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Income Tax Appellate Tribunal, DELHI
Before: SH. ANIL CHATURVEDI & SH. YOGESH KUMAR US
This appeal filed by the assessee is directed against the order of the Addl. Commissioner of Income Tax, Income-tax Officer, National e-Assessment Centre, Delhi under section 143(3) r.w.s. 144C(13) and 144C(13) read with Section 143(3A) & 143(3B) of the Income Tax Act pursuant to the direction of Dispute Resolution Panel (DRP) – 1, New Delhi order dated 15.03.2021 for Assessment Year 2016-17.
The assessee has also filed a Stay Application (SA) seeking stay of disputed tax demand for A.Y. 2016-17.
We first proceed with disposing of the appeal of assessee in :
The relevant facts as culled from the material on records are as under :
Assessee is a company stated to be engaged in distribution and marketing of a range of Adidas and tailor made branded athletic and lifestyle products. Assessee electronically filed its return of income for A.Y 2016-17 on 30.11.2016 declaring total income at Rs. 67,85,52,440/-. The case was selected for scrutiny and accordingly notices u/s 143(2) and 142(1) of the Act were issued.
AO on perusing the Form 3CEB, noticed that assessee had entered into International Transactions (IT) with its Associated Enterprises (AE) aggregating to Rs.118.59 Crores. Accordingly, in view of the provision of Section 92CA of the Act, the International Transactions entered into by the assessee with its AEs were referred to the Transfer Pricing Officer (TPO) for determining the Arm’s Length Price. The TPO vide order dated 31.10.2019 passed u/s 92CA(3) suggested following adjustments:
Nature of International Adjustment u/s Transaction 92CA suggested by TPO AMP 51,14,40,354 On Protective basis AMP 31,34,39,910 On Substantive Basis Royalty 34,12,19,757 On substantive Basis
Thereafter, a draft assessment order was passed u/s 144C of the Act by the AO vide order dated 23.12.2019 determining the total income at Rs.142,55,16,753/-. Aggrieved by the draft assessment order passed by AO, assessee carried the matter before DRP. DRP vide order dated 04.03.2021 directed the AO to complete the assessment as per the directions contained in the aforesaid order. Consequent to the directions of DRP, AO vide order dated 31.03.2021 passed u/s 143(3) r.w.s. 144C(13) r.w.s. 143(3A) and 143(3B) of the Act, determined the total income of the assessee at Rs.1,35,21,54,510/-. Aggrieved by the order passed by AO pursuant to DRP’s directions, assessee is now in appeal and has raised the following grounds: 1. “TP adjustment with respect to Advertisement, Marketing and Promotion (‘AMP’) expenditure On the facts and circumstances of the case, & in law, the Ld. Assessing Officer (Ld. AO)/ Learned Transfer Pricing Officer ( Ld. TPO’) [in pursuance to the directions of the Dispute Resolution Panel ('Ld. DRP’)], erred in enhancing the income of the Appellant by INR 31,34,39,910/- (on substantive basis) and INR 51,14,40,354/- (on protective basis) holding that alleged excessive AMP expenses is an international transaction and in doing so have grossly erred in: 1.1 not appreciating that incurring of AMP expenditure by the Appellant does not constitute an “International Transaction” in terms of the Section 92B of the Income-tax Act, 1961 ( the Act’), thereby violating the principles laid down by the jurisdictional High Court and favourable adjudication/ findings of the Hon'ble Income- tax Appellate Tribunal (‘ITAT’) in Appellant’s own case; 1.2 proposing adjustment basis an incorrect understanding of the functional profile of the Appellant, thereby characterizing it as a distributor instead of a manufacturer; Substantive Adjustment 1.3 Without prejudice to the Ground 1.1 and 1.2, on the facts and in the circumstances of the case, & in law, Ld, AO/Ld. TPO (in pursuance to the directions of the Ld. DRP) erred in making substantive adjustment by applying Residual Profit Split Method (‘RPSM’) not in accordance with the provision of section 92C of the Act read with Rule 10B(1)(d) of the Income- tax Rules, 1962.
Protective Adjustment 1.4 Without prejudice to the Ground 1.1 and 1.2. on the facts and in the circumstances of the case & in law, Ld AO/Ld. TPO (in pursuance, to the directions of the Ld DRP) erred in making protective adjustment applying bright line test (‘BLT’) (AMP/Sales) which does not have a statutory mandate and is specifically struck down by the Jurisdictional High Court. While doing so, the Ld. AO/ Ld. TPO grossly erred in; 1.4.1 imputing a mark-up of 16.79% [being operating profit ('OP’)/ operating cost ('OC’)] on the alleged AMP expenses, without providing any cogent reason and selecting companies which are functionally different and ought to be excluded.
