MARKS AND SPENCER (INDIA) PRIVATE LIMITED,GURGAON vs. ACIT, CIRCLE 1(1), GURGAON

3 ITA No.1937/Del/2022 international transaction (amongst others) was duly reported in the Accountant’s Report (Form No 3CEB) filed along with the assessee’s return of income and in this regard, he referred to page 82 of Paperbook which is relevant extract of copy of Form 3CEB. 5. Summary of the benchmarking analysis performed by the assessee is summarized in the table below and he referred page 35 of paperbook for relevant extract of TP documentation :-

Nature of international Name of Most Net profit Tested Comparable’s transaction the tested appropriate indicator Party's margin/ range party method operating margin Payment for business M&S Transactional OP/ OR 11.47% 2.60% to 2.65% services and license of India Net Margin proprietary marks Method (‘royalty’) (‘TNMM’) 6. The above results provide evidence that the subject international transactions of the assessee were at arm’s length in accordance with the Indian TP Regulations. 7. Further he brought to our notice that during the course of assessment proceedings, the Deputy/ Assistant Commissioner of Income Tax, Transfer Pricing officer- 1(3)(1) (TPO) sought information with regard to international transaction pertaining to ‘Payment for business services and license of proprietary marks’. In response to the queries raised by the Ld. TPO, the assessee duly submitted required information/ documents before the TPO through various submissions on a time-to-time basis.

4 ITA No.1937/Del/2022 8. The TPO disregarded the analysis/ documents provided by the assessee vide various submissions and vide order dated July 30, 2021 under section 92CA(3) of the Act proposed the following by referring to pages 94 to 116 of Appeal set which is a copy of TP order :-  rejected TNMM as most appropriate method opted by the assessee, disregarded economic analysis carried out by the assessee and applied an arbitrary Comparable Uncontrolled Price (‘CUP’)method;  rejected the corroborative CUP analysis submitted by the assessee without providing any cogent reason. 9. Based on the above, the TPO arrived at a set of 3 comparable companies with arm’s length rate as 3.92%. Consequently, the TPO proposed a transfer pricing adjustment of Rs.6,21,87,194 to the income of the assessee and referred pages 114& 115of Appeal set for relevant extract of the TP order. 10. Subsequently, the Assessing Officer, National Faceless Assessment Centre (‘AO’) proceeded to pass draft assessment order by considering the adjustments proposed by the TPO and referred pages 90 to 93 of Appeal set which is the copy of the draft assessment order. 11. Aggrieved by the adjustment made in TP Order and draft assessment order, the assessee filed objections before the ld. Dispute Resolution Panel (‘ld. DRP’) which also upheld the adjustment made in the draft

5 ITA No.1937/Del/2022 assessment order vide its directions dated June 24, 2022 and referred pages 19 to 25 of Appeal set for the DRP directions. 12. Thereafter, the AO issued the final assessment order wherein adjustment of Rs.6,21,87,194 was made in the case of assessee and referred pages 7to 10 of the Appeal set for the final assessment order. 13. With regard to final assessment order, ld. AR submitted before us that it is pertinent to mention that the Final Assessment Order was passed by the Jurisdictional Assessing Officer (‘JAO’) instead of National Faceless Assessment Centre (‘NFAC’). As per section 144Bof the Act, all assessment under section 143 is required to be made in a faceless manner as per the procedure stipulated in the said section. 14. However, in scenario where the Principal Chief Commissioner of Income Tax/ Principal Director General of Income Tax in charge of NFAC, if considered necessary may transfer the case to Jurisdictional Assessing Officer only with the prior approval of CBDT. He further submitted that no such approval was obtained prior to the transfer of the case to the JAO. Moreover, the assessment order does not reference said approval or the need to transfer the case from NFAC to JAO. As a result, the order lacks jurisdiction and, thus, liable to be quashed. 15. At the time of hearing, ld. AR of the assessee submitted as under :- A. Importance of bundled rights and services and corresponding tangible benefits received 1. The Appellant wishes to submit before the Hon’ble ITAT that the AE has provided rights to

6 ITA No.1937/Del/2022 the Appellant for efficient conduct of domestic business operations of the Appellant in India. The valuable rights provided by the AE to the Appellant are enumerated below:  Right to use the M&S Trademark;  Assignment of contract and know-how of product specifications i.e. quality of material, design patterns, suppliers information, etc.;  Access to business network of M&S Plc thereby providing benefit to M&S India of obtaining discounted rates with supplier/ contract manufacturers on account of the large volume of business provided through M&S Plc purchases; and  Right to sell to the M&S Joint Venture in India. 2. In addition to above the Appellant has also availed services in relation to strategy and business development, marketing, buying and merchandising, logistics, IT and supply chain, human resource, finance, legal etc., For the said bundled services and the rights granted by the AE, the Appellant has paid cumulative payment at the rate of 6% of total revenue. Therefore, considering the fact that the Appellant is also receiving services in addition to the abovementioned rights, the arm’s length remuneration for the bundled rights and services should be at least 6% on sales. 3. Further, it is pertinent to mention that since the international transaction of ‘Payment for business services and license of proprietary marks’ is germane to and inextricably linked with the trading business of the Appellant, TNMM has been appropriately selected as the most appropriate method. B. Incorrect rejection of TNMM adopted by the Appellant 4. The Ld. TPO arbitrarily rejected the TNMM by alleging that the transaction of royalty cannot be clubbed with the trading segment of the Appellant. Refer page 105to 107 of Appeal set for relevant extract of TP order. 5. The Appellant would like to humbly submit that it has not chosen TNMM as a matter of convenience, but on basis of facts and circumstances of the case. The Hon’ble ITAT would appreciate that TNMM, being a margin-based and residuary method, relies upon ascertaining the impact of all transactions in earning of margins. In cases where the resultant margin is higher than the arm’s length margin, it can be reasonably concluded that all transactions forming a part of such computation have been undertaken on arm’s length terms. The Appellant’s arguments are squarely supported by Rule 10B(1)(e) of the Income Tax Rules, 1962 (‘the Rules’) and OECD guidelines, January 2022. 6. Additionally, Profit Level Indicator (‘PLI’) used in TNMM are less affected by transactional differences than in the case with price as used in the CUP method. Differences in the functions performed between enterprises are often reflected in variations in operating expenses. Consequently, enterprises may have a wide range of gross profit margins but still earn broadly similar levels of net operating profit indicators. In this case, since the functions performed by the comparables identified were broadly similar to the functions performed by the Appellant, the TNMM, which involves net margin comparison, was considered as the most appropriate method and reliable for testing the above-mentioned transaction. 7. Further, as already mentioned above the Appellant supplies goods only to M&S Joint Venture

