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TMI Blog2019 (8) TMI 1723X X X X Extracts X X X X X X X X Extracts X X X X ..... d in law, the learned AO has erred in initiating reassessment proceedings under section 147 of the Act on the basis of surmise and conjectures and not on the basis of any tangible and conclusive material. Ground No. 2: Reimbursement of rebate and discount is not in nature of Royalty (i) On the facts and in the circumstances of the case and in law, the Hon'ble DRP and the learned AO erred in holding that reimbursement of rebate and discount received by the Appellant from Braitrim India Private Limited ('BIPL') is for the use of the brand 'Braitrim' and is assessable to tax as 'Royalty' under section 9(1)(vi) of the Act/Article 13 of the India-United Kingdom tax treaty. (ii) On the facts and in the circumstances of the case and in law, the Hon'ble DRP and the learned AO erred in not appreciating the fact that payments received by the Appellant from BIPL were purely in the nature of reimbursement of 'rebate and discount' which the Appellant had passed onto the Retailers on 'cost to cost' basis without any mark-up. (iii) On the facts and in the circumstances of the case and in law, the Hon'ble DRP and the learned AO erred in not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has group companies in other countries also. Assessee has agreements with various global retail chains (hereinafter referred to as 'retailers') in terms of which assessee and its group concerns are nominated as the preferred or exclusive sourcing point for hangers to be used by the garment suppliers of such retailers. Because of such arrangement, the retailers negotiate advantageous terms from the Braitrim group. Under such negotiated arrangements with the retailers, assessee-company is required to give a rebate/discount to the retailers based on the volume or units of sales of hangers made to garment suppliers by various Braitrim group entities worldwide. The assessee-company recovers proportionate share of such rebate/discount from its group companies based on the respective sales of such group companies to the respective retailers. Such arrangement included the Indian subsidiary, namely BIPL, also. Consequently, assessee-company has entered into a Cost Reimbursement Agreement (in short 'CRA') dated 13.2.2004 which is effective from 1.4.2001 onwards, a copy of which has been placed in the Paper Book at pages 19 to 24. In terms of such arrangement between the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tailers on assessee-company, copies of which have been placed at pages 25 to 112 of the Paper Book. The case made out by the assessee is that there is no mismatch between the invoices raised by the retailers on assessee and the amount reimbursed by BIPL and it is further pointed out that assessee pays to the retailer the rebate/discount recovered from BIPL on a cost-to-cost basis without any profit mark-up. 7. The aforesaid stand of assessee has not been accepted either by the Assessing Officer in the draft assessment order dated 28.3.2014 passed u/s. 144C(1) r.w.s. 147 r.w.s. 143(3) of the Act or in the final assessment order passed u/s. 143(3) r.w.s. 147 r.w.s. 144C(13) of the Act consequent to the directions of the DRP dated 19.12.2014 (supra). The stand of the Revenue, as manifested in the orders of the authorities below, can be understood as follows. According to the Revenue, even though the remittances received by the assessee have been termed as administrative charges, but the CRA does not specifically mention these as discount/rebate given by assessee to the retailers. According to the Revenue, as per the CRA, the administrative charges are stated to be payments in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en made on all the sales effected, which would lead to the inference that it is a consideration paid for use of brand "Braitrim" and is thus, assessable as royalty under the Act as well as in terms of the India-U.K. DTAA. 9. At the time of hearing, the learned representative for the assessee pointed out that it has been the consistent stand of assessee that the receipts from BIPL constitute reimbursement not chargeable to tax in India and in support, assessee had referred to sample copies of back to back invoices and the relevant clauses of the CRA. The learned representative pointed out that in the draft assessment order, the Assessing Officer had observed about non-production of details to substantiate the payment of rebate/discount to retailers; for the said reason, assessee had obtained a report from an independent U.K. Chartered Accountant, Blick Rothenberg, a copy of which has been placed at pages 148 to 153 of the Paper Book, which clearly brings out the payment made to the retailers vis-a-vis the invoices of rebate/discount raised by retailers on assessee, which in turn, have been back to back invoiced by assessee to BIPL. It was, therefore, submitted that such evidence, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te/discount to the retailers, based on the volume/units of sales to garment suppliers, associated with the Braitrim group. This rebate/discount is stated as "Administration charges" by Braitrim, for its accounting purposes. Subsequently, the proportionate share of rebate/discount is recovered by Braitrim UK, from its group companies (including Braitrim India), based on the relative sales of those group companies. 