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Adidas Technical Services P. Ltd. Versus DCIT, Circle 1 (2) , New Delhi

2016 (2) TMI 916 - ITAT DELHI

Foreign exchange loss/gain treated as non-operating selection of comparables - Held that:- Perusal of the functions of the assessee as mandated by the agreement on 1st day of October, 2006 demonstrates that the assessee is not a normal service provider nor a ITES company. The assessee requires skill, capability as well as expertise in a particular filed of procurement and manufacturing for performing the functions referred above. The assessee is required to perform functions including, quality c .....

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aw Ltd are directed to be excluded as a comparable. - Treating foreign exchange loss/gain as non-operative - Held that:- On observing the functional profile of the assessee, we are inclined to agree with the contentions of the assessee that the foreign exchange loss/profit is an operating loss, if the transaction on which it arose is connected with the core business/services being rendered by the assessee. This aspect needs examination. Thus we deem it appropriate to set aside the issue to t .....

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143(3) r.w.s.144C of the Income Tax Act, 1961 (the Act) dated 27.1.2015. 2. Facts in brief:- The assessee s profile is brought out in para 2 of the Transfer Pricing Officer (TPO) s order which is extracted for ready reference. 2. Taxpayer s profile A TSPL, a wholly owned subsidiary of adidas Sourcing Ltd. ( aSL ) is engaged in rendering support services to aSL which in turn renders sourcing services to adidas Group companies for international premium range of footwear and apparels (for the purpo .....

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s, while adidas Technical Services Private Limited ( aTSPL ) provides execution support. Functional Performed. The functions performed by aTSPL and its AE in relation to the international transaction pertaining to the provision of support service by aTSPL to its AE are summarized below. * Conceptualization of entrepreneurial services aSL is responsible for determining the scope of work to be performed by aTSPL. and it provides the relevant details pertaining to the type of products to be manufac .....

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ier with necessary product details and its responsible for coordination for local supplier to ensure smooth and efficient execution of the transaction. aTSPL is involved in price coordination with local supplier regarding the costing aspect and intimate the costing details of the manufactures to its AE for review. Services rendered by aTSPL are recommendatory in nature and AE/ customer of AE directly enter into a agreement with the contract manufacturer for the required suppliers. * Quality cont .....

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, for the final products manufactured by local manufactures, the contract manufacturer is responsible for ensuring that the product meets required quality standards. * Human resource aTSPL is responsible for the day to day management and maintenance of team of suitably qualified personnel so as to ensure the proper fulfillment of its obligation under the agreement with AE. 2.1. The provision of support services was bench marked by using the TNMM as the MAM. The PLI was taken as a percentage of O .....

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the assessee that comparable companies which are providing high end services should not be selected is not correct. He held that the assessee is rendering high end services of varied nature and that this can be concluded by seeing the employees profile, salary structure etc. He also held that, provision for high end service or low end service cannot be a criteria by a comparable company for acceptance or rejection of a comparable, especially when the tax payer and the comparables have similar em .....

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before the DRP. The DRP rejected some of the comparables selected by the assessee company and included certain comparables. Consequent to the order of the DRP the A.O. made a transfer pricing adjustment of ₹ 2,18,26,570/-. 3. Aggrieved the assessee carried the matter in appeal before us. 4. The grounds of appeal read as follows. On the facts and circumstances of the case and in law, the Ld.Dy.CIT, Circle 1(2), New Delhi ( AO ) has erred in passing the assessment order u/s 143(3) of the Ac .....

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tal income of the Appellant on account of adjustment in the arm's length price ("ALP") of the international transactions related to business support services entered into by the Appellant with its associated enterprises ("AEs"). 2. The learned AO / TPO / DRP have erred in classifying the functions of the assessee as providing high value services and accordingly selecting comparables in same genre. 3. The learned AO/TPO/DRP have erred by not accepting the economic analysis .....

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d Ma Foi Global Services) identified by the appellant for having different accounting year (i.e. having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months). 6. The learned AO /TPO /DRP have erred in : a. using single year data instead of multiple year data b. Determining the arm's length margins / prices using data pertaining only to FY 2009-10 which was not available to the Appellant at the time of complying with the Transfer P .....