7 ITA No.1937/Del/2022 in India after branding the goods with the proprietary mark granted by M&S Plc. Additionally, it is submitted that the business-related services availed by the Appellant are crucial for the conduct of business of the Appellant. Accordingly, the services availed by the Appellant and the rights granted by the M&S Plc are directly related with the trading business of the Appellant. Thus, entity level benchmarking aggregating the interrelated/closely linked international using TNMM is the most appropriate method for such a transaction. 8. In this regards, it is worthwhile to refer to the decision of Hon’ble Delhi High Court in the case of Sony Erricsson Mobile Communications India Pvt. Ltd. [ITA No. 16/2014], wherein the Hon’ble High Court held that aggregation of closely linked transaction is not only desirable but as well as permissible if the nature of transactions are closely linked. The relevant extracts from the aforesaid pronouncement are reproduced as follows: “Aggregation of transactions is desirable and not merely permissible, if the nature of transactions(s) taken as a whole is so inter-related that it will be more reliable means of determining the arm’s length considerations for the controlled transactions. There are often situations where separate transactions are intertwined and linked or are continuous that they cannot be evaluated adequately on separate basis.” 9. In view of the above arguments, selection of TNMM for benchmarking the transaction of ‘Payment for business services and license of proprietary marks’ is legally tenable as well as backed by strong factual reasoning. Accordingly, the Appellant humbly requests the Hon’ble ITAT to upheld the application of TNMM in the instant case. C. On a without prejudice basis, incorrect application of an arbitrary CUP 10. Without prejudice to our other contentions, the Appellant wishes to submit that the Ld. TPO has inappropriately selected CUP as the most appropriate method for benchmarking the impugned international transaction. The Ld. TPO without assigning any cogent reasons arbitrarily rejected the TNMM analysis undertaken by the Appellant to apply CUP method in a hasty and ad-hoc manner. Such an approach is unappreciable and struck down by the Jurisdictional Delhi Bench of the Hon’ble ITAT in the case of Mentor Graphics (Noida) Private Limited (2007) 109 ITD 101 and Mumbai bench in the case of Indo American Jewellery Limited (2010) 41 SOT 1. 11. The Appellant would like to submit that the search process adopted by the Ld. TPO suffers from varied flaws as instead of identifying comparable royalty agreements from the database, the Ld. TPO has proceeded to compare royalty rate of the Appellant with the royalty/ sales percentage of the companies (computed from the annual report). The Ld. TPO has also not provided details of any price charged/ royalty rate as per the royalty agreements of the comparable uncontrolled transactions but has merely computed royalty/ sales of the companies. 12. This has been done in spite of the availability of an alternate benchmarking analysis wherein Royalty agreements were in fact submitted before the Ld. TPO which were summarily rejected (refer page 320-618 of the Paper Book for the alternate benchmarking analysis). 13. Further, It is submitted that on perusal of the annual report of the companies (selected by the Ld. TPO), it is not possible to identify the terms, nature and type of royalty paid by these companies. Also, the information pertaining to the nature of products on which the same is paid is not available, in the absence of which, the search process adopted by the Ld. TPO suffers from limitations in relation to identifying what type of rights or services are provided

8 ITA No.1937/Del/2022 by the AEs of the comparable companies. Thus, rate of royalty determined by Ld. TPO using such data is erroneous, inappropriate and not in line with settled principles of transfer pricing law. 14. It may also be relevant to note that the Ld. TPO in his order accepted that it is difficult to find comparable similar to the product and function of the Appellant business and based on his surmises selectively picked comparable provided by the Appellant and concluded the assessment. In this regard, it is important to mention that CUP method could be applied in the case where either the AE or the Appellant have entered into similar royalty arrangements with third parties or the data for external comparable transaction between independent parties in India is available which is similar to the transaction of Appellant. Since, CUP requires an apple to apple comparison and the fact that the Ld. TPO has itself acknowledged that comparable transaction similar to Appellant’s transaction is not available, application of CUP seems completely unjustified and incorrect. The Ld. TPO has departed entirely from the principles of benchmarking and proceeded to conclude the analysis by comparing annual reports instead of royalty agreements. 15. In view of the above submission, the order of the Ld. TPO is liable to set aside and the economic analysis of the Appellant conducted in the TP study report liable to be accepted . 16. Following the flawed CUP methodology, the Ld. TPO arrived at a set of following three comparable companies: S. No. Comparable company Royalty expense as % of sales 1 Jockey International Inc. (Page Industries Ltd.) 5% 2 S SI P L Lifestyle Pvt. Ltd. 1.81% 3 Benetton India Pvt Ltd 4.94% Average 3.92%

