SKECHERS SARL ,MUMBAI vs. THE ASSISTANT COMMISSIONER OF INCOME TAX 4(2)(1), MUMBAI

Per: Smt. Beena Pillai, J.M.: The present appeal filed by the assessee arises out of final assessment order dated 15/01/2025 passed by ACIT 4(2)(1), Mumbai for assessment year 2022-23 on following grounds of appeal:

2 ITA 2028/Mum/2025; A.Y. 2022-23 Skechers Sarl “ On being aggrieved by the order dated 15 January 2025 passed by the Assistant Commissioner of Income Tax, International Tax Circle 4(2)(1), Mumbai ('herein referred to as the Ld. AO') under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 ('the Act'), the present appeal is preferred on the following grounds , which it is prayed may be considered without prejudice to one another On the facts and circumstances of the case and in law, the Ld. AO and the Hon'ble Dispute Resolution Panel-2, Mumbai ('DRP'): General Ground: 1. erred in assessing the total income at INR 52,06,95,454 instead of income offered to tax as per Return of Income ('ROI') at INR 16,93,95,185, Final assessment order barred by limitation: 2. erred in not appreciating that the time limit prescribed under section 153 is the outer time limit for passing the final assessment order, and hence, the final assessment order dated

15. January 2025 is time barred and liable to be quashed; Addition of Buying Commission of INR 35,13,00,269: 3. erred in making addition in respect of Buying Agency Commission of INR 35,13,00,269 as Fees for Technical Services ('FTS') as per Article 12 of the Double Taxation Avoidance Agreement between India and the Swiss Confederation ('India-Swiss DTAA'); 4. erred in holding that the services rendered by Skechers SARL are in the nature of 'managerial", technical' or 'consultancy' services as per Article 12 of India-Swiss DTAA; 5. ought to have held that the buying commission income constitutes business income as per the provisions of Article 7 of India-Swiss DTAA, and in the absence of any Permanent Establishment in India, it would not be chargeable to tax in India, and hence, not liable to tax in India, Levy of interest under section 234B of the Act 6. erred in levying interest of INR 1,19,85,816 under section 234B of the Act, Initiation of penalty proceedings under section 270A of the Act:

3 ITA 2028/Mum/2025; A.Y. 2022-23 Skechers Sarl 7. erred in initiating penalty proceedings under section 270A of the Act, without appreciating the fact that the Appellant has not misreported any income. The Appellant craves leave to add, alter, omit or substitute any or all of the above grounds of appeal

, at any time before or at the time of the appeal.”

2. The assessee raised following additional grounds challenging the powers of DRP in re-characterising the taxability of buying agency commission as FTS as against Business Income by the Ld.AO. The Ld.AR submitted that the assessee filed application dated 25/07/2025 for admission of additional ground that reads as under:

“With respect to the subject appellate proceedings, the Appellant respectfully submits the following additional grounds of appeal

. Based on the facts and circumstances of the case and in law, the Appellant has preferred an appeal before Your Honours against the final assessment order passed by the Assistant Commissioner of Income Tax, Int Tax Circle 4(2)(1), under section 143(3) read with section 144C(13) of the Income Tax Act, 1961 ('the Act'), dated

15. January 2025. On the facts and in circumstances of the case and in law, the Ld. AO/ Hon'ble DRP Hon'ble DRP directions bad in law, hence final assessment order bad in law 8. erred in exceeding its jurisdiction provided under Section 144C of the Act by reviewing the issue on taxability of buying agency commission as FTS which has been already examined by the Ld. AO during assessment proceedings and thereby, this issue cannot be adjudicated again by Hon'ble DRP as it has been already accepted by Ld. AO No Show Cause Notice issued by the Hon'ble DRP before making enhancement 9. erred in making an enhancement by taxing buying agency commission as FTS without issuing a prior SCN, thereby violating the principles of natural justice.

4 ITA 2028/Mum/2025; A.Y. 2022-23 Skechers Sarl The Appellant respectfully craves leave to add, amend, alter, vary, omit or substitute the aforesaid ground of appeal at any time before the hearing of the appeal, as may be advised” 2.1 The Ld.AR submitted that the above ground is a legal issue and goes to the root cause of the case and no new records needs to be looked into for disposing off the issue. 2.2 The Ld.DR though could not object to the submission of the assessee did not support admission of additional ground. We have perused the submissions advanced by both sides in the light of records placed before us. 2.3 Considering the submissions and respectfully following the decisions of Hon’ble Supreme Court in case of National Thermal Power Co. Ltd. Vs. CIT reported in (1998) 229 ITR 383 and Jute Corporation of India Ltd. Vs. CIT reported in 187 ITR 688, we are admitting the additional grounds raised by the assessee. Respectfully following the above, we admit the additional grounds raised by assessee in both the years under consideration.

