TMI Blog2020 (10) TMI 1049X X X X Extracts X X X X X X X X Extracts X X X X ..... eld by Hon ble jurisdictional Karnataka High Court in the case of Karnataka Bank [ 2015 (7) TMI 535 - KARNATAKA HIGH COURT] . We notice that the TPO/AO has taken a conscious decision on this issue on the basis of explanations furnished by the assessee. Having taken a conscious decision, it is not permissible for the AO to take a different view on the basis of subsequent decision of the Tribunal, after expiry of four years from the end of the relevant assessment year. The decision rendered in the case of Sesa Goa Ltd [ 2004 (5) TMI 54 - BOMBAY HIGH COURT] supports the case of the assessee. We find merit in the contentions of the assessee that the reopening is bad in law for more than one reason and hence the assessment order is liable to be quashed. Accordingly, we allow the legal ground urged by the assessee and accordingly the impugned assessment order is liable to be quashed TP adjustment made in respect of Advertisement and Market Promotion (AMP) expenses other than that paid to BCCI for advertisement - HELD THAT:- As decided in own case AY 2009-10 as per the definition of the international transactions as contemplated under Section 92B r.w.s. 92F(v) it does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o passed by the TPO/AO. TP adjustment made in respect of payment of trade mark Royalty - HELD THAT:- Having regard to the fact that the TPO has accepted service tax component as assessee s expenditure in assessment year 2012-13 and consequently did not make any Transfer pricing adjustment, we are of the view that this issue may be restored to the file of TPO for examining it afresh. Accordingly, we set aside the order passed by A.O. on this issue and restore the same to the file of AO/TPO. TP adjustment made in respect of interest paid on Compulsorily Convertible Debentures (CCD) - HELD THAT:- TPO has been taking different stand in different years. While he accepted the CCD as debentures in AY 2012-13 and reduced the rate of interest only, the TPO treated CCD as equity in AY 2014-15. However, in AY 2015-16, the TPO has accepted the rate of interest of 12% to be at arms length. We notice that the TPO has made certain enquiries in AY 2015-16 and accordingly came to the conclusion that the interest payment is at arms length. The benefit of those enquiries was not available with the TPO in the two years under consideration. Since the issue is the same in all the years and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fall under the category of Present obligation as a result of past events . Hence various case laws relied upon by the assessee and the Accounting Standard 29 would not support the case of the assessee - AO justified in holding the Provision for sales return as contingent liability. Accordingly we confirm the disallowance made by the assessing officer on this issue in both the years referred above. Disallowance made u/s 40(a) - Provision for expenses made by it in the earlier was disallowed in earlier years for non-deduction of tax at source - HELD THAT:- Having regard to the submissions made by Ld A.R and also the observations made by the AO in the assessment order, we are of the view that this issue requires fresh examination at the end of the AO. Accordingly, we set aside the order passed by the AO on this issue and restore the same to his file for examining it afresh in accordance with law. - IT(TP)A No.330/Bang/2015, 804/Bang/2016, 356/Bang/2017, 739/Bang/2017 & 3321/Bang/2018 (Assessment Year: 2010-11, 2011-12, 2007-08, 2012-13 & 2014-15) - - - Dated:- 14-10-2020 - SHRI B. R. BASKARAN, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER Appellant by: Shri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Nike India Pvt. Ltd., Nike India should not have reimbursed the same. These expenditures which were on travel, accommodation and conveyance, salary payment to employees of Nike Inc., US and cost of samples etc. are in fact the liabilities of Nike Inc., US and in view of the fact that, the nature of these expenses are such that they cannot be attributed to have been solely and exclusively incurred for the distribution business of the assessee company and that the assessee has not derived any tangible benefit from these expenses. In view of the above, these expenditures should not be debited to the P L account by the assessee. For A.Y. 2007-08 also the assessee company has reimbursed such expenditure amounting to ₹ 4,75,49,193/- to its AE M/s. Nike Inc, USA. Therefore, I have reason to believe that the income chargeable to tax to the extent of ₹ 4,75,49,193/- has escaped assessment within the meaning of sec.147 of the I.T Act. 4. It can be noticed that the reasons for reopening was related to the reimbursement of expenditure made by the assessee to its Associated Enterprises. In the original assessment proceedings, the AO/TPO had held that the expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reasons for reopening that there was failure on the part of the assessee to disclose truly and fully all material facts, when the reopening is done after expiry of 4 years from the end of the relevant assessment year, as held by Hon ble Madras High Court in the case of Shri Shakti Textiles Ltd. Vs. JCIT (2010) 193 Taxmann 216. Failure to record so will vitiate the reassessment proceedings. He submitted