TMI Blog2019 (8) TMI 351X X X X Extracts X X X X X X X X Extracts X X X X ..... ue of adjustment to the International transaction of import of finished goods. The grounds No. 2 to 2.3 of the appeal are accordingly allowed for statistical purposes. AMP adjustment - expenditure on advertisement, marketing and sales promotion - HELD THAT:- The issue in dispute of determination of AMP adjustment is restored to the file of the Assessing Officer for deciding in accordance with the direction given by the Tribunal in assessment year 2006-07 [ 2019 (5) TMI 1598 - ITAT DELHI] . It is needless to mention that the assessee shall be afforded adequate opportunity of being heard. TDS u/s 195 - disallowance u/s 40(a)(i) in respect of buying agency services - procurement of goods from outside India - according to the lower authorities, the expenditure on buying agency services are in the nature of fee for technical services in terms of section 9(1)(vii) - HELD THAT:- Since identical issue of buying commission paid in response to buying agency agreement for activities of coordination with the manufacture for procurement of goods by the assessee is involved in the instant case, respectfully following the finding of the Tribunal [ 2013 (1) TMI 106 - ITAT DELHI] w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... electing the Transactional Net Margin Method ('TNMM') as the most appropriate method ('MAM') as against the Comparable Uncontrolled Price ('CUP') method, which is direct and most reliable under the specific facts of the case. 2.2. On the facts, in law, and in the circumstances of the case, the Ld. AO/TPO erred the Panel erred in making adjustment by not selecting appropriate comparable companies for determination of arm's length margin. 2.3. On the facts, and in the circumstances of the case, the Ld. AO/TPO erreci in not applying the DRP directions appropriately by selecting wrong comparable and taking incorrect computation of the operating margins of such comparable. 3. On the facts, in law, and in the circumstances of the case, the Ld. AO/TPO and the Panel erred in making an addition of INR 38,97,45,132 by allegedly assuming the expenditure on account of Advertisement, Marketing and Promotional ( AMP ) to be an international transaction in the present case. 3.1. On the facts, in law, and in the circumstances of the case, the Panel erred in enhancing the income of the Appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices under Section 40(a)(i) of the Income-tax Act, 1961 ('the Act') paid by the Appellant to adidas International Trading B. V. by holding the same to fall within the definition of Fees for technical services under section 9(l)(vii) of the Act and Article 12(5) of the India- Nether lands Double Taxation Avoidance Agreement ( the DTAA ). 9.1 On the facts and circumstances of the case and in law, the Panel gravely erred in enhancing the income of the Appellant by directing disallowance of fee for buying agency services . 9.2 Without prejudice to the above, the Panel erred in law by reading into the meaning of Fees for technical services contained in section 9(l)(vii) of the Act for the purpose of interpreting the definition of Fees for technical services provided under Article 12(5) of the India-Netherlands DTAA. 9.3 Without prejudice to the above, the Panel grossly erred in categorizing the services rendered by adidas International Trading B.V. into the scope of make available as provided in Article 12(5) of the India-Netherlands DTAA. 10. Without prejudice to the above, on the facts and ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and AMP expenses on aggregated basis applying Transactional Net Margin Method (TNMM) accepting five companies engaged in promotion of the brand owned by AEs or by themselves as comparable companies and made an adjustment of ₹ 8,87,80,971/- to the purchase of the finished goods. 3.1 Pursuant to the order of the learned TPO, the Assessing Officer issued draft assessment order confirming the adjustment proposed by the learned TPO. In the draft assessment order, the learned Assessing Officer also proposed disallowance of buying commission expenses in terms of section 40(a)(i) for nondeduction of the tax at source. 3.2 Aggrieved by the draft assessment order passed by the learned Assessing Officer, the assessee filed objection before the learned DRP. The learned DRP, however, followed segregated matter for benchmarking of the International transaction of purchase of the finished goods and AMP transactions. Regarding the transaction of purchase of finished goods, the learned DRP found defect in the criteria for search of the comparables by the learned TPO and directed to undertake a fresh benchmarking following certain filters ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under: DRP's findings The TPO has discussed the issue in regard to selection of comparables on page 4 12 on the order. The Comparables that were selected by the TPO were from the ones that were suggested by the assessee to benchmark its distribution function. As