Accordingly, the additional grounds filed by assessee stand admitted. Brief facts of the case are as under:

5 ITA 2028/Mum/2025; A.Y. 2022-23 Skechers Sarl 3.1 Before the Ld.AO the assessee explained taxability of Buying commission. The assessee submitted that, it entered into Buying Agency Agreement with Skechers South Asia Private Limited ('SSAPL') to act as a buying representative in China and Vietnam, for the goods proposed to be purchased by SSAPL from the said countries. It was submitted that in consideration for the said services assessee received 10% commission at Free on Board price (FOB). It was also submitted that, the services under the said agreement would be rendered outside India and no service was to be rendered in India, and therefore no income would be deemed to accrue or arise in India under section 9(1)(i) of the Act. 3.2 The assessee submitted that, as the services rendered by it are neither managerial, technical or consultancy in nature, the consideration paid towards the same cannot be termed as Fees for Technical Services as per section 9(1)(vii) of the Act. The assessee thus submitted that, it also does not have PE/Business Connection in India, therefore the said commission income is not liable to taxed in India. The assessee, vide submission dated 23/10/2023, provided copy of TRC and No PE certificate before the Ld.AO. 3.3 Subsequently, on 26/02/2024, the Ld.AO issued another notice calling upon the assessee to furnish note on taxability of buying agency commission and its treatment. The assessee filed its response vide submission dated 04/03/2024, wherein the assessee submitted regarding taxability of buying commission. 3.4 Subsequently, a SCN dated 22/03/2024 was issued calling upon the assessee to show cause as to why buying agency commission income ought not to be taxed as royalty/FTS. In 6 ITA 2028/Mum/2025; A.Y. 2022-23 Skechers Sarl response, the assessee filed its submission on 26/03/2024, wherein the assessee contended that, the services are rendered outside India and not in India. It was submitted that, such services do not fall within the ambit of royalty or FTS, in absence of grant of any copyright, license, trademark, patent, or similar intangible right, or provision of any managerial, technical, or consultancy services. It was thus submitted that the said income shall qualify as business income. It was also further stated that, in the absence of PE/ business connection in India, the said business income shall not be liable to tax in India as per Article 7 of India-Swiss Double Taxation Avoidance Agreement (India- Swiss DTAA). 3.5 In the draft assessment order, the Ld.AO proposed to deny beneficial provisions of India-Swiss DTAA on the ground that, the Tax Residency Certificate (TRC') submitted by the Assessee pertains to Korea-Swiss Treaty. 3.6 Further, the Ld.AO proposed to tax the receipt as business income on the ground that the aassessee constitutes Significant Economic Presence ('SEP') in India on account of provisions of Explanation 2A to section 9(1)(i) of the Act. 3.7 Further, in the draft assessment order, the Ld.AO noted that, the assessee itself accepted that the receipt is in the nature of business income in its response dated 26/03/2024 and held that, the income shall be taxable as per provisions of the Act as income is deemed to accrue or arise in India because of business connection in India on account of SEP. 3.8 After considering the submissions made by the assessee, the Ld.AO passed draft assessment order on 29/03/2024, 7 ITA 2028/Mum/2025; A.Y. 2022-23 Skechers Sarl proposing, addition of INR 35,13,00,269 on account of buying commission, by treating it as business income, received from assessee's affiliate, Skechers South Asia Private Limited ('SSAPL') along with various additions. Aggrieved by the draft assessment order, the assessee preferred objections before the DRP.

(i) Whether there is a PE as per treaty. Examine and report. Do not copy past from draft assessment order.

(ii) In case PE is absent, how the sums can be brought to tax in India as business income?

(iii) Entire proceeds have been taxed as income. Examine the profitability and attribution due to India and report.

(iv) Why the sums should not be treated as FTS/or Royalty examine and explain 4.2 The Ld.AO in the remand report stated as under:

6. Further, in accordance with the provisions of section 90 of the Income tax Act, 1961 (hereinafter referred to as the Act), in order to claim benefit of taxation under DTAA being more beneficial, an asscasce has to furnish Tax Residency Certificate (TRC) for the year under consideration. However, in this case during the course of assessment proceedings the assessee had failed to furnish valid TRC. The TRC submitted by assessee is in respect of DTAA between Republic of Korea and the Swiss Confederation which is irrelevant to the DTAA between in India and Swiss Confederation. Further, from the additional evidence filed before your goodself, it is seen that the assessee has filed certificate of registration issued by Swiss Authority and not tax residency certificate. Therefore, in the absence of relevant TRC, the assessee is ineligible for taxation benefit under DTAA between India and Switzerland. Accordingly, to establish assessee's permanent establishment (PE) in accordance with DTAA is not needed. Consequently, the assessee's income is taxable under the provisions of the Act and not under the DTAA. In accordance with the provisions of section 9(1)(i) read with Explanation 2A and Rule 11UD, the assessee has business connection in lieu of "significant economic presence in India as the transaction value with Indian entity Skechers South Asia Pvt. Ltd. (SSAPL) exceeds prescribed threshold of Rs.2 crores. Therefore, the income received by assessee from SSAPL on account of sale of goods to it of Rs.4,47,18,608 is taxable u/s 9(1)(i) of the Act and buying commission of Rs. 35,13,00,269 is taxable as business income in India under aforesaid provisions on without prejudice basis. In absence of India specific account, Rule 10 of IT Rules may be invoked to compute taxable income u/s 9(1)(i) of the Act on account of sale of goods and buying commission. 4.3 The DRP provided a copy of the remand report to the assessee vide notice dated 20/12/2024. In response, the assessee filed its rejoinder vide letter dated 24/12/2024, wherein it submitted as under:

9 ITA 2028/Mum/2025; A.Y. 2022-23 Skechers Sarl 1.2. In this regard, we wish to invite your Honour's attention to the clarifications filed before your Honour vide para 1.7 to 1.14 of the submission dated 19 December 2024 wherein it has been submitted that as per the provisions of the Act and the Double Taxation Avoidance Agreement between India and Switzerland ('India-Swiss DTAA), for any 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 nature of services provided by Skechers SARL are as under: (a) Skechers SARL was working under the control and supervision of its Principal Skechers South Asia Private Limited (SSAPL) and had neither decision-making authority nor capacity to bind SSAPL. Its role was only in the context of routine buying support services which cannot be termed as Managerial services. (b) Further, the activities done by Skechers SARL were only liaising coordination, facilitator or supervision service to ensure that the merchandise which SSAPL wants to purchase meet their specifications. Hence, the same cannot be equated with technical service. (c ) Skechers SARL was also not providing any expert service or opinion regarding any matter to SSAPL and hence cannot qualify as consulting services under the definition of FTS under the Art 1.3. Therefore, having regard to the above and various decisions precedents listed out under para 1.14 of the said submission dated 19 December 2024, 2024, it it can can be concluded that the sale of goods and buying commission do not fall under the definition of FTS/Royalty as per provisions of the Act and India-Swiss DTAA.

3. Applicability of provisions of Significant Economic Presence

10 ITA 2028/Mum/2025; A.Y. 2022-23 Skechers Sarl 3.1. In the remand report, it has also stated that as per provisions of Section 9(1)(0) read with Explanation 2A of the Act read with Rule 11UD of the Rules, the Assessee has Significant Economic Presence ('SEP) in India and therefore sale of good and buying commission earned by Skechers SARL are taxable in India. In this regard, we wish to invite your Honour's attention to Sr. No. 9 of Appendix 3 to Form 35A filed by the Assessee (Refer Pg. no. 14 of Detailed submission on objections filed before the DRP) It is reiterated that the intent behind introduction of SEP as emanating from the Explanatory Memorandum was to tax digital players and enterprises who carry out business in India digitally. The relevant extract of the Explanatory Memorandum is reproduced below for your Honour's ready reference: “OECD under its BEPS Action Plan 1 addressed the tax challenges in a digital economy wherein it has discussed several options to tackle the direct tax challenges arising in digital businesses. One such option is a new nexus rule based on “significant economic presence”. As per the Action Plan 1 Report, a non-resident enterprise would create a taxable presence in a country if it has significant economic presence in that country on the basis of factors that have a purposeful and sustained interaction with the economy by the aid of technology and other automated tools” 3.2. As per BEPS Action Plan 1. (refer relevant extract at Pg. no. 330 of the LPB), SEP needs to be determined based on factors that evidence a "purposeful and sustained interaction with the economy of source country via technology and other automated tools. Thus, BEPS Action 1 intends to target only digital transactions. This is also highlighted by the fact that Action Plan 1 suggests combination of revenue factor with digital factor. The same has been reiterated by the Explanatory Memorandum making it clear that the intention of the statute is to include digital economy in the far net and not conventional physical transactions for which tax provisions are already in place even before introduction of SEP 3.3. The Assesses is not engaged in sales in India though digital means. Assessee is engaged in sale of physical goods in India and such sale is completed conventionally outside India (I.e. offshore sale) There is no involvement of any digital means in the sale transaction and does not involve any download of data/software in India. Thus, the Assessee does not have any SEP in India and consequently there is no business connection as per the provisions of section 9(1)(i) of the Act. We shall be pleased to furnish any other information or clarifications in this regard that the Hon'ble Panel may require. 4.4 The DRP, after considering of the submissions of the assessee accepted the TRC and held that, the assessee is eligible 11 ITA 2028/Mum/2025; A.Y. 2022-23 Skechers Sarl to claim beneficial provisions of India-Swiss DTAA. The DRP also held that the buying commission cannot be brought to tax in India as business income. Instead the DRP recharacterized the buying commission as FTS under Article 12 of the India-Swiss DTAA, on the ground that the services rendered fell within the scope of managerial, technical, or consultancy services. 4.5 The DRP issued directions, vide order dated 24/12/2024, and directed the Ld.AO to treat the buying commission received by the assessee as Fees for Technical Services ('FTS') in accordance with Article 12 of the India-Swiss DTAA, and deleted other additions proposed by the Ld.AO in the draft assessment order.

5. On receipt of the DRP direction, the Ld.AO passed the impugned order on 15/01/2025, making addition for buying commission as FTS, and taxed at 10% as per provisions of Article 12 of India-Swiss DTAA. Aggrieved by the order of the Ld.AO, the Assessee preferred an appeal before this Tribunal.