that the assessee had furnished all the relevant details to the AO during the course of original assessment proceedings and hence, there is no failure as contemplated in the proviso to sec. 147 of the Act. The Ld. A.R. further submitted that the Hon ble Karnataka High Court has held in the case of CIT Vs. Karnataka Bank (2014) 52 Tamann.com 526 that when there is no case of failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment and further where the assessing authority applied its mind and being satisfied with the claim had allowed the case of the assessee, the assessing authority could not have initiated proceedings u/s 147 of the Act, after the end of 4 years. He submitted that an identical view has been expressed by coordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R. submitted that the reopening is valid. 9. We heard the rival contentions and perused the record. A perusal of reasons for reopening recorded by the A.O., which is extracted above, would show that the A.O. has reopened the assessment as a result of order passed by the Tribunal in the assessee s own case for assessment years 2005-06 2006-07, wherein the Tribunal has upheld the transfer pricing adjustment made in respect of reimbursement of expenses. It is a fact that during the year under consideration, the TPO had held in the original assessment proceedings that the reimbursement of expenses is related to the business activities of the assessee and hence are at arm s length. Be that as it may, the undisputed fact is that reopening has been done after expiry of 4 years from the end of the assessment year, in which case the conditions prescribed in proviso to section 147 of the Act has to be satisfied by the AO before reopening of assessment. The proviso to section 147 reads as under: Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The first common issue relates to the T.P adjustment made in respect of Advertisement and Market Promotion (AMP) expenses other than that paid to BCCI for advertisement. This issue is being contested in AY 2010-11, 2011-12, 2012-13 and 2014-15. 14.1 The TPO took the view that the assessee is spending huge amount towards selling and marketing expenses. He also noticed that the assessee was incurring losses and further noticed that the losses have arisen mainly due to incurring of huge AMP expenses. The TPO further noticed that the average AMP expenses incurred by comparable companies was 0.76% of the sales. Accordingly, the TPO determined the above said indicator of 0.76% as the bright line. The AMP expenses incurred by the assessee included the expenses incurred in accordance with advertisement agreement entered by the assessee with Board of Control for Cricket of India (BCCI). In respect of the said expenditure, the assessee had also received a share from its Associated Enterprises (AE). Since the AMP expenses incurred by the assessee was far in excess of the industry average, the TPO treated the excess expenditure over and above the industry average as non-routine expense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under:- 1. Allowable Expenditure 1.02% of ₹ 231,12,21,724 ₹ 2,35,74,462 2. Expenditure to be disallowed Less:- Add:- Salary of seconded expatrates ₹ 89,58,16,134 2,35,74,462 70,30,601 Total (A) ₹ 87,92,72,273 3. Mark-up on Expenditure (B) (₹ 68,74,18,043 * 21.10% ₹ 18,55,26,450 4. Reimbursement to be received with markup ((A) + (B)) ₹ 106,47,98,723 5. Reimbursement to be received Less:- Amount received ₹ 106,47,98,723 ₹ 14,39,85,554 T.P Adjustment ₹ 92,08,13,169/- (C) Assessment Year- 2012-13:- The TP adjustment was worked out by the TPO as under. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the direction to re-examine the AMP expenses relating to BCCI. The issue relating to first category is being contested in AY 2010-11, 2011- 12, 2012-13 and 2014-15. The issue relating to AMP expenses- BCCI is being contested in AY 2010-11 and 2011-12. 14.5 With regard to the first category, the co-ordinate bench has decided the issue in favour of the assessee in AY 2009-10 (supra) with the following observations:- 9. As regards the other local AMP expenses apart from BCCI we find that such expenses are incurred by the assessee for promotion of its advertisement and promotion of its products and there is no agreement or arrangement either in writing or otherwise with the AE as nothing has been brought on record to indicate that apart from the expenses of BCCI the assessee and its AE has any understanding or agreement for incurring of AMP expenses by the assessee. Therefore, except the BCCI expenses of ₹ 34.04 Crores the rest of the expenses of AMP cannot be considered as an international transactions in view of the decision of the co-ordinate bench of this Tribunal in the case of Essilor India Pvt. Ltd. Vs. DCIT (supra) wherein the co-ordinate bench of this Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal was right in holding that transfer pricing adjustment in respect of AMP Expenses should be computed by applying Cost Plus Method. (v) Whether the Income Tax Appellate Tribunal was right in directing that fresh bench marking/comparability analysis should be undertaken by the Transfer Pricing Officer by applying the parameters specified in paragraph 17.4 of the order dated 23.01.2013 passed by the Special Bench in the case of LG Electronics India (P) Ltd.? 17. The conclusions