9911796707
TMI Blog2025 (2) TMI 326X X X X Extracts X X X X X X X X Extracts X X X X ..... rder giving effect passed by the ld. AO/TPO. 2. Assessee is aggrieved and has raised the following grounds of appeal: - "General Ground: 1. The Ld. AO /TPO /DRP erred in determining and assessing the total income of the Appellant at INR 1,74,77,76,980 as against returned income of NIL computed by the Appellant. 2. The Ld. AO /TPO /DRP erred in assessing total income of the Appellant thereby making an upward adjustment of INR 1,74,77,76,980 comprising of: 2.1 INR 1,14,18,85,697 in respect of trading segment 2.2 INR 33,24,39,508 in respect of intra-group charges 2.3 INR 16,04,745 in respect of interest on delayed receivables and 2.4 INR 7,75,00,000 in respect of store closure expenses. 2.5 INR 19,43,47,030 in respect of non-utilization of brought forward losses. Transfer Pricing ("TP") Grounds: Rejection of transfer pricing documentation maintained with respect to trading segment, payment of intra group services and trade receivables 3. The Ld. AO /TPO /DRP erred in not accepting the transfer pricing analysis undertaken by the Appellant in accordance with the provision of the Act read with Income-tax Rules, 1962 ("the Rules") and holding that the Appellant's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder consideration is not substantially lower than the gross margins earned by it for the previous years and the average of the gross margins earned by the comparable companies. Adjustment on account of payment of intra-group services 12. The Ld. AO /TPO /DRP, once having considered the payment for intra- group services i.e., information technology ("IT") support charges of INR 33,24,39,508 as part of operating cost base for arriving at the margins of the trading segment, cannot benchmark the same transaction separately and determine the value of such expense to be NIL. Thus, the adjustment in relation to intra group services deserve to be quashed. 13. Without prejudice to above ground, the Ld. AO /TPO /DRP, erred in disallowing intra-group services i.e., payment of information technology ("IT") support charges of INR 33,24,39,508 and determining the ALP as NIL. 14. The Ld. AO /TPO /DRP, erred in exercising power beyond his jurisdiction to determine the necessity and prudency of availing intra-group services from its AEs and concluding that the Appellant has not derived any benefit which provides economic and commercial value from the services received from its AE. 15. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arguments, if outstanding receivables are considered as unsecured loans, benefit must be given of Circular dated 01.04.2020 through which Reserve Bank of India provides for a collection period of 9 months for export receivables which had been extended up to 15 months due to the COVID-19 pandemic. 24. The Ld. AO /TPO /DRP, erred in application of LIBOR @ 2.317% plus 450 basis points on ad doc basis without providing any rationale/reason. Corporate tax Grounds: Adjustment on account of store closure expenses On the facts and circumstances of the case and in law: 25. The Ld. AO /DRP, erred in not accepting the contention and the arguments presented by the Appellant and has made disallowance in respect of the store closure expenses incurred during the relevant year. 26. The Ld. AO /DRP, erred in making additions to the total income of INR 7,75,00,000 in respect of store closure expenses (which includes expenses such as professional/ legal fees for closure of store or settlement of dispute, painting/ restoration charges, dismantling charges, rental charges, etc) incurred by the Appellant in relation to its non-performing stores without appreciating that such expenses are i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rts goods from third party vendors. These goods are resold in India. 4. The return of income was filed on 13.2.2021 at Rs. NIL which was picked up for scrutiny on TP risk parameters, compliance for ICDS and other factors. Consequent notice u/s. 143(2) of the Act was issued on 29.6.2021. 5. As assessee has entered several international transactions and therefore the ld. AO made a reference to the ld. TPO after obtaining approval of the PCIT on 03.12.2021. 6. Assessee has a trading segment of purchase and sale of sports goods, of Rs 7353162873/- where in assessee has made purchases from 'Desipro Pte Ltd. Singapore' [Desipro] [Purchase of Rs 7347291830/-] Decathlon Italy [Purchase of Rs 3752255/-] and Decathlon Portugal [Purchase of Rs 2118788/-]. Assessee selected the Transactional Net Margin Method [TNMM] as the Most Appropriate Method selecting Desipro (foreign entity) as a tested party, from whom 99 % of Purchases are made, stating that operations performed by it are less complex. For this, in the TP Study Report (TPSR) page 32, assessee has given the details of functions performed by the assessee as well as foreign AEs at page 34. It has also given a risk matrix. Further on pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be selected as a tested party. He also carried out a fresh search on Prowess Database applying fresh filters and using keyword 'Wholesale in games and sports goods', reached at 3 comparable, whose weighted average margin was found to be 5.04%. 8. Assessee replied on 13.7.2023 at para 2.1 & 3.1.1, defended the selection of foreign AE as tested party stating that it is least complex, least function performed, least risk and least assets employed by Desipro. The analysis was given in para 3.1.1.4 of that letter. It was also submitted that reliable information about Desipro is readily and easily available in public domain and with respect to the comparable companies, same are captured in the TPSR, therefore information is sufficiently available for comparability analysis. Assessee also objected that AE is not a manufacturer at all, therefore the tested party is correctly taken as foreign AE. 9. The ld. TPO rejected the explanation of the assessee and rejected foreign AE as tested party in absence of reliable information and availability of more information about the assessee, proceeded with taking assessee as tested party, made an adjustment in trading segment amounting to Rs. 126 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entered intra-group services payment which is not an inter-linked transaction and therefore it should be benchmarked adopting the CUP method as the most appropriate method. He also asked the assessee to explain the evidence to prove rendition test, need test, benefit test and justification for the payment. Assessee could not give any further information regarding the same and therefore the learned TPO held