D. Erroneous acceptance of functionally dissimilar company 17. Without prejudice to the above contentions, the Appellant wishes to submit that one comparable, namely SSIPL Lifestyle Pvt. Ltd. (‘SSIPL’) has been erroneously selected by the Ld. TPO as it is entirely different from the Appellant. 18. SSIPL is a leading retailer for international brands such as Nike, Levis, Lotto, United Colors of Benetton, Clarks and Mmojah. SSIPL is exclusive licensee for only one brand i.e., Smiley(Refer page no. 192 of paperbook).However, the sales made by SSIPL comprises sales of products of multiple brands. Therefore, royalty rate computed by Ld. TPO is patently incorrect. Computation made by TPO is mentioned below: Particulars Amount in INR Remarks Total Revenue (A) 323,51,96,286 Sales amount from multiple brand products Nike, Levis, Lotto, United Colors of Benetton, Clarks and Mmojah Royalty (B) 5,85,30,964 Royalty paid for Smiley brand license. Royalty rate computed by 1.81% Ld. TPO (C=B/A)

9 ITA No.1937/Del/2022 19. It is reiterated that the royalty has been paid only for Smiley brand and comparing it with sales made for all multiple brands would tantamount to arriving at a very low and incorrect royalty rate which is simply non comparable. 20. Even otherwise also, in the absence of royalty agreement, there is no way to establish the nature of services for which the royalty is paid. Approach followed by Ld. TPO of cherry picking figures from Annual Reports of the comparables without providing the cogent basis for the same is patently incorrect. E. On a without prejudice basis, incorrect rejection of corroborative CUP analysis 21. The Appellant had conducted an independent benchmarking analysis, using Royalty Stat Database, to identify royalty agreements that could be considered as comparables to the Appellant for the subject transaction. The Appellant applied CUP method for arriving at an arm’s length range of royalty rates. Refer page 320 to 321 of Paperbook for copy of the detailed search and royalty agreements. 22. The analysis indicates that the range of royalty rates of the comparable royalty agreements, paid as a percentage of net sales, varies from 6.00% to 8.00% with a median of 7.00%. Further, the rate at which royalty is paid by the Appellant to AE is 6.00% of sales. Accordingly, the international transaction of payment of royalty was said to meets the arm’s length standard under the Indian regulations. Refer Annexure 1 for the search results. 23. However, the Ld. TPO has outrightly rejected the analysis undertaken the Appellant without attempting to elaborate or touch upon why the independent agreements selected by the Appellant are not appropriate. 24. In addition to the above, the Appellant would like to argue that due to lack of availability of comparable data, the search process was broadened to include royalty agreements operating in wider jurisdictions. Without prejudice to arguments raised above, the Appellant has identified following comparable royalty agreements out of its search, license of which is authorised to be exploited by licensees throughout the World (including India). The Hon’ble ITAT would appreciate that even the royalty paid by licensees for the license exploitable in the World, is in the range of 6% to 7% of sales. Accordingly, the rate at which royalty is paid by the Appellant to AE i.e. 6.00% of sales meets the arm’s length standard under the Indian regulations. Refer Annexure 2 for the results. 25. In addition to the above grounds, the Appellant wishes to highlight that the said international transaction under dispute was accepted to be at arm’s length in the previous AY i.e. AY 2017-18. Given that the fundamental facts from previous AY remained same and hence, the rule of consistency must be applied. (Refer page 617 to 618 of Paperbook for copy of the TP order for AY 2017-18). In the light of above factual and legal positions, it is submitted that the addition made is bad in law and should be deleted. 16. Ld. AR further submitted results of corroborative CUP analysis with the

written submissions which is reproduced as under :-

10 ITA No.1937/Del/2022 “As mentioned above the Appellant is engaged in the wholesale business of procuring and selling branded apparels and accessories including leather products and toiletries. It also renders sourcing support services to its AE. the Appellant purchases branded apparels and accessories from third party suppliers who manufactures for and on behalf of the Appellant, for further resale to affiliate joint venture entity in India. In order to have the goods manufactured and procured through the contract manufacturers/ suppliers, Marks and Spencer plc, UK (‘M&S plc’ or ‘AE’) has licensed various rights to the Appellant for latter’s efficient conduct of business operations in India. Accordingly, comparable similar Assessee business are as follows: S. Reference Licensor Licensee Description as per Basis Royalty No. no. the Agreement for Rate Royalty 1. 388 Donna Karan ‘Broadway Manufacture, sale Net 7.00% Studio Jeanswear and distribution of Sales Holdings, Inc., men, women and children apparels using trademark “DKNY JEANS” 2. 806 Marker, Ltd. And Ski & Sports Selling apparels, Net 5.00% Marker Recreation sportswear and Sales International, Inc. Company, LLC accessories under the “Marker” trademark. 3. 1193 S & J Perfume Tristar Using trademark Net 5.00% Company Corporation “Marks” on products Sales produced, marketed, sold and distributed by Licensee. 4. 2354 Aris Industries, Grupo Extra of Manufacturing, Net 8.00% Inc., XOXO Clothing New York, Inc. selling and Sales Company, distributing Incorporated, BP sportswear, Clothing Company, outerwear, golf Inc., wear and denim Europe Craft bottoms using Imports, Inc. and trademark “Member Marcade Realty Only (R)” and other Corp. trademarks. 5. 6834 Victorinox AG Swiss Army Selling all type Net 3% Brands Inc. mens, women and Sales On sale of children apparel, product hats, footwear, belt to North and accessories American under the territory trademark of 7% “Victorinox”. Other additional territories 6. 7002 Victorinox AG Swiss Army Selling all type Net 10% Brands Inc mens, women and Sales children apparel, hats, footwear, belt and accessories under the trademark of “Victorinox”.

