TUPPERWARE INDIA PVT. LTD.,NEW DELHI vs. ADDL. CIT, SPECIAL RANGE- 9, NEW DELHI

The appeal filed by the assessee is directed against the order dated 18.10.2017 of the Addl. Commissioner of Income Tax, Special Range-9, New Delhi (“AO”) under section 143(3) read with section 144(C) of the Income Tax Act, 1961 (the “Act”) pertaining to Assessment Year (“AY”) 2013-14.

3.1 After considering the transfer pricing report and other documentation as also the submissions furnished by the assessee in response to the show cause notices issued, the Ld. TPO proposed an adjustment of Rs. 57,47,55,473/- in his order dated 31.10.2016 as under:-

S. No. Particulars Amount (in INR) 1. Advertisement, Marketing and Promotion 39,33,04,674 function 2. Management Services Fee paid to AE 1,90,95,07 3. Royalty paid to AE 15,65,90,752 4. ESOP on behalf of parent company 57,65,030 Total 57,47,55,473

6. The Hon’ble DRP, thus provided partial relief by deleting the substantive adjustment which was made by the Ld. TPO by undertaking intensity adjustment on account of AMP expenditure and the adjustment on account of ESOP. With respect to the adjustment on account of management service fee paid to AE and royalty paid to AE, the Hon’ble DRP upheld the findings of the Ld. TPO. The Ld. AO passed the final assessment order on 18.10.2017 making transfer pricing adjustments, post DRP directions. 7. Aggrieved, the assessee filed an appeal before the Tribunal taking the following grounds of appeal:-

1. That on the facts and circumstances of the case and in law, the order passed by Learned Additional Commissioner of Income Tax (“Ld. AO”) under section 143(3) read with section I44C of the Act is bad in law to the extent of adjustment on account of transfer pricing (“TP”) and corporate tax issues amounting to INR 32,67,87,255 made in the impugned assessment order.

2. That on the facts and circumstances of the case and in law, the Ld. AO [following the directions of Ld. DRP erred in assessing the returned income of the Appellant of INR 59,18,25,310 at INR 91,86,12,565. TRANSFER PRICING GROUNDS: 3. That the Ld. AO (following the directions of Ld. DRP) erred in proposing to assess the income of the Appellant at INR 91,86,12,565 as against the returned income declared by the Appellant at INR 59,18,25,310 by making an addition of INR 32,27,57,986 by holding that the Appellant’s international transaction does not satisfy the arm’s length principle envisaged under the Act. 4. That the Ld. DRP/Learned Deputy Commissioner of Income Tax, Transfer Pricing Officer 3(2)(1) (“Ld. TPO”)/ Ld. AO (following the directions of Ld. DRP) erred on facts and in law in enhancing the income of the Appellant by INR l4,70,72,217 on account of Advertisement, Marketing and Promotion (“AMP”) expenses: 3.1 not appreciating the characterization of the Appellant, that it functions in the capacity of a licensed manufacturer and is entitled to appropriate share of residual profit/loss arising in the business; 3.2 not appreciating that in the case of an entrepreneurial entity, if the payment of royalty is demonstrated to be at arm's length and appropriate share of residual profits reside in India, having regard to the functional, asset and risk analysis of the appellant, the question of any adjustment on account of AMP expenses does not arise 3.3 not appreciating that the Appellant is the economic owner of marketing intangibles commensurate with the functions performed in India; 3.4 not appreciating the fact that application of bright line test (“BLT”) (intensity based adjustment) is not permissible in the light of the judicial precedents on the issue; and 3.5 failed to understand the business model of the Appellant and made several misstatements in the remand reports on several occasions during the course of proceedings before Ld. DRP. 5. That on the facts and circumstances of the case and in law, the Ld. DRP and Ld. TPO have grossly erred in rejecting the profit split method (“PSM”) analysis undertaken by the ^ Appellant during the course of proceedings. In doing so Ld. DRP/ Ld. TPO erred in; 4.1 not appreciating the analysis by application contribution profit split method furnished by the Appellant as an additional evidence during the course of proceedings before Ld. DRP to demonstrate that payment of royalty is at arm's length and appropriate share of residual profits belong to Tupperware India; 4.2 not appreciating the fresh analysis by application of residual profit split method (“RPSM”) submitted by the Appellant during the course of remand back proceedings before Ld. DRP stating the same has been undertaken based on assumptions, approximations and insufficient evidences; and 4.3 conducting an incorrect RPSM analysis, splitting the profits by assigning weights to the research & development expenses incurred by Tupperware Products Inc. and ', AMP expenses incurred by the Appellant, thereby, leading to absurd results.

6. That the Ld. TPO and Ld. DRP has erred in rejecting the transfer pricing documentation maintained by the Appellant in respect of payment of royalty and arbitrarily determining arm’s length royalty rate as 2% of the sales of the Appellant. In doing so, the Ld. AO/Ld. TPO erred: 5.1 by assuming that ‘no benefit’ has been conferred on the Appellant from the use of trademarks and know-how for which royalty was paid by the Appellant. The Ld. TPO/Ld. DRP have erred in not giving due cognizance to the information and documents submitted by the Appellant; 5.2 by arbitrarily determining the royalty rate of 2% without performing any uncontrolled comparable analysis and relying on the guidelines issued by Reserve Bank of India (“RBI”) for determining arm’s length royalty rate; 5.3 by disregarding the economic analysis performed by the Appellant, thereby rejecting the comparable agreements selected by the Appellant in the transfer pricing documentation on account of geographical differences; and 5.4 by arbitrarily determining the royalty rate of 2% based on the fresh search undertaken by the Ld. TPO during the course of proceedings before Ld. DRP by adopting the methodology similar to that adopted by the Appellant in the transfer pricing documentation.

7. That on the facts and circumstances of the case and in law, the Ld. DRP/Ld. AO (following the directions of Ld. DRP) have grossly erred in applying BLT (intensity based adjustment) to make transfer pricing adjustment amounting to INR 14,70,72,217 ,on protective basis, without appreciating that BLT has been expressly rejected by the several judicial pronouncements of Hon'ble Delhi High Court, thus, the order is bad in law and void ab-initio.