Roth Protective und Substantive Adjustment 1.5 Without prejudice to the Ground 1.1 and 1.2, on the facts and in the circumstances of the case, & in law. Ld. AO/Ld. TPO (in pursuance to the directions of the Ld. DRP) erred in 1.5.1 identifying the companies, which are not functionally comparable to the Appellant; 1.5.2 on-inclusion of an additional comparable proposed by the Appellant; 1.5.3 not providing the search process along with backup documentation such as accept-reject matrix to evaluate the appropriateness of the comparable proposed by the Ld. TPO; 1.5.4 not appreciating the arithmetical inaccuracies while computing the protective and substantive adjustment; 1.5.5 considering the selling & distribution and sales commission expenses paid to third parties by Appellant as alleged excessive AMP expenses; and 1.5.6 violating the cardinal principle of natural justice by not giving reasonable opportunity' to the Appellant of refuting / rebutting the basis on which adjustment was made in the transfer pricing order.
2. TP adjustment with respect to payment of royalty On the facts and circumstances of the case & in law, the Ld. AO/ Ld. TPO [in pursuance to the directions of the Ld. DRP] erred in enhancing the income of the Appellant by INR 26,78,57,509/- while holding that the international transaction pertaining to payment of royalty does not satisfy the arm’s length principle envisaged under the Act, and in doing so have grossly erred in:
2.1 rejecting / not commenting on the comparable agreements accepted by the Appellant to benchmark royalty transaction using Comparable Uncontrolled Price ('CUP) method; 2.2 determining the arm's length royalty rate by considering royalty / sales ratio of companies basis information available in the Profit & Loss account of certain identified companies without having regard to the comparability conditions laid down under Rule 10B read with Section 92C for application of CUP method; 2.3 Without prejudice to Ground 2.2 above, the Ld. TPO / Ld. AO (following the directions of the Ld. DRP), erred on facts and in law; 2.3.1 Not providing the detailed search process along with backup documentation such as accept-reject matrix to provide Appellant an opportunity to evaluate the appropriateness of the benchmarking analysis; and 2.3.2 not considering certain additional companies proposed/ identified by the Appellant.
3. Corporate Tax Grounds 3.1 On the facts and in the circumstances of the case, & in law the Ld. AO erred in disallowing fee for buying agency services under section 40(a)(i) of the Act paid by the Appellant to adidas International Trading B.V (‘aIBV’), holding the same to fall within the definition of fees for technical services ('FTS') under Section 9(1)(vii) of the Act and Article 12(5) of the India-Netherlands Double Taxation Avoidance Agreement (‘DTAA').
3.2 On the facts and in the circumstances of the case & in law, the Ld. AO erred in applying the meaning of FTS contained in Section 9(1)(vii) of the Act while interpreting the definition of FTS provided under Article 12(5) of the India-Netherlands DTAA.
3.3 Without prejudice to the above, the Ld. AO grossly erred in categorizing the services rendered by alBV into the scope of make available’ as provided in Article 12(5) of the India- Netherlands DTAA.
3.4 On the facts and circumstances of the case, & in law the Ld. AO grossly erred in not following the favourable order of Hon’ble ITAT in Appellant’s own case for AY 2011-12 (ITA No. 953/Del/2016) and AY 2012-13 (ITA No. 729/Del/2017) on the issue under consideration. The above grounds and sub-grounds are without prejudice to each other. The Appellant craves leave to add, alter, amend, modify or withdraw all or any of the aforesaid grounds of appeal as may be considered necessary at any time before or at the time of hearing of the appeal. The Appellant prays that appropriate relief be granted based on the said grounds of appeal and the facts and circumstances of the case.”
7. Ground No.1 and its sub grounds are with respect to the TP adjustment on account of Advertisement, Marketing & Promotion (AMP) expenses made on substantive and protective basis.