11 ITA No.1937/Del/2022 7. 19596 The North Face, Youngone Manufacturing, Net 5% Inc. Corp. promotion and sale Sales of Licensors full line of apparel, equipment and other products. 8. 19968 Rodney Henry Legacy Athletic Production. Net 7.33% Apparel LLC Distribution, Sales marketing and sale of athletic footwears and athletic apparels under the trademark of licensor 9. 21504 Stone Corporation Horiyoshi the Manufacture, Net 6% Inc Third Limited promotion, sale and Sales distribution in the of apparels and other products under trademark “HORIYOSHI”. 10. 33289 Brand Strategy Ami James Develop, Net 10% Group, Inc Brands Inc manufacture, sell, Sales and market the apparels under the trademarks of “Phillip Acker” 11. 34407 Ami James Ink LLC Quoram Corp Utilise the Net 10% trademarks to Sales manufacture, distribution, sale and marketing of men, women and children apparels. 12. 34802 Robert Graham Auri, Inc. Manufacture, Net 15% Holdings Plc marketing, display, Sales advertising, promotion, distribution and sale of products under trademark of “ROBERT GRAHAM” Count 13 35th Percentile 6.00% Median 7.00% 65th Percentile 8.00%

lower authorities and submitted written submissions which are

reproduced below for the sake of brevity :-

12 ITA No.1937/Del/2022 “During the course of hearing in respect of above-mentioned appeal, arguments were made by the undersigned contending TPO was justified in rejecting entity level benchmarking of Royalty Payments and Supply of Business Services and in determining Arm's Length Price (ALP) for Royalty in non-aggregated manner using CUP. As desired by the Hon'ble Bench, following written submission is being made in matter, which may kindly be taken into consideration for the purpose of deciding the instant appeal. 1. Functions Performed and International Transactions under Trading Division: The assessee is "Wholesale trader in apparel and merchandise" under its trading division. The issue involved in present appeal is relating to benchmarking of royalty payment under Trading division. As per contention of the assessee, it has benchmarked international transactions of payment of charges for business services and royalty payment charges for use of proprietary marks in aggregated manner using TNMM, which has been rejected by the TPO. In its place, the TPO used CUP for benchmarking of Royalty payment. In this regard, it would be useful to go through the functions performed by the assessee with respect of above International Transactions of Trading Division as given in para 4.3, page 18 of TPSR (P/B page no 18-19), which is reproduced as under: "Functions performed by M&S India M&S plc. has entered into a Service Agreement with M&S India for the supply of business services and license of Trademarks. The salient features of the arrangement are as follows: • The agreement appoints M&S India to trade by way of wholesale for the purposes of selling Marks and Spencer products with an exclusive and non-assignable rights to use the Trademarks in relation to the products sourced or manufactured by and on behalf of M&S India; • The Trademarks shall only be applied on products sold in the Marks & Spencer stores in the territory; and • Trademarks provided shall only be used according to the directions of M&S plc Apart from the use of trademarks, certain services in relation to the following, are also received from AE under the arrangement: Apart from the use of trademarks, certain services in relation to the following are also received from AE under the arrangement :  Strategy and business development  Marketing

13 ITA No.1937/Del/2022  Buying and Merchandising  Logistics, IT and supply chain  Human Resources  Finance  Legal There is a service agreement dated 10.07.2014 between the assessee and its AE i.e. Marks and Spencer Plc, U.K. with respect to the above services i.e. use of proprietary marks and other business services. However, facts of the instant case indicate that the entire payment by assessee to Mark and Spencer Plc. under above agreement is of the nature of royalty only as other services/business services were not availed by the assessee. In this regard, it is important to note that as per the above agreement, the assessee is required to pay 6% of its Revenue to the A.E. i.e. Mark and Spencer Plc and in the profit and loss account, the assessee has shown royalty payment of Rs.17,93,86,136/-, which comes to 6% of the Revenue from traded Good i.e. Revenue of Trading Division of Rs.2,98,97,68,941/-. (Kindly refer to page 22 and 23 of the Paper Book). As per the details of related party transactions given in Note 28 forming part of Financial Statements on page 28 of the Paper Book too, this amount of Rs.17,93,86,136/- is in nature of royalty payment to Marks and Spencer Plc, U.K. Further, it is important to note that there is no other payment made to the said A.E. i.e. Marks and Spencer Plc, U.K. by the assessee as evident from related party transaction details on Note 28 on Page 28 of the Paper Book. Hence, there is no payment made by the assessee to Marks and Spencer Plc, U.K. (A.E.) other than the payment made towards the royalty. Thus, as per assessee own admission, there are no business services availed from Marks and Spencer Plc, U.K. other than availing of right to use proprietary marks, for which royalty was paid. Moreover, as evident from para 4.1 on page 8 to 10 of TP order, the TPO has also given a finding in its order that assessee has not been able to provide details/evidences with regard to International Transaction of Availing of Business Services from Marks and Spencer Plc, U.K. The same may kindly be perused. It is also noteworthy that all the other/business services mentioned in para above or in Appendix-l to agreement are managerial or those related to general administration only. At the same time, nature of various expenses debited to P&L Account shows that assessee itself incurred similar type of expenses for its business. For example, there are legal and professional fee of Rs.l.63 Crores, Rental expenses on account of operating leases of Rs.2.07 crores, warehouse expenses of Rs.l.13 Crores and Salary-wages of Rs. 16.18 Crores debited to P&L Account. Hence, under Trading division, there was no reason with the assessee to avail some business services from its AE (Marks and Spencer Plc.). This goes to show that entire payment of Rs.17,93,86,136/- made to Mark and Spencer Plc. is on account of royalty only as held by the TPO.

