on the issue of intergroup services without assigning any cogent reasons. 1.8 The Hon'ble CIT (Appeals) erred in not considering the fact that the learned Assessing Officer/ learned TPO have accepted the above reimbursement of expenses paid by the appellant to its AEs at arm's length for the assessment year 2007-08. 2. The Hon'ble CIT (Appeals) erred in holding that he is in total agreement with the learned Assessing Officer/learned TPO's view that the amounts were essentially spent towards brand promotion of its AEs not towards the business interest of the appellant. 3. The Hon'ble CIT (Appeals) has erred in stating that the computing interest under section234B of the Act is mandatory in nature. It is important to note that the learned Assessing Officer has computed the interest under section 234B of the Act to the proposed adjustment is consequential in nature." 3.2 For Assessment Year 2005-06, the assessee has basically raised three grounds of appeal. Ground Nos.1, 1.1 to 1.6 and 2 are on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional transactions to the TPO. Section 92CA(3) of the Act stipulates that the TPO shall, by order in writing, determine the ALP in relation to the international transactions in accordance with the provisions of section 92C(3) and send a copy of the order to the Assessing Officer. Section 92CA(4) of the Act stipulates that once the TPO has passed the order, the Assessing Officer shall compute the total income of the assessee under section 92CA(4) of the Act, in conformity with the ALP as determined by the TPO. 4.4 The CBDT had vide Instructions No.3 of 2003 to the field formations of the Income Tax Department had stipulated that in any case wherein the aggregate of international transactions exceeds Rs.5 Crores, the Assessing Officer is required to make a reference to the TPO under section 92CA for having the ALP of international transactions examined. The Hon'ble Delhi High Court in the case of Sony India Pvt Ltd v. CBDT (2006 - TIOL - 01 - HC - DEC - TP) had upheld the validity of the CBDT, Instruction No.3 of 2003. This instruction as regards the threshold of aggregation of international transactions have been amended from Rs.5 Crores to Rs.15 Crores by Board's Circular dt.30.7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7,02,222; as it is in conformity with the jurisdiction conferred on him by the provisions of section 92C of the Act. We, therefore, dismiss the ground of S.No.1.1 raised by the assessee. T.P. Adjustment on payment of cross charges in respect of ex-pats costs and contractor charges. (Assessment Years 2005-06 2006-07) 5.1 All the other grounds raised in these two appeals for Assessment Years 2005-06 and 2006-07 except for ground at S.No.3 are in respect of the T.P. adjustment carried on in respect of payment of cross charges of ex-pat costs and contractor charges claimed as reimbursement to the parent company by the assessee. In the period relevant to Assessment Year 2005-06, the assessee made payments of Rs.4,79,96,697 to Nike Inc., USA, its Associated Enterprise ('AE' in short); reportedly incurred by the parent company on behalf of the assessee. The break up of such expenses are given as under : S .No. Nature of Expenses Amount Rs. 1. Travel, Accommodation Conveyance. Rs.6,94,744 2. Salary payments to seconded employees. 1,65,21,238 3. Cost of samples of sports goods and accessories. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the AE on behalf of the tax-payer. (ii) the assessee itself had separately incurred expenditure of approx. Rs.2.42 Crores towards marketing, public relations, conveyance which worked to approx. 8% of sales. (iii) the taxpayer failed to show any tangible, commercial benefit derived by the huge payment of approx. Rs.4.79 Crores, which is approx. 15.65% of the turnover, when it has in fact incurred a loss of Rs.9.58% on sales, even after showing a gross profit margin of 29.32%. (iv) the arm's length nature of the payment of cross charges is not proved/ established. 5.3 In proceedings before us, the learned Authorised Representative reiterated the point that these expenses have been incurred by the parent company on behalf of the assessee and that there have been reimbursed, at cost, to the parent company by the assessee. The learned Authorised Representative also took us through the decision of the Special Bench of the ITAT, Delhi in the case of LG Electronics India Pvt. Ltd. V ACIT (ITA No.5140/Del/2011). In an attempt to explain as to how the principles upheld by the Special Bench in the cited case are not applicable to the facts of the assessee's case. 5.4 Per contra, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Based 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." 5.5.3 What emerges from a perusal of the above paragraphs of the Transfer Pricing 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... personnel. However, recruitment of key employees at higher levels are guided by Nike Group. NIKE Group bears a greater degree of this risk as it needs to retain key employees and trained technical people. 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 ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar. The facts could be different for each year and could 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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