TMI Blog2019 (8) TMI 663X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 hands of the assessee, it is distinct and separate from the insurance claimed by the assessee from the Bajaj Allianz. The Adidas AG has paid premium separately for the Global insurance policy and no part of the same has been allocated to the assessee or reimbursed by the assessee. Under the Global insurance policy, which was entered between Adidas AG and Zurich insurance, privity of contract was between the said two parties, without assessee being a party. We agree with contention of the learned counsel that the assessee was not having any right or obligation under the said GIP. The Adidas AG, has shown the said compensation received under the GIP from the Zurich insurance as its income and paid taxes accordingly. We may like to emphasize here that the compensation settled under the GIP is for diminution in the financial interest of Adidas AG after adjusting the loss compensat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 ( Act ), is bad in law, violative of principles of natural justice and void ab-initio. 1.1 That on the facts and circumstances of the case, the assessing officer erred on facts and in law in completing the assessment under section 143(3) read with section 144C of the Income-tax Act, 1961 ( the Act ) at total income of ₹ 1,10,22,13,698, before set-off of brought forward losses, as against loss of ₹ 12,61,25,995 returned by the appellant. Transfer Pricing Adjustment on AMP Expenses: 2. That the assessing officer erred on facts and in law in making addition of ₹ 31,90,82,215 on account of alleged difference in the arm s length price of international transactions resulting from the advertisement, marketing and sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 have been purchased by the appellant from contract manufacturer as per the specification provided by the AE and hence the appellant could not be regarded as an independent manufacturer. 2.11 That the DRP erred on facts and in law in holding that between appellant and the associated enterprise, the latter is the entrepreneur and the vital function of the marketing should actually be carried out by the associated enterprise, being the entrepreneur, which function has been assigned to the appellant. 2.12 That the DRP/TPO erred on facts and in law in not appreciating that adjustment on account of all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 enterprise. 2.24 That the DRP erred on facts and in law in confirming the adjustment made by the TPO with regard to the AMP expenses holding that (i) no independent person, would forego the compensation for the additional marketing activities undertaken by the appellant, (ii) the AE needs to compensate the appellant as it had been found that the appellant had incurred excessive AMP expenses, and development and promotion of a brand in India directly benefitted the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut 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 discounts and selling expenses aggregating to ₹ 200,507,000 from the quantum of AMP expenditure, allegedly holding that the question being investigated is marketing intangible and not just brand promotion alone in the instant case. 2.37 Without prejudice that the DRP/TPO erred on facts and in law in not considering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lux Industries Ltd 15.59% Zodiac Clothing Co. Ltd 13.48% Kewal Kiran Clothing Ltd 16.11% Raymond Apparel Ltd 13.26% Company Name AMP/Sales Color Plus Fashions Ltd 18.32% Cotton County retail Ltd 11.77% Dollar Industries Ltd 20.66% Rupa Company Ltd 11.37% Relaxo Footwears Limited. 10.42% Lakhani India Ltd 3.37% Liberty Shoes Limited 7.69% Sanspareils Greenland Pvt. Ltd 4.25% Arithmetic Mean 13.27% 2.41 That the TPO/DRP erred on facts and in law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the loss of business assets suffered by the appellant in India in fire. 3.2 That the assessing officer / DRP erred on facts and in law in holding mat if the aforesaid amount of compensation was reflected as income of the appellant and consequently credited to its profit and loss account, there would have been no reduction in the value of financial merest held by Adidas AG in the appellant, warranting payment dependent compensation outside India. 