14 ITA No.1937/Del/2022 Thus, above discussed facts reveal that the issue involved in present case is relating to benchmarking of royalty payment only during the relevant previous year. 2. Most Appropriate Method: The assessee has used TNMM at entity level (for trading division) to determine the ALP for royalty, which can not be considered as most appropriate method. TNMM is an Indirect method, which can be used as a method of last resort when other methods like CUP, RPM, (PM can not be applied due to lack of comparables or other specific reasons. When assessee is using TNNM for trading division, it is basically comparing entity/segment level profit margin with those of comparables. The approach used by the assessee is not comparing price of concerned international transaction of royalty, despite the fact the royalty payment can be very easily compared on basis or price with suitable comparable as good data base exist for royalty payments. Under Transfer Pricing laws, for the purpose of determination of ALP of a transaction like royalty, direct price based method like CUP is preferred in comparison to indirect profit based method like TNMM, as direct method provides more accurate results. Moreover, TNMM is to be used as a method of last resort for determining ALP of an international transaction, if methods other than TNMM are not found appropriate. Can it be said in the instant case that for determining ALP of royalty payment, CUP would not be a suitable method, particularly when there is separate royalty data base available and line of business of the assessee is such that there are many other similarly placed players operating in Indian market leading to availability of good number of comparables? The answer to this question will be 'NO'. Thus, the approach of the assessee to determine ALP of royalty using TNMM is patently unjustified. OECD Transfer Pricing Guidelines recognizes this principle in its para 2.3, which is reproduced as under: "Traditional transaction methods are regarded as the most direct means of establishing whether conditions in the commercial and financial relations between associated enterprises are arm's length. This is because any difference in the price of a controlled transaction from the price in a comparable uncontrolled transaction can normally be traced directly to the commercial and financial relations mode are imposed between the enterprises, and the arm's length conditions can be established by directly substituting the price in the comparable uncontrolled transaction far the price of the controlled transaction. As a result, where, taking account of the criteria described in paragraph 2.2, a traditional transaction method and a transactional profit method can be applied in an equally reliable manner, the traditional transaction method is preferable to the transactional profit method. Moreover, where, taking account of the criteria described in paragraph 2.2, the comparable uncontrolled price method (CUP) and another transfer pricing method can be applied in on equally reliable manner, the CUP method is 10 be preferred. See paragraphs 2.14-2.26 for a discussion of the CUP method.”

15 ITA No.1937/Del/2022

The assessee has mentioned in its TPSR that CUP has not been used due to lack of reliable data. ( Refer to page 52 of Paper Book). This claim of the assessee is without any basis as there are many traders in similar line of business and there is royalty data base available for the purpose of benchmarking. Infact, TPO in its analysis used such data to find out comparable cases and assessee also proposed comparables for the purpose of CUP during TP proceedings. This goes to show that above claim of non- availability of data is patently incorrect. Conversely. it also shows that assessee should not have any objection to use of CUP if reliable data is available and applied by the TPO. Moreover, when TNMM is applied at entity or segment level, then it is basically comparing margins of tested party with margin of com parables at entity level. It has been held in catena of decisions by the Courts and Tribunal that over all high profit margins at entity or segment level can not be considered a basis for accepting contention of an assessee that all its international transactions forming part of such segment are at Arm's Length Price. Following decisions supports the case of Revenue on this point. (i) ITAT, Mumbai in the case of like UCB India (P.} Ltd. (2009), 121 ITD 131 (Mumbai) - Relevant para 75. (ii) ITAT, Delhi in the case of JCB India limited ( 2016), 69 Taxmann.com 383{Delhi) - Relevant Para 7.6 and 7.7- Even though, as discussed in earlier paragraphs, entire payment of Rs.17,93,86,136/- made to Mark and Spencer Plc is on account of royalty only and there is no evidence of any service received or payment made by the assessee on account of other/business services. still it would be pertinent to highlight the circumstances under which two or more International Transactions can be benchmarked in aggregated manner as assessee has claimed to have use aggregated transaction approach. Two or more international transactions can be bench marked in aggregated manner only if they are intertwined and inextricably linked or are continuous that they can not be evaluated adequately on separate basis as held by Hon'ble High Court of Delhi in the case of Sony Ericsson Mobile Communications (I) Pvt. Ltd vs. CIT (201S), 55 Taxmann.com 240 ( Relevant Para 137). Further, in the case of Denso India limited (2016), 68 Taxamnn.com 55, Hon'ble High Court of Delhi had upheld rejection of aggregation of transactions and use of CUP by TPO for ALP determination of an International Transaction. The ration of above judgements is squarely applicable to the case of the assessee as in the present case too, the transactions sought to be aggregated by the assessee are entirely of dissimilar nature and can not considered as inextricably linked to each other. As per provision of law, Separate benchmarking using transaction by transaction approach is a norm and use of aggregated approach is basically in the nature of an exception to be used only in suitable cases. Hence, the assessee was not