12 ITA 2028/Mum/2025; A.Y. 2022-23 Skechers Sarl manufacturers in China, Vietnam and other such countries under supervision, control, guidance from SSAPL. It was submitted that under the agreement, the assessee is contractually obligated to perform certain functions such as identification of vendors in China Vietnam etc., placing order, technical support, quality assurance and control, logistics, anti- transshipment compliance, accounts, operation and administrative support. 6.2 The Ld.AR submitted that, the assessee does research for potential new factors, including evaluating their capabilities, sampling limitations and assessing financial stability. He submitted that considering the same SSAPL communicates the requirement for goods to the assessee. The Ld.AR submitted that the assessee collates requirements from across the globe and places order by issuing Purchase Order (PO) to the manufacturers. He emphasised that the assessee is responsible to group the order and submit the same to the concerned factories. The assessee also reviews the component price list provided by factories and negotiates Freight on Board (FOB) price and the final quote is sent to SSAPL for approval. 6.3 The Ld.AR submitted that, in the draft assessment order, the Ld.AO proposed to deny benefit under India-Swiss DTAA on the ground that the Tax Residency Certificate (TRC) submitted by the Assessee pertains to Korea-Swiss Treaty. The Ld.AO in the draft assessment order proposed to tax the receipt as business income on the ground that the assessee constitutes Significant Economic Presence ('SEP') in India on account of provisions of Explanation 2A to section 9(1)(i) of the Act.

13 ITA 2028/Mum/2025; A.Y. 2022-23 Skechers Sarl 6.4 The Ld.AR submitted that the DRP on the contrary, accepted the TRC submitted by the assessee and held that the assessee is eligible to claim the beneficial provisions of India- Swiss DTAA based on the reasons in para 7.3.6 of the DRP direction. He submitted that, the DRP observed that, the Ld.AO failed to establish existence of PE in India. The DRP thus held that in the absence of PE, profit attribution does not arise. The Ld.AR submitted that the DRP thus rejected the findings of the Ld.AO on the nature of the buying commission to be Business income, and was held to be taxable in India by virtue of Article 5 of India Swiss DTAA r.w.Sec. 9(1)(i) of the Act. 6.5 He submitted that the DRP thereafter recharacterized the buying commission as FTS under Article 12 of India-Swiss DTAA, on the ground that the services rendered fell within the scope of managerial, technical, or consultancy services. 6.6 The Ld.AR submitted that, the services in respect of buying commission are rendered outside India and no service is rendered in India. Further, in the absence of provision of any managerial, technical or consultancy service, the said services are not in the nature of royalty/ FTS. Therefore, the said income shall qualify as business income. 6.7 The Ld.AR submitted that the assessee do not have a place of business in India from where such agency services are provided to SSAPL. Further, no employee of the assessee visited India to provide such services to SSAPL during the year under consideration. All the services were provided outside India. The said commission is received by the assessee outside India. He submitted that, the assessee does not have any bank account in 14 ITA 2028/Mum/2025; A.Y. 2022-23 Skechers Sarl India. The Ld.AR thus submitted that, in the absence of PE/ business connection in India, the said business income shall not be liable to tax in India as per the provisions of Article 7 of India- Swiss Treaty. 6.8 The Ld.AR contended that, the services do not fall within the ambit of royalty or FTS, in absence of grant of any copyright, license, trademark, patent, or similar intangible right, or provision of any managerial, technical, or consultancy services. The Ld.AR submitted that, the said income qualify as business income. It was also submitted that in the absence of PE/ business connection in India, the said business income shall not be liable to tax in India as per Article 7 of India-Swiss DTAA. 6.9 On the contrary, the Ld.DR submitted that, the assessee has Dependent Agency PE in India. He submitted that based on the agreement and various obligation on the part of the assessee, the array of services rendered by the assessee qualify as technical services and are taxable as FTS under Article 12 of India Swiss DTAA. He submitted that, the nature of services and extensive use of expertise, skill and technical knowledge satisfy the definition of technical or consultancy services as per the treaty. He placed reliance on the observation of the DRP in Para 8.3.4 to 8.3.5. 6.10 The Ld.DR relied on the following written submission filed in support of his argument. SI. Nature of Classification as Reasons for such Page No. of No. Services Technical/Manage classification DRP Order Rendered by rial/Consultancy appellant. 1 Buying Technical These services 80 Services Office require deep industry knowledge, expertise

15 ITA 2028/Mum/2025; A.Y. 2022-23 Skechers Sarl in supply chain management and technical insight into vendor capabilities and compliance. 2 Source Support Technical These services 80 Services require specialized engineering and compliance skills as well as expertise in testing and quality assurance. 3 Vendor Technical These functions 81 identification, involve scientific Order analysis, technical Placement and evaluation and Validation. exclusive domain expertise in materials and factory capabilities. 4 Technical Technical The technical 81 support for expertise required commercializat includes in-depth ion. knowledge of manufacturing processes, design specifications and production techniques. 5 Quality Technical These services 81 Assurance and demand proficiency Control in quality control methodologies, defect identification and process improvement. 6 Logistics and Technical These activities 82 Anti-Trans- involve expertise in shipment international trade Policy regulations, logistic Compliance. management and compliance. 7 Social and Technical These functions 82 Environment require regulatory Compliance expertise, technical knowledge of environmental standards and monitoring systems.