8, That on the facts and circumstances of the case and in law, the Ld. DRP/Ld. AO (following the directions of Ld. DRP) have grossly erred in determining AMP adjustment amounting to INR 14,70,72,217 on protective basis having no statutory mandate.

9. That on the facts and circumstances of the case and in law, Ld. DRP and Ld. AO (following the directions of Ld. DRP), erred in holding that the Appellant has also made payment for the use of technology received from associated enterprises. In doing so, the Ld. TPO/Ld. DRP have grossly erred in not appreciating that the Appellant has paid royalty only for the use ‘licensed trademarks and marketing information’ as evident from the license agreement entered between Appellant and associated enterprises.

10. That the Ld. AO/Ld. TPO have erred in rejecting the transfer pricing documentation maintained by the Appellant in respect of payment of management service fees and arbitrarily determining arm’s length price as ‘Nil’ by applying Comparable Uncontrolled Price (“CUP”) Method. In doing so, the Ld. AO/Ld. TPO erred: 9.1 by ignoring/rejecting the economic analysis undertaken by the Appellant without providing any cogent reasons for the same; 9.2 by disregarding the documentary evidences submitted by the Appellant to demonstrate the actual receipt of management services and the benefits arising thereof; and 9.3 by not giving cognizance to the detailed cost benefit analysis submitted by the Appellant and concluding the same to be vague and inconsequential.

11. That on the facts and circumstances of the case and in law, the Ld. AO/TPO have erred in challenging the commercial/business wisdom of the Appellant while questioning the payment of royalty and management fee.

12. That on the facts and circumstances of the case and in law, the Ld. AO/TPO have erred in proposing an adjustment of INR 1,90,95,017 on account of payment of management services. In doing so, the Ld. TPO/Ld. AO erred in applying CUP method in contravention of the provisions of Rule 10B of the Rules and determining the arm's length price as Nil' in relation to aforesaid international transaction. CORPORATE TAX GROUNDS: 13. That on the facts and circumstance of the case, and in law, the Ld. AO (following the directions of Ld. DRP) erred in making disallowance under section 40(a)(i) of the Act in respect of reimbursements of expenses amounting to INR 1,362,384 & INR 2,666,885 made by the Appellant to Dart Industries Inc. (“Dart”) by erroneously holding that the same are in the nature of Royalty under Article 12 of the India-USA Double tax avoidance agreement (“DTAA”) as well as Explanation 9 (l)(vi) of the Act.

14. That: on the facts and circumstances of the case, ,and in law, the Ed. AO (following the directions of Ld. DRP) erred in disregarding the submission of the Appellant that the amount in question are pure reimbursements of expenses based upon proper allocation key and without any mark up.

15. Without prejudice to Ground No. 3 & 4, that on the facts and circumstances of the case, and in law, the Ld. AO (following the directions of Ld. DRP) failed to appreciate that the amounts in question are held not liable to be taxed in the hands of Dart for the year under consideration, thereby disallowance under section 40(a)(i) of the Act unwarranted and liable j to be deleted.

16. That on the facts and circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under section 271(l)(c) of the Act.

17. On the facts and in the circumstances of the case and in law, the Ld. AO erred in levying interest under section 234B of the Act. That the above grounds of appeal are without prejudice to each other.

8. Ground No. 1, 2 and 3 are general and ground No. 5 is not pressed.

9. Ground No. 4, 7 and 8 relate to adjustment amounting to Rs. 14,70,72,217/- on account of AMP expenditure incurred by the assessee.

9.1 The Ld. TPO proposed an adjustment of Rs. 39,33,04,674/- on account of AMP function by observing that AMP expenses incurred by the assessee are significantly high and leads to creation of marketing intangibles in India. The Ld. TPO discussed application of both intensity-based adjustment and Bright Line Test (“BLT”). The Ld. TPO proposed an adjustment by application of BLT in the absence of any adjustment that could be made by application of intensity based approach. The Ld. TPO concluded that the AMP expenses of the assessee are higher than that of comparable companies and applied BLT by charging a mark up of 15.43% for alleged brand building services provided to AE.

9.2 On objections raised by the assessee, the Hon’ble DRP upheld the view of the Ld. TPO in characterising AMP expenses as an international 7 transaction. The Hon’ble DRP rejected the contention of the assessee that the application of BLT has been ruled out by the decision of the Hon’ble Delhi High Court in the case of Maruti Suzuki India Ltd. (ITA No. 110/2014 and by holding that this ruling is in different context as it involves a different entity with an entirely different functional and risk profile. However, the Hon’ble DRP accepted the contention of the assessee that selling and distribution expenses do not form part of AMP expenses and accordingly directed the Ld. TPO to exclude selling expenses from the AMP expenses. The Hon’ble DRP further directed the Ld. TPO to compare intensity of AMP spending to determine ALP in view of the facts of this case and to re-compute the mark-up on the basis of comparables upheld by the panel. The Ld. TPO was also directed to bring the adjustment in tune with BEPS directions. Following the directions of the Hon’ble DRP, the Ld. TPO/AO re-computed the proposed adjustment and revised it to Rs. 14,70,72,217/- from Rs. 53,36,20,577/- on protective basis. As regards adjustment on substantive basis – functional intensity the Ld. TPO/AO recomputed the adjusted margin of the comparable companies with an average of 10.33% and the operating margin of the assessee at 27.48%. Since the operating margin of the assessee i.e. 27.48% was higher than the mean margin of the comparables (OP/OR) i.e. 10.33% the ALP of the international transaction of the assessee was accepted. Accordingly the proposed adjustment was revised from Rs. 6,29,16,365/- to Rs. NIL on substantive basis.

