LOTUS FOOTWEAR ENTERPRISES LIMITED (INDIA BRANCH),TIRUVANNAMALAI vs. DCIT INTERNATIONAL TAXATION 1(2), CHENNAI

आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member) 1. Aforesaid appeals by assessee for Assessment Years (AY) 2009- 10 to 2011-12 arises out of separate final assessment orders passed

IT(TP)A No.13 to 15/Chny/2019 - 2 -

by Ld. Assessing Officer (AO) pursuant to the directions of Learned Dispute Resolution Panel-2, Bengaluru [DRP]. The facts as well as issues are stated to be pari-materia the same. This is a second round of litigation before us since the matter, in the first round, was remitted back by Tribunal in ITA Nos.779/Mds/2014 & 801/Mds/2015 & 810/Mds/2016 vide common order dated 21-09-2016 as under: - “5. We have considered the contentions. In our opinion, the APA has considerable bearing for the years under appeal, since prima facie, the rollback of four years which went to assessment year 2011-12, was curtailed to three years. Obviously, the curtailment was allowed in the APA after considering the submissions of the assessee that it had become a contract manufacturer only in financial year 2010- 11 pursuant to labour upheaval. Ld TPO in the orders for all the impugned assessment years had considered assessee to be a contract manufacturer and in his order for assessment year 2009-10, this is specifically mentioned at page 69 of the order. Nature of business of the assessee would have considerable bearing on the Arms Length Pricing study of the international transactions with its AEs. The APA having been signed on 24.5.2016, assessee had no occasion to produce it before lower authorities. We are, therefore, of the opinion that the additional evidence has to be admitted. We, therefore, admit the additional evidence, set aside the orders of the lower authorities and remit all the issues back to the Assessing Officer/TPO for consideration afresh in accordance with law. Needless to say all the pleadings taken by the assessee shall remain open.”

2.1 Pursuant to the same, another order has been passed by Ld. TPO on 31.10.2017 wherein Transfer Pricing Adjustments have been retained. The same, upon confirmation by Ld. DRP, is in further challenge before us. The assessee is stated to be engaged in manufacturing of shoes. It is an Indian Branch of Lotus Footwear Ltd. based in British Virgin Islands. In the first round, for AY 2009-10, Ld. TPO proposed upward adjustment of Rs.2501.58 Lacs while determining Arm's Length Price (ALP) of International Transactions as carried out by the assessee with its Associated Enterprises (AE). The Tribunal restored the matter back by observing that the assessee entered into an Advance Pricing Agreement (APA) and nature of

IT(TP)A No.13 to 15/Chny/2019 - 3 - business of the assessee would have considerable bearing on the Arm’s Length Pricing Study. 2.2 In the second round, the assessee sought various economic adjustments while computing its margins. However, Ld. TPO held that the assessee was a contract manufacturer whereas the assessee claims that it is a risk bearing contract manufacture. The Ld. TPO held that the claim that the assessee was a risk bearing manufacturer would not have any relevance for determination of ALP since the assessee bears the same risk as borne by any other contract manufacturers. It was noted that the assessee was retaining 90% of invoice value while selling goods to its AE i.e., Growth Link Overseas Company Limited (GLO) which would sell the goods to final customer i.e., Nike and would retain the remaining 10%. 2.3 The assessee submitted that it is remunerated with 90% of the group’s revenue whereas GLO receives the remaining 10% who retain merely 1.15% of the revenue and distribute the remaining 8.85% to other AEs for providing know-how and development and towards recovery of interest cost etc. The assessee was thus characterized as routine manufacturer exposed to normal risks associated with carrying out its business. The TPO rejected all the economic adjustments claimed by the assessee owing to initial years of business operations during start-up phase. In the second round, all these economic adjustments were again denied by Ld. TPO relying on the findings in first round. The Ld. DRP confirmed the same against which the assessee is in further appeal before us. 3. The Ld. AR made limited submission that the assessee entered into an Advance pricing Agreement (APA) u/s 92CC with Hon’ble

IT(TP)A No.13 to 15/Chny/2019 - 4 -

CBDT on 24.05.2016. The copy of the same has been placed on record. The Ld. AR submitted that APA covers AYs 2015-16 to 2019- 20 with a roll back period of three years covering AYs 2012-13 to 2014- 15. As per the terms of the agreement, TNMM method has been agreed upon as the Most Appropriate Method (MAM) to benchmark the impugned transactions, The ALP of these transactions would be considered as lower of operating profit on operating cost of 6.25% or operating profit computed considering 100% of the sale consideration receivable by the AEs from their customers for the goods invoiced by the assessee to its AEs. As evident from the functional profile of the assessee, it proposes to operate on a full cost markup basis and therefore, would not be exposed to various risks. Applying the same formulae, the TP adjustments, for all these years could be computed as under: -

