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2019 (8) TMI 663

..... e action in the instant year following the direction of the Tribunal n the case of the assessee for assessment year 2006-07 [2019 (5) TMI 1598 - ITAT DELHI] Addition in respect of amount of ‘insurance compensation’ pertaining to fire, received by the Adidas AG - whether the claim of insurance received by the ‘Adidas AG’ under GIP is income accrued in the hands of the assessee or not? - HELD THAT:- Policy of insurance against loss of stock by fire taken by the assessee from Bajaj Allianz (BA) was to secure stock in trade, which is a tangible asset, whereas the Global Insurance Policy (GIP), taken by the Adidas AG from Zurich insurance was for securing investment made in subsidiaries or say financial interest, which is an intangible asset. Thus, the interest insured by the assessee and the interest insured by the Adidas AG are two different interest, the later one is larger than the earlier one. After considering the submission of the parties, we are of the firm view that loss in economic value of the financial interest, constituting insurable interest in the case of Adidas AG, which though has been computed with reference to loss of stock by the fire in the h .....

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..... device was adopted by the assessee for evading taxes in India. We are of the opinion that claim of insurance received by M/s Adidas AG is not taxable in the hands of the assessee either under section 5 or under section 9(1)(i) of the Act. The grounds of the appeal raised by the assessee are accordingly allowed. - ITA No.1431/Del/2015 Assessment Year: 2010-11   - 29-7-2019 - Shri Amit Shukla, Judicial Member And Shri O.P. Kant, Accountant Member Appellant by Shri Ajay Vohra, Ms. Shaily Gupta, CA; and Mr. Ramit Katyal, CA Respondent by Shri Sanjay I. Bara, CIT(DR) ORDER O.P. Kant, This appeal by the assessee is directed against order dated 02/02/2015 passed by the Income Tax Officer, Ward 1(3), Range -1, New Delhi (hereinafter will be referred as the Assessing Officer ) in compliance to the directions issued by the learned Dispute Resolution Panel (in short the DRP ). The grounds raised by the assessee in the appeal are reproduced as under: General: 1. The impugned order of assessment framed by the assessing officer in pursuance of the directions of the Dispute Resolution Panel (hereinafter referred to as DRP ) under Section 143(3) read with Section 144C of the Income-tax Act, 1961 ( .....

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..... epts, designs, creative thinking, music, graphics, TV spots, films, etc. are owned by the associated enterprise. 2.6 That the DRP erred on facts and in law in observing that the expenditure on AMP creates advertisement, which creates long term asset, the ownership of which vests with the taxpayer and, therefore, the contention of the appellant that such AMP expenses were incurred on its own account, is contradicted by fact. 2.7 That the DRP/TPO erred on facts and in law in not appreciating that since the appellant was performing the key people/critical decision making functions with regard to advertisement and marketing activity, the risk related to such activity ought to have been borne by the applicant. 2.8 That the DRP erred on facts and in law in holding that in the transactions between the appellant and the associated enterprise, it is the associated enterprise which is operating as an entrepreneur. 2.9 That the TPO erred on facts and in law in re-characterizing the appellant as a distributor and not as a manufacturer. 2.10 That the DRP erred on facts and in law in holding that Adidas Salomon group of AEs are intricately associated with the manufacturing function and goods hav .....

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..... That the DRP erred on facts and in law in observing that the AE of the appellant was involved in formulation of AMP policy by way of its association at every stage of formulation of marketing strategy and the averment of the appellant that marketing exercise carried out by it is independent of the AE, was incorrect. 2.21 That the DRP erred on facts and in law in holding that the associated enterprise is involved in formulation of AMP policy of the appellant, not appreciating that such involvement of the associated enterprise is only in the nature of assistance provided by the associated enterprise and the ultimate discretion rests with the appellant. 2.22 That the DRP erred on facts and in law in referring to the license agreement and inferring that the appellant is carrying the marketing activity at the behest of the associated enterprise, not appreciating that the terms of the license agreement were comparable with third party agreements entered into by the associated enterprise. 2.23 That the DRP erred on facts and in law in drawing unwarranted inferences from the loss incurred by the appellant without substantiating as to how such losses resulted in benefit to the associated e .....