On perusal of the documents furnished before the TPO, TPO noted that assessee was not only carrying out functions of purchase and sale of manufactured goods but was also discharging marketing functions which includes market development thereby creating and adding value to the existing intangibles owned by the AE as well as other marketing intangibles. He was of the view that the functions performed and by incurring marketing expenditure, benefit was provided to the AEs which was substantially in excess of level of function and expenditure which an independent enterprises in comparable transactions would have incurred. He noted that Adidas brand was globally recognized premium brand in the sporting goods industry and the brand was owned by Adidas AG which was responsible for setting out the global brand marketing strategy. He noted that assessee did not own or develop any significant intangibles asset and any significant intangible assets used by assessee during its operations in India were owned by the AEs. He was of the view that when the assessee carried out the level of expenditure, it was actually rendering a service to the AEs and the service being in the form of international transactions that involves the creation and use of a marketing intangible in favour of the AE. He was of the view that such an act on the part of the assessee calls for a higher remuneration to the assessee. He noted that in the case of the assessee in earlier years, the Revenue had taken a stand that Bright Line Test should be applied and any AMP expenditure incurred by the assessee in excess of the expenditure incurred by the comparables should be considered as the expenditure incurred by the assessee for the benefit of the parent AE and corresponding adjustment should be made. He also noted that though the High Court in the case of Sony Mobile Communication (India) Pvt. Ltd. had rejected the contention of the Revenue on the applicability of Bright Line Test and corresponding calculations but however Department had filed an appeal against the order of Hon’ble High Court and contested the judgment before the Hon’ble Supreme Court. He was further of the view that the assessee has not been suitably compensated by the AEs in respect of the expenditure incurred by the assessee on Advertising and Sales Promotion expenses (AMP) to penetrate the market and to increase the sales by promoting the brand name. He thereafter proposed to compare AMP expenditure of the assessee with AMP expenditure of other comparables engaged in similar business using Advertisement and Marketing and Promotional expenditure to the sales ratio for comparability analysis. He thereafter by following the Bright Line Method worked out the amount that should have been compensated to the assessee as under: Sales of the assessee 8540597000 AMP/Sales of the comparables 3.60% Amount representing bright line expenditure 307461492 AMP expenditure of the assessee 745376000 Amount in excess of brightline 437914508
He thus concluded that the excess expenditure of Rs.43,79,14,508/- should have been compensated by the AEs which was not compensated. He thereafter by considering the mark up @21% worked out the proposed adjustment on protective basis at Rs.530,314,469/-. He thereafter also proposed adjustment to the extent of Rs.31,34,39,910/- on account of AMP expenditure on substantive basis and proposed its additions.
Aggrieved by the proposed addition by TPO, assessee carried the matter before DRP. DRP noted that identical issue also arose in assessee’s own case before the Tribunal in A.Y. 2006-07, 2007- 08, 2008-09, 2010-11, 2011-12 & 2012-13 and CIT(A) in A.Y. 2013-14, 2014-15 & 2015-16 have decided the issue in assessee’s favour. It however noted that on the issue involving AMP expenditure though the Hon’ble Delhi High Court had decided the issue against the Revenue but since Revenue has preferred SLP before the Hon’ble Apex Court, DRP upheld the order of AO. AO thereafter made adjustment on account of AMP expenses. Aggrieved by the order of AO consequent to the directions of DRP, assessee is now before us.
Before us, Learned AR reiterated the submissions made before AO and CIT(A) and further submitted that identical issue arose in assessee’s own case in A.Y. 2011-12 before the Hon’ble Tribunal and the Hon’ble Tribunal vide order dated 31.07.2019 in and by following the order of Tribunal in assessee’s own case for earlier years had restored the matter back to the file of the AO. He submitted that since the facts of the case in the year are identical to that of earlier years, the matter be restored back to the AO with similar directions.
Learned DR on the other hand did not controvert the submissions made by Learned AR but however supported the order of lower authorities.
We have heard the rival submissions and perused the material available on record. The issue in the present ground is with respect to the adjustment of AMP expenditure. We find that identical issue arose in assessee’s own case for A.Y. 2011-12 before the Co-ordinate Bench of Tribunal. The Co-ordinate Bench of Tribunal vide order dated 31.07.2019 had restored the matter back to the file of the AO by observing as under: “6. In grounds No. 3 to 8 of the appeal, the assessee has raised the issue of AMP adjustment of Rs.38,97,45,132/- made in the case of the assessee.
6.1 Before us, both the parties agreed that issue in dispute is covered by the direction of the Tribunal in assessment year 2006- 07 in and this may be decided accordingly.
6.2 We have heard the submission of the parties and perused the relevant material on record. The issue whether incurring of expenditure on advertisement, marketing and sales promotion by the assessee, amounts to International transaction and determination of its arms length price, has been decided by the Tribunal in assessment year 2006-07 The relevant finding of the Tribunal is reproduced as under:
“8.1.2. We don’t deny that there would be incidental benefit to foreign AE, being, Adidas-Saloman AG, which is ultimate parent of assessee. However, expenditure towards advertisement and marketing incurred by assessee in India is mainly for its own benefit to market products manufactured by it in India. Main purpose of incurring of such huge AMP expenses has largely benefited assessee in India, with an incidental benefit arising to foreign AE. Unless Ld.TPO can establish direct benefit accruing to foreign AE, it is very difficult to accept existence of international transaction, under present facts of the case. We rely upon decision of Hon’ble Delhi High Court in case of Sony Ericson Mobile Communication India Pvt.Ltd (supra) in support of aforestated observations.