the functions/segment' that was being benchmarked was primarily the distribution function therefore, the-TPO held the comparables proposed by the assessee as valid comparables. The TPO out of 30 comparables of the assessee selected 5 comparables, on the basis that The assessee is engaged in promotion of brand name which is not owned by it but is owned by its AEs which leads to creation of marketing intangibles for its AEs; The TPO selected 5 companies out of 10 comparables which neither own a brand nor were they incurring AMP expensed for brands owned by some other person or entity From the order of the TPO, it is observed that the taxpayer had submitted 30 comparables before him. Neither the taxpayer in its submissions nor the TPO in his analysis has mentioned the search criteria for selection of these 30 comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Pricing Officer and has submitted rectified margin for five comparables. The Transfer Pricing Officer had rejected the above calculation of operating margins from the annual report on the premise that the assessee earlier submitted the operating margin calculations using Prowess/Capitaline database. The assessee submits that the annual report is a vital document which is considered to be the most reliable source of qualitative as quantitative information about a company. This view has been upheld in various judicial pronouncements. There are major difference in the competition of the OP/Sales % by the assessee and that by the TPO. The TPO is directed to re-compute the OP/Sale % and rectify any omission or mistake in the calculation as ideally there should not be any difference in the two computations. 5.5 We find that while giving effect to the order of the learned DRP, the learned TPO in letter dated 28/01/2016 has recomputed only AMP adjustment and adjustment in respect of International transaction of import of finished goods was retained at ₹ 8,87,80,971/-. The relevant paragraph of the said letter is reproduced as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 144C(13) of the Act, the Assessing Officer is bound to pass the final assessment order in conformity with the direction of the DRP. The relevant provision of the Act is reproduced as under: Reference to dispute resolution panel. 144C (13) Upon receipt of the directions issued under sub-section (5), the Assessing Officer shall, in conformity with the directions, complete, notwithstanding anything to the contrary contained in section 153 or section 153B, the assessment without providing any further opportunity of being heard to the assessee, within one month from the end of the month in which such direction is received. 5.8 In view of the above provision there is no scope for the Assessing Officer/TPO for any deviation from the direction issued by the learned DRP. In the instant case, the learned TPO/AO ought to have followed the direction of the learned DRP and this omission on the part of the learned AO/TPO should have been rectified by them at the earliest. This omission in the impugned order, which is against the rule of law, cannot be continued. The impugned order to the extent of addition of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ternational transaction must be established de hors the Bright Line Test before undertaking bench marking of AMP expenses. We therefore respectfully follow the view taken by this Hon ble Delhi High Court in Sony Ericson Mobile Communications (supra), and delete adjustment made in respect of AMP expenses. 8.3 However, we appreciate the concern raised by Ld. Sr. DR that decision of Hon ble Supreme Court will be binding upon assessee as well as revenue. 19. After considering the legal position as discussed in the preceding paragraphs, we are of the considered opinion that the ALP of an international transaction involving AMP expenses, the adjustment made by the TPO/DRP/AO is not sustainable in the eyes of law. At the same time, we cannot ignore the submission of the learned DR that the matter is pending before Hon'ble Apex Court and the decision of Hon'ble Apex Court would be binding upon all the authorities. In view of the above, we set aside the orders of authorities below and restore the matter to the file of the Assessing Officer. We hold that as per the facts of the case and the legal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... components and goods, both during and on completion of manufacture, f. rejecting those goods that do not conform to such terms and standards; g. sign manufacturing agreements ( Manufacturing Agreement ) h. Facilitating obtaining relevant documentation, particularly with regards to invoices, export licences, certificates of origin and / or GSP / EURI documentation, etc.; i. Arranging, the insurance, transport and delivery of goods j. to arrange storage of goods until requirement date; k. Liaise with manufacturers to ensure that confirmed ex-factory dates are met; I. Liaise with manufacturers with regards left-over material, mould management, tooling and late deliveries aiming to settle such issues as directed by the Principal, and; m. Liaise with courier and logistics companies as required to facilitate the delivery of orders placed by the Principal. 