16 ITA 2028/Mum/2025; A.Y. 2022-23 Skechers Sarl 5.4.2 In para 8.3.5.1, the Ld. DRP also classifies certain services as managerial services and in para 8.3.5.2 it has classified other services provided by the appellant as Consultancy Services. It may kindly be noted that there is some overlapping in the nature of services provided by the appellant. Such findings are tabulated hereunder: 8 Vendor identification, Managerial Para 8.3.5.1: 83 Order Placement Managerial Services involve planning, organizing, coordinating 9 Logistics and Freight Managerial and overseeing 83 Management operations or business 10 Social and Managerial functions. Environment Compliance 11 Vendor Certification Consultancy Para 8.3.5.2: 84 Program Consultancy 84 12 Improving Delivery Consultancy services involve 84 and Operations providing professional 13 Compliance Consultancy advice and Consultancy recommendations based on specialized expertise. 14 Design for Technical Para 8.3.5.3: 84 Manufacturability Technical services require 15 Final Testing and Technical 85 and application of Inspections 86 specialized knowledge, experience and expertise.

2.2 It is to be pointed out that Article 12 of the DTAA between India and Switzerland does not have any 'make available' clause 2.3 On the basis of the above, the DRP in para 8.3.11 of its order has correctly held that the nature of services rendered as given in the; "Buying Agency Agreement', mischaracterizes a comprehensive array of technical services as mere agency functions. In order to properly appreciate the conclusion, the said para is re-produced hereunder: "In conclusion, the "Buying Agency Agreement' is a colourable document, mischaracterizing a comprehensive array of technical services as mere agency functions. The misnomer appears to be deliberate attempt to minimize tax liabilities or obscure the true nature of services. The activities performed, the terms of agreement and the 17 ITA 2028/Mum/2025; A.Y. 2022-23 Skechers Sarl nature of services unequivocally demonstrate that Skechers SARL is rendering technical services that involve significant expertise and specialized skills. This makes the payments made under the agreement taxable as FTS, as per the provisions of the DTAA. The DRP should disregard the nomenclature of the agreement and appellant the payments based on substances of the services rendered." 2.4 The appellant is an overall expert in this kind of industry/market and owner of 'Skechers' trade mark/brand/logo. It is having global presence and all the services rendered by it is not only to protect its brand value but also to its interests in international markets. By providing technical support, overseas market research, identifying potential manufacturers who can match the quality and standards of appellant's products etc. the appellant has protected its overall interests in India.

3. In view of the above, the Revenue strongly relies on the order of the Ld. DRP passed in the above lines and asserts that the appellant company was providing services to the Indian Entity which were in the nature of FTS as per Article 12 of India-Swiss DTAA and therefore, the Revenue prays that this appeal on this count be dismissed. 6.11 The Ld.AR in response submitted that the term Fees for Technical Services defined under para 4 of Article 12 of the India - Swiss DTAA reads as under:

"4. For purposes of this Article the term "fees for technical services" means payments of any kind to any person in consideration for the rendering of any managerial, technical or consultancy services, including the provision of services by technical or other personnel. 6.12 He submitted that, as per the provisions of the Act as well as India-Swiss DTAA, for any stream of income to be characterized as 'fees for technical services', it is necessary that some kind of 'managerial', "technical' or 'consultancy' services should have been rendered in consideration. He submitted that the terms 'managerial', 'technical' or 'consultancy' are neither defined under the Act nor the Treaty. It is a settled law that they need to be interpreted based on their understanding in common parlance. It is submitted that the services provided by the 18 ITA 2028/Mum/2025; A.Y. 2022-23 Skechers Sarl assessee do not fulfill the definition of managerial, technical or consultancy services and therefore cannot be treated as FTS. He relied on following decisions wherein the terms; managerial, technical and consultancy services has been defined:

(i) Decision of coordinate bench of Hon’ble Delhi Tribunal in case of Adidas Sourcing Ltd. Vs. ACIT reported in [2012] [21 ITR(T) 697] dated 18 September 2012. Hon'ble Delhi Tribunal held 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 services'. (ii) Decision of Hon’ble Delhi High Court in case of DIT vs. Panalfa Autoelektrik Ltd. Reported in [2014] (272 CTR 117), wherein Hon'ble HC, relied on various judicial precedents and OECD Report on e- commerce Tax Treaty Characterisation Issues, the relevant extracts of the same are as follows- 14. The expressions "managerial, technical and consultancy services" have not been defined either under the Act or under the General Clauses Act, 1897. The said terms have to be read together with the word 'services' to understand and appreciate their purport and meaning. We have to examine the general or common usage of these words or expressions, how they are interpreted and understood by the persons engaged in business and by the common man who is aware and understands the said terms. The expression "management services" was elucidated upon by this Court in J.K (Bombay) Ltd. v. CBDT. [1979] 118 ITR 312/1 Taxman 537 in the following terms- 6. It may be asked whether management is not a technical service. According to an Article on "Management Sciences", in 14 Encyclopaedia Britannica 747, the management in organisations 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 19 ITA 2028/Mum/2025; A.Y. 2022-23 Skechers Sarl (d) initiating steps to change policies when they are judged to be less effective than they ought to be. Management thus pervades all organizations 15. The services rendered, the procurement of export orders, etc. cannot be treated as management services provided by the non-resident to the respondent-assessee. The non- resident was not acting as a manager or dealing with administration. It was not controlling the policies or scrutinising the effectiveness of the policies. It did not perform as a primary executor, any supervisory function whatsoever... ….…..