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..... ment and brand promotion expenses could not be made. 2.32 Without prejudice, that the TPO/DRP erred on facts and in law in rejecting the analysis undertaken by the appellant by applying the Comparable Uncontrolled Price ( CUP ) method. 2.33 That the DRP/TPO erred on facts and in holding that CUP analysis cannot be relied upon in view of difference in markets without placing on record any evidence to substantiate that difference in markets has an influence on the AMP/Sales ratio. 2.34 That the DRP/TPO erred on facts and in law in disregarding the CUP analysis conducted by the appellant on the basis of third party license agreements, holding that the appellant has not provided the data with respect to price at which goods are purchased from the AEs without appreciating that such transaction was accepted to be at arm s length by the Transfer Pricing Officer. 2.35 Without prejudice, that the DRP erred on facts and in law in not appreciating that the compensation with respect to the marketing function was built in the lower price at which the goods were purchased by the appellant from the associated enterprise. 2.36 That the DRP / TPO erred on facts and in law in not excluding the disco .....

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..... ed to the value added expenses incurred by the appellant for providing the alleged service in the nature of brand promotion. 2.43 That the /TPO erred on facts and in law in applying a markup of 14.88% on the alleged excess AMP expenditure incurred by the appellant, while computing the value of compensation to be received by the appellant on account of promotion of Adidas brand. 2.44 Without prejudice, that the TPO erred on facts and in law in not restricting the mark up to Prime Lending Rate ( PLR ) of State Bank of India ( SBI ) plus a margin of 150 basis points, despite the direction of DRP to this effect. 2.45 Without prejudice, the assessing officer/DRP erred on facts and in law in not appreciating that markup, if at all, had to be restricted to the value added expenses incurred by the appellant for providing the alleged service in the nature of brand promotion. 2.46 Without prejudice, that the TPO /DRP erred in not appreciating that the associated enterprise has already compensated the appellant by allowing a royalty free use of brand Adidas and by providing loans at concessional rates. Corporate Tax Addition: 3. That the assessing officer / DRP erred on facts and in law in ma .....

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..... er Section 234B and Section 234C of the Act. 2. The assessee also filed additional grounds of appeal on 22/11/2018 alongwith date chart from filing of income tax return to the date of passing the final assessment order as under: That on the facts and circumstances of the case and in law, the impugned order passed by the Assessing Officer is barred by limitation and therefore, is liable to be quashed. 3. However, before us, the additional ground was not pressed by the Ld. counsel of the assessee and therefore, same is dismissed as infructuous. 4. The brief facts of the case are that: (i) The assessee company is engaged in the business of sourcing, distribution and marketing of products of brand-name Adidas in India. The assessee company was incorporated in the year 1995 under the Companies Act, 1956 with 98.99 percentile shares of the assessee company held by the Adidas India Private Limited, which is in turn is a subsidiary of M/s. Adidas AG, Germany. (ii) The assessee filed its original return of income on 15/10/2010 declaring a loss of ₹ 12,61,27,241/-. The return of income was revised on 27/03/2012 declaring loss of ₹ 12,61,25,995/-. The case was selected for scrutin .....

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..... or and is entitled to retain intangible income in India. The learned TPO observed that the assessee by way of expenditure on promoting Adidas brand , developing and maintaining network of sub distributor, dealers, retailers etc., developing efficient after sale service network in creating customer awareness and loyalty by advertisement, organizing events, education, trade shows etc has developed local marketing intangible for its AE. The learned TPO issued show-cause the assessee as why the expenditure over and above (Bright Line Test) the routine marketing promotion and advertisement expenditure should not be held as the services rendered to the AE for development of marketing intangible. The internal CUP proposed by the assessee to benchmark the AMP expenditure incurred by it, was analyzed by the learned TPO and rejected. Before the TPO, the assessee furnished a set of 30 comparables, out of which 15 were rejected by the learned TPO for the reason that those companies were engaged in brand development also. Out of the balance 15 comparables, the learned TPO rejected 3 companies for the reason that the business of those companies was mainly into export market, having the export to .....