that such payment could be at arm's length, only after satisfying the above tests by producing the evidence of receipt of such services and the benefit of such services to the assessee. He also rejected the aggregation approach of intra-group services with other IT services, as the detailed questionnaire at para 20.4 of the TPO's order mentioned only a few evidence on the services provided by the assessee. The assessee in response to the show cause notice where the learned assessing officer asked for the various information, the taxpayer only provided a very brief note on the services received by it from associated enterprises. Assessee submitted that services are related to helpdesk assistance, local centres, hardware leasing and network leasing for which it charged a markup of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... export activities and during the year it closed some of its stores at few locations because of non- performance. The expenses related to these stores such as salary, compensation, professional fees, etc. were included in the store closure expenses. The above expenditure is solely and exclusively incurred for the purposes of business and is deductible. 15. The ld. AO asked for the supporting documents wherein the assessee submitted that details voluminous and are getting collated. The ld. AO noted that assessee has not provided the complete details and in absence of such concrete documentary evidence, he disallowed Rs. 7.75 crores. 16. Accordingly, a draft assessment order u/s. 144C (1) was passed on 01.9.2023 wherein the TP adjustment of Rs. 160,21,51,485 and disallowance of Rs. 7.75 crores were made, and total income of assessee was proposed to be assessed at Rs. 167,96,51,485. 17. The assessee aggrieved with the same, preferred objections before the ld. DRP, who gave its directions on 20.6.2024. 18. On transfer pricing issue, with respect to trading segment adjustments, the ld. DRP confirmed the rejection of the tested party as foreign entity in absence of sufficient informa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th price adjustment with respect to the trading segment where the assessee has selected foreign AE i.e. AR took us to the trading segment adjustment with respect to TPSR and the approach of the ld. TPO. His only submission is that the foreign AE is least complex and performs least functions carrying least risk and therefore the comparability analysis should be made taking the foreign entity as the tested party, Singapore entity as the party, which is rejected by the learned TPO and confirmed by the learned dispute resolution panel and then taking assessee as a tested party and on fresh search resulting into an adjustment. He referred to various representations made before the lower authorities. He also referred to the function matrix, risk matrix mentioned in the TPSR. Therefore, according to him, it was submitted that foreign AE should be considered as tested party. TPO and the ld. DRP could not be proper. 28. However, he referred to application for admission of additional evidence dated 28.10.2024 wherein the assessee submits the audited financial statements of AE, Desipro with respect to ground nos. 4 to 6 for the year ending 31.12.2019. Further a TP documentation of Desipro wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h respect to the vendor identification, resource listing for sports goods, quality, placement of orders, purchase price, quality control and logistics jointly with the assessee. With respect to risk metrics, it is further stated that Singapore entity does not have any market risk, limited product liability risk and credit collection risk from the assessee. Such risk metrics is placed at page number 34 of the transfer pricing study report. With respect to the assets employed, assessee submitted that it has an asset base of Rs. 380 crores of tangible assets however, there is reference of asset base of tested party. Based on this information at paragraph number 4.6.3 the assessee stated that based on the results of the functions performed, risks assumed, assets employed assessee concluded that assessee can be characterised as a risk bearing distributor of the capital on sports goods, etc. 31. The OECD guidelines provides that when applying transactional net margin method, it is necessary to choose the party to the transaction for which a financial indicator (mark-up on costs, gross margin, or net profit indicator) is tested. The choice of the tested party should be consistent with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . However, while examining the facts about the tested party the learned transfer pricing officer in paragraph number 4 of the transfer pricing order has categorically held that the AE of the taxpayer company is responsible for manufacturing and providing the goods to other associated enterprises therefore it is undertaking operations such as procuring the raw material, engaging the labour, get the items manufactured and sale the same to the associated enterprises for onward distribution etc. We also failed to understand that how the learned TPO got this information without having any material in hand. In fact, the tested party is also a reseller. Thus, the learned TPO has concluded that the associated enterprises are more complex and is also having higher risk. 36. Therefore, there is no dispute on the most appropriate method where assessee and the learned TPO agreed on transactional net margin method. The only dispute is whose margin is to be compared with the comparable companies. Both the parties have determined the complexity of assessee as well as the associated enterprises without looking at the functional, risk and asset profile of the associated enterprises. Naturally, unl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect to the comparables were available with the assessing officer in the form of transfer pricing study report. Further for selection of the method as transactional net margin method was not in dispute between the parties. Therefore, so far as the comparability analysis is concerned the assessee has selected seven comparables from different database and TPO are selected three comparables from Prowess database. 