Particulars F.Y. 2008-09 FY 2009-10 FY 2010-11 Total adjustment TP Adjustment as per TP order 209,468,528 139,708,685 255,853,091 605,030,304

Revenue (A) 169,655,269 1,212,030,169 1,853,036,932 Total unadjusted cost (B) 359,459,550 1,310,802,808 2,089,867,555 Adjustment claimed in TP study (175,070,937) (152,112,427) (291,770,295) Pre-Commencement (34,794,178) expenditure(C) Adjusted cost (D) 149,594,435 1,158,690,381 1,798,097,260 Profit as per TP report (A-D) 20,060,834 53,339,788 54,939,672 Profit as per TP Order (A-B-C) (155,010,103) (98,772,639) (236,830,623) Operating profit / unadjusted - 43.12% - 7.54% - 11.33% cost

100% FOB (E) 185,857,361 1,346,670,801 2,017,166,830 Arm’s length revenue as per TP 379,123,797 1,351,738,854 2,108,890,023 order (F) Arm’s length revenue % on 204% 100% 105% 100% FOB (F/E)

IT(TP)A No.13 to 15/Chny/2019 - 5 -

TP adjustment considering 16,202,092 134,640,632 164,129,898 314,972,622 100% FOB (A-E) 94% FOB (G) 174,705,919 1,265,870,553 1,896,136,820 TP adjustment considering 94% 5,050,650 53,840,384 43,099,888 101,990,922 FOB (G-A) TP adjustment under TNMM 23,209,511 - 84,065,758 107,275,269 considering economic adjustments The Ld. AR further argued that the assessee was situated in SEZ enjoying 100% tax holiday and accordingly, it would have no intention to shift profits outside India. The Ld. AR submitted that TP adjustment could not exceed global profit of the group as a whole and therefore, TP adjustments may be restricted by considering 94% or in worst scenario @100% of sales consideration received from ultimate customer i.e., Nike. 4. The Ld. CIT-DR, on the other hand, referred to the earlier order of Ld. TPO in first round and submitted that the assessee was to be remunerated at cost-plus mark-up and therefore, no economic adjustments could have been granted to the assessee. The Ld. CIT- DR also submitted that the terms of APA were not applicable in these years and therefore, the orders of lower authorities were to be confirmed. Having heard rival submissions and after perusal of case records, our adjudication would be as under. 5. We find that the basic factual matrix is not under dispute. The assessee works as a contract manufacturer and supplies goods to its AE (GLO), who, in turn, sells it to an independent customer i.e., Nike. The revenue is shared to the extent of 90% by the assessee whereas balance 10% is retained by AE (GLO) who retains 1.15% of the revenue and distribute 6% to another AE i.e., Feng Tay (FT) Taiwan)

IT(TP)A No.13 to 15/Chny/2019 - 6 - as renumeration for Design, Models and Technical, Know-how. The balance revenue of 2.85% is given to another AE for certain services. From the perusal of adjustments as made by lower authorities, it could be seen that Ld. TPO has proposed overall adjustment of Rs.60.50 Crores for all the three years which far exceeds the 100% of revenue ultimately realized by the assessee group from Nike. The same could not be held to be justified from any angle particularly considering the fact that in APA for subsequent years, it has been agreed that ALP, in no case, would exceed 100% of sale consideration receivable from ultimate customer. Therefore, accepting the plea of Ld. AR, we direct Ld. TPO to restrict the TP adjustment, for all the three years, by considering 100% of sale consideration receivable from ultimate customer i.e., Nike. The same has been tabulated by Ld. AR in the above table and works out to be Rs.31.49 Crores for all the three years. The Ld. TPO is directed to verify the figures and restrict the adjustment to that extent. No economic adjustment would be available to the assessee. Necessary computations shall follow. No other grounds have been urged before us. 6. All the appeals stand partly allowed in terms of our above order. Order pronounced on 11th January, 2023.

Sd/- Sd/- (V. DURGA RAO) (MANOJ KUMAR AGGARWAL) �ाियक सद4 /JUDICIAL MEMBER लेखा सद4 /ACCOUNTANT MEMBER चे6ई / Chennai; िदनांक / Dated : 11-01-2023 DS आदेश की Vितिलिप अ9ेिषत/Copy of the Order forwarded to : 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु� (अपील)/CIT(A) 4. आयकर आयु�/CIT 5. िवभागीय �ितिनिध/DR 6. गाड� फाईल/GF