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..... ight Line Test for determination of arm s length price of the International transactions of AMP. The learned DRP, accordingly upheld the AMP adjustment proposed by the learned TPO. The learned DRP also upheld the amount of insurance received by the AE as income of the assessee. The learned DRP accordingly issued directions in the order dated 30/12/2014. (viii) The Ld. Assessing Officer in compliance to the order of the learned DRP passed the final assessment order on 02/02/2015 incorporating addition of ₹ 29,35,17,838/- on account of transfer pricing adjustment and addition of ₹ 90,92,57,478/- on account of insurance compensation pertaining to loss due to fire received by the M/s. Adidas AG, Germany. (ix) Aggrieved with the additions made by the Assessing Officer in the final assessment order, the assessee is before the Tribunal raising the grounds as reproduced above. 5. The learned Senior Counsel of the assessee Sh. Ajay Vohra, submitted that ground No. 1 to 1.1 are general in nature and not required to be adjudicated specifically, accordingly same were dismissed as infructuous. 6. In respect of ground No. 2 to 2.46, the Ld. Sr. counsel submitted that all these ground .....

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..... action 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 position as of now and discussed above in this order, the adjustment made by the TPO/DRP/AO in resp .....

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..... ₹ 91 crore) was received by M/s Adidas AG after subtracting the claim of Euro 71,39,005 (approximately ₹ 47 crore) by the assessee in India from the Indian insurer (i.e. Bajaj Allianz). 7.2 According to the Assessing Officer, this overseas policy (GIP) was also in respect of the stock of the assessee. It has been mentioned by the Assessing Officer that insurance in India in respect of the stock was on cost, whereas the insurance taken by the Adidas AG with the overseas insurer on the stock of the assessee was at the selling price. However, this fact has been disputed by the assessee and according to the assessee, this policy was to cover loss of financial interest due to erosion of economic values of subsidiaries and thus the claim received by the assessee and the overseas entity were for different interest insured. 7.3 The learned Assessing Officer also referred to documents found during the course of survey indicating exchange of emails between the officials of the overseas insurer and the officials of Adidas AG. The Ld. Assessing Officer has referred to email dated 21/04/2010 from Mr. Schmitt Dieter to Mr. Felix with CC to Mr. Andreas Geliner and Mr. Marcus Reichel, .....

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..... a. 7.4 Before the Ld. DRP, the assessee made detailed submissions contesting that insurable interest into two policies, one taken by the assessee and another taken by Adidas AG are different. It was contended that the assessee had never been a contracting party to the GIP and therefore, due to privity of contract between two foreign parties, no contractual legal right inures to the assessee company. It was also submitted that no inter-company charges or cost allocation was made by the Adidas AG towards the assessee and the Adidas AG had borne the entire cost of GIP while the assessee has born cost of the local insurance with Bajaj Allianz. It was further submitted that compensation received by the Adidas AG outside India has been included in the taxable income of the Adidas AG in Germany. The assessee submitted that the expression accrue means to become a present and enforceable right and to become present right of demand. According to the assessee income accrues only when the taxpayer acquires the right to receive it and in the present case there is no actual or constructive receipt of income in the hands of the assessee. The assessee submitted that email correspondence cannot jus .....

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..... m any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of the capital asset situated in India, is would deem to accrue or arise in India. The learned DRP held that compensation was through or from any business connection in India because the impugned income has been due to the loss sustained on the fire of the stock, profit which could have been earned on such a stock when sold, the loss suffered on other assets and other incidentals. According to the learned DRP, the property in ordinary sense includes both movable and immovable and thus the income of compensation was also through or from any property in India. The learned DRP also held that the income was through or from any asset or source of income in India due to the reason that loss sustained on fire of the stock, profit which could have been earned on such a stock when sold, the loss suffered on other assets and other incidentals, which are part and parcel of the business carried on by the assessee in India. The learned DRP accordingly concluded in para 5.5.9 on the taxability of income in the hands of the assessee as un .....

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..... the value of the shares of the assessee would have been protected if the amount of compensation had been transferred to the assessee. The learned DRP is in agreement with the finding of the AO that the assessee devised a mechanism of tax evasion. In view of the above discussion, the learned DRP upheld the finding of the Assessing Officer. 7.7 Before us, the learned Senior Counsel of the assessee filed a paper-book containing pages 1 to 717 and reiterated the facts related to the issue in dispute. The learned senior counsel referred to a copy of General Insurance Policy taken by the assessee with M/s Bajaj Allianz, which is available on pages 559588 of the paper book. He also referred to the insurance claim received of ₹ 47 crores towards loss of stock and ₹ 1.25 crores received towards loss of fixed asset from Bajaj Allianz (BA). The Ld. Senior Counsel also referred to a copy of Global Insurance Policy (GIP) covering loss of financial interest due to erosion of economic value of its investment in subsidiary companies across the globe including the assessee with an overseas insurance company, i.e, M/s. Zurich insurance, which is available on page 272 to 556 of APB-II. Th .....