of the Division Bench in Sony Ericsson (supra) are as under: (i) The Court concurred with the majority of the Special Bench of the ITAT in the LG Electronics case qua the applicability of 92CA(2B) and how it cured the defect inherent in 92CA(2A). The issue concerning retrospective insertion of 92CA(2B) was decided in favour of the Revenue. (ii) AMP expenses were held to be international transaction as this was not denied as such by the assessees. (iii) Chapter X and Section 37(1) of the Act operated independently. The former dealt with the ALP of an international transaction whereas the latter deals with the allowability/disallowability of business expenditure. Also, once th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led transaction. Set off of transactions segregated as a single transaction is just and equitable and not prohibited by Section 92(3). Set-off is also recognized by international tax experts and commentaries. (x) Segregation of bundled transactions shall be done only if exceptions laid down in CIT v. EKL Appliances Ltd. [2012] 345 ITR 241 (Del) are justified. Re-categorisation and segregation of transactions are different exercises; former would require separate comparables and functional analysis. (xi) Economic ownership of a brand would only arise in cases of longterm contracts and where there is no negative stipulation denying economic ownership. Economic ownership of a brand or a trade mark when pleaded can be accepted if it is proved by the Assessee. The burden is on the Assessee. It cannot be assumed. (xii) After the order of the Supreme Court in the Maruti Suzuki case, the judgment of the Delhi High Court does not continue to bind the parties. This position was misunderstood by the majority of the Special Bench in the LG Electronics Case. (xiii) The RP Method loses its accuracy and reliability where the reseller adds substantially to the value of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k-up has to be benchmarked with comparable uncontrolled transactions or transactions for providing similar service/product. (xviii) The exceptions laid down in EKL Appliances Case (supra) were neither invoked in the present case nor were the conditions satisfied. (xix) An order of remand to the ITAT for de novo consideration would be appropriate because the legal standards or ratio accepted and applied by the ITAT was erroneous. On the basis of the legal ratio expounded in this decision, facts have to be ascertained and applied. If required and necessary, the assessed and the Revenue should be asked to furnish details or tables. The ITAT, in the first instance, would try and dispose of the appeals, rather than passing an order of remand to the AO /TPO. An endeavour should be to ascertain and satisfy whether the gross/net profit margin would duly account for AMP expenses. When figures and calculations as per the TNM or RP Method adopted and applied show that the net/gross margins are adequate and acceptable, the appeal of the assessed should be accepted. Where there is a doubt or the other view is plausible, an order of remand for re-examination by the AO/TPO would be ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) and (iv) Yum Restaurants (India) Pvt. Ltd. Vs. ITO (ITA No.349/2015 dated 13/01/2016) and (v) Honda Seil Products In the above-mentioned decisions, the issue of the very existence of international transaction on incurring AMP expenditure and the method of determination of ALP was the subject matter of appeal before the Hon ble Delhi High Court. The Hon ble Delhi High Court had categorically held that in the absence of agreement between Indian entity and foreign AE whereby the Indian entity was obliged to incur AMP expenditure of a certain level for foreign entity for the purpose of promoting the brand value of the products of the foreign entity, no international transaction can be presumed. It was further held that the fact that there was an incidental benefit to the foreign AE, it cannot be said that AMP expenditure incurred by an Indian entity was for promoting brand of foreign AE. One more aspect highlighted by the Hon ble High Court is that in the absence of machinery provisions, bringing an imagined transaction to tax was not possible. While coming to this conclusion, the Hon ble High Court had placed reliance on the decisions of the Hon ble Apex Court in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price. 55. Section 92B defines international transaction as under: Meaning of international transaction. 92B.(1) For the purposes of this section and sections 92, 92C , 92D and 92E , international transaction means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt by pointing out: Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v) which defines 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', it is still incumbent on the Revenue to show the existence of an 'understanding' or an 'arrangement' or 'action in concert' between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the means part and the includes part of Section 92B (1) what has to be definitely shown is the existence of transaction whereby MSIL has been obliged to incur AMP of a certain level for SMC for the purposes of promoting the brand of SMC. 59. In Whirlpool of India Ltd. (supra), the Court interpreted the expression acted in concert and in that context referred to the decision of