8.2. Further it has been submitted by both sides that facts and circumstances in present appeal are no manner different with that of Maruti Suzuki Inida Ltd. Reported in 381 ITR 117; and Soney Ericson Mobile Communications (supra), wherein Hon’ble High Court has held that existence of international transaction must be established de hors the Bright Line Test before undertaking bench marking of AMP expenses. We therefore respectfully follow the view taken by this Hon’ble Delhi High Court in Sony Ericson Mobile Communications (supra), and delete adjustment made in respect of AMP expenses.
8.3 However, we appreciate the concern raised by Ld. Sr. DR that decision of Hon’ble Supreme Court will be binding upon assessee as well as revenue.
19. After considering the legal position as discussed in the preceding paragraphs, we are of the considered opinion that the ALP of an international transaction involving AMP expenses, the adjustment made by the TPO/DRP/AO is not sustainable in the eyes of law. At the same time, we cannot ignore the submission of the learned DR that the matter is pending before Hon'ble Apex Court and the decision of Hon'ble Apex Court would be binding upon all the authorities. In view of the above, we set aside the orders of authorities below and restore the matter to the file of the Assessing Officer. We hold that as per the facts of the case and the legal position as of now and discussed above in this order, the adjustment made by the TPO/DRP/AO in respect of AMP expenses is not sustainable. However, if the above decisions of Hon'ble Jurisdictional High Court which is under consideration before the Hon’ble Apex Court is modified or reversed by the Hon’ble Apex Court, then the Assessing Officer would pass the order afresh considering the decision of Hon’ble Apex Court. In those circumstances, he will also allow opportunity of being heard to the assessee.
Accordingly Grounds 2 to 2.24 stand allowed for statistical purposes.”
6.3 We note that the Tribunal in assessment year 2010-11 in has also restored the matter to the Assessing Officer to decide in view of the finding in assessment year 2006- 07.
6.4 Respectfully following the finding of the Tribunal(supra), the issue in dispute of determination of AMP adjustment is restored to the file of the Assessing Officer for deciding in accordance with the direction given by the Tribunal in assessment year 2006-07. It is needless to mention that the assessee shall be afforded adequate opportunity of being heard. The grounds of the appeal from 3 to 8 are accordingly allowed for statistical purposes.”
Before us, since both the parties had admitted that the facts are identical to that of earlier years and in A.Y. 2011-12, the Co- ordinate Bench of Tribunal had restored the issue back to the file of AO by following the order of Tribunal in A.Y. 2006-07, we therefore following the order of the Co-ordinate Bench for A.Y. 2011-12 & with similar directions restore the issue back to the file of AO for deciding the issue in accordance with the direction given by Tribunal in A.Y. 2006-07. Thus the grounds of assessee are allowed for statistical purposes.
Ground No.2 and its sub grounds are with respect to the TP adjustment on account of payment of royalty.
During the course of TP proceedings, TPO noticed that assessee had paid royalty of Rs. 34,12,19,757/- to Adidas AG. Assessee was asked to substantiate the royalty payment made to its AEs and justify that the transactions was at arm’s length. Assessee inter alia objected to the benchmarking of the transactions and submitted that royalty payment made by the assessee was at arm’s length. The submissions of the assessee was not found acceptable to TPO. Assessee also submitted a list of 7 comparable agreements which were not found acceptable to the TPO as according to him the agreements were functionally different and therefore they were not comparable. TPO noted that since the comparables furnished by the assessee were not found appropriate it had conducted a fresh search to find out the comparable companies on its own but since the search did not give any result, he considered the royalty payment by the assessee to be Nil and thus proposed adjustment of Rs. 341,219,757/-.
Aggrieved by the order of TPO, assessee carried the matter before DRP. During the DRP proceedings, assessee filed additional evidence to support the payment of royalty to its AEs. On the additional evidences submitted by the assessee, remand report was called from TPO which is reproduced by DRP on Page 13 & 14 of its order. In the remand proceedings, the TPO on the basis of the comparable Indian companies paying royalty, proposed adjustment to the extent of Rs. 26,78,57,509/-. The DRP agreed with the TP study conducted by the TPO in the remand proceedings and upheld the adjustment proposed in the remand report. Aggrieved by the order of AO consequent to DRP directions, assessee is now before us.