9.3 So far as the substantive addition of Rs. NIL is concerned, the Ld. AR submitted that since after applying the intensity test the substantive addition has become zero during the year under consideration, the same has not been pressed. However, the assessee may be granted the liberty to present its argument on this issue in subsequent years. We have no objection to do so.

9.4 As regards protective addition, the Ld. AO/TPO held that AMP expenses incurred by the assessee are significantly higher than that of comparable companies and made addition of Rs. 14,70,72,217/- by 8 applying Bright Line Test by charging a mark-up of 15.43% for alleged brand building services provided to the AE. The Ld. DRP confirmed the protective addition made by the Ld. TPO/AO applying BLT in characterizing AMP expenses as an international transaction. Aggrieved by this addition the assessee is before us. The Ld. AR submitted that though the Hon’ble DRP and the Ld. TPO acknowledged the fact that BLT as a tool is not permitted in the law the Ld. TPO while benchmarking the AMP functions of the assessee applied a method wherein the adjusted cost and sales was computed by taking into account the difference in intensity of AMP functions undertaken by the assessee and comparable companies. The Ld. TPO has made an adjustment on AMP expenditure of the assessee without acknowledging the fact that the applied method is BLT. The Ld. AR also submitted that AMP is not an international transaction as envisaged by the Ld. TPO. The AMP expenses are incurred by the assessee in the course of carrying on its business in India. Such AMP expenses are neither incurred at the instance of overseas AEs, nor is there any mutual agreement or understanding or arrangement as to allocation or contribution towards reimbursement of any part of AMP expenditure incurred by the assessee for the purpose of its business. In the absence of any understanding, arrangement etc. no ‘transaction’ or ‘international transaction’ could be said to be involved with respect to such AMP expenditure incurred by the domestic enterprise, which may be covered within the ambit of transfer pricing regulation. In support of the contention the Ld. AR relied on the decision of the Hon’ble Delhi High Court in the case of Maruti Suzuki India Ltd. (ITA 110/2014 and ITA 710/2015) and Sony Ericsson Mobile Communications India Pvt. Ltd. (ITA 70/2014). The Ld. DR supported the findings of the Hon’ble DRP/Ld. AO/Ld. TPO.

"70. What is clear is that it is the 'price' of an international transaction which is required to be adjusted The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an 'adjustment' has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed 'price' of such transaction and thereafter ask whether it is an ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment.

10.1 Similar view has been taken by the Hon’ble Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. (supra) wherein the Hon’ble Delhi High Court observed as under :-

127. We agree and accept the position in the portion reproduced above in bold and italics. The object and purpose of Transfer Pricing adjustment is to ensure that the controlled taxpayers are given tax parity with uncontrolled taxpayers by determining their true taxable income. There should be adequate and proper compensation for the functions performed including AMP expenses. Thus, we disagree with the Revenue and do not accept the overbearing and orotund submission that the exercise to separate 'routine ' and 'non- routine' AMP or brand building exercise by applying bright line test' of non-comparables and in all case, costs or compensation paid for AMP expenses would be ‘NILor at best would mean the amount or compensation expressly paid for AMP expenses. Unhesitatingly, we add that in a specific case this criteria and even zero attribution could be possible, but facts should so reveal and require. To this extent, we would disagree with the majority decision in L.G.. Electronics India Pvt. Ltd. (supra).

10.2 Based on the above, it is amply clear that BLT as an approach is not permissible for undertaking any addition on account of AMP expenses incurred by the assessee. We, therefore, set aside this issue to the file of the Ld. AO/ TPO to decide it afresh in light of the decisions of the Hon’ble Delhi High Court in the case of Maruti Suzuki India Ltd. (supra) and Sony Ericsson Mobile Communications India Pvt. Ltd. (supra) after giving reasonable opportunity of hearing to the assessee.

12.1 Briefly stated, the facts in relation to payment of royalty are that the assessee in its transfer pricing study adopted CUP as the most appropriate method for the purpose of benchmarking the transaction. During the course of assessment proceedings, the assessee also submitted a corroborative analysis by application of TNMM method. The approach of application of TNMM was rejected by the Ld. TPO as well as the Hon’ble DRP. The Ld. TPO in his order dated 31.10.2016 selected CUP as the most appropriate method for the purpose of benchmarking payment of royalty.

12.1.1 The assessee had submitted a fresh corroborative analysis using Profit Split Method (“PSM”) before the Hon’ble DRP. The Hon’ble DRP forwarded the fresh corroborative analysis to the Ld. TPO calling for his comments /remand report. The Ld. TPO in his remand report specifically rejected PSM analysis which was also not adopted by the Hon’ble DRP as the most appropriate method.

12.1.2 The Ld. TPO in his remand report conducted a fresh analysis by adopting a search strategy similar to one adopted in the transfer pricing study by the assessee and one comparable was selected to arrive at an arm’s length royalty rate of 2%. The Ld. TPO adopted CUP as the most appropriate method to benchmark the royalty transaction.

12.2 The Hon’ble DRP has made the following observations in relation to the comparables selected by the assessee:-

“The assessee has paid royalty @ 5.56% of the sales amounting to Rs 25,33,48,790/. The assessee is in business in India since 1996 and has been using “Tupperware” brand name since then. The assessee never paid any royalty for the use of brand name since its inception in India. It has paid royalty for the first time during the year. In the TP Study the assessee has benchmarked royalty as per CUP. In the CUP analysis the assessee has used external comparables selected by using Royalty Stat Data base. Ten comparables have been mentioned in the TP Study. They are as under:

S. Description of agreement as given in the Royalty RoyaltyStat No. Licensor Licensee Rates 1 Smith & Taylor Cutlery Exclusive license to sell cutlery and cutlery 7% Wesson Corp. gift sets under the trademarks "Smith & Wesson,” “.357 Magnum," "Magnum," "LadySmith," "Airweight," "Kit Gun,” "Chiefs Special," "Combat Magnum," “ 44 Magnum," "Service Kit Gun," "Target Kit Gun," “ .357 Combat Magnum," "Distinguished Combat Magnum," and "Distinguished Service Magnum."