7.1 Before us, the learned counsel of the assessee submitted that the assessee made payment of commission to Adidas International Trading BV (ITBV) on account of procurement of goods from outs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is evident that for a particular stream of income to be characterized as fees for technical services , it is necessary that some sort of managerial , technical or consultancy services should have been rendered in consideration. The terms managerial , technical or consultancy do not find a definition in the Income-tax Act, 1961 and it is a settled law that they need to be interpreted based on their understanding in common parlance. Let us examine the meaning of each of these words: Managerial : the Delhi High Court in the case of J.K. (Bombay) Ltd. vs. CBDT Anr. (1979) 1 18 1TR 312 (Del) referred to an article on Management Sciences' in Encyclopaedia 747, wherein it is stated that the management in organizations include at least the following: (a) discovering, developing, defining and evaluating the goals of the organization and the alternative policies that will lead towards the goals; (b) getting the organization to adopt the policies; (c) scrutinizing the effectiveness of the policies that are adopted and (d) initiating steps to change policies when they are judged to be less effective than they ought to be. Management thus pervade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee. 5.3. The copies of the Buying Agency Services agreement are placed on record, the nature of services have not been disputed. Department has only interpreted them to be amounting to Fees for Technical Services , in our considered opinion these are not technical services but routine services offered in the procurement assistance . The agreements demonstrate that the assessee was to receive commission for procuring the products of AIMPL and rendering incidental services for purchases. The primary services provided by the assessee to AIMPL in terms of the Buying Agency Services agreement are as under: (i) Co-ordinate between AIMPL and manufacturers for the purpose of buying the merchandise, (ii) assisting in negotiations, (iii) assist in procurement of samples and sending them to AIMPL, (iv) maintain relationship with the manufacturers and search for new manufacturers, (v) supply credit reports and other marketing information concerning manufacturers and (vi) provide translation services as required for commun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otective and substantive basis. 2. On the facts, in law, and in the circumstances of the case, the Ld. AO/ Ld. TPO erred in enhancing the income of the assessee by INR 68,35,11,040 as a substantive adjustment on transfer pricing issues by allegedly assuming the expenditure on account of AMP to be an international transaction in the present case. 3. On the facts, in law, and in the circumstances of the case, the Ld. AO/ Ld. TPO erred in concluding the existence of international transaction without providing any cogent finding to establish an existence of an understanding/ arrangement / action in concert between the Appellant and its associated enterprises ('AEs') and proceeded to make an adjustment by disregarding various judgments pronounced by the Honourable Jurisdictional High Court, thereby not following the judicial discipline as mandated by law. 4. Without prejudice to ground 2 and 3 above, even if an understanding/ arrangement / action in concert were to exist, the Ld. AO/TPO erred on the facts, in law, to make an adjustment in the absence of any machinery provisions under the Act to determine the value of inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Grounds 14. That on the facts in the circumstances of the case and in law, the Hon'ble Dispute Panel-1 ('Hon'ble DRP') erred in upholding the adjustments made by the Learned Deputy Commission of Income tax, Circle 1(2), New Delhi ('Ld. AO') which is bad in law, contrary to the facts and must be quashed. 15. On the facts in the circumstances of the case and in law, the Ld. AO/ Hon'ble DRP erred in directing to disallow fee for buying agency services under Section 40(a)(i) of the Income-tax Act, 1961 ('the Act') paid by the Appellant to adidas International Trading B. V. ('aIBV') by holding the same to fall within the definition of Fees for technical services under section 9(l)(vii) of the Act and Article 12(5) of the India-Netherlands Double Taxation Avoidance Agreement ( the DTAA ). 16. Without prejudice, on the facts in the circumstances of the case and in law, the Ld. AO/ Hon'ble DRP erred in law by reading into the meaning of Fees for technical services contained in section 9(l)(vii) of the Act for the purpose of interpreting the definition of Fees for technical ..... X X X X Extracts X X X X X X X X Extracts X X X X
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