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..... r the years made substantial financial investment in the assessee, which as on 31/03/2010 stood of equity (through the subsidiaries) of ₹ 54.96 crores and interest-free loan (ECB) of ₹ 29 crores. In addition, the Adidas AG had also provided guaranteed to Indian banks for granting overdraft/working capital loan to the assessee of ₹ 293 crores. 7.11 It was submitted that the insurable interest of the assessee and Adidas AG under two separate and district contracts of insurance with independent unrelated third-party insurers, for which premium was separately paid by each of the two entities, was distinct and separate. It was submitted that any business loss suffered by the assessee had a direct impact on the various investment made by the Adidas AG in the assessee, including loans and guarantees and it was the aforesaid loss in economic value of the financial interest, considering insurable interest in the case of Adidas AG, which was computed with reference to loss of stock by fire in the hands of the assessee. 7.12 On the issue that loss of stock of the assessee was not covered under the insurance policy of Zurich insurance is due to regulatory prohibitions, the Ld .....

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..... orm of liability insurance that covers Adidas AG s financial interest in AIPL. Accordingly, it cannot be held that the GIP was a contract taken out by Adidas AG with Zurich Insurance (for which premium was undisputedly paid by Adidas AG), for and on behalf of the Appellant, in violation of Indian regulations. 7.12 Regarding the substantial financial interest of Adidas AG in assessee, which was insurable interest as per insurance law in Germany, the learned counsel submitted as under: The SIP specifically stipulates in Part IV of GIP that the insured is solely Adidas AG. Zurich provides cover to Adidas AG in the event its financial interest in an overseas subsidiary is adversely affected. The compensation settled under the GIP is for diminution in the financial interest of Adidas AG in AIMPL after adjusting the loss compensated by BA. It is in accordance with the German law. Furthermore, the GIP stipulates a measurement approach of Adidas AG s financial loss by reference to AIMPL s loss. This agreed value approach, in which Zurich and adidas AG agree, in advance, on the value of Adidas AG s financial interest in AIMPL, is legally enforceable in Germany. In view of the above, it is c .....

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..... A contract of insurance is a contract of indemnity. The loss/damage to the goods covered by a policy of insurance, may be caused either due to an act for which the owner (assured) may not have a remedy against any third party (as for example when the loss is on account of an act of God) or due to a wrongful act of a third party, for which he may have a remedy against such third party (as for example where the loss is on account of negligence of the third party). In both cases, the assured can obtain reimbursement of the loss, from the insurer. In the first case, neither the assured, nor the insurer can make any claim against any third party. But where the damage is on account of negligence of a third party, the assured will have the right to sue the wrongdoer for damages; and where the assured has obtained the value of the goods lost from the insurer in pursuance of the contract of insurance, the law of insurance recognizes as an equitable corollary of the principle of indemnity that the rights and remedies of the assured against the wrongdoer stand transferred to and vested in the insurer. 16. The equitable assignment of the rights and remedies of the assured in favour of the insu .....

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..... ue of ₹ 50 crores. The claim from the insurance company for loss of such stock could, at the highest, be in the amount of ₹ 50 crores. The Appellant could not have expected to receive anything more and above the amount of ₹ 50 crores for such loss sustained. In that view of the matter, too, receipt of ₹ 90.92 crores received by Adidas AG from Zurich Insurance which is sought to be imputed as belonging to the Appellant (alleged to be received by Adidas AG on behalf of the Appellant) would be impermissible in terms of the insurance taken out by the Appellant. 7.17 On the issue of emails correspondence impounded during the survey from the premises of the assessee, the Ld. Senior counsel submitted as under: The first e-mail dated 21.4.2010 which is written by Mr. Dieter Schmitt/Marcus Reichel, being the Executives of Insurance Department of Adidas AG to the Appellant. The aforesaid e-mail was written by Insurance Department of Adidas AG to the executives of the Appellant, in relation to the settlement of insurance claim of Adidas AG under GIP, after the settlement of insurance claim of the Appellant with BA. Accordingly, the aforesaid correspondences were exchan .....