the Supreme Court in Daiichi Sankyo Company Ltd. v. Jayaram Chigurupati 2010(6) MANU/SC/0454/2010, which arose in the context of acquisition of shares of Zenotech Laborator ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 61. There is merit in the contention of the Assessee that a distinction is required to be drawn between a 'function' and a 'transaction' and that every expenditure forming part of the function cannot be construed as a 'transaction'. Further, the Revenue's attempt at re-characterising the AMP expenditure incurred as a transaction by itself when it has neither been identified as such by the Assessee or legislatively recognised in the Explanation to Section 92 B runs counter to legal position explained in CIT v. EKL Appliances Ltd. (supra) which required a TPO to examine the international transaction as he actually finds the same. 62. In the present case, the mere fact that B L, USA through B L, South Asia, Inc holds 99.9% of the share of the Assessee will not ipso facto lead to the conclusion that the mere increasing of AMP expenditure by the Assessee involves an international transaction in that regard, with B L, USA. A similar contention by the Revenue, namely, that even if there is no explicit arrangement, the fact that the benefit of such AMP expenses would also ensure to the AE is itself sufficient to infer the existence of an international ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, what the Revenue has sought to do in the present case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on application of the BLT, is excessive, thereby evidencing the existence of an international transaction involving the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case. ......... 74. The problem with the Revenue's approach is that it wants every instance of an AMP spend by an Indian entity which happens to use the brand of a foreign AE to be presumed to involve an international transaction. And this, notwithstanding that this is not one of the deemed international transactions listed under the Explanation to Section 92B of the Act. The problem does not stop here. Even if a transaction involving an AMP spend for a foreign AE is able to be located in some agreement, written (for e.g., the sample agreements produced before the Court by the Revenue) or otherwise, how should a TPO proceed to benchmark the portion of such AMP spend that the Indian entity should be compensated for? 63. Further, in Maruti Suzuki India Ltd. (supra) the Court further explaine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncidental benefit to the foreign AE, it cannot be said that the AMP expenses incurred by the Indian entity was for promoting the brand of the foreign AE. As mentioned in Sassoon J David (supra) the fact that somebody other than the Assessee is also benefitted by the expenditure should not come in the way of an expenditure being allowed by way of a deduction under Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law . 21. Respectfully following the ratio of the decision of the Hon ble Delhi High Court in the above cases, we hold that no TP adjustment can be made by deducing from the difference between AMP expenditure incurred by assessee-company and AMP expenditure of comparable entity, if there is no explicit arrangement between the assessee-company and its foreign AE for incurring such expenditure. The fact that the benefit of such AMP expenditure would also enure to its foreign AE is not sufficient to infer existence of international transaction. The onus lies on the revenue to prove the existence of international transaction involving AMP expenditure between the assessee-company and its foreign AE. We also h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding or agreement between the assessee and its AE to incur AMP expenses to promote the brand value of the AE. Accordingly, to maintain the rule of consistency, we follow the decision of the co-ordinate bench of this Tribunal so far as the AMP expenditure, other than BCCI expenses incurred by the assessee and direct the A.O/TPO not to consider the same as an independent international transactions but the same would be part of other international transactions . 14.6 With regard to the second category relating to BCCI expenses, the co-ordinate bench has restored the matter to the file of AO/TPO with the following observations:- 10. As regards the BCCI expenditure, it has to be ascertained whether there was any brand building and promotion expenses for the brand name NIKE as a result of the agreement between the assessee and its AE as well as with BCCI would amounts to an arrangement, understanding or agreement between the assessee and its AE for incurring AMP expenditure by the assessee to promote and enhance the brand value of NIKE. It requires to analyse the agreement between the assessee and BCCI and further the agreement between the assessee and its AE. The assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll force and effect for a period of five (5) years, through December 31, 2010, unless the Agreement is sooner terminated or further extended in accordance with the terms and conditions hereof (the Term ). 