16 ITA No.1937/Del/2022 justified in contending that international transactions relating to Royalty payment and payment for business/other services could be benchmarked in aggregated manner. In view of above discussion, determination of ALP of international transactions relating to royalty for use of proprietary marks should have been carried out by the assessee in non-aggregated manner by using direct method of CUP. Hence, the approach of the TPO is fully justified in this regard. With regard to above prepositions, reliance is placed on following case laws which support case of the Revenue. (i) ITAT, Delhi in the case of JCB India Limited ( 2016), 69 Taxmann.com 383(Delhi) - Relevant Para 7.6 and 7.7- In this case, Assessee's contention for aggregation of transactions and entity level benchmarking was rejected and it was held that determination of ALP of international transaction of payment of royalty, being independent of other transactions. should be done separately on transaction-by transaction basis .using CUP. (ii) ITAT, Mumbai in the case of like UCB India (P.) Ltd. ( 2009), 121 ITD 131 (Mumbai) - Relevant para 75- In this case, Hon'ble ITAT has categorically rejected approach of the assessee to compare overall profit of the tested party with overall profit of comparables i.e. entity level benchmarking and had upheld order of the TPO. In addition to the above, reliance is also placed upon decisions cited by the TPO on page 12 to 14 of her order, which may kindly be taken into consideration. In view of the above discussion, ALP of royalty payment is required to be determined separately in non-aggregated manner by benchmarking separately. The method used by the TPO i.e. CUP is most appropriate method for determining ALP of royalty payment in light of facts of the case of the assessee in light of discussion made above. 3. Suitability of Comparables chosen under CUP and determination of ALP: It is pertinent to highlight that on perusal of TP study report, it does not emerge that the assessee had used 'royalty payment' as a criteria for selecting comparables (Refer to page no. 69 & 70 of the paper book/38 &39 of the TPSR) while choosing comparables for trading segments. Further, discussion about the comparables chosen by the assessee also does not indicate at all that comparables chosen also had transactions relating to royalty payment( Page 74-75 of the Paper Book). In other words, the assessee had not used criteria of royalty payment to choose the comparables, whereas in the case of assessee, significant amount of royalty had been made to the AE and issue involved is

17 ITA No.1937/Del/2022 determination of ALP for payment of Royalty only. Hence, the benchmarking approach used by the assessee was flawed and deserved to be rejected. It is in this backdrop and in light of discussion made above that the approach of the TPO to benchmark royalty separately using CUP is fully justifiable and provide more accurate benchmarking. During the course of TP proceedings, the assessee was given an opportunity to offer its comments with regard to comparables proposed by the TPO and assessee had also proposed some fresh comparables, out of which one comparable was found suitable by the TPO (Page no. 18 to 21 of the TPO Order). All the three comparables chosen by the TPO are functioning in the similar line of business. Therefore, the contention of the assessee that the CUP analysis has not been carried out by the TPO correctly is not justified at all. It is important to note that as per the observations made in DRP directions dated 21.06.2022 in para 3.2.2 (page 6), the same issue of royalty payment was examined in A.Y. 2015-16 too. Hon'ble DRP in A.Y. 2015-16 had observed that royalty was paid @1% up to 2014-15 as per agreement dated 04.06.2007, which subsequently raised to 6% vide agreement dated 10.07.2014 based on a planning memorandum from BSR & Co. LLP. Both the agreements had provisions relating to receiving of bundled rights and services implying that there was no change in services received by the assessee as per new agreement vis-a-vis old agreement. Thus, there was no justification for increasing rate of royalty payment to 6% from 1%. On specific query, the assessee was not able to furnish details of changes before DRP with regard to services received by the assessee from its AE, which could have justified such drastic increase in royalty payment. Thus, it was held by the DRP that royalty rate was increased to 6% from 1% without basis and it was merely an Instrument to shift profit out of the country. In current year, the DRP has relied upon its finding given in A.Y.2015•16 as there is not change in facts considering that it is the agreement dated 10.07.2014, which is applicable in current year too. Finding of the DRP is relevant to take note the royalty rate of 6% prescribed in agreement dated 10.07.2014 has no basis at all as in earlier years, for identical services, the assessee was paying royalty at the rate of 1%. Hence, it is essential in the case of assessee to determine ALP of royalty payment by using direct transaction method i.e. CUP as this method is best suited to arrive at market rate of royalty for similarly placed cases by directly comparing royalty agreements of comparables with that of the assessee. In view of the above, it is requested to uphold the order of the TPO and dismiss appeal of the assessee.”

18 ITA No.1937/Del/2022 “The captioned matter was listed for hearing before the Hon’ble Bench on 09 October 2025, wherein the Appellant challenged the methodology adopted by Learned Transfer Pricing Officer (‘Ld. TPO’) in benchmarking the International Transaction of‘ Payment for business services and license of proprietary marks’. In this regard, Learned Department Representative (‘Ld. DR’) was asked by the Hon’ble Bench to submit a rebuttal submission against the synopsis filed by the Appellant. The Appellant is in receipt of the rebuttal filed by the Ld. DR dated October 17,2025 (received on October 18,2025). In the said rebuttal the contentions raised by the Ld. DR are in fact reiteration of the same arguments which were part of the order passed by the Ld. TPO. In response to such rebuttal, the Appellant respectfully submits the brief note on relevance of using Transactional Net Margin Method (‘TNMM’)for benchmarking the interlinked transactions viz. payment for business services and license of proprietary marks with the trading segment, as below: Reply to the Rebuttal filed by Ld. DR: A. Application of TNMM where payment of royalty is inextricably linked to the core trading business of the Appellant. 1. The Appellant is engaged in the business of trading M&S-branded apparels to its Joint venture in India (Domestic segment business) and the operations of the Appellant are wholly dependent upon the bundled services and proprietary rights granted by its Associated Enterprise (‘M&S Plc’). 2. M&S Plc does not merely provide the right to use proprietary marks but also grants know-how related to product specifications, such as quality of materials, design patterns, and supplier information, as well as other key services including strategy and business development, marketing, buying and merchandising, logistics, IT and supply chain, human resources, finance, legal, and more. For the aforesaid bundled services and the rights granted by the AE, the Appellant has made accumulative payment at the rate of 6% on trading sales revenue. For a detailed description of services, kindly refer to the TP Report (refer page 49-50 of the paperbook) and the agreement with the AE (refer Page 88-104 of the paperbook). 3. It is submitted that the aforesaid services are inextricably linked to the trading business of the Appellant and cannot be benchmarked in isolation. Thus, benchmarking the transaction separately would not yield a reliable or rational determination of the arm’s length price.

