ADIDAS TECHNICAL SERVICES PVT. LTD.,DELHI vs. DCIT, NEW DELHI

ORDER

PER J. SUDHAKAR REDDY, ACCOUNTANT MEMBER

ITA 1233/Del/2015 A.Y. 2010-11 Adidas Technical Services Ltd., Delhi its AEs i.e, providing various support services towards facilitating the communication between the manufacturers in India and the AEs and monitoring the quality of goods manufactured by them based on the specifications provided by the AEs. Thus, the AEs set the broad strategies and guidelines, while adidas Technical Services Private Limited (‘aTSPL’) provides execution support.

Functional Performed. The functions performed by aTSPL and its AE in relation to the international transaction pertaining to the provision of support service by aTSPL to its AE are summarized below. * Conceptualization of entrepreneurial services aSL is responsible for determining the scope of work to be performed by aTSPL. and it provides the relevant details pertaining to the type of products to be manufactured, qualify details, quantity etc. so that aTSPL can coordinate with the local contract manufacturers. Participation by aTSPL in this process is limited to the process of coordinating with the local manufactures. * Business development/coordination and liaisoning. a TSPL assists the identification of the footwear manufacture for its AE, which is subject to aSL's review. It helps to ensure that other requirement such as quality, products requirement, etc, are satisfied. It update the supplier with necessary product details and its responsible for coordination for local supplier to ensure smooth and efficient execution of the transaction. aTSPL is involved in price coordination with local supplier regarding the costing aspect and intimate the costing details of the manufactures to its AE for review. Services rendered by aTSPL are recommendatory in nature and AE/ customer of AE directly enter into a agreement with the contract manufacturer for the required suppliers.

* Quality control As per the agreement between aTSPL and its AE, aTSPL is responsible for providing quality control service to it AE. With regard to expected services, aTSPL monitors the operations to ensure that quality of good produced by local contact manufactures is an accordance with the international standards of the adidas group. In this relation, the AE have implement various quality control mechanism. aTSPL is responsible for monitoring the quality of products manufactured by local suppliers. However, for the final products manufactured by local manufactures, the contract manufacturer is responsible for ensuring that the product meets required quality standards.

* Human resource

ITA 1233/Del/2015 A.Y. 2010-11 Adidas Technical Services Ltd., Delhi aTSPL is responsible for the day to day management and maintenance of team of suitably qualified personnel so as to ensure the proper fulfillment of its obligation under the agreement with AE.

2.1. The provision of support services was bench marked by using the TNMM as the MAM. The PLI was taken as a percentage of Operating Profit to Operating Expenses i.e. % of O.P./O.C. 2.2. The TPO came to the following conclusions. (i) The services provided by the tax payer of the A.E. are in the nature of market support services, managerial services and even technical support, in case of after sales support. The TPO, based on the qualification of the majority of the employees, has classified the companies into various categories. He held that the tax payer is not a routine service provider and hence the contention of the assessee that comparable companies which are providing high end services should not be selected is not correct. He held that the assessee is rendering high end services of varied nature and that this can be concluded by seeing the employees profile, salary structure etc. He also held that, provision for high end service or low end service cannot be a criteria by a comparable company for acceptance or rejection of a comparable, especially when the tax payer and the comparables have similar employee profile because, TNMM is accepted as the Most Appropriate Method (MAM) where the standard of comparability are relatively relaxed and only broad similarity of functions are required. (ii) After considering all the contentions of the assessee and dealing with the same, the TPO rejected some of the comparable companies selected by the assessee company and included certain other comparable companies. He proposed an adjustment u/s 92CA of Rs.2,63,83,909/-. The assessee carried the matter before the DRP. The DRP rejected some of the comparables selected by the assessee company and included certain comparables. Consequent to the ITA 1233/Del/2015 A.Y. 2010-11 Adidas Technical Services Ltd., Delhi order of the DRP the A.O. made a transfer pricing adjustment of Rs.2,18,26,570/-. 3. Aggrieved the assessee carried the matter in appeal before us. 4. The grounds of appeal read as follows.

On the facts and circumstances of the case and in law, the Ld.Dy.CIT, Circle 1(2), New Delhi (‘ AO’ ) has erred in passing the assessment order u/s 143(3) of the Act after considering the adjustments proposed by the DDIT, Transfer Pricing, New Delhi (‘TPO’ ) in his order passed u/s 92CA(3) of the Act and subsequently confirmed by the Hon’ble Dispute Resolution Panel (‘ DRP’ ). Each of the ground is referred to separately, which may kindly be considered independent of each other and without prejudice to each other. That on the facts and circumstances of the case and in law, 1. The learned AO/TPO/DRP have erred in making an addition of INR 2,18,26,570 to the total income of the Appellant on account of adjustment in the arm's length price ( ALP") of the international transactions related to business support services entered into by the Appellant with its associated enterprises ("AEs").

2. The learned AO / TPO / DRP have erred in classifying the functions of the assessee as providing high value services and accordingly selecting comparables in same genre.

5. The learned AO/TPO/DRP have erred in rejecting certain comparable companies (Ma Foi Management Consultants Ltd and Ma Foi Global Services) identified by the appellant for having different accounting year (i.e. having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months).