3. BASE COMPENSATION AND BONUSES (a) Base Compensation. In consideration of the sponsorship benefits including the right for NIKE to advertise and promote its trademark on the NON LEADING ARM, and ON THE CHEST of the players shirts as the case may be as per ICC guidelines [as per Exhibit C] to be provided and licensing rights granted by BCCI (as more fully described below) and of the other obligations undertaken by BCCI herein, NIKE shall pay BCCI compensation of an amount described below for the relevant Contract Year: 5. GRANT OF ENDORSEMENT RIGHTS OFFICIAL SPONSORSHIP DESIGNATIONS. BCCI hereby grants to NIKE, and NIKE hereby accepts: (i) The designation as the exclusive supplier of the athletic footwear, apparel and accessory products of BCCI and Cricket India; and (ii) The right to utilize (subject to the approval provisions of Paragraph 10 below) the Licensed Marks and/or Designations worldwide, in any media including, the worldwide web, CD-ROM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard, and after considerable effort, NIKE India has secured worldwide rights to supply and sponsor the national cricket team of India through the BCCI Agreement and has received the corresponding rights to retail product bearing both the NIKE Marks and the BCCI Marks. Both parties agree that the BCCI Agreement will provide considerable benefits for the NIKE Brand in the Territory. NIL Understands that the costs associated with sponsoring the national cricket team of India as very high and NIKE India, as a new participant in the market, is unable to support those costs unaided. Understanding that the BCCI Agreement will generate considerable retail sales for NIKE assist NIKE India with the costs of the BCCI Agreement for a limited period of time until NIKE India can support the costs of its relationship with BCCI independently. NIKE India agrees to use best efforts to expand the NIKE business in the Territory through the BCCI Agreement, and to maximize sales of NIKE Products through its relationship with BCCI, thereby maximizing royalty sales to NIL and enhancing the value of the NIKE brand within the Territory. In consideration for the benefits that the N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eversed to the extent of the expenditure incurred in normal course without any agreement, understanding or action in concert therefore, the determination of ALP of the international transactions to the extent of the sharing of cost between the assessee and AE paid to the BCCI is required to be reconsidered and readjudicated. Accordingly, we set aside this issue to the record of the TPO.A.O for determination of ALP afresh. The other AMP expenses should be considered as part of the operating cost. Accordingly, following the decision rendered by the co-ordinate bench in AY 2009-10 in the assessee s own case, we decide the issue relating to first category in favour of the assessee in AY 2010-11, 2011-12, 2012-13 and 2014-15. We restore the issue relating to second category to the file of AO/TPO with similar directions in AY 2010-11 and 2011-12. 15. The next issue urged by the assessee relates to T.P adjustment in respect of reimbursement of expenses. The details of expenses and the year in which they are being contested are given below:- (a) Purchase of trade samples - AY 2010-11, 2011-12 (b) Payment of salary to expatriates AY 2010-11, 2012-13, 2014-15 (c) Expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2014-15 Purchase of trade samples from the AE ✓ ✓ Payment of salary to expatriates ✓ ✓ ✓ Expenses incurred on sporting events ✓ ✓ Expenses relating to freight and insurance ✓ Nature of expenses reimbursed Purchase of trade samples from the AE Assessment year Reference to Paperbook 2010-11 Page 73 2011-12 Page 61 NIPL being an entrepreneur distributor bears all risks in relation to its distribution activity in India. The samples, displayed by NIPL to third party distributors are new products proposed to be introduced by NIKE Group into the market. Given that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y NIKE Inc., US and other expenditure incurred in respect of these employees deputed is crosscharged to the Appellant. These expatriates are paying personal taxes in India and are duly filing their respective income tax returns. The secondment of employee to NIPL was purely for the benefit of NIPL and that it enjoys all associated benefits with it and therefore can be termed as the Economic Owner of the seconded employees. In relation to the above, reliance is placed on the following rulings of IDS Software Solutions (I) Pvt Ltd. (ITA No. 87/13ang/2008) and Caterpillar India Private Limited (ITA 630/Bang/2010). Further reliance is placed on the judicial decision in the case of Caparo Engineering India Pvt. Ltd [TS-325-ITAT-2018(DEL)-TP] wherein it was held that where the employees have been deployed for the business operations of the assessee, the ALP cannot be determined as NIL on the basis of failing benefit test. Therefore, it is clear from the above that the employees seconded to NIPL were purely for the benefit of NIPL and that it enjoys all associated benefits with it and therefore can be termed as the Economic Owner of the seconded employees. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h informative and useful. In the Transfer Pricing report, under the heading Brief on the Business , it is mentioned that 1.2.3 Nike India, a wholly owned subsidiary of NIKE Holdings Inc., is responsible for distribution of footwear, sports apparel and equipment. In addition, NIKE India Provides administrative support in relation to the marketing and brand promotion initiatives of NIKE Group in India. 