Before us, Learned AR reiterated the submissions made before the TPO & DRP and submitted that assessee had entered into an agreement with Adidas AG for the availing license to affix the trademarks of “Adidas”, “Trefoil”, “3 Strips” and “3 Bars” for promotion, distribution marketing and sale of products and for which assessee had paid royalty aggregating to Rs.341,219,757/- (being 6% of net sales of the products manufactured in India) to Adidas, AG. He submitted that since comparable uncontrolled agreements for payment of license fee was available, Assessee considered CUP method as most appropriate method for benchmarking international transactions for payment of license fees to the AEs. He submitted that following the CUP method, 7 agreements which pertained to grant of royalty for both knowhow and trademark for use were accepted as comparables. The list of such comparables are listed at Page 145 of the paper book. He submitted that the royalty charged in those comparables was with an arithmetic mean of 6% and since assessee had also paid license fee of 6%, which is at par with comparable agreements, the payment of royalty was considered to be an arm’s length. TPO however considered the payment of royalty to be Nil and proposed the adjustment of Rs.34,12,19,757/-. The action of TPO was upheld by DRP. Aggrieved by the action of DRP, assessee is now before us.
Before us, Learned AR firstly submitted that though the agreement pursuant to which the royalty payment has been made by the assessee was finalized in 2006 and the assessee has been paying the royalty in all the earlier years based on the aforesaid agreements, but no adjustment has been proposed to the royalty payment in any of the earlier years. He thereafter pointed to the TPO report (Para 13 page 54 of TPO order) wherein the table of comparable agreements were furnished by the assessee. From the aforesaid table, he submitted that no speaking order has been passed by TPO for rejecting the comparables and he has simply mentioned that the comparables selected by the assessee were functionally different. He submitted that TPO has not pointed out as to how the comparable selected by the assessee are functionally different. He therefore fairly submitted that the matter may be remitted back to TPO/DRP for passing necessary speaking order on the issue.
Learned DR on the other hand did not controvert the submissions made by Learned AR but however supported the order of lower authorities.
We have heard the rival submissions and perused the material available on record. The issue in the present ground is with respect to the adjustment made to the royalty payment. The royalty payment by the assessee was determined at Rs. Nil by TPO as against the payment of Rs.34,12,19,757/-. Before us, it is assessee’s contention that the agreement pursuant to which the royalty payment has been made was entered by the assessee with its AEs in January 2006 and the same agreement continues till date and further the payment of royalty made pursuant to the aforesaid agreement in earlier years has been accepted by the Revenue. The aforesaid contention of Learned AR has not been controverted by Revenue before us. We further find that assessee had furnished the comparable agreements but the same were rejected by TPO. We find that while rejecting the comparables submitted by assessee no valid reason have been given by the TPO or DRP. In such a situation, we find merit in the submissions of Learned AR requesting for remitting the issue back to the file of TPO. We therefore restore the issue back to the file of TPO and direct him to re-compute the adjustment if any, to the payment of royalty after considering the submissions of the assessee and by passing a speaking order on the issue. Needless to state that assessee shall furnish all the necessary details called for by the authorities. Thus the Ground of assessee is allowed for statistical purposes.
Ground No.3 and its sub grounds are with respect to the disallowing fee for buying agency services under section 40(a)(i) of the Act.
TPO noticed that during the year under consideration assessee had paid an amount of Rs.9,23,04,646/- to Adidas International Trading B.V., Netherlands (‘aIBV’) in respect of goods imported from contract manufactures outside India. TPO was of the view that the payment appeared to be in the nature of ‘fees for technical services’ (‘FTS’). Assessee was asked to show- cause as to why no TDS has been deducted on the aforesaid payment and therefore the same not be added to the income. Assessee filed the detailed submissions which are reproduced by the TPO in his order. However the submissions of the assessee was not found acceptable as TPO was of the view that provision of Section 9(1)(vii) of the Act were amended by Finance Act 2010 with retrospective effect from 01.06.1976 and as per the provision of Explanation to Section 9(1) for the purpose of clause –(vii), the scope of income includes the services rendered and also the same which has been utilized in India in so long as the source of payment towards the payment was in India. TPO was thereafter of the view that payment made to the assessee was in the nature of FTS and the assessee was liable to deduct tax at source which it had failed to do so. He was therefore of the view that provision of Section 40(a)(i) of the Act are attracted and therefore proposed an addition of Rs.9,23,04,646/-.