2 Westinghouse Catalina Exclusive license to use the 4% Electric Lighting, Inc. "Westinghouse," "Circle W," and "You can Corporation be sure ... if it's Westinghouse" trademarks to manufacture and sell lighting fixtures, portable lighting, and flashlights.

3 Harrow Global Home Exclusive license to use "The Collections of 5% Enterprises Marketing Inc. Jennifer Gucci" trademark to manufacture, sell, and distribute glassware, dinnerware and tableware.

4 Colonial Colonial Gifts Exclusive license to use the "Colonial" 7.5% Downs, L.P and and Sportswear, trademarks to supply, sell and distribute Stansley Racing Inc. insignia souvenirs, including clothing, Corp. hats, pennants, office supplies, such as pens, pencils, paper, paperweights; post cards, photobooks, picture frames, jewelry, watches, golf items, tees, balls, club covers, drinking containers, such as mugs, glasses, plastic bottles; coolers, 5 FAR-B Lifetime Hoan Exclusive license to use the "Farberware" 5% Acquisition , Corporation trademark to source and sell cookware, Corp. bakeware, electric products, flatware, and tabletop products through outlet stores only.

6 Sunbeam Empyrean Nonexclusive license to use the 7% Corporation "Sunbeam" trademark to sell and Bioscience, distribute hand sanitizers and first aid antiseptics, sanitizing wet wipes, Inc. disinfectant surface sprays and sanitizing baby wipes.

7 The Coleman Empyrean Nonexclusive license to use the "Coleman" 7% Company, Inc, Bioscience, Inc. trademark to sell and distribute hand sanitizers and first aid antiseptic, sanitizing wet wipes, disinfectant surface sprays and sanitizing baby wipes, 8 PGA Tour Keller Exclusive license to use the "PGA Tour" 5% Licensing. logos and other symbols to manufacture, Manufacturing distribute and sell case goods, including Company, Inc. bedroom, dining room and casual dining furniture.

9 Genius J. Wasson Nonexclusive license to use the "Baby 9% Products, Inc. Enterprises, Inc. Genius" trademark to manufacture, distribute and sell baby diaper bags and accessories, including pacifier pouch, mesh bags, baby wipe storage bags, bottle warmer bags, juice cup bags, bottle bags, sleeping mats, changing pads, wet packs, and meal time feeding bags with bibb.

10 Equilink Macgregor Exclusive license to use the "MacGregor" 3% Licensing Corp. Sports Products, trademarks to source, import, export, Inc. manufacture, promote, advertise, merchandise, offer, distribute, and sublicense sports equipment such as bicycles and exercise products.

Lower Upper No. of Minimum Quartile Mean Median Maximum Agreements Quartile Comparable 10 3% 5% 6% 6% 7% 9% Agreements From the table given above, it is clear that neither the geographical area is same nor there is any product similarity. Further the assessee has not furnished the copies of respective agreements. CUP requires very close comparability standards. In none of the 10 comparables selected by the assessee , the licensee is in India. Under these circumstances, the TPO was right in rejecting the TP analysis of the assessee for benchmarking royalty.”

12.2.1 Further, the Hon’ble DRP in the order dated 26.09.2016 observed as follows:-

Thus it is clear that the royalty is being paid for use of trademark. The assessee in it’s submission dated 11/9/2017 has mentioned that the assessee paid royalty for use of Licensed trademarks and marketing information to its AEs. Further the assessee has also used the technology and moulds provided by Tupperware Products Inc. for manufacturing of products in India. However the assessee has not paid any royalty for the use of technology. Here it may be mentioned that the assesses is in fact separately paying rent for the use of moulds to manufacture licensed products of to the AE. In the manufacturing process, almost all the raw material is procured from the local market. The only distinguishing “technology used in the manufacturing process is use of typical moulds which gives air tight finish to the containers and lids (covers). The assessee is making separate payment by means of rent for the use of “Special” moulds. Hence it is wrong to say that no payment was made for the use of technology. As mentioned above the new benchmarking done by the assessee using Contribution profits split has inherent flaws. It is very subjective and is totally dependent on selection of factors and relative weightage given to them. As far as application of Contribution profits split method is concerned, the Panel agrees with the TPO that the method is too subjective to be accepted as method of benchmarking.

Secondly the “residual profit Split Method” applied by the TPO at the remand stage has its own limitations. The Royalty is paid for use of trade mark and marketing information. While benchmarking AMP it has been held that the assessee made excessive expenditure for Brand promotion and for development of marketing intangibles. Thus in a way the assessee itself was responsible for development of marketing intangibles and for promotion of the Brand owned by the AE of the assessee. While benchmarking AMP it has also been mentioned that any improvement in marketing intangibles or brand will also belong to the AE as per the license agreement.”

12.3 Relying upon the above, the Hon’ble DRP upheld benchmarking undertaken by the Ld. TPO in his order (i.e. 2% of sales) as the arm’s length rate for payment of royalty.

13.1 The Ld. AR also submitted that the approach adopted by the Ld. TPO does not constitute a valid CUP as the conditions stipulated by RBI/ FIPB for royalty payments are for ease of doing business and cannot be considered as a valid CUP for transfer pricing purposes. In support thereof, the Ld. AR relied upon the decision in the case of Sara Lee TTK Limited (TS- 663-ITAT-2016(Mum)-TP) wherein the Hon’ble Tribunal has held that the purpose of the RBI/FIPB approvals is entirely different and cannot be equated with the arm’s length principles.