3.3 That the assessing officer / DRP erred on facts and in law in holding that since the impugned amount of insurance money became due on account of loss of stock lying with the appellant in India, which constitutes a business connection or property or asset or source of income in India, such income would be deemed to accrue or arise in India in the hands of the appellant under section 5 read with section 9(1 )(i) of the Act. 3.4 That the assessing officer / DRP erred on facts and in law in relying upon and misconstruing certain e-mails exchanged between appellant s and Adidas AG personnel and communication of independent consultant(s), to hold that the insurance claim received by Adidas AG belonged to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Commission by adidas International Trading sample purchase CUP 6,96,807 Import of Finished Products for Resale in India (traded goods by adidas International Trading) CUP 40,02,92,546 Other than adidas International Trading BV 7,31,18,713 Purchase of other products No Bench- marking required 10,70,552/- Reimbursement of Expenses by Associated Enterprises No Bench 41,24,636 (iv) The Ld. Assessing Officer referred the matter of determination of Arm s Length Price (ALP) of those international transactions to the learned Transfer Pricing Officer (TPO). The learned TPO after taking into consideration submission of the assessee, was of the view that the assessee was engaged in brand building and marketing of Adidas products in India and thus incurred a cost in connection with the benefit and the services provided to the AEs under a mutual agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he learned TPO considered an expenditure of ₹ 23.006 crores as a routine AMP expenditure and expenditure over and above, i.e. (48.55 - 23.006= 25.54 crores), was held to be the expenditure for development of marketing intangibles for the AE. Over this, the learned TPO applied a markup of 14.88%, which was on account of opportunity cost of time and money used (prime lending rate of SBI+3%). Accordingly, the learned TPO applying the bright line test proposed adjustment of ₹ 25,54,99,511/-on account of international transaction of advertising, marketing and promotion (AMP) expenditure incurred for AEs. (v) During assessment proceeding, the Assessing Officer also proposed an addition of ₹ 90,92,57,478/- on account of insurance compensation pertaining to loss due to fire, received by the Adidas AG, Germany. (vi) The Assessing Officer issued draft assessment order, wherein he included the additions proposed for transfer pricing adjustment of AMP expenditure as well as reimbursement of insurance amount received by the AE. (vii) Aggrieved by the draft assessment order, the assessee filed objection before the Ld. Dispute Resolution Panel (DRP). Bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese grounds are in respect of transfer pricing adjustment for AMP expenditure. The learned counsel submitted that identical issue of transfer pricing adjustment on account of AMP expenditure has been deleted by the coordinate bench of the Tribunal in the case of the assessee for assessment year 2006-07 in IT No. 3727/del/2014. Accordingly, he submitted that issue in dispute in the year under consideration being identical, the AMP adjustment during the year might also be deleted. 6.1 The Ld. DR, on the other hand, submitted that the international transaction of AMP exists in the case of the assessee and which may be benchmarked either in the aggregated or segregated manner, if the Bright Line Test is rejected. He accordingly submitted that issue in dispute may be restored to the file of the learned AO/TPO for benchmarking the transaction of AMP in view of the decision of the Hon ble Delhi High Court in the case of Sony Ericsson Vs. Dy.CIT, ITA No. 638/2015, dated 28.01.2016 6.2 We have heard the rival submission of the parties on the issue in dispute. We find that the coordinate bench of the Tribunal (supra) in the case of the assessee itself has discussed the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ussed above in this order, the adjustment made by the TPO/DRP/AO in respect of AMP expenses is not sustainable. However, if the above decisions of Hon'ble Jurisdictional High Court which is under consideration before the Hon'ble Apex Court is modified or reversed by the Hon'ble Apex Court, then the Assessing Officer would pass the order afresh considering the decision of Hon'ble Apex Court. In those circumstances, he will also allow opportunity of being heard to the assessee. Accordingly Grounds 2 to 2.24 stand allowed for statistical purposes. 6.3 The issue in dispute involved in present appeal before us being identical to the issue decided by the Tribunal, we, respectfully following the said decision of the Tribunal, set aside the orders of the Authorities below and restore the matter to the file of the AO/TPO to take action in the instant year following the direction of the Tribunal (supra) in para 8.3 for assessment year 2006-07. The grounds of appeal from 2 to 2.46 are accordingly allowed for statistical purposes. 