20 ITA 2028/Mum/2025; A.Y. 2022-23 Skechers Sarl ….…..

23 ITA 2028/Mum/2025; A.Y. 2022-23 Skechers Sarl Design IP includes all know-how, inventions, updates, adaptations, software, technical data, trade secrets, etc. In consideration for use of Design IP, SSAPL pays royalty to Skechers USA, Inc II. In consideration for use of Design IP, SSAPL pays royalty to Skechers USA, Inc II and such decision is supplied by SSAPL to third party vendors while manufacturing the goods. 6.15 Thus, the the Ld.AR submitted that, the the assessee is the owner of 'Skechers' Trademark but not the owner of the know- how that is involved in developing the design for the products. The owner of the know-how is Skechers USA, Inc II. He submitted that the assessee is merely acting as an agent to ensure that the products confirm to the standard design and quality of the brand. As a result, the beneficiary of the services provided by the Assessee is not SSAPL but the Assessee itself. HE submitted that these services are rendered to sustain and improve the brand value of Skechers of which the Assessee is the owner. Further, all the functions are being performed by the Assessee on the instructions of SSAPL, thus substantiating the fact that the Assessee is acting in the capacity of the agent.

6.16 The Ld.AR also placed reliance on following decisions wherein it has been held that buying commission is not covered under the definition of managerial, technical and consultancy services and shall not be taxable as FTS:

• Decision of Hon’ble Supreme Court in case of PCIT vs. Puma Sports India (P.) Ltd. Reported in (2022) 285 Taxman 191 • Decision of Hon’ble Delhi High ourt in case of CIT vs. Springer Nature Customer Services Centre GMBH reported in 458 ITR 728

24 ITA 2028/Mum/2025; A.Y. 2022-23 Skechers Sarl • Decision of Hon’ble Karnataka High Court in case of PCIT vs. Puma Sports India (P.) Ltd. Reported in(2021) 434 ITR 69 • Decision of cooridate bench of this Tribunal in case of Linde AG vs. ITO reported in (1997) 62 ITD 330 • Decision of cooridate bench of this Tribunal in case of DCIT vs. Samsung Engg. Co. Ltd reported in (2011) 43 SOT 38 • Decision of cooridate bench of this Tribunal in case of Endemol South Africa (Proprietary) Ltd. Reported in (2018) 67 ITR(T) 520 • Decision of cooridate bench of this Tribunal in case of ITP Publishing India P Ltd vs. ACIT in vide order dated 13/01/2023 • Decision of cooridate bench of this Tribunal in case of DCIT vs. BASF india Limited in vide order dated 20/02/2025 • Decision of cooridate bench of this Tribunal in case of Adidas India Marketing (P.) Ltd. v. National E Assessment Centre in ITA No. 487/Del/2021 vide order dated 05/04/2022 • Decision of cooridate bench of Hon’ble Delhi Tribunal in case of DCIT vs. Adidas Sourcing Ltd in ITA No. 2667/Del/2015 dated 05/04/2022. • Decision of cooridate bench of Hon’ble Bangalore Tribunal in case of Jeans Knit (P) Ltd. Vs. DCIT in ITA No. 19/Bang/2010 vide order dated 29/06/2012 • Decision of cooridate bench of Hon’ble Bangalore Tribunal in case of Puma Sports India (P.) Ltd vs. DCIT in IT(TP)A No. 1611/Bang/2017 vide order dated 28/09/2017 We have perused the submissions advanced by both sides in light of records placed before us.

25 ITA 2028/Mum/2025; A.Y. 2022-23 Skechers Sarl • As per Clause 2(b) of the Buying Agency Agreement, assessee surveys potential manufacturers to match SSAPL's requirements. It is noted that this is a routine sourcing function, aimed at aligning vendor offerings with SSAPL's needs. It does not involve any technical or managerial input. • As per Clause 2(c) of the Buying Agency Agreement, assessee places orders with manufacturers only upon explicit written instructions from SSAPL and has no authority to bind SSAPL. • As per Clause 2(d) of the Buying Agency Agreement, assessee quotes ex-factory prices and negotiates payment terms under SSAPL's supervision. • As per Clause 2(e) of the Buying Agency Agreement, assessee arranges logistics and documentation for importation, subject to SSAPL's prior approval. • As per Clause 2(f) of the Buying Agency Agreement, assessee inspects merchandise at vendor sites and reports non-conformities to SSAPL; • As per Clause 2(g) of the Buying Agency Agreement,assessee undertakes various support functions such as production oversight, costing, R&D coordination, and commercialization; • As per Clause 2(i) of the Buying Agency Agreement, the assessee assists SSAPL in returning defective merchandise and recovering dues from vendors; • As per Clause 2(j) of the Buying Agency Agreement, the assessee ensures supplier quotations include complete details; • As per Clause 2(k) of the Buying Agency Agreement, the assessee certifies the origin of goods in line with SSAPL's anti-transshipment policy ; • As per Clause 2(I) of the Buying Agency Agreement, the assessee vets suppliers for transshipment violations and avoids dealing with flagged entities. 7.1 Form the above the nature of services rendered by the assessee in a nutshell are that:

� The assessee acts as a buying agent for SSAPL (its Indian affiliate) on a non-exclusive basis; � The assessee provides support functions such as vendor identification, quality assurance, logistics coordination, order placement, price negotiation, and compliance support;

26 ITA 2028/Mum/2025; A.Y. 2022-23 Skechers Sarl � The assessee receives commission at 10% of FOB value on purchases made by SSAPL.