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..... Insurance in terms of the GIP taken out by Adidas AG and of which premium was paid by Adidas AG, was, in law, income of the Appellant liable to tax in India. 8. On the issue, whether there is deemed accrual of income in India in accordance with section 9(1)(i), the learned counsel submitted that said section has no application insofar as assessee is concerned, who is resident in India. 8.1 As regard to allegation of the Assessing Officer that GIP was a scheme for tax evasion, the learned counsel submitted that GIP was taken out by the Adidas AG as a global policy with Zurich insurance company, which is a legal and valid contract under the German law. He submitted that this policy was taken by the Adidas AG not only for protecting the rights in its subsidiary in India, in particular, but for investments in subsidiaries companies anywhere in the globe. Even prior to the formation of the assessee, the Adidas AG had been taking GIP for a purpose of ensuring its global financial interest in group companies and by way of this policy the Adidas AG is covering its risk in investment in more than hundred subsidiaries across the word. Further the learned counsel submitted that the intent beh .....

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..... gitimately led by the policyholder or additionally insured business or defect or controlled (direct or indirect interest) or if they are entrepreneurial. These business venture hereinafter referred to a subsidiary ………………………………………………………….. 8.6 Further, on page 548 of the paper-book, the subject matter of the insurance, event covered by the insurance and insurance benefit has been mentioned as under: 2. SUBJECT MATTER OF THE INSURANCE The Adidas AG has investments in the subsidiary companies with headquarters in those countries, which prohibit the operating of the insurance business through in an insurer not permitted there (countries with permit reservation) Object of this insurance is the interest of Adidas AG, to sustain the economical value of its investment in such subsidiary companies in case of a property/BU, liability-or transport damages and be protected from the thus resulting, own financial losses. The insurance therefore exclusively refers to the purely financial interests of Adidas AG. Insured investments are In subsidi .....

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..... o extensive insurance protection for legal defense costs (defense covering), the Adidas AG has to take care in the framework of its influences for an appropriate defense or legal representation for checking of the issue of liability and for defense/clearance of unjustified claims. In this case the Adidas AG is compensated for the costs required for the legal defense. 8.7 After considering arguments of the parties and available records, the factual position in our view is that the policy of insurance against loss of stock by fire taken by the assessee from Bajaj Allianz (BA) was to secure stock in trade, which is a tangible asset, whereas the Global Insurance Policy (GIP), taken by the Adidas AG from Zurich insurance was for securing investment made in subsidiaries or say financial interest, which is an intangible asset. 8.8 Thus, the interest insured by the assessee and the interest insured by the Adidas AG are two different interest, the later one is larger than the earlier one. After considering the submission of the parties, we are of the firm view that loss in economic value of the financial interest, constituting insurable interest in the case of Adidas AG, which though has be .....

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..... ) says that income which accrues or arises or is deemed to accrue arise in India during such year to the said resident is included in the total income. The third clause 5(1)(c) includes the income under the total income, which accrues or arise to an resident assessee outside India during such year. Thus, here the main issue arises is whether the income accrued or arises to the assessee. In this respect, we may like to refer to the decision of the Hon ble Supreme Court in the case of ED Sassoon & Co Ltd (supra) as under: 48. What has, however, got to be determined is whether the income, profits or gains accrued to the assessee and in order that the same may accrue to him it is necessary that he must have acquired a right to receive the same or that a right to the income, profits or gains has become vested in him though its valuation may be postponed or though its materialisation may depend on the contingency that the making up of the accounts would show income, profits or gains. The argument that the income, profits or gains are embedded in the sale proceeds as and when received by the company also does not help the transferees, because the managing agents have no share or inter .....

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..... espect of loss of tangible property in the form of stock of the assessee. The claim was certainly in respect of the intangible asset in the form of financial interest of the Adidas AG and thus the claim of insurance cannot be said to have any business connection in India. Similarly, the insured interest of Adidas AG in its subsidiaries cannot be said to have through or from any property in India or through or from any asset or source of income in India. The Adidas AG has entered into contact in Germany for insuring the intangible asset in the form of financial interest in its subsidiaries, which is quite distinct from the physical stock-intrade of the assessee, which lost in fire. Thus, the claim received by Adidas AG cannot be treated as income deemed to accrue or arise in the hands of the assessee in India. 9.4 We also do not find any substance in the finding of the lower authorities that in email correspondence between employees of Adidas AG and Zurich insurance indicated as claim of GIP belongs to the assessee. The Assessing Officer in draft assessment order has reproduced gist of correspondence made through emails. On perusal of the said correspondence, we find that same is re .....

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