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are earning super normal profits) as comparable to the Appellant: " • Apitco Ltd. •Global Procurement Consultants Ltd. •TSR Darashaw Ltd 9. The learned AO/TPO/DRP have erred in rejecting Ma Foi Global Services on the basis of erroneous application of negative net worth filter. 10. The learned AO/TPO /DRP have erred in rejecting certain comparable companies identified by the Appellant using "Turnover less than INR 1 Crores" as a comparability criterion. 11. The lear .....

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plying the proviso to Section 92C(2) of the Act correctly and has failed to allow the benefit of downward variation of 5 percent in the determining arm's length price so computed. 15. The learned AO erred in holding that the appellant has furnished inaccurate particulars of income in respect of each item of disallowance/ additions and in initiating penalty proceedings under section 274 read with section 271 of the Act. The Appellant craves leave to add, amend, vary, omit or substitute any of .....

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ground nos. 1, 13 and 14 do not require specific adjudication and hence they are dismissd as such. Ground nos. 3, 4, 5, 6, 7, 8, 9, 10 and 15 are dismissed as not pressed . 5.1. An additional ground in the form of ground no.2.1 has been raised. It reads as follows. 2.1. The Ld.AO/TPO/DRP have erred on facts and in law in treating foreign exchange loss/gain as non-operating. This additional ground is admitted. 5.2. Mr.Deepak Chopra submitted that the revenue authorities have not correctly apprec .....

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rt services to ASL. He submitted that aTSPL is engaged in provision of support services to aSL in connection with sourcing services to its adidas Group entities. He pointed out that the actual manufacturing is done by, third party contract manufacturers, who are located at different locations across the country. The assessee regularly inspects the manufacturing process, from the material procurement stage onwards to the final packaging stage and provides advisory services in respect to manufactu .....

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rating. He relied on certain case laws and submitted that foreign exchange gain/loss should be treated as an operating profit/loss. 6. The Ld.CIT, D.R. Smt. Anupama Anand, on the other hand opposed the contentions of the assessee. She relied on the order of the DRP and submitted that the DRP had carefully considered each and every argument being made by the assessee with respect to the comparables. She relied on the order of the DRP and submitted that the same should be upheld. She also opposed .....

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services, to its parent company adidas Sourcing Ltd. (hereinafter referred to as aSL). These services are governed by an agreement dt. 1st day of October, 2006. The description of the services is given in Clause I of the agreement. This is extracted for ready reference. Clause I: Arrange for the manufacture of products desired by the purchasers; Identify new manufacturers and provide the purchasers with sufficient information regarding such manufacturers to enable it to decide whether to utilise .....

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ents to verify that the quality and quantity 'of the Products shipped corresponds to the requirements of the contracts between the Purchasers and the manufacturers; Provide technical services with respect to the Products and, in this connection, aid the manufacturers of Products in correcting any manufacturing problems that adversely affect the quality of Products manufactured for the purchaser by providing appropriate technical advice; Provide guidance to the relevant manufacturers to acqui .....

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support all arrangements for overseas shipment of the Products; Respect the instructions provided by the Purchasers on the carrier to be chosen and the other shipping particulars as specified by the Purchasers; Advise the Purchasers of the particulars of any individual shipment, such as port of dispatch, name of the vessel or aircraft on which merchandise is shipped, the entry port in the country of destination and the expected date of arrival; Procure that all necessary shipping documents be c .....

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as it reasonably considers to be most beneficial to aSL's interests; Establish for close any branches within India upon the prior approval of aSL and to provide reasonably accurate estimates on the cost of furnishings, fixed and movable assets and renovation; RTSPL shall in performing the-above service on behalf of aSL be acting as an agent on account of aSL and in so far as practicable explicitly represent themselves as the agent of aSL, However, it is specifically acknowledged that failure .....

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The assessee is required to perform functions including, quality control services, providing technical services with respect to the products and aid the manufacturers of the products, provide guidance to the manufacturers with respect to acquisition of raw material, randomly inspect relevant factory conditions etc. In other words the assessee is offering a comprehensive range of procurement related advisory services including quality control etc. On this factual position we now consider each of .....