19 ITA No.1937/Del/2022 4. It may also kindly be noted that the Ld. TPO has admitted the fact that the transactions which are closely linked or occur on a continuous basis can be benchmarked on an aggregate basis. Accordingly, in the given case benchmarking using aggregation approach is most suitable method for the determination of the Arm’s Length Price. 5. The use of the aggregation approach in closely linked transactions has also been affirmed and accepted by the Hon’ble Delhi High Court in the case of Sony Erricsson Mobile Communications India Pvt. Ltd. [ITA No. 16/2014], wherein the Hon’ble High Court held as follows: “Aggregation of transactions is desirable and not merely permissible, if the nature of transactions(s) taken as a whole is so inter-related that it will be more reliable means of determining the arm’s length considerations for the controlled transactions. There are often situations where separate transactions are intertwined and linked or are continuous that they cannot be evaluated adequately on separate basis.” 6. In fact, the Ld. TPO in para 2.1 at Page no 4 of the TPO Order has also accepted that the aggregation approach is applicable, in case if the services are inextricably linked following the principle of the Hon’ble Delhi High Court in the case of Sony Ericsson (supra).Following the same principle, it is categorically mentioned that the payment is for business services and license of proprietary marks. Somehow, the Ld. TPO as well as DR missed this point and argued that the payment is only for royalty for using proprietary mark. 7. In this regard, reference may be made to the relevant para of the TP Report as hereunder (Para 4.3.1 on page 49-50): 4.3.1 Functional analysis A functional analysis facilitates the characterisation of the transactions between AEs after taking into account their functions, assets and risks and assists in establishing a degree of comparability with similar transactions in uncontrolled conditions. For the trading activity, M&S India uses the proprietary marks of M&S Plc. Against the use of such proprietary marks and other business services received, M&S India makes service payments to M&S Plc. 4.3.2 Functions Performed 4.3.2.1. Functions performed by M&S plc M&S plc provides specific guidance on:

20 ITA No.1937/Del/2022  The operation and development of the Marks and Spencer retail concept and associated supply chain  Strategy and business development to grow M&S India's trading business  Buying and merchandizing including the quality of fabrics that are to be used in the products manufactured/ traded in by M&S pie  Product designs  Supplier information including assistance in obtaining preferential rates for entering into  contracts with such supplier/contract manufacturers  Marketing and brand management  Right to sell to the joint venture in India

4.3.2.2. Functions performed by M&S India M&S plc has entered into a Service Agreement with M&S India for the supply of business services and license of Trademarks. The salient features of the arrangement are as follows:  The agreement appoints M&S India to trade by way of wholesale for the purposes of selling Marks and Spencer products with an exclusive and non-assignable rights to use the Trademarks in relation to the products sourced or manufactured by and on behalf of M&S India;  The Trademarks shall only be applied on products sold in the Marks & Spencer stores in the territory; and  Trademarks provided shall only be used according to the directions of M&S plc Apart from the use of trademarks, certain services in relation to the fo1lowing, are also received from AE under the arrangement:  Strategy and business development  Marketing  Buying and Merchandising  Logistics, IT and supply chai1i  Human Resources  Finance  Legal

21 ITA No.1937/Del/2022 8. This fact is also evident from para 4.3 of the TP Report wherein the FAR analysis of the AE as well as the Appellant is mentioned. 9. From a perusal of the aforementioned paras of the TP Report along with the relevant agreement and proper FAR analysis, it is clear that the AE i.e. M&S Plc has developed a system for conducting the business worldwide which includes product design & specification, identification of suppliers, maintaining the quality and fashion design and exploitation of brand name. This is known as the Marks &Spencer Retail Concept and Customer Proposition which is known for its high standard of quality, value, service, innovation and trust in the retailing of its products and services. This is a complete system, and the amount so charged related to the exploitation of entire the bundle of services along with the right to use its proprietary marks/ brand name. Therefore, the view of the Ld. TPO/DR dissecting the services and the brand name is inherently flawed and incorrect. 10. This fact is also mentioned in the Services and Trademark License Agreement dated July 10,2014. (please refer to the paper book pages 88-104). Annexure 1 of the agreement on pages 102-103 elaborately discusses the various services and further proves that these are a bundle of services which are inextricably linked with each other. 11. It is pertinent to mention here that the Appellant filed a detailed reply dated July 23,2021 before the Ld. TPO reiterating the contentions on the linkage of services along with a detailed description of each and every service and how these are linked with each other (Please refer to paper book pages122-131). Accordingly, the contention of the Ld. TPO as well as Ld. DR that the Appellant has not availed of any services is purely baseless. 12. In light of the above, it is respectfully submitted that considering the nature of the Appellant’s business and the necessity for inter-related services, TNMM should be upheld as the MAM for benchmarking the subject transaction. The argument of the Ld. DR is based on a complete misappreciation of the facts, relevant agreement and the business model. 13. The Ld. DR has also mentioned various case laws in the rebuttal filed but at the same time failed to appreciate that inextricable linkage of services is a common factor permeating in all the case laws and as observed by the jurisdictional High Court in the illustrated Sony judgement(supra)and thus the same should be applied in the instant case as well. Rest is only the nature of services which on the basis of the averments made in the above paras are clearly inextricably linked with each other. It may kindly be appreciated that

