BESTSELLER FASHION INDIA PRIVATE LIMITED ,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX, 9(2)(1), MUMBAI

The ld. TPO vide order dated 17.01.2015 passed u/s. 92CA(3) of the Act made an upward adjustment of Rs.1,43,48,901/- being a markup of 13.61% towards the fashion show expenses aggregating to Rs.10,54,29,109/- received by the assessee from its AE and after duly considering the average earning on cost of three comparables selected by the ld. TPO. The ld. A.O. passed the draft assessment order u/s. 144C(1) of the Act dated 24.03.2014 and subsequently the final assessment order dated 08.05.2015 passed u/s. 143(3) r.w.s. 144C(3)(b) of the Act determining a loss at Rs.1,64,39,930/- after making an addition of Rs.1,43,48,901/- being the upward adjustment for the impugned international transaction.

The assessee is in appeal before us challenging the impugned order of the first appellate authority.

The learned Authorised Representative ('ld. AR' for short) for the assessee contended that the ld. TPO /A.O. had erred in charging mark up of 13.61% by taking the average margin of 3 comparable companies selected by the ld. A.O. towards the reimbursement of fashion show expenses of Rs.10.54 crores received from its AE. The ld. AR further stated that the said expenses was incurred by the assessee for conducting fashion shows at Mumbai and Delhi through an event manager named ‘Celebrity Locker Entertainment Pvt. Ltd.’ where the assessee does not have a bandwidth expertise for conducting such shows. The said expenses were reimbursed by the AE and that the assessee has not provided any additional service beyond what Celebrity Locker have provided. The ld. AR further contended that the BSF’s establishment costs consists of only the “Personnel Cost” of Rs.42,419/- and Rs.5,75,875/- as rental cost thereby stating that the assessee had no risk and was merely a pass through service. The ld. AR relied on the decision of the co-ordinate bench in the case of Signity India (P.) Ltd. vs. CIT(A) & Dy. CIT [2022] 143 taxmann.com 267 (Mum-Trib.). The ld. AR further stated that the ld. A.O. in assessee’s case for A.Ys. 2013-14 and 2014-15 has not made any addition on similar transaction. The ld. AR further stated that the expenditure incurred on fashion shows had in fact increased the sale of the assessee and are merely a routine expenditure incurred by the assessee and pointed out that the comparables selected by the ld. TPO are (A.Y. 2011-12) Bestseller Fashion India Private Limited vs. Asst. CIT into the business of marketing and promotion of brands which are not akin to that of the assessee and objected to the said selection of comparable as being functionally different.

The learned Departmental Representative ('ld.DR' for short), on the other hand, controverted the said facts and stated that these are long term expenditure incurred by the AE as brand promotion expenses in Indian fashion industries and are not mere pass through expenses. The ld. DR further stated that the expenditure incurred on fashion shows have increased the brand value of the AE for which mark up is to be charged unlike any advertisement and sales promotion expenses. The ld. DR also contended that the assessee in its P & L account has debit of Rs.3,01,66,855/- on sales promotion during the year under consideration where the sales aggregated to Rs.61,65,444/- which goes to show that the assessee had assisted the AE in promoting this product in the Indian market. The ld. DR relied on the orders of the lower authorities.

We have heard the rival submissions and perused the materials available on record. It is observed that the assessee during the impugned year has reported the following international transaction entered into with its AE in Form No. 3CEB:

The assessee is said to have received reimbursement of Rs.15,35,37,843/- from its AE as expenses incurred for brand building which break up is tabulated hereunder:

On perusal of the same, the ld. TPO/A.O. during the assessment proceeding considered that the reimbursement of fashion show expenses aggregating to Rs.10,54,29,109/- was not at ALP and had sought explanation from the assessee as to charging mark up on these expenses incurred by the assessee and reimbursed by its AE.

On furnishing the said details, the assessee contended that the assessee entered into its first year of operation of the company where the first sale was made in the month of March, 2010. The ld. AR contended that the assessee had incurred huge losses declaring the same in its return of income. The ld. AR further contended that Celebrity Locker Entertainment Pvt. Ltd. was a third party vendor engaged to execute the advertisement and marketing campaigns of BSAS in India by conducting fashion shows in Delhi and Mumbai for introducing BSF and the brands promoted by it in the Indian market. The ld. AR stated that the assessee has incurred very meager expenses towards personnel cost of Rs.42,419/-, rental cost of Rs.5,75,875/- and the other substantial

The assessee claims the said expenses to be a pass through cost where the assessee was not involved in any of the activities and had no risks in whatsoever manner may be.