7.2 These services in our view are essentially procurement support / sourcing services, i.e., commercial agency functions. Article 12(4) of the India Switzerland DTAA defines FTS as:

“For the purposes of this Article, ‘fees for technical services’ means payments of any kind to any person in consideration for rendering of any managerial, technical or consultancy nature, including the provision of services of technical or other personnel.” 7.3 Applying Article 12(4) of the India–Switzerland DTAA to the facts of the present case, the commission received by the assessee for acting as a buying agent of SSAPL cannot be regarded as “fees for technical services.” The assessee’s activities such as, identifying and coordinating with vendors, placing purchase orders, performing quality checks, assisting with logistics, and providing administrative and operational support are essentially in the nature of procurement facilitation and commercial agency functions. These activities, though require business acumen and coordination, do not involve any technical knowledge, experience, skill, know-how or process to SSAPL as these services are rendered for and on behalf of SSAPL, and the benefit remains confined only to the execution of the transactions. Therefore the receipts are not taxable in India as FTS u/Article 12(4) of Inida-Swiss DTAA.

7.4 Accordingly, the income earned by the assessee constitutes business income, in the hands of the assessee. However such income is taxable in India only if the assessee has a PE in India as per Article 7 of the India–Switzerland DTAA. It is further noted

27 ITA 2028/Mum/2025; A.Y. 2022-23 Skechers Sarl that the DRP itself has observed that the assessee does not have a PE in India and also does not have significant economic presence in India. In the absence of PE, and given that the nature of services rendered do not fall within the ambit of Article 12(4), the commission income earned by the assessee cannot be brought to tax in India.

Accordingly Ground No. 4 raised by the assessee stands allowed.

Additional Ground No.8-9

We have heard the rival submissions of both sides on this issue.

8.1 The powers of DRP are provided in section 144C of the Act which is reproduced as under for ready reference: "(5) The Dispute Resolution Panel shall, in a case where any objection is received under sub-section (2), Issue such directions, as it thinks fit, for the guidance of the Assessing Officer to enable him to complete the assessment. (6) The Dispute Resolution Panel shall issue the directions referred to in sub-section (5), after considering the following, namely:— (a) draft order; (b) objections filed by the assessee; . (c) evidence furnished by the assessee; (d) report, if any, of the Assessing Officer, Valuation Officer or Transfer Officer or any other authority; (e) records relating to the draft order

28 ITA 2028/Mum/2025; A.Y. 2022-23 Skechers Sarl (f) evidence collected by, or caused to be collected by, it; and (g) result of any enquiry made by, or caused to be made by, it. (7) The Dispute Resolution Panel may, before issuing any directions referred to in subsection (5),— (a) make such further enquiry, as it thinks fit; or (b) cause any further enquiry to be made by any income-tax authority and report the result of the same to it. (8) The Dispute Resolution Panel may confirm, reduce or enhance the variations proposed in the draft order so, however, that it shall not set aside any proposed variation or issue any direction under sub-section (5) for further enquiry and passing of the assessment order. Explanation.—For the removal of doubts, it is hereby declared that the power of the Dispute Resolution Panel to enhance the variation shall include and shall be deemed always to have included the power to consider any matter arising out of the assessment proceedings relating to the draft order, notwithstanding that such matter was raised or not by the eligible assessee." 8.2 Prior to insertion of Explanation to section 144C(8) by the Finance Act, 2012, various judicial precedents held that the powers of DRP was restricted to the issues raised in the draft assessment order and therefore it was not possible to enhance any variation proposed in the draft assessment order as a result of any new issue which comes to notice during the proceedings before DRP. 8.3 The Finance Act, 2012 inserted Explanation to section 144C(8) to clarify the scope of the powers of the DRP. The legislative intent, as reflected in the Explanatory Notes to the Finance Bill, 2012, was to ensure that the DRP’s powers were not narrowly confined only to the issues raised in the draft assessment order but extended to any matter arising out of the assessment proceedings. The relevant extract of explanatory notes as clarified by the parliament the DRP’s jurisdiction to the 29 ITA 2028/Mum/2025; A.Y. 2022-23 Skechers Sarl variations proposed in the draft assessment order; is reproduced as under:

Power of the DRP to enhance variations Dispute Resolution Panel (DRP) had been constituted with a view to expeditiously resolve the cases involving transfer pricing issues in the case of any person having international transactions of in case of a foreign company. It has been provided under sub-section (B) of section 1440 that DPP may confirm, reduce or enhance the variations proposed in the craft order of the Assessing Officer. In a recent judgement, it was held that the power of DRP is restricted only to the issues raised in the craft assessment order and therefore it cannot enhance the variations proposed in the order as a result of any new issue which comes to the notice of the panel during the course of proceedings before it This is not in accordance with the legislative intent It is accordingly proposed to insert an Explanation in the provisions of section 144C to clarify that the power of the DRP enhance the variation shall include and shall always be deemed to have included the power to consider any matter arising out of the assessment proceedings relating to the all assessment order This power to consider any issue would be irrespective of the fact whether such matter was raised by the eligible assessee or not The amendment will be effective retrospectively from the 1st day of April, 2009 and will accordingly apply to assessment year 2009-10 and subsequent assessment years 8.4 Accordingly, the Explanation inserted to subsection (8) to section 144C expressly provides that the DRP’s powers to “enhance the variation” shall include and shall always be deemed to have included the power to consider any matter arising out of the assessment proceedings relating to the draft assessment order, regardless of whether such matter was raised by the assessee or not. This amendment was given retrospective effect from 1 April 2009, making it applicable from AY 2009–10 onwards.