13.2 The Ld. AR further submitted that the Ld. TPO in his fresh search conducted in the remand report identified three comparables viz. (i) Amen Wardy, Sr.; Amen Wardy, Jr., USA (ii) Mikasa Inc.; American Commercial Inc., Mikasa Licensing Inc.; ARC International, SA, USA (iii) Oneida Ltd., USA. However, he included only one comparable i.e. Amen Wardy, Sr.; Amen Wardy, Jr., USA in the final set of comparables observing that when only trademarks or trade names are involved only nominal payment of 2% is sufficient. The Ld. AR referred to the relevant paras of the remand report which is reproduced below:-

“This office, as a further step, searched for similar royalty agreements on a public database, “Royaltystat”. Though no exact comparable agreements were found, however following agreements are considered suitable for determining the royalty rates which should have been paid by the assessee to its AE:

S.NO. Licensor Licensee Agreement Description of agreement in Royalty royalty stats rates Type (taking net sales as base) 1 Amen St. John Copyrights; Exclusive license to use 2.00 % Wardy, Sr.; Knits, Inc. Trade Name; the "St. John Home by Amen Trademark Amen Wardy" Wardy, Jr. trademarks, trade names and designs to market and distribute a line of home furnishing products and gifts, including window coverings, wall coverings, paints, floor, coverings, furniture, linens, art objects, accent pieces, architectural treatments, china, dishware, flatware, stemware, cookware, bed and bath items, and home accessories 2 Mikasa Inc.; TMC Asset Sale of all interest in a 5.00%

American Acquisiti Purchase; business which designs, Commercial on Copyrights; develops, markets, Inc.; Mikasa Inc.; Know-how; distributes and sells Licensing Lifetime Patent; branded and co-branded Inc.; ARC Brands, Proprietary dinnerware, giftware, International, Inc. Information; stemware, barware, SA Technology; flatware and other Trade Name; products designed for Trademark; decorative or utilitarian Web content purposes, including inventory, the "Mikasa" and "Oenology" trademarks and trade names, patents, copyrights, technology, know-how, formulations, web content and domain names, goodwill, marketing materials, a showroom lease, contracts, actions, and raw materials. 3 Oneida Ltd. Robinson Copyrights; Exclusive patent, know- 8.00% Home Know-how; how and copyright Products Patent; license to use the Inc. Trademark "Oneida" trademarks to design, engineer, market, promote, manufacture, distribute, use and sell flatware, dinnerware, kitchen gadgets, tools, barware and cutlery products, and other products including cookware, bakeware, glassware, hollowware, stemware, serve ware, and storage accessories, for sale to consumers in the retail trade channel, excluding the consumer direct channel and foodservice or institutional channels. AVERAGE 5.00%

From the aforementioned agreements, it can be noticed that only 2.00% royalty is paid in case of Amen Wardy, Sr.; Amen Wardy, Jr. for the payment of trademarks, tradenames and copyrights. In case of Mikasa Inc.; American Commercial Inc.; Mikasa Licensing Inc.; ARC International, SA, 5.00% royalty is payable for Asset Purchase; Copyrights; Know-how; Patent; Proprietary Information; Technology; Trade Name; Trademark; Web content and in case of Oneida Ltd., 8.00% royalty is payable for Copyrights; Know-how; Patent; Trademark. These three agreements average out to 5.00%. These findings clearly show that when only trademarks or tradenames are involved, only nominal payment of 2.00% is sufficient. With the increase in the royalty rates, various other benefits in the name of Asset Purchase; Copyrights; Know-how; Patent; Proprietary Information; Technology etc. are provided. Thus, from these findings, it can be concluded that the royalty paid by the assessee to AE @ 5.56% does not justify the agreement type of just trademarks. Hence, TPO was justified by allowing royalty @2.00%.”

13.3 The Ld. AR brought to our notice detailed evidence submitted during transfer pricing assessment proceedings demonstrating receipt of marketing information/know-how for selling Tupperware products in India and submitted that this clearly shows that the royalty paid by the assessee is not only for the use of trade name / trademark but also for use of marketing information / know-how provided by Tupperware USA.

13.4 As regards the objection of the Hon’ble DRP with respect to the comparables operating in different geographical region than that of the assessee, the Ld. AR submitted that in the fresh search conducted by the Ld. TPO, he himself accepted royalty agreements operating in foreign jurisdictions and hence ‘geographical region’ filter applied by him is inappropriate. The comparables selected by the Ld. TPO have also been upheld by the Hon’ble DRP. Thus, in view of approach adopted by the Ld. TPO, the comparables selected by the assessee in its transfer pricing report should be accepted.

13.5 With respect to the ‘product similarity’ filter applied by the Ld. TPO/Hon’ble DRP, the Ld. AR submitted that royalty is paid for the use of intangibles and that it is a factor of profit generating potential of the intangibles. In transactions relating to payment of royalty, similarity ought to be considered in respect of the use of intangibles, rather than the comparability of products for which license has been granted and hence the comparable selected by the assessee in the transfer pricing documentation should be accepted in the final set of comparable agreements.

16.1 We note that in the transfer pricing study report, the payment of royalty has been benchmarked by the assessee using CUP method. The benchmarking was done on the basis of the search conducted using the RoyaltyStats online database which resulted into selection of 10 comparable agreements in the final set of comparables. However, the benchmarking analysis of the assessee was rejected by the Hon’ble DRP who proceeded to uphold the ALP determined by the Ld. TPO at 2% of sales. The Ld. TPO in para 26 of his order dated 31.10.2016 recorded his finding as under: - “26. The assessee submitted its reply vide various submissions dated as per order sheet. The same has been studied carefully and issues were discussed with the AR, After considering all the facts of the case and adequate opportunity of being heard duly provided to the Assessee including oral hearing, it was apparent that the license agreement signed by the assessee was only to transfer profit to its foreign AEs. As already discussed in earlier paragraphs that the assessee has failed to provide the comparable Royalty payment data of the Group Entities. The assessee has also not provided the CUP analysis of comparable companies in India having similar FAR as that of the assessee, which can establish that the transaction is at Arm’s Length. Such comparables MANUFACTURING PLASTIC KITCHENWARE PRODUCTS need to have similar royalty transactions originating in India providing the royalty to the AEs or Non-AEs in USA where the AE of the assessee is situated. As per the conditions of allowable Royalty Payment laid down by the Reserve Bank of India and the Foreign Investment Promotion Board, in cases where the BRAND is used is around 1% to 2%, As already discussed in earlier paragraphs, the assessee has not received any technical knowhow from its AEs, rather it has used the Brand of its AE the "Tupperware". However, considering the various contentions and functions of the Assessee, and in absence of any reliable comparable analysis or the data submitted by the assessee, the undersigned is having view that royalty of 2% of the sales is justifiable in the case of the Assessee, being Arm's Length of Royalty payment, Therefore, the undersigned proposes to make an adjustment against excess royalty being paid by the Assessee Company to its foreign based AEs with the purpose of tax evasion u/s 92CA. Computation of Arm’s Length Price: Particulars Amount (In INR) Sales of the Assessee Company (A) 483,79,01,881 Royalty Allowable [ B=A*2%] 9,67,58,038 Total Royalty paid to AE [C] 25,33,48,790 Adjustment u/s 92CA [D=C-B] 5,65,90,752 16.2 We find force in the contention of the assessee that royalty agreements operating in different geographical regions can be applied as a filter as the Ld. TPO himself has accepted royalty agreements operating in foreign jurisdictions. While the primary objection of the Hon’ble DRP in respect of comparability analysis is that the comparable selected by the assessee are from a different geographical region (i.e. USA), we observe that the three comparables considered by the Ld. TPO in the remand report are from the same geographical location (i.e. USA) and hence in our view the objection relating to difference in geographical region does not hold good.