The contention of the assessee that such expenses are revenue in nature as the apparel industry requires a continuous advertisement process incurred on yearly basis

The assessee objected to the said comparable companies on the ground that they are functionally different from the assessee company and that the assessee is into wholesale trading of fashion readymade garments and fashion accessories whereas the comparable companies are into marketing and advertisement service providers which is similar in nature with that of Celebrity Locker Entertainment Pvt. Ltd. The assessee had also objected to the function asset and risk analysis (FAR) which had a huge variation of 37.88% on the total operating cost compared to that of the assessee’s which is around 0.04% with regard to the employee cost and the outsourced activity of the said comparables were 7.77% and in the case of the assessee the same was Nil as the said activities were performed by third party. The assessee also objected on the fixed assets of the assessee company and the comparable companies and also the risk parameters, which was wholly upon the Celebrity Locker Entertainment Pvt. Ltd. and the AE. The ld. TPO rejected the assessee’s objection and held that these are not routine expenses and cannot be considered as pass through expenses as it does not relate to any business exigency like advertisement and sales promotion expenses. It was held that fashion show expenses are for long term brand building benefiting for over a period of years and without doubt has added value to the brand. The ld. TPO held that the comparable companies are (A.Y. 2011-12) Bestseller Fashion India Private Limited vs. Asst. CIT functionally comparable with that of the assessee’s in terms of advertisement, marketing and brand promotion.

The ld. CIT(A) upheld the addition made by the ld. TPO/A.O. on the ground that the assessee in its profit and loss account for the impugned year has spent Rs.3,01,66,855/- on sales promotion of Rs.61,65,444/-, thereby rejecting the contention that the assessee was merely a distributor for the parent company (AE). The ld. CIT(A) further held that the assessee had incurred expenses in promoting and marketing products which was not reimbursed by AE. It was also held that the assessee had rendered some services to the AE by supervising the fashion show and monitoring the payments made to the Celebrity Locker Entertainment Pvt. Ltd. by BSAS and, therefore, markup was justifiable for building of brand value.

In the above factual matrix of the case, it is seen that the expenses incurred for conducting fashion show was reimbursed by the AE to the assessee on cost to cost basis for which the assessee has furnished the details of the invoices along with the dates claimed by it from the AE. The assessee being in the business of apparels and fashion accessories require advertisement and marketing especially when the impugned year was the first year of operation and conducting fashion shows is one of the mode of promoting the assessee’s business which is a common trend in fashion industry. The Revenue’s stand is that these are capital/long term expenditure having enduring benefit, whereas the assessee’s contention is that it is a continuous process to advertise and market such products as and when there is a change in the fashion and trend of such garments.

In the present case in hand, it is observed that the ld. TPO has rejected the assessee’s contention that these are mere pass through expenses and are not pertaining to (A.Y. 2011-12) Bestseller Fashion India Private Limited vs. Asst. CIT business exigency like advertisement, sales promotion expenses and has held that the sales cannot be directly related to the fashion show conducted on behalf of the AE. The ld. TPO further stated that these are long term brand building benefiting for over a period of time, thereby adding value to the brand. The ld. TPO has also accepted that the assessee bears no risk in such pass through services at para 7.2 of the ld. TPO’s order. It is also pertinent to point out that the ld. TPO has considered the comparables which are into advertisement and marketing support services and are functionally distinct with that of the assessee. The ld. TPO has also not made a FAR analysis on the same as to the functions performed by the assessee, the assets and the risks for the purpose of determining the ALP of the said transaction. It is also to be noted that neither the assessee nor the ld. TPO/A.O. has dealt with the terms of the agreement between the assessee and its AE for carrying out the impugned transactions. We would place our reliance on the decision of the Delhi Tribunal in the case of Dy. CIT vs. Cheil Communications India (P)

Further, OECD in ITS 2009 Transfer Pricing Guidelines has laid down as under : "7.36 When an AE is acting only as an agent or intermediary in the provision of services, it is important in applying the cost plus method that the return or mark-up is appropriate for the performance of an agency function rather than for the performance of the services themselves. In such a case, it may not be appropriate to determine arm's length pricing as a mark-up on the cost of the services but rather on the costs of the agency function itself or alternatively, depending on the type of comparable data being used, the mark-up on the cost of services should be lower than would be appropriate for the performance of the services themselves. For example, an AE may incur the costs of rendering advertising space on behalf of group members, costs that the group members would have incurred directly had they been independent. In such a case, it may well be appropriate to pass on these costs to the group recipients without a mark-up, and to apply a mark-up only to the costs incurred by the intermediary in performing its agency function."

From the above observation, it is evident that the ld. TPO should have determined the ALP as a mark up on the cost of the services rendered by the assessee in coordinating with the Celebrity Locker Entertainment Pvt. Ltd. which is limited to identifying and engaging the advertisement agency for the purpose of conducting the fashion show on behalf of the AE and not on the entire performance of service done by Celebrity Locker Entertainment Pvt. Ltd. The assessee even assuming to be an intermediary in performing the function on behalf of the AE should only be entitled to a mark up to the cost which is incurred by it as an intermediary between its AE and Celebrity Locker Entertainment Pvt. Ltd. The ld. TPO has not considered that the impugned transaction does not merely pertain to the assessee and the AE but is a performance done through a third party namely Celebrity Locker Entertainment Pvt. Ltd. We, therefore, deem it fit to restore the issue back to the file of the ld. TPO/A.O. for the purpose of characterization of the nature of function performed by the assessee in engaging Celebrity Locker Entertainment Pvt. Ltd.

In the result, the appeal filed by the assessee is allowed for statistical purpose.