Aggrieved by the directions proposed by TPO, assessee carried the matter before DRP. DRP upheld the order of TPO. Consequently, AO in the final assessment order made addition on the aforesaid amount. Aggrieved by the order of AO, assessee is now before us.
Before us, at the outset, Learned AR submitted that identical issue arose in the case of assessee in A.Y. 2010-11 before the Co-ordinate Bench of Tribunal. The Co-ordinate Bench of Tribunal while deciding the issue in order dated 13.03.2020 and by following the order of Tribunal in assessee’s own case for A.Ys. 2011-12 & 2012-13 decided the issue in assessee’s favour. He pointed to the relevant order placed in the paper book. He therefore submitted that following the order of Co-ordinate Bench of Tribunal in assessee’s own case, matter be decided in similar way. He also relied on the decision in the case of Director of Income-tax (International Taxation)-II vs. Panalfa Autoelektrik Ltd. reported in [2014] 49 taxmann.com 412 (Delhi) wherein it has been held that the commission paid by assessee to its foreign agent for arranging of export sales and recovery of payments could not be regarded as fee for technical services under section 9(1)(vii) of the Act.
Learned DR on the other hand supported the order of lower authorities and further placing reliance on the Supreme Court decision in the case of GVK Industries Ltd. & Anr vs. ITO Civil Appeal No.7796 of 1997 submitted that the matter may be remitted back to AO to determine as to whether the Netherlands Company had a PE in India. Learned AR in his rejoinder submitted that the TPO holds the payment to be an FTS and it is not his case that the amount paid by assessee is taxable as business profits of the AE and taxability of business profit would only arise when the AE has PE in India. He therefore submitted that Revenue cannot improve the case of AO.
We have heard the rival submissions and perused the material available on record. The issue in the present ground is with respect to the disallowance u/s 40(a)(i) of the Act of the payments in respect of buying agency charges paid by assessee to Adidas International Trading BV (‘aIBV’). We find that identical issue arose in assessee’s own case in A.Y. 2010-11 before the Co- ordinate Bench of Tribunal. The Co-ordinate Bench of Tribunal decided the issue in assessee’s favour by observing as under: 3. “The ground Nos. 5-7 raised by the assessee are with regard to action of the Ld. CIT(A) in confirming the disallowance made by the Ld. AO in respect of fee for buying agency services u/s.40(a)(i) of the Act in respect of the payments made by the assessee to Adidas International Trading B.V by holding that the same falls within the ambit of "fee for technical services" u/s.9(1)(vii) and also satisfying the make available clause mentioned in Article 12(5) of India-Netherlands treaty.
3.1. We have heard rival submissions and perused the materials available on record. We find that assessee company is engaged in the business of sourcing, distribution and marketing of range of Adidas branded athletic and life-style products. The Holding company of the assessee is Adidas India Pvt. Ltd., holding 98.99% of share capital. We find that the assessee had entered into 'Buying Agency Agreement with Adidas International Trading B.V, (ABV) in respect of goods imported from contract manufacturers outside India. During the year under consideration, the assessed paid an amount of Rs. 2,56,55,345/- to ABV under the above mentioned agreement in respect of procurement services rendered to the assessee. On this amount, no tax was deducted at source in terms of Section 195 of the Act. Accordingly, the assessee was asked to show cause as to why buying commission of Rs. 2,56,55,345/- should not be treated as 'Fee for technical service' and why the same should not be disallowed u/s 40(a)(i), on account of non-deduction of TDS. The Ld. AO disregarded the contentions of the assessee and proceeded to disallow the sum of Rs.2,56,55,345/- u/s.40(a)(i) of the Act in the assessment which was upheld by the Ld. CIT(A).
3.2. We find that the issue in dispute has already been addressed by the Co ordinate Bench of this Tribunal in assessee's own case for A.Y.s 2011-12 and 2012-13 in and ITA No.729/Del/2017 respectively dated 31/07/2019 wherein the grounds raised before this Tribunal were as under:-
9. On the facts and circumstances of the case and in law, the Panel erred in directing to disallow fee for ‘buying agency services under Section 40(a)(i) of the Income-tax Act, 1961 ('the Act') paid by the Appellant to adidas International Trading B. V. by holding the same to fall within the definition of Fees for technical services" under section 9(l)(vii) of the Act and Article 12(5) of the IndiaNether lands Double Taxation Avoidance Agreement ("the DTAA").