22 ITA No.1937/Del/2022 without this complete bundle of services, the retail concept of business of M&S group would not work. 14. The Ld. DR has also tried to place reliance on the direction of Ld. DRP for AY 2015-16 without realizing that in that particular year the arm’s length price was computed at 1%by the Ld. TPO without carrying out any benchmarking analysis and accordingly the Hon’ble ITAT remanded back the matter with a direction to compute the arm’s length price with due consideration to the market factors and relevant facts on the record. However, in the year under consideration, the Ld. TPO himself has computed the arm’s length price and the issue is only in respect of the relevant method and the comparable thereof. Relevant extracts from the Hon’ble ITAT order is extracted below for your ready reference: “21. From the entire factum, we find that the revenue has derived ALP without resorting to any method prescribed as per the Income Tax Rules. The disallowance of 6% during the current year has been merely made on the pretest that in the earlier year , the royalty paid was @ 1%. Hence, it is directed that the TPO/AO shall undertake appropriate TP study and determine Arm’s Length Price .” 15. Thus, all the contentions raised by the Ld. DR in the rebuttal are bereft of any legal force and are oblivious to the intricacies involved in the Appellant’s business and the facts on the record. Therefore, it is most humbly prayed that the contentions of the Appellant for the application of TNMM in view of the nature of services should be accepted.” B. Without prejudice to above, it is mentioned that the Ld. TPO arbitrarily applied CUP method. 16. Without prejudice to our above contention, it is submitted that Ld. TPO applied CUP in an ad-hoc manner, the search process adopted by the Ld. TPO suffers from varied flaws as instead of identifying comparable royalty agreements from the database, the Ld. TPO has proceeded to compare royalty rate of the Appellant with the royalty/ sales percentage of the companies (computed from the annual report and not agreements). 17. Further, it is mentioned that on perusal of the annual report of the companies (selected by the Ld. TPO), it is not possible to identify the terms, nature and type of royalty paid by these companies. Also, the information pertaining to the nature of products on which the same is paid is not available, in the absence of which, the search process adopted by the Ld. TPO suffers from limitations in relation to identifying what type of rights or services are provided by the AEs of the comparable companies. Thus, rate of royalty

23 ITA No.1937/Del/2022 determined by Ld. TPO using such data is erroneous, inappropriate and not in line with settled principles of transfer pricing law. 18. Therefore, should Your Honor be inclined to favor the application of the CUP method as the MAM, it is respectfully submitted that the corroborative CUP analysis provided by the Appellant during the assessment proceedings should be accepted. (Refer page no. 7of the synopsis). 19. The Appellant had conducted an independent benchmarking analysis, using Royalty Stat Database, to identify royalty agreements that could be considered as comparables to the Appellant for the subject transaction. The Appellant applied CUP method for arriving at an arm’s length range of royalty rates. (Refer page 320 to 321 of Paperbook) for copy of the detailed search and royalty agreements. 20. Accordingly, Your Honor are requested to direct Ld. TPO to consider the under mentioned comparables for the purpose of benchmarking analysis.” 19. Considered the rival submissions and material placed on record. We observed that the assessee who is joint venture partner with its AE, who owns the brand and it allows the Indian entity to use the proprietary marks alongwith know-how related to product specifications like quality material, design patterns, supplier information and other key parameters like business development, marketing, logistics, IT support, supply chain, human resources, finance and legal support. All these bundled services and rights are granted to the assessee at accumulated charges of 6% on the gross sales achieved by the assessee. The AE chose to provide all the above bundled services at consolidated charges of 6% on sales. No doubt all the services provided by its AE are inextricably linked to the business of the assessee. Just because it is provided continuously does not mean that there is only option to bench mark the transaction on the basis of

24 ITA No.1937/Del/2022 aggregation approach to follow the transactional profit method. In our considered view, the AE has decided and chose to charge royalty not only on the trade mark usage but also the allied business service charges together. This being the case, there is no complication involved in determining the ALP applying the traditional transaction method. However, the AE chose to charge a standard rate of 6% of sales and provided several services which are inter-twined with the operations of the assessee. 20. We observed that the assessee relied on the decision of Hon’ble Delhi Court decision in the case of Sony Erricsson Mobile (supra) wherein it was held that aggregation of transaction is desirable, if the nature of transactions taken as a whole, is so interrelated that it will be more reliable means of determining the arms length consideration for the controlled transactions, in our considered view, in the given case there is no complication involved and it is so reliable that direct traditional transactional method can be applied adopting for proper TP analysis. Provided the TPO finds exact similar comparables, who also provides services similar to the services provided by the AE. 21. After considering the nature and functions of the transactions involved, the bundle of transactions provided by Marks & Spencer, Singapore can be benchmark by adopting direct transactional method, the most

25 ITA No.1937/Del/2022 appropriate method available in the Income Tax Rules is CUP method provided the TPO finds exact similar comparables. We are in agreement with the submissions of learned DR. At the same time, we observed that learned TPO had adopted and selected few comparables which are most probably Indian entities who are in manufacturing of the relevant products and also Germaine from Local market as well as local developer of brands in India. In short, the comparable selected are not proper. After considering the submissions of both the parties, in our considered view, there is justification in the submissions of the assessee that the comparable selected by the TPO are not proper. We are also of the view that there are several companies/joint ventures engaged in India, who are also providing similar nature of trademarks along with other services to their Indian partners to execute their businesses. Therefore, after considering the submissions of both parties, we are inclined to remit this issue back to the file of AO/TPO to benchmark the payment of royalty transaction carried on by the assessee afresh after giving proper opportunity of being heard to assessee. Here, endeavour is to find the most appropriate method, in case, the TPO could not find exact similar comparables who also receives bundled services from their AE. In case, the TPO and assessee could not find such comparables, it is best to do the bench marking adopting the TNMM by finding proper comparables. In

26 ITA No.1937/Del/2022 this case, the assessee also submitted the ‘TPAR’ before TPO. The TPO may consider the same and redo the bench marking afresh. In the result, appeal filed by the assessee is allowed for statistical purpose. We direct the AO/TPO to benchmark the transactions de novo as per our direction above after giving proper opportunity of being heard. 22. In the result, the appeal filed by the assessee is allowed for statistical purpose. Order pronounced in the open court on this 5TH day of January, 2026.

SD/- SD/- (SUDHIR PAREEK) (S.RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 05.01.2026/TS