39. Therefore, as the basic object of selecting a tested party is reliability of application of the method and comparability analysis for determining the arm's-length price of the international transaction, and as assessee as well as TPO both have reached at a conclusion of a different tested party without looking into the balance sheet of the associated enterprise and holding whether the assessee or the foreign AE is least complex. Obviously, there is no bar in selecting a foreign entity as a tested party if the arm's-length price of international transaction by selecting reliable method and reliable comparability analysis can be made. 40. Both the parties have placed before us judicial precedent that foreign AE can be taken as a tested party, but all the decisions have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pproach of benchmarking the subject intragroup services transaction by considering the same is operating under the trading segment and benchmark using transaction by transaction approach resulting in double adjustment which is grossly prejudicial to the interest of the assessee. The learned authorised representative relied upon the decision of the coordinate bench in case of ACIT versus Yokogawa India Ltd (ITA (TP) A number 2088/Bangalore/2017) wherein it was held that when the international transactions are analysed under the transactional net margin method then the same should not be further tested separately. The learned authorised representative further submitted that with respect to the details of services received by the assessee the assessee has submitted the intercompany agreement for receipt of IT services where the complete description of the services is mentioned. He further referred that the price allocation and method of assessee is also provided along with an appropriate allocation key and further the invoices are issued monthly and payable at 45 days from the receipt of the invoice. He further referred to the fact that that the requirement of intragroup services cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee placed at page number 1487 about the pricing allocation methodology of cost incurred by the associated enterprises, on looking at the same page it is merely an IT service and licensing agreement. In the agreement also there is no reference of any other services and therefore also it is clear-cut that the services cannot be closely related or closely linked with any other services. It is an independent agreement between Decathlon SA and assessee. Thus, merely producing an agreement does not give the pricing and allocation methodology of cost incurred by the associated enterprises. No evidence is placed with respect to the benefit derived by the assessee from the above intragroup services. With respect to the rendition of the services the assessee has referred to page number 1484 of the paper book which is also the agreement only. Against this the transfer pricing officer has given a categorical finding that a show cause notice dated 27/6/2023 was issued to the assessee but taxpayer did not provide any submission regarding payment of the above services mentioned in paragraph number 19.4 of the order of the learned TPO. The assessee merely described what are the services. It also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is found to be a license fees paid for various software or platforms, and if the allocation key with respect to the number of users is found to be appropriate, determine the arm's-length price of the international transaction of intragroup services in accordance with the law after granting assessee an opportunity of hearing. We once again make it clear that provision of the data and information is the sole responsibility of the assessee. Accordingly ground number 12 - 20 are restored back to the file of the learned TPO with above direction. 51. Ground numbers 21 - 24 is with respect to the adjustment on account of interest on delayed receivable of Rs. 1,604,745. The claim of the assessee that these are interlinked transaction and therefore could not be benchmarked separately and further the benefit of circular dated 1/4/2020 issued by the reserve bank of India providing a collection of nine months which is extended to 15 months due to Covid 19 pandemic should be granted to the assessee and further the rate adopted by the learned transfer pricing officer of LIBOR at the rate of 2.317% +450 basis points is without providing any rational. It was further contended before us that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ading of sports accessories, sports apparel, sports goods, and sports equipment and has many stores across the country. Due to certain commercial consideration the assessee closed non-performing stores in a few locations. Pertaining to the closure of stores are salary, compensation, forfeiture of rental deposits, professional fees etc. and all these expenses are clubbed together and debited to the store closure expenses. While assessment proceedings, the assessee submitted sample evidence in relation to such expenses incurred during the year as the details was voluminous. It was the contention of the assessee that these expenses are normal, routine expenditure in the kind of business of the assessee. Those expenses are revenue in nature and allowable under section 37(1) of the act. 55. The learned assessing officer noted that assessee has provided a comprehensive explanation regarding the classification and deductibility of these expenditure allowable under section 37(1) of the act however those have not been substantiated the claim with supporting documentary evidence. The learned assessing officer noted at page number 9 of the draft order that as the assessee has taken a lot of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... horities and therefore it resulted into disallowance. 59. We have carefully considered the rival contention and perused the orders of the learned lower authorities. Assessee, trading in sports accessories and has many stores across the country. During the year the assessee has closed some of its stores at some of the location. And therefore, it has incurred the expenditure of Rs. 7.75 crores. These expenditures are dismantling, loading, and unloading charges, packaging charges, transportation charges, signage removing charges, legal charges etc. The assessee has provided sample invoices of these expenditure placed at page number 1816 - 1846. The invoices those submitted on sample basis but are giving picture that at what location the stores are closed what kind of expenses the assessee has incurred. The letter dated 28 August 2023 submitted by the assessee clearly gives nature of expenditure, and the purpose of such expenditure. In the draft assessment order passed by the learned assessing officer on 1 September 2023 stated that assessee has not submitted the complete details but completely agree that such expenditure is not disallowable. The only reason of the disallowance is non ..... X X X X Extracts X X X X X X X X Extracts X X X X
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