8.2. As a result of aforesaid arrangements between Braitrim UK and the third party retailers, the assessee sells hangers to the Indian garment suppliers of the said retailers. It is stated that the retailers then charge the agreed rebates to Braitrim UK. Thereafter, the assessee reimburses the rebate paid by Braitrim to the retailers to the extent it pertains to India sales (i.e., sales to Indian garment suppliers of the retailers located outside India). In view of the above, it is stated, that Braitrim UK has entered into a cost reimbursement agreement with the assessee, whereby the assessee is required to reimburse its proportionate share of the discount/rebate to Braitrim UK without any mark up. 10. .......... As part of these arrangements/agreements, Braitrim UK agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee and the invoices recorded by BIPL while it was accepted that the payment of administrative charges to assessee-company was only reimbursement. The learned representative pointed out that as a consequence of the directions of the Tribunal, a remand report was called from DIT(IT) and based on the remand report submitted by the DIT(IT) dated 21.11.2014, copy of which is placed at pages 203 to 210 of the Paper Book, the DRP vide its order, copy of which is placed at pages 249 to 254 of the Paper Book, has held that the Transfer Pricing adjustment is taken as NIL. On the basis of the aforesaid proceedings in the case of BIPL for Assessment Year 2007-08, what is sought to be emphasised is that the nature of administrative charges paid to the assessee-company has been accepted as mere reimbursements and, therefore, according to the assessee-company, the assessing authority in the present case cannot take a divergent view. On this aspect of the matter, the learned representative for the assessee relied upon the decision of the Chennai Bench of Tribunal in the case of R.K. Swamy vs. ACIT, 88 ITD 185 (Chennai) for the proposition that the same transaction cannot be characterised diffe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uently, the proportionate share of rebate/discount is recovered by the assessee from its group companies, including BIPL, based on the relative sales of those group companies to the respective retailers. The assessee has, accordingly entered into a reimbursement agreement with BIPL, whereby BIPL has acknowledged its obligation to reimburse its proportionate share of the discount/rebate to the assessee based on sale volumes/units achieved by it. As per the Cost Reimbursement Agreement (CRA), such reimbursements are depicted as 'Administration charges' by BIPL in its books of account. 14. We find it relevant to refer to the following clauses of the Cost Reimbursement Agreement (CRA) in order to appreciate the nature and characterisation of the amount of reimbursements:- (i) that the title to the agreement is described as 'Cost Reimbursement Agreement'; (ii) that the preamble to the agreement mentions the fact of payment of administration charges by the Assessee to the customer companies in respect of goods supplied by worldwide entities of Braitrim group including BIPL and the purpose of the agreement is to recover such charges by the assessee from BIPL; (iii) tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pted by the taxpayer, these expenses are nothing but reimbursement of expenses incurred by the AE for the discounts to be passed on to the retailers by Braitrim UK. After considering the arguments of the assessee it can be inferred that Braitrim UK negotiates globally with various garment retailers to use the hangers manufactured by Braitrim group companies all over the world. As part of these arrangements/agreements Braitrim UK agreed to pass on the discount at the rate 1% of sale of hangers by Braitrim group of companies to the retailers. As rightly stated by the assessee because of this arrangement the taxpayer is getting business without much effort on advertisement and marketing as evidenced by no expenses on marketing or advertisement debited in the profit and loss account for the FY 2006-07. The Braitrim group companies supply the hangers to the garment manufacturers, which in turn supply to the ultimate retailers in the form of pre-hanged clothes. The assessee also supplied hangers to garment manufacturers within and outside India. Based on the sale of these hangers by the assessee Braitrim UK has to pay to the retailers at the rate of 1% on these sales made by the taxpayer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , we are inclined to uphold the grievance of the assessee that the payments qualify as a pure reimbursement of expenses and accordingly, not taxable in India. The reimbursements received by the assessee are in respect of specific and actual expenses incurred by the assessee and do not involve any mark-up and the assessee has furnished sufficient evidence to demonstrate the incurrence of expenses. There is thus no good reason to make any addition to income in respect of these reimbursements of expenses. The action of the Assessing Officer, as the learned counsel rightly contends, is on pure surmises and conjectures. 19. Here, we would also like to refer to the judgment in the case of AP Moller (supra). Facts of that case were that the assessee was a foreign company engaged in shipping business and was a tax resident of Denmark; that it had agents working for it, who booked cargo and acted as clearing agents for the assessee; and, that in order to help all its agents across the globe, the assessee had set up and maintained a global telecommunication facility called Maersk net system which was a vertically integrated communication system. The agents would pay for the system on pro ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Neither the Assessing Officer nor the Commissioner (Appeals) had stated that there was any profit element embedded in the payments received by the assessee from its agents in India. Once the character of the payment was in the nature of reimbursement of the expenses, it could not be income chargeable to tax. Moreover, freight income generated by the assessee in the assessment years in question was accepted as not chargeable to tax as it arose from the operation of ships in international waters in terms of article 9 of the DTAA. Once that was accepted and it was also found that the Maersk net system was an integral part of the shipping business which was allowed to be used by the agents of the assessee as well in order to enable them to discharge their role more effectively as agents, and the business could not be conducted without it, it could not be treated as any technical services provided to the agents." 20. Quite clearly, payments by way of reimbursement of expenses incurred on behalf of the payer cannot be construed as income chargeable to tax in the hands of the payee, a proposition which is approved by the Hon'ble Bombay High Court in the case of Siemens Aktiongesells ..... X X X X Extracts X X X X X X X X Extracts X X X X
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