6. The learned AO /TPO /DRP have erred in : a. using single year data instead of multiple year data ITA 1233/Del/2015 A.Y. 2010-11 Adidas Technical Services Ltd., Delhi b. Determining the arm's length margins / prices using data pertaining only to FY 2009-10 which was not available to the Appellant at the time of complying with the Transfer Pricing ("TP") documentation requirements.

7. The learned AO/TPO/DRP have erred in rejecting following comparable companies identified by the Appellant using employee cost greater than 25 percent of the total cost as a comparability criterion: • Asian Business Exhibition & Conferences Ltd. • Times Innovative Media Ltd • Concept Public Relations Ltd • Impresario Event Management India Ltd

8. The learned AO/TPO/DRP have erred in selecting following companies (which are earning super normal profits) as comparable to the Appellant: " • Apitco Ltd. •Global Procurement Consultants Ltd. •TSR Darashaw Ltd

9. The learned AO/TPO/DRP have erred in rejecting Ma Foi Global Services on the basis of erroneous application of negative net worth filter.

10. The learned AO/TPO /DRP have erred in rejecting certain comparable companies identified by the Appellant using "Turnover less than INR 1 Crores" as a comparability criterion.

11. The learned AO/TPO/DRP have erred in rejecting fresh search conducted by the appellant. 12. The learned AO/TPO /DRP have erred in rejecting certain companies which comparable to the Appellant and adding certain functionally dissimilar companies to the final set of comparable companies. 13. The learned AO/TPO/DRP have erred by not making suitable adjustments to account. for differences in the risk profile of the Appellant vis-a-vis the comparable companies. 14. The learned AO/TPO/DRP have erred in not applying the proviso to Section 92C(2) of the Act correctly and has failed to allow the benefit of downward variation of 5 percent in the determining arm's length price so computed. 15. The learned AO erred in holding that the appellant has furnished inaccurate particulars of income in respect of each item of disallowance/ additions and in initiating penalty proceedings under section 274 read with section 271 of the Act.

ITA 1233/Del/2015 A.Y. 2010-11 Adidas Technical Services Ltd., Delhi The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal. The Appellant prays for appropriate relief based on the said grounds of appeal and the facts and circumstances of the case.”

8.1. The assessee Adidas Technical Services Pvt. Ltd. (hereinafter referred to as ‘aTSPL’) provides buying agency services, to its parent company adidas Sourcing Ltd. (hereinafter referred to as aSL). These services are governed by an agreement dt. 1st day of October, 2006. The description of the services is given in Clause I of the agreement. This is extracted for ready reference.

ITA 1233/Del/2015 A.Y. 2010-11 Adidas Technical Services Ltd., Delhi Clause I: • Arrange for the manufacture of products desired by the purchasers; • Identify new manufacturers and provide the purchasers with sufficient information regarding such manufacturers to enable it to decide whether to utilise such manufacturers; • Act as a general consultant to the purchasers on all matters concerning the manufacture and purchase of the products; • Keep the purchasers informed of sources of supply required by purchasers, in a particular country, and general conditions appearing likely to affect the future price or condition of such products or likely to interfere with the prompt supply thereof to the purchasers; • Provide quality control services, which shall include randomly checking and inspecting shipments to verify that the quality and quantity 'of the Products shipped corresponds to the requirements of the contracts between the Purchasers and the manufacturers; • Provide technical services with respect to the Products and, in this connection, aid the manufacturers of Products in correcting any manufacturing problems that adversely affect the quality of Products manufactured for the purchaser by providing appropriate technical advice; • Provide guidance to the relevant manufacturers to acquire the necessary raw materials to produce the Products; • Obtain offers, , quotations and samples of Products, as may be appropriate, and submit the same to the Purchasers pursuant to their written instructions, and inform the Purchasers of the failure of any samples to conform to their standards of quality; • Randomly inspect the relevant factory conditions and the Products under order and verify and execute production certificates and other factory documentation required for clearance; • Monitor and support all arrangements for overseas shipment of the Products; • Respect the instructions provided by the Purchasers on the carrier to be chosen and the other shipping particulars as specified by the Purchasers; • Advise the Purchasers of the particulars of any individual shipment, such as port of dispatch, name of the vessel or aircraft on which merchandise is shipped, the entry port in the country of destination and the expected date of arrival; • Procure that all necessary shipping documents be collated in the country of export and be forwarded to the Purchasers or its designated agent. • Furnish the Purchasers with further information with respect to the shipment of the Products as it may require upon the receipt of a request for such additional information from the Purchasers; and • Observe all reasonable directions and instructions given to it by aSL in relation to the purchase and manufacture of the Products and, in the absence of any such directions or instructions, act in such manner as it reasonably considers to be most beneficial to aSL's interests;