1.2.4 The development of arm s length price in this analysis recognizes that NIKE India acts as a wholesale distributor and is primarily engaged in the business of providing value added services, acting as an intermediary between entrepreneurs and customers. This analysis reflects the provisions of the OECD Guidelines concluding that, at arm s length, companies engaged in providing such value added services are entitled to receive compensation appropriate to the services performed and the capital invested in their businesses, but are not entitled to share in any returns attributable to the marketing or commercial intangibles that belong to the entrepreneur. 1.2.5 NIKE group owns virtually all the valuable intellectual property rights (know how, copy rights, etc.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sales of the products and not for the purpose of creating brand awareness is on the assessee, which onus is not discharged by the assessee. Also considering that the assessee itself has admitted that the parent, Nike Inc. USA has brand marketing and promotion initiatives in India, it is but natural to conclude that the expenses incurred by Nike Inc., USA are towards creation of brand awareness, for which the parent has the responsibility. In this view of the matter, the expenses on cost of samples, etc., have to be attributed to the parent, Nike Inc., USA and therefore it is not correct to conclude that these expenses have to be borne by the assessee. 5.5.5 As regards the expenses related to employees, of the parent company who have been deputed to the assessee, the FAR analysis in the Transfer Pricing Study/Report related to the employees states as under: Risk Category and Description Exposure to NIKE India Exposure to NIKE Group Manpower Risk: Any enterprise, which is largely dependent for its success, upon quality personnel with superior technical knowledge is faced with this risk. Compe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m's length in the assessee's own case for Assessment Year 2008-09, therefore, they should be treated as arm's length in the year under consideration. We are unable to accept the contention that the transfer pricing adjustment made in the two years under consideration has to be negated only on the ground that such an adjustment was not made in the subsequent year. It is a well settled position in law that the assessment of every year stands on its own legs and the 'principle of res judicata' does not apply to income tax assessment proceedings. The ALP for each year is determined based on the set of facts applicable to each of the individual years and no common proposition can be propounded for all the years. As mentioned earlier, for the two years under consideration before us, the assessee has not furnished any evidence to substantiate its claim that these persons work only for the distribution activity undertaken by the assessee. The onus for bringing such evidence on record to substantiate the claim rests with the assessee and wefind that such onus has neither been discharged before us nor before the authorities below. If these expenses were held to be at arm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. 16.1 The TPO noticed that the assessee was paying royalty on goods endorsed by celebrity sports persons around the world on the basis its sales turnover in India. The TPO noticed that the assessee has not furnished any agreement in respect of this arrangement. The assessee could not also furnish workings as to how it is allocated to it. Further, the assessee was seen paying royalty @ 1% on the sales, in addition to the payment of third party royalty, in accordance with the agreement entered by it with M/s NEON, an Associated Enterprises, which manages endorsement contracts with world class athletes. Accordingly, the TPO took the view that the payment of third party royalty would amount to duplication of payment. The TPO also noticed that the assessee has not obtained approval from RBI for making this payment. Accordingly, he took the view that the third party royalty is not an expenditure related to the assessee. Accordingly the TPO determined the ALP of this expenditure at NIL. 16.2 The Ld A.R submitted that there is no duplication of royalty payment as presumed by the TPO. He submitted that the assessee is paying royalty of 1% for using the brand name NIKE in its product ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d service tax component as assessee s expenditure in assessment year 2012-13 and consequently did not make any Transfer pricing adjustment, we are of the view that this issue may be restored to the file of TPO for examining it afresh. Accordingly, we set aside the order passed by A.O. on this issue and restore the same to the file of AO/TPO. 18. The next issue relates to transfer pricing adjustment made in respect of interest paid on Compulsorily Convertible Debentures (CCD). This issue is being contested by the assessee in AY 2012-13 and 2014-15. 