7. In ground Nos.3 to 3.5, the assessee has raised issue of addition of ₹ 90,92,57,478/- made by the AO in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer 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, wherein it is written that from the insurance prospective all payments relating to physical loss, business interruption and mitigation cost belongs to Adidas India (i.e. the assessee). An another email written by Mr. Sonja Dachacher to Mr. Andreas Gellner, MD of the assessee company has been referred by the Assessing Officer, which contained an attachment mentioning that the entire claim excluding the tax levied needs to be reflected in Adidas India (i.e., the assessee). There is another email from Mr. Gaurav Mehndiratta, partner in KPMG to Mr. Andreas Gellner, MD of the assessee company, according to which the Adidas AG wanted to transfer the compensation amount in question to the assessee and was looking for the possible option for infusing those funds in Indian subsidiary. In view of these emails, the Assessing Officer was of the view that the money received in insurance claim abroad by the Adidas AG was the money of the assessee as this was the compensation for loss suffered by the assessee. According to the Assessing Officer, there is a dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payer 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 justify taxability of the compensation and the tax liability is based on accrual and arising of income and receipt is not the only test to tax an income. Relying on the decision of Sutron Corporation Vs Director of Income Tax (2004) 268 ITR 156 (Del), the assessee submitted that place of accrual depends on the place of formation of the contract and the place where contract is carried out. Further, relying on the decision in the case of CG Krishnaswami Naidu Vs. CIT (1968) 62 ITR 686 ( Mad.), it was submitted that income accrues at a place where right to receive the same arises. In view of the decisions relied, the assessee submitted that there is no right to receive income in the hands of the assessee and income if any has been received, earned, accrued and taxed in the hands of the Adidas AG in Germany and the assessee did not have any right to receive the compensation from the same in India and the said compensation cannot by any stretch of imagination brought to tax in the hands o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts 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 under: 5.5.9 From the, discussion made above, it is evident that the impugned receipts are clearly covered under section 5(1 )(i) of the Act and when read in association with section 5(1)(b) of the Act, the impugned receipt will be a part of the total income chargeable to tax in the hands of the taxpayer. The obligation to pay such amount by the Insurance Company has arisen with the very source of income, namely, the stock in goods held by AIMPL (and not by adidas AG') and therefore, the amount paid constitutes income of AIMPL. Moreover, in the e-mail from Schmitt Dieter to Felix with cc to Andreas Gellner and Marcus Reichel dated 21.4.2010, it has been clearly mentioned by Schmitt Dieter that: from the insurance perspective, all payments relating to the physical loss, business interruption and mitigation cost belong to Adidas India.' It is relevant to mention that Mr. Andreas Gellner is the Managing Director of the taxpaye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. The learned Senior Counsel also referred to details of insurance claim received by Adidas AG under the GIP of Euro 1,37,52,599 (approximately ₹ 91 Crores) from Zurich insurance, available on pages 592 to 606 of the APB-II. The learned Sr. Counsel also filed a written synopsis in the case. 7.8 The learned Sr. counsel submitted before us that two insurance policies, i.e., the policy taken by the assessee and the policy taken by the Adidas AG are in respect of two different interest insured. According to the learned counsel, the GIP covered financial interest of the Adidas AG in subsidiary and not the assets owned by the subsidiary. The learned counsel referred to various features of the GIP. He submitted that as per Germany Law: a subsidiary situated in a country which does not permit Zurich to be a coinsurer will have to take an independent local policy with a domestic insurer. In such a ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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. senior counsel submitted as under: The GIP specifically stipulates that Zurich does not cover Adidas Group entities, which are residents in countries where there is a strict prohibition on the domestic insurance laws for a German/foreign insurer to operate. It needs to be borne in mind that in terms of provisions of section 25 of the General Insurance Business (Nationalization) Act, 1972 it was not possible for the Appellant to take out fire insurance policy with Zurich Insurance for the goods lying in stock in the Indian warehouse. The same was also not permitted in terms of Foreign Exchange Management (Insurance) Regulations, 2000 notified vide Notification No. FEMA 12/2000-RB dated 3rd May, 2000. Consequently, Zurich is not permitted to, and therefore, could not, cover the goods owned by appellant in India due to the provisions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P 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 clear that Adidas AG had substantial financial interests in the Appellant, which was insurable interest as per insurance laws in Germany, the diminution in which could have been insured by Adidas AG in its own right with an insurer in Germany. 