9.1 On the facts and circumstances of the case and in law, the Panel gravely erred in enhancing the income of the Appellant by directing disallowance of fee for "buying agency services".
9.2 Without prejudice to the above, the Panel erred in law by reading into the meaning of "Fees for technical services" contained in section 9(l)(vii) of the Act for the purpose of interpreting the definition of "Fees for technical services" provided under Article 12(5) of the India-Netherlands DTAA.
9.3 Without prejudice to the above, the Panel grossly erred in categorizing the services rendered by adidas International Trading B.V. into the scope of "make available" as provided in Article 12(5) of the India-Netherlands DTAA.”
3.3. This Tribunal had disposed of the aforesaid grounds by observing as under:-
“7. The grounds No. 9 to 9.3 of the appeal relates to disallowance under section 40(a)(i) of the Act in respect of buying agency services. According to the lower authorities, the expenditure on buying agency services are in the nature of “fee for technical services” in terms of section 9(1)(vii) of the Act and therefore, the assessee was required to deduct tax at source on such payment and failure to do so resulted in disallowance under section 40(a)(i) of the Act. The learned DRP in their order has listed the activities carried out by the Adidas International Trading BV in relation to procurement of goods as under:
“a. Finding manufacturers for the goods concerned and making arrangements for their manufacture; b. Sourcing samples. c. placing orders for and / or purchase goods, d. Managing payment for goods made by manufacturers on behalf of the Principal; e. Inspecting materials, components and goods, both during and on completion of manufacture, f. rejecting those goods that do not conform to such terms and standards; g. sign manufacturing agreements ("Manufacturing Agreement") h. Facilitating obtaining relevant documentation, particularly with regards to invoices, export licences, certificates of origin and / or GSP / EURI documentation, etc.; i. Arranging, the insurance, transport and delivery of goods j. to arrange storage of goods until "requirement" date; k. Liaise with manufacturers to ensure that confirmed ex- factory dates are met; I. Liaise with manufacturers with regards left-over material, mould management, tooling and late deliveries aiming to settle such issues as directed by the Principal, and; m. Liaise with courier and logistics companies as required to facilitate the delivery of orders placed by the Principal. "
7.1 Before us, the learned counsel of the assessee submitted that the assessee made payment of commission to Adidas International Trading BV (ITBV) on account of procurement of goods from outside India and for that purpose it has entered in a ‘buying agency agreement’ with said associated concern, which is placed on page 144 -145 of the paper-book. The activities of ITBV include the contacting the manufacture, sourcing the sample and many other activities but the primary purpose was procurement of goods only. According to the Ld. counsel, the buying commission to ITBV was not account of any services but for procuring goods from global manufacturer, which are entrepreneurial activities and cannot be taxed in absence of a permanent establishment. The Ld. counsel submitted that issue in dispute is squarely covered by the decision of the Tribunal Delhi bench in the case of a Adidas Sourcing Ltd versus ADIT (2012) 150 TTJ 801, wherein it is held that buying commission paid does not fall within the ambit of the fee for technical services.
7.2 The learned DR, on the other hand, relied on the order of the lower authorities.
7.3 We have heard the rival submission of the parties on the issue in dispute. The identical issue of buying commission in the case of sister concern of the assessee has been decided by the Tribunal (supra) as commission and not fee for technical services. The relevant finding of the Tribunal is reproduced as under:
“5. We have heard the rival contentions and perused the submissions made by the parties in detail. The main issue for consideration is whether the consideration received by the assessee from AIMPL under the Buying Agency Services Agreement (‘BAS') could be characterized as ‘fees for technical services' under section 9(1)(vii) of the Act and accordingly by taxed under the provisions of section 1 15A of the Act. Explanation 2 to section 9(1)(vii) defines ‘fees for technical services’ as under:
Explanation 2.—For the purposes of this clause, 'fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) hut does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".
5.1. It is evident that for a particular stream of income to be characterized as ‘fees for technical services’, it is necessary that some sort of ‘managerial’, ‘technical’ or ‘consultancy’ services should have been rendered in consideration. The terms ‘managerial’, ‘technical’ or ‘consultancy’ do not find a definition in the Income-tax Act, 1961 and it is a settled law that they need to be interpreted based on their understanding in common parlance. Let us examine the meaning of each of these words:
Managerial : the Delhi High Court in the case of J.K. (Bombay) Ltd. vs. CBDT & Anr. (1979) 118 1TR 312 (Del) referred to an article on ‘Management Sciences' in Encyclopedia 747, wherein it is stated that the management in organizations include at least the following: (a) discovering, developing, defining and evaluating the goals of the organization and the alternative policies that will lead towards the goals; (b) getting the organization to adopt the policies; (c) scrutinizing the effectiveness of the policies that are adopted and (d) initiating steps to change policies when they are judged to be less effective than they ought to be. Management thus pervades all organizations.