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t that its operations are mainly based on the policy requirements of the government and the fact that it is a preferred company of the Government of India for entrustment of works, cannot be ignored. Be it as it may, in our considered opinion, the functional profile of this company is different from that of the assessee company and hence the same should be excluded from the list of comparable companies while computing the ALP. (b) Global Procurement Consultants Ltd.:- The Ld.Counsel for the asse .....

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available and hence it cannot be taken as a comparable. The Ld.D.R. submitted that this comparable company as a client s representative in taking on the total responsibility of procurement by providing the comprehensive range of procurement related advisory services at inter-allied activities for projects in India and abroad and hence is functional comparable. The ITAT Delhi I-2 Bench in the case of International SOS Services Ltd. vs. DCIT in ITA 1631/Del/2014 order dt. 8.12.2015, at para 4 has .....

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in which this company provides support services is totally different from the type of support services provided by the assessee. He placed reliance on the decision of the Hon ble Delhi High Court in the case of Rampgreen Solutions Pvt. Limited vs. CIT, ITA No. 102/2015 judgment dated 10/08/2015 for the proposition that functionally dissimilar companies cannot be taken as comparables. He pointed out that decision of the Spl. Bench of the Tribunal in the case of Global India Pvt. Limited has been .....

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ort services, which required high profile skill and timely delivery of quality services, which is comparable with the functional profile of the assessee. 12.8 On a careful consideration of these arguments, we are of the considered opinion that this company should be taken as a comparable for the following reasons: a) This is not a 100% Government owned company as claimed by the assessee. Under the head corporate synergy it is stated that this company is co-promoted by the Export Import Bank of I .....

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ny cannot be found, companies rendering support services in other fields have to be taken as comparables. c) We have also perused the decision of the Hon ble Jurisdictional High Court in the case of Rampgreen Solutions Pvt. Ltd.(supra). The claim of the ld. Counsel for the assessee is based on the propositions laid down in this case law. If on such an argument, the comparable Global Procurement Consulting Limited is excluded, then all the other comparables cited by the assessee as well as the ld .....

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of the considered opinion that Global Procurement Consulting Limited has rightly be taken as the comparable by the TPO. Hence we dismiss this argument of the assessee. Consistent with the view taken therein, we agree with the Ld.TPO that this company has to be taken as functionally comparable. But this company is also undertaking many other activities such as valuation etc. The issue for consideration would be as to whether segmental data is available. If such data is available then the company .....

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and valuer for construction equipment, earth moving machineries, commercial vehicles and other assets. It was further submitted that the annual report of the comparable is not available in the public domain for quantitative analysis. The Ld.D.R. submits that this company is functionally comparable as it is providing large gamut of services including allied business services to its clients. He further submitted that the company also qualifies the quantitative filters. On perusal of rival content .....

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the ground that the company is providing business out sourcing services to clients in India. These services are provided to local clients and not the foreign clients and hence they are not similar to ITES services. The TPO observed that ITES companies have the advantage of location savings, while the business service companies do not have advantage. Since in this case the services are predominantly provided in India, the company is a correct comparable. He also held that the assessee had not go .....

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service rendered and marketing support service provided. It was contended that TSR Darashaw Ltd. is a broking and investment banking house and as 57.4% of its income is from the share registry services segment and hence not a comparable. Reliance is placed on the following decisions. i. Microsoft Corporation P.Ltd. vs. DCIT in ITA no.5766/Del/2011; ii. Premier Exploration Services P.Ltd. vs. ITO in ITA no.4935/Del/2011. In our considered opinion TSR Darashaw Ltd. cannot be taken as a comparable .....

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nd investment banking house. Its other segments are : Registrar and Transfer Agent activity (R&D) and Records management activity (Records) . The segment of Pay Roll was considered by the assessee as comparable in its TP study report and the same is now assailed. Under the Pay Roll segment, this company undertakes pay roll and employee trust fund administration and management. When we compare the nature of pay roll activity undertaken by this company with the marketing support services rende .....

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