16.3 So far as the objection of the Hon’ble DRP on the product dissimilarity is concerned, it is observed from the perusal of the description of the agreements as provided in the Royaltstat database, all the three comparables selected by the Ld. TPO and the comparables selected by the assessee belong to same industry i.e. “kitchenware and home furnishing items” and hence these are valid comparables.

16.4 The License agreement which is already on record adequately proves that the payment of royalty made by the assessee is for the use of trademark as well as marketing information provided by Tupperware USA and the same is evident from the relevant clauses of the License Agreement reproduced below:- “WHEREAS, LICENSOR and LICENSEE recognize that LICENSOR has rights that relate to marketing information and know-how that may expand the LICENSEE’S product line; and WHEREAS, LICENSEE desires to utilize the marketing information and know-how of LICENSOR; and j 3. Rights Granted (b) The nonexclusive right to use, in connection with the marketing of Licensed Products, all the Marketing Information provided to LICENSEE under Article 6 hereof.

9. Payments (a) In consideration of the license and rights granted hereunder, LICENSEE agrees to pay a royalty of five percent (5%) of the net sales proceeds of the Licensed Products manufactured and sold by LICENSEE in India, in connection with which LICENSEE utilizes any of the Licensed Trademarks or the Marketing Information, or any part of anyone or more thereof. 1n this connection, the net sales proceeds shall be the gross sales proceeds of the Licensed Products marketed and sold under this Agreement minus the following: (1) sales discounts including any sales rebates; (2) sales returns; and (3) indirect taxes (value added tax, etc.) on sales of goods.”

16.5 Coming to the issue whether the set of comparables selected by the assessee are appropriate for benchmarking the payment of royalty or not, we note that the assessee selected ten comparables in the transfer pricing study (refer para 12.2 above), however, all of them were rejected by the Ld. TPO/Hon’ble DRP. Before us, the assessee is contending inclusion of five comparables out of ten comparables selected in the transfer pricing study and inclusion of all three comparables analysed by the Ld. TPO in the remand report proceedings (refer para 13.2 above). Therefore, the assessee’s submission before the Tribunal is to consider eight comparables, three of the Ld. TPO and five from the TP study which will result into the payment of royalty at ALP. The assessee submitted a chart of eight comparables which showing the arithmetic mean for royalty rate at 6% viz. a viz. 5.56% paid by the assessee to Tupperware USA which is reproduced below:- Royalty Product Industry S. Rates Licensor Geography No.

Kitchenware & Kitchenware Amen Wardy, Sr.; USA 1 2.00% home furnishing (dishware,flatware, stemware, Amen Wardy, Jr. items cookware)

Mikasa Inc.; American Commercial Inc.; Mikasa Licensing Inc.; Kitchenware & ARC International, SA 5.00% Kitchenware (dinnerware, USA 2 home furnishing giftware, stemware) items

Kitchenware (cookware, Kitchenware & bakeware, glassware, 3 Oneida Ltd. 8.00% USA home furnishing hollowware, stemware, serve items ware, and storage accessories)

Kitchenware & Kitchenware (cutlery and cutlery 4 7.00% USA Smith & Wesson Corp. home furnishing gift sets) items Kitchenware & Harrow Enterprises Kitchenware (glassware, 5 5.00% USA home furnishing Inc. dinnerware and tableware) items

Colonial Downs, L.P Kitchenware & Kitchenware (plastic bottles, 6 7.00% USA and Stansley Racing home furnishing coolers, drink holders) Corp. items

Kitchenware & FAR-B Acquisition Kitchenware (cookware, 7 5.00% USA home furnishing Corp. bakeware) items

Kitchenware & Kitchenware (juice cap bags, 8 Genius Products, Inc. 9.00% USA home furnishing bottle bags) items Arithmetic mean 6.00%

18.1 At the outset, the Ld. AR submitted that the similar issue arose for consideration of the Hon’ble Tribunal in AY 2012-13 with a similar fact pattern with regard to payment of management services fee to the AE wherein the Hon’ble Tribunal remanded the matter back to the file of Ld. TPO. Hence this issue is squarely covered by the decision of the coordinate bench in assessee’s own case for AY 2012-13. The Ld. DR conceded.