30 ITA 2028/Mum/2025; A.Y. 2022-23 Skechers Sarl 8.5 It is thus an admitted legal position that the powers of the DRP are pari materia with those of the CIT(A), i.e; both authorities possess jurisdiction to confirm, reduce, or enhance an assessment, including the power to consider any matter that arises from the assessment proceedings, even if not originally contested by the assessee.

8.6 We may also note that, a draft assessment order is issued under section 144 C(1) is before passing the final assessment order in cases involving eligible assessees (i.e., foreign companies or cases where transfer pricing adjustments are proposed). This is to give the assessee an opportunity to object to the proposed variations before the assessment becomes final. It is also not in dispute that a draft assessment order is neither final nor executable. It merely proposes adjustments and awaits either acceptance by the assessee or DRP adjudication. We therefore reject the argument advanced by the Ld.AR on this aspect with regard to the powers of DRP.

8.7 In the present facts of the case, before the DRP proceeded to re-characterise the nature of the income, it is obligatory on its part to provide the assessee with a specific opportunity of being heard. This flows from the principles of natural justice and is also implicit in section 144C(11) of the Act, which empowers the DRP to issue directions only after considering the draft order, objections, evidence, and the report of the Assessing Officer. Any change in the character of income (for instance, treating business income as royalty or FTS) without confronting the assessee with the proposed re-characterisation and granting assessee an 31 ITA 2028/Mum/2025; A.Y. 2022-23 Skechers Sarl opportunity to explain or rebut, would render the DRP’s direction procedurally defective and legally unsustainable. Thus, the DRP must issue a show-cause notice, or at least communicate its intent to alter the income’s characterization before finalizing its directions.

8.8 In the present case, it is noted that, the DRP before proceeding to recharacterize the assessee’s receipt of buying commission as Fees for Technical Services (FTS), called for remand report from the Ld.AO vide letter dated 13.12.2024 and also called upon the assessee to furnish its submissions vide letter dated 24.12.2024, thereby providing an opportunity to object to the proposed recharacterisation of the income.

8.9 The procedural steps undertaken by the DRP clearly evidence adherence to the principles of natural justice before proposing any recharacterisation of income. By calling for a remand report from the Assessing Officer and simultaneously affording the assessee an opportunity to furnish detailed submissions, the DRP ensured a fair and transparent process. This demonstrates that the assessee was not taken by surprise and was provided ample opportunity to explain its position. Accordingly, the contention of Ld.AR that the recharacterisation was beyond the jurisdiction of the DRP is untenable.

8.10 On the contrary, the DRP’s proactive engagement through remand and additional inquiry underscores that the issue was examined in depth, and the final finding represents a reasoned

32 ITA 2028/Mum/2025; A.Y. 2022-23 Skechers Sarl and lawful exercise of its powers under section 144C, fully consistent with legislative intent and procedural fairness.

8.11. The Ld. AR relied upon the decision of the Hon’ble Karnataka High Court in GE India Technology Centre (P.) Ltd. v. DRP reported in (2011) 12 taxmann.com 442, wherein Hon’ble Court considered whether the DRP could hold that a deduction under section 10A was not available, even though the draft assessment order had merely proposed a partial reduction of such deduction and not its complete denial. Hon’ble High Court, in the specific factual context of that case, held that the DRP had travelled beyond the scope of the variation proposed in the draft assessment order and, accordingly, acted without jurisdiction.

8.12. From the facts recorded in that judgment, it is not evident whether the DRP therein had adhered to the principles of natural justice by granting the assessee a fair and reasonable opportunity of being heard before enhancement. The ratio of that case, therefore, is confined to its peculiar facts and cannot be applied where the DRP has acted within its enlarged statutory powers under the amended provision and has ensured due compliance with procedural fairness.

8.13. Be that as it may, it is pertinent to note that, the said judgment was rendered prior to the insertion of the Explanation to sub-section (8) of Section 144C by the Finance Act, 2012, which expressly clarifies that the power of the DRP to enhance the variation shall include, and shall be deemed always to have included, the power to consider any matter arising out of the 33 ITA 2028/Mum/2025; A.Y. 2022-23 Skechers Sarl assessment proceedings relating to the draft order, notwithstanding that such matter was raised or not by the eligible assessee. The legislative amendment thus expressly expands and clarifies the scope of the DRP’s powers and effectively neutralises the restrictive interpretation adopted in the GE India decision.

34 ITA 2028/Mum/2025; A.Y. 2022-23 Skechers Sarl 10.1 Ground Number 1 is general in nature and therefore not adjudicated separately.

10.2 Ground Number 5-7 are consequential in nature and therefore not adjudicated. In the result the appeal filed by the assessee stands partly allowed. Order pronounced in the open court on 03/11/2025