Technical : In the case of Skyccll Communications Ltd. vs. DCIT (251 ITR 53) (Madras), the Hon’ble High Court has held that the popular meaning associated with the word ‘technical’ is ‘involving or concerning applied and industrial science’.
Consultancy : consultancy is generally understood to mean an advisory services. Further, it may be fair to state that not all kind of advisory could qualify as technical services. For any consultancy to be treated as a technical services, it would be necessary that an technical element is involved in such advisory. Thus, the consultancy should be rendered by someone who has special skills and expertise in rendering such advisory.
5.2. Our attention was also brought to the decision of the Mumbai bench of the ITAT in the case of Linde AG vs TTO (62 ITD 330) wherein it is observed that:
In the definition for ‘fees for technical services’ the consideration has to be for rendering technical, managerial or consultancy service. By making purchase for the Indian concern no consultancy services is provided as no advice is given to them. It is a simple procurement of equipments by the assessee for them. It is also not a technical service in the sense of technical education is concerned with leaching applied sciences and special training in applied sciences, technical procedures and skills required for practice of trade or profession, especially those involving the use of machinery or scientific equipment. If the information is given for the use of the machinery or scientific equipment it would partake the character of fees for technical serviices hut when it is only for the procurement of the scientific equipments it would be a simple service of commercial and industrial nature. It, therefore, cannot he termed as a technical service for which the procurement fees charged by the assessee cannot he a consideration for technical services. The third category is managerial service. The managerial service, as aforesaid, is towards the adoption and carrying out the policies of an organization. It is of permanent nature for the organization as a whole. In making the stray purchases, it cannot he said that the assessee has been managing the affairs of the Indian concern or was rendering managerial services to the assessee.
5.3. The copies of the Buying Agency Services agreement are placed on record, the nature of services have not been disputed. Department has only interpreted them to be amounting to ‘Fees for Technical Services’, in our considered opinion these are not technical services but routine services offered in the procurement assistance . The agreements demonstrate that the assessee was to receive commission for procuring the products of AIMPL and rendering incidental services for purchases. The primary services provided by the assessee to AIMPL in terms of the Buying Agency Services agreement are as under:
(i) Co-ordinate between AIMPL and manufacturers for the purpose of buying the merchandise, (ii) assisting in negotiations, (iii) assist in procurement of samples and sending them to AIMPL, (iii) maintain relationship with the manufacturers and search for new manufacturers, (v) supply credit reports and other marketing information concerning manufacturers and (vi) provide translation services as required for communication between AIMPL and the manufacturers.
5.4. Applying the principles and case laws discussed above to the facts of the present case, we arc of the view that the services rendered by the assessee in this case were purely in the nature of procurement services and cannot be characterized as ‘managerial’ ‘technical’ or ‘consultancy’ services. Accordingly, the consideration received by the assessee was appropriately classified as ‘commission’ as against ‘fees for technical.”
7.4 Since identical issue of buying commission paid in response to buying agency agreement for activities of coordination with the manufacture for procurement of goods by the assessee is involved in the instant case, respectfully following the finding of the Tribunal (supra), we hold that consideration paid by the assessee cannot be classified as fee for technical services and accordingly, not liable for deduction of tax at source and disallowance under section 40(a)(i) is not warranted. The ground of the appeal from 9 to 9.3 are accordingly allowed.”
6.3 Respectfully following the said decision, the ground Nos.5-7 raised by the assessee are decided in favour of the assessee.”
Before us, no material has been placed on record by the Revenue to demonstrate that the decision of the Tribunal in assessee’s own case in earlier years has been set aside, stayed or overruled by higher judicial forum. Further, Revenue has also not pointed to any distinguishing feature in the facts of the case in the year under consideration and that of earlier years. We therefore following the decision of the Co-ordinate Bench of Tribunal, are of the view that no addition is called for in the present ground. Thus the grounds of assessee are allowed.
In the result, appeal of the assessee is allowed Now we proceed with the assesee’s Stay Application No.73- Del-2021 for A.Y. 2016-17 :
We have hereinabove decided the appeal filed by the assessee. In such a situation, Stay Application filed by the assessee does not survive. Hence the Stay Application filed by the assessee is hereby dismissed as being in fructuous.
In the combined result, appeal of the assessee is allowed and Stay application of the assessee is dismissed.