18.2 We have perused the order dated 24.11.2021 of the coordinate bench in for AY 2012-13. The relevant observations and findings of the Hon’ble Tribunal in its order (supra) are as under:-

“7. With regard to ground No. 1 and 2 the assessee has submitted the only dispute of determination of ALP of Management services, he referred to Paper Book-II and shows us the various kinds of services covered in the management service agreement. He referred to Appendix-K which is page No. 133A of the transfer pricing study report where the type of services rendered and received by the assesee is shown along with basis of the allocation, details of services availed, manner in which services rendered and details of benefit derived is mentioned. He further referred to page No. 250 of the paper book which are bills for the services availed by the assesee. He referred to Page No. 251 of whereby complete details are submitted of the services received. In view of this, he submitted that the additions confirmed by the Ld. CIT(A) deserves to be deleted. The Id DR submitted that if in a service any 3ld party would make a payment then 8. such services should satisfy the following test. Firstly such services should be required. Such services should also be rendered, such services should also be having the same benefit to the assessee and those services should not be duplicative in nature. He submitted that the assessee has failed to show any evidence with respect to the receipt of services by the assessee. He submitted that the agreement is a document where both party agree to perform in a particular manner. It does not show actual performance. Further, in absence of actual performance according to that agreement the Id TPO has correctly decided the ALP at Rs. Nil. He supported the orders of the lower authorities.

performed certain services. The details of number of test is devoid by them is also tabulated and same is multiplied by the rate of services each day. This is the supporting attached with the bills of services. Coming to the agreement which is placed at page No. 242 to 249 of the Paper Book. The clause NO. 2 shows that the rate of compensation which would be @ times spent by the service provider employeed in rendering the service. It has also given the charge out rate as per annexure B. However, as the charge out rate are attached for the period April 2002 to March 2006. No such charge out rates are available for FY 2011-12. In view of this the supporting of rendition of the service at page No. 251 to 260 required verification along with rates for this year. Further, it was also not known whether the services are rendered from Hong Kong or from US. This, is so because the rate of the employees are different for this region. Further, merely the annexure at page No. 252 onwards does not show evidence of the rendition of the services, it is merely a breakup of the invoice. In view of this fact, we set aside the whole issue back to the file of the Id TPO with a direction to the assessee to show the actual data, person involved, actual rate as per agreement, rate paid by the assessee as per invoices, technological competence of the persons rendering services to show that services were actually rendered and benefit derived by the assessee. The assessee is also required to show that 3ul party would pay for such services and they are not duplicative in nature. On assessee providing all these details, the Id TPO is directed to examine the same and decide the arms length price of such transaction afresh. The need and benefit test should be left to the wisdom of the assessee. In the result ground No. 1 and 2 of the appeal are allowed with above direction.

20.1 During AY 2013-14, the assessee paid software charges of Rs. 13,62,384/- and intranet and other IT cost reimbursement of Rs. 26,66,885/- aggregating to Rs. 40,29,269/- to M/s. Dart Industries Inc., 27 USA (Dart). The assessee was asked by the Ld. AO to furnish the details of TDS on the same to which the assessee responded that no TDS has been deducted on these charges because they were merely in the nature of reimbursement and the same cannot partake the character of income in the hands of the non-resident recipient that accrues or arises in India. The assessee vide submission dated 27.12.2016 made detailed factual and legal submissions on the aforesaid reimbursement of expenses explaining that the assessee has reimbursed its share of cost to Dart on an actual cost basis (without any mark up) and hence the payments made are in the nature of pure reimbursement. Such cost to cost reimbursement of software and intranet and IT related charges are made as per the underlying cost reimbursement arrangement between the assessee and Dart Industries Inc. A copy of such cost reimbursement agreement was also submitted on 20.12.2016.

20.2 During the assessment proceedings, the assessee also submitted before the Ld. AO that the payments towards aforesaid charges do not constitute ‘royalties’ under the Act as well as the India-USA DTAA as alleged by the Ld. AO and thus taxes are not liable to be deducted thereon under section 195 of the Act and the consequential withholding provisions do not apply. The assessee submitted that the consideration paid towards purchase of software or standard applications from third party vendors is not taxable as royalty under the provisions of section 9(1)(vi) of the Act as well as under relevant Article of the India-USA DTAA. It was further submitted that the issue of taxability of royalty is no longer res-integra and reliance was placed upon several decisions of various judicial forums in support thereof.

20.3 The Ld. AO, however, disregarded the submissions made by the assessee and classified the reimbursements as royalty and FIS by observing that:- i. such payments are for the use of IT Infrastructure, consisting of hardware, software and interconnecting devices, and the same have been treated as consideration for information concerning industrial or 28 commercial experience as per the definition of royalty within the meaning of section 9(1)(vi) of the Act as well as Article 12(3) of the India-USA Double Taxation Avoidance Agreement (‘DTAA’). ii. the payments to Dart, are for the use or right to use the IT Infrastructure and commercial database which the software operates upon, have also been treated as payments for use or right to use copyright in a literary or scientific work within the meaning of royalty as per section 9(1)(vi) of the Act as well as Article 12(3) of the relevant DTAA. iii. the payments to Dart have been treated as payments for use of industrial or commercial equipment in the nature of royalty as per the provisions of Article 12(3) of the DTAA. iv. the payment for the use of the software embedded in IT Infrastructure have also been treated as royalty considering such payment to be for the use or right to use of process, patent, trademark, design or similar property within the meaning of the provisions of the Act as well as the India-USA DTAA. v. the payments to Dart, have been considered in the nature of royalty and taxable in India as per the provisions of the Act as well as Article 12 of the India-USA DTAA. vi. such payments are Fee for Included Services (‘FIS’), considering that the services rendered by Dart are ancillary and subsidiary to the application or enjoyment of the right, property of information, which have been held as royalty and made taxable in India, as per the provisions of the Act as well as Article 12 of the India-USA DTAA.

The Ld. AO thus proceeded to make the impugned addition of Rs. 46,29,269/- to the income of the assessee by making disallowance under section 40(a)(i) of the Act on account of non-deduction of tax on payments made to Dart.