7.13 The Ld. counsel in support of his contention relied on the decision of the Court of Appeal for Ontario, Canada in the case of Kossmopoulos Vs, Constitution insurance company (1987) 1 SCR 2 and decision of Authority for Advance Ruling in the case of Aker contracting FP ASA, In Re. 381 ITR 489. 7.14 According to the learned counsel, the GIP was entered between Adidas AG and Zurich insurance, and the preview of contract was between the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty. 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 insurer, implied in a contract of indemnity, known as subrogation , is based on two basic principles of equity: (a) No tortfeasor should escape liability for his wrong; (b) No unjust enrichment for the injured, by recovery of compensation for the same loss, from more than one source. The doctrine of subrogation will thus enable the insurer, to step into the shoes of the assured, and enforce the rights and remedies available to the assured. 17. The term subrogation in the context of insurance, has been defined in Black's Law Dictionary thus: The principle under which an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant. 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 exchanged with reference to the claim under GIP to be settled by Zurich Insurance Co. in favour of Adidas AG in respect of insurable interest of Adidas AG, i.e., financial exposure in Appellant. Since the amount of compensation under the GIP was the loss of profit remaining after compensation received by the Appellant in India, which compensation could have been determined only after the exact figure of compensation payable by BA was finally known references to compensation paid by BA to the appellant have been made in the correspondences. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned 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 behind the decision to take insurance policy can never be to evade taxes. The insurance policies taken by way of paying huge premiums to cover the contingent losses that may or may not arise in future. The insurable event may or may not arise in any country. The learned counsel further referred to the decision of the Hon ble Supreme Court in the case of Union of India Vs. Azadi Bachao Andolan (2003) 263 ITR 706. 8.2 In view of the arguments, the learned counsel submitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness 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 subsidiary companies, which fulfill the pre-requisites of the additional insured companies in the sense of a master contract and which have their headquarters in countries with permit reservation; In subsidiary companies, which are newly formed or acquired in the sense of an insurance contract as well as were inadvertently not announced and have their headquarters in countries with permit reservation. On the inclusion of such companies in the insurance protection, the regulations of this insurance contract are correspondingly valid in the framework of this part of the contract. For the subsidiary company of Adidas AG there exist risk adequate local policies coordinated with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 been computed with reference to loss of stock by the fire in the hands of the assessee, it is distinct and separate from the insurance claimed by the assessee from the Bajaj Allianz. The Adidas AG has paid premium separately for the Global insurance policy and no part of the same has been allocated to the assessee or reimbursed by the assessee. Under the Global insurance policy, which was entered between Adidas AG and Zurich insurance, privity of contract was between the said two parties, without assessee being a party. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 interest in the sale proceeds received as such. They are not co-sharers with the company and no part of the sale proceeds belongs to them. Nor is there any ground for saying that the company are the trustees for the business or any of the assets for the managing agents. The managing agents cannot, therefore, be said to have acquired a right to receive any commission unless and until the accounts are made up at the end of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 related more to explore mode of transfer of money from the Adidas AG to the assessee, because the Adidas AG was interested in restoring the loss in its financial interest in Indian subsidiary i.e. assessee. Thus, correspondence in emails was related to application of the income and not as under whose hand it would be taxable. Further, the issue as to whether the income by way of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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