18.1 During the year relevant to AY 2012-13, the assessee had issued debentures to the tune of ₹ 527.54 crores to M/s Nike India Holding B V (Netherlands). The Debentures carried interest rate @ 12% p.a. The TPO noticed that the average Base rate of interest determined by State Bank of India during the financial year 2011-12 worked out to 9.31%. Accordingly he proposed to make transfer pricing adjustment by adopting the rate of interest @ 9.31% under CUP method by taking the base lending rate determined by State Bank of India. The assessee submitted that the base rate is the minimum rate set by Reserve Bank of India and the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AY 2014-15. 19.1 During the year relevant to the assessment year 2014-15, the assessee has paid sourcing commission of ₹ 22.24 crores to its Associated Enterprise named M/s Nike Global Trading Pte., Singapore (NGTPS). The rate of commission paid by the assessee was 7% of the value of products sourced. The assessee benchmarked the same under CUP method by selecting certain comparable companies, which had paid sourcing commission in the range of 5% to 12%. Accordingly, the assessee claimed the payment to be at arms length. 19.2 The TPO observed that the comparable companies selected by the assessee has not been proved to be really comparable. The TPO has also analysed the agreements entered by the comparable companies with their respective agents and took the view that they are materially different. Accordingly, the TPO took the view that the CUP method adopted by the assessee is not suitable to the assessee. Hence he called for various details from the assessee. After considering those details, the TPO came to the conclusion that the assessee has not been able to show that NGTPS did all those activities as mentioned in the agreements. Accordingly he came to the conclusio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , as the assessee is only distributor of products. 20.2 The AE of the assessee, viz., Nike Inc., has introduced new products and accordingly sent samples to the assessee for giving the same to the third party distributors, who are required to display the same in their premises. The objective is apparently promotion of the new products. The AE has charged the assessee towards cost of samples given to it. The AO took the view that the assessee is only a distributor of the NIKE products and hence the expenditure on samples should be borne by the manufacturer only. Accordingly the AO took the view that the manufacturer should not pass on the burden to the assessee. Accordingly, the AO took the view that the expenditure on purchase of samples and incidental expenses are not related to the business activities of the assessee. Accordingly he disallowed the same. The Ld DRP also confirmed the same. 20.3 The Ld A.R submitted that the assessing officer cannot sit in the arm chair of the assessee and decide the mode of conducting business. He submitted that the assessee has incurred expenditure on samples on commercial considerations and hence the same should be allowed. The Ld A.R plac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wholly and exclusively for the purposes of business of the assessee. In the context of AMP expenses, the co-ordinate bench has taken the view that the sample expenses are related to brand promotion and marketing initiatives of the parent company of the assessee, meaning thereby, it cannot be said that this expenditure has been expended wholly and exclusively for the business of the assessee. The Ld A.R contended that the assessing officer cannot question the necessity of incurring the expenditure. However, in our view, when the transaction is between related parties, the Act places more burden on the shoulders of the assessee to prove that the expenditure is related to the business of the assessee. Further, in trade circles also, it is known fact that the expenditure on samples are borne by the manufacturers only. Hence this claim of expenditure is against the trade practice and the assessee appears to have borne the expenses only on the reasoning that the same was charged upon it by its parent company. Hence, we are of the view that the AO was justified in holding that the burden to incur this expenditure is that of parent company and is not related to the business activities of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ited right of return. Hence it would be appropriate to make a suitable provision for returns based on previous experience. Accordingly he submitted that the provision for sales return is allowable as deduction u/s 37(1) of the Act. 21.3 We heard Ld D.R on this issue and perused the record. It is the submission of the assessee that it is providing for sales returns on a scientific basis on substantial degree of estimation. It has taken support of Accounting Standard 29 (AS 29) relating to Provisions, Contingent Liabilities and Contingent assets . AS 29 explains that a provision should be recognized when - an enterprise has a present obligation as a result of past event. - It is probable that an outflow of resources embodying economic benefit will be required to settle the obligation and - A reliable estimate can be made of the amount of the obligation. 21.4 A careful perusal of the above said definition of provision given in AS 29 would show that there should exist a present obligation as a result of Past event . The question here is whether the Provision for sales return would satisfy above said requirement? 21.5 Whether Provision for sales return can ..... X X X X Extracts X X X X X X X X Extracts X X X X
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