In this case Dart is not purchasing software in bulk to have economy of scale and transferring the same to AEs but is purchasing software and related hardware and is creating an infrastructure of hardware and software. The AEs are enabled to use the infrastructure of software and the related hardware. Even fair and transparent allocation of charges for use of software is not possible without such infrastructure. Further JD Edwards is an ERP software which needs high level of customization before it can be used by any enterprise. If the assesee is using JD Edwards software it must have been customized for it and Dart must have done that. Similarly, Dart is not buying internet hours from a service provider and allocating it to AEs but has created a platform for the AEs to use its Internet system. Clearly the payment for such services is covered under Article 12 and Explanation 2 of section 9(i)(vi) of the Act. The AO was right in holding such payment to be payment for royalties. Royalty is taxable in the country of origin; the assessee was liable to deduct tax at source under section 194J. The assesee did not do TDS hence the expenditure was disallowable under section 40(a)(ia). The addition made by the AO is confirmed the objection is dismissed.

22.1 The Ld. AR reiterated the submissions made before the Hon’ble DRP/Ld. AO. He further submitted that the assessee has paid consideration towards purchase of software/standard application from third party vendor which is not taxable as ‘royalty’ under the provisions of section 9(1)(vi) of the Act as well as Article 12 of the India-USA DTAA and thus the consequential withholding provisions do not apply in the present case. He placed reliance on the judgment of the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited [TS-106-SC-2021]. He submitted that the issue under consideration is squarely covered by the Apex Court’s judgment in Engineering Analysis Centre of Excellence Private Limited (supra). The Ld. AR also took an alternative plea that payments made to Dart Industries are purely in the nature of reimbursement and that there is no value addition by the assessee. He relied on the decision of Mumbai ITAT in Bharti Airtel in support thereof.

22.1.1 In its written submissions the Ld. AR submitted that the Ld. AO/Hon’ble DRP has not appreciated the fact that these services are availed by the assessee to confirm to the standards of the Tupperware group as a whole and to align its products and practices with the global practices of the group worldwide. There is no confidential information being provided by Dart which is used for commercial exploitation by the assessee. Payments made to Dart are merely towards standard applications which are required for any multi-national assessee to operate in India. However, no portion of these applications or standard facilities provided to the assessee can be said to be in the nature of royalties.

22.1.2 On the alleged finding of the Ld. AO/Hon’ble DRP that the global IT infrastructure / facility of Dart is nothing but equipment, being physical devices, machines or resources, which are used or accessed by the assessee in its operations or activities the Ld. AR has submitted that the assessee merely made use of the facility, though did not use the equipment itself. The Hon’ble DRP / Ld. AO has failed to understand that the control of the equipment always remained with the service provider and not with the assessee. Hence, the service charges are not in the nature of royalty as the ultimate customer which is the assessee in the present case is not permitted to use a process, right , property or information contained in that hardware or process.

22.1.3 It was also contended that before alleging that the payment for software applications/ services falls within the ambit of royalties for use or right to use the equipment , it has to be proved whether the essential condition of ‘use or right to use’ has been fulfilled, which the Hon’ble DRP / Ld. AO has failed to do.

22.1.4 It was submitted that there was no commercial exploitation of the software application by the assessee and the subject payments are not in the nature of royalty but business income and since the service provider does not have a permanent establishment in India the same are not subject to tax in India. Hence the assessee was not under any obligation to deduct tax at source thereon. Accordingly in view of the above factual matrix of the case, payment towards standard software applications cannot be considered as payment towards use or right to use of any industrial, commercial or scientific equipment.

22.1.5 In the background of above legal and factual submissions, the Ld. AR submitted that the subject payment made to Dart towards reimbursement of software applications is not taxable in royalty income as per provisions of section 9(1)(vi) of the Act read with the beneficial provisions of the India-USA DTAA and therefore, the assessee was never obliged to deduct tax at source under section 195 of the Act.

22.1.6 The Ld. AR also submitted that since the Ld. TPO examined the transaction of reimbursement of expenses in detail during the transfer pricing proceedings taking into account the documentary evidence submitted during the course of assessment proceedings and no adverse inference was drawn by him in his order dated 26.09.2017 in respect of the ALP of such reimbursements, no addition to the income of the assessee in respect of such payments is called for by the Ld. AO/DRP.

22.1.7 The Ld. AR, without prejudice to the above arguments, took an alternative plea that the payments made to Dart were merely in the nature of reimbursements and the same cannot partake the character of income in the hands of the non-resident recipient that accrues or arises in India by placing reliance on the decision of Mumbai Tribunal in M/s. Bharti Airtel Limited (ITA Nos. 3681, 3682, 2877, 3878/Mum/2011) wherein the Hon’ble Tribunal held that “... as regards the payment for reimbursement, there is no profit element involved and therefore, TDS provisions could not be applied.

22.2 On the other hand, the Ld. DR submitted that the Apex Court’s decision in Engineering Analysis Centre of Excellence Private Limited (supra) will not be applicable in the present case as the software supplied to the assessee is customised software/custom made whereas the Apex Court’s decision has been rendered in the context of the standard software.

23.1 As against the explanation offered by the assessee that the software supplied to it is a standard/off-the-shelf software, the allegation of the Ld. AO/DRP is that JD Edwards is an ERP software which needs high level of customization before it can be used by any enterprise and hence it must have been customized for the assessee as well by Dart. Therefore, the Revenue has contended that the decision of the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence P. Ltd. (supra) cited and relied upon by the assessee is not applicable to the facts of the present case which case applies to the payments made for standard/off-the-shelf software and not customized software as in the case of the assessee.

23.2 The issue whether the amounts paid by resident Indian end users / distributors to non-resident computer software manufacturer / supplier as consideration for the resale/use of the computer software through end users license agreements (EULAs) /distribution agreements is the payment of royalty for the use of copyright in the computer software now stands settled by the decision of the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence P. Ltd. (supra) wherein the Hon’ble Supreme Court has held that such payments are not royalty payment and the same does not give rise to any income taxable in India, as a result of which such payments are not liable to tax deduction at source under the provisions of section 195 of the Act. The decision (supra) of the Hon’ble Supreme Court will apply to the case of the assessee provided the consideration paid by the assessee is towards purchase of standard/off-the-shelf software from Dart.