ITA 1233/Del/2015 A.Y. 2010-11 Adidas Technical Services Ltd., Delhi • Establish for close any branches within India upon the prior approval of aSL and to provide reasonably accurate estimates on the cost of furnishings, fixed and movable assets and renovation; • RTSPL shall in performing the-above service on behalf of aSL be acting as an agent on account of aSL and in so far as practicable explicitly represent themselves as the agent of aSL, However, it is specifically acknowledged that failure to explicitly represent themselves as agent of aSL shall not diminish the agency capacity of Reebok Technical Services Private Limited (‘RTSPL’). 8.2. A perusal of these functions of the assessee as mandated by this agreement on 1st day of October, 2006 demonstrates that the assessee is not a normal service provider nor a ITES company. The assessee requires skill, capability as well as expertise in a particular filed of procurement and manufacturing for performing the functions referred above. The assessee is required to perform functions including, quality control services, providing technical services with respect to the products and aid the manufacturers of the products, provide guidance to the manufacturers with respect to acquisition of raw material, randomly inspect relevant factory conditions etc. In other words the assessee is offering a comprehensive range of procurement related advisory services including quality control etc. On this factual position we now consider each of the comparables that are in dispute.

8.3. We first take up the case of Apitco Ltd. (a) Apitco Ltd.:- Apitco Ltd. is a Public Sector Undertaking providing various support services for the development of tourism industry. Later the functional profile of the company had undergone a change, and it is now engaged in providing technical consultancy relating to asset reconstruction companies, management services, micro enterprise development, skill development etc. This is a government company. The fact that its operations are mainly based on the policy requirements of the government and the fact that it is a preferred company of the Government of India for entrustment of works, cannot be ignored. Be it as it may, in our considered opinion, the functional profile of this company is different from that of the assessee company and hence the same should be excluded from the list of ITA 1233/Del/2015 A.Y. 2010-11 Adidas Technical Services Ltd., Delhi comparable companies while computing the ALP. (b) Global Procurement Consultants Ltd.:- The Ld.Counsel for the assessee submitted that the functional profile of the company is different and that Global Procurement Consultants Ltd. is merely rendering services to government bodies and international organisations. It was further submitted that it is engaged in providing varied services in consultancy segment which are as follows. (a) Bid support services; (b) Performance review; (c) Valuation assignments; (d) Financial advisory services and other assignments. It was further argued that no segmental details are available and hence it cannot be taken as a comparable. The Ld.D.R. submitted that this comparable company as a client’s representative in taking on the total responsibility of procurement by providing the comprehensive range of procurement related advisory services at inter-allied activities for projects in India and abroad and hence is functional comparable. The ITAT Delhi I-2 Bench in the case of International SOS Services Ltd. vs. DCIT in ITA 1631/Del/2014 order dt. 8.12.2015, at para 4 has held as follows.

“4. Global Procurement Consultant Limited: 12.6 The ld. Counsel for the assessee submitted that this is an 100% Government owned company as it is promoted by Exim Bank. He vehemently contended that functionally, this company is not a comparable, as it works with in the field of power, water resources, transportation industry such as economic, textile, mining, cement, leather, health education, environment, InfoTech etc. The pith and substance of the submission are that the areas in which this company provides support services is totally different from the type of support services provided by the assessee. He placed reliance on the decision of the Hon’ble Delhi High Court in the case of Rampgreen Solutions

ITA 1233/Del/2015 A.Y. 2010-11 Adidas Technical Services Ltd., Delhi Pvt. Limited vs. CIT, judgment dated 10/08/2015 for the proposition that functionally dissimilar companies cannot be taken as comparables. He pointed out that decision of the Spl. Bench of the Tribunal in the case of Global India Pvt. Limited has been overruled by the Hon’ble Delhi High Court in ITA No. 7466/M/11 judgment dated 07/03/2004. 12.7 The ld. Departmental Representative on the other hand, pointed out that Global Procurement Limited is not a 100% Government of India owned company and that it is being promoted by export import bank of India, as a private sector company in partnership with Leading corporate groups like MECON, ICCI, TCE Consulting Engineers Ltd. etc. She submitted that the functional profile is that of specialized support services, which required high profile skill and timely delivery of quality services, which is comparable with the functional profile of the assessee. 12.8 On a careful consideration of these arguments, we are of the considered opinion that this company should be taken as a comparable for the following reasons: a) This is not a 100% Government owned company as claimed by the assessee. Under the head “corporate synergy” it is stated that this company is co-promoted by the Export Import Bank of India as private sector Company along with a number of other Private Companies. b) The functional profile of this company is rendering of highly specialized procurement support services. The quality of service, the skills are comparable with the quality and skill of support services provided by the assessee, though in functionally different areas. As the ld. Counsel for the assessee has accepted before us that comparable companies rendering services in the same field as that of the assessee company cannot be found, companies rendering support services in other fields have to be taken as comparables. c) We have also perused the decision of the Hon’ble Jurisdictional High Court in the case of Rampgreen Solutions Pvt. Ltd.(supra). The claim of the ld. Counsel for the assessee is based on the propositions laid down in this case law. If on such an argument, the comparable Global Procurement Consulting Limited is excluded, then all the other

ITA 1233/Del/2015 A.Y. 2010-11 Adidas Technical Services Ltd., Delhi comparables cited by the assessee as well as the ld.TPO have to be excluded on the same principle. This will leave us with no other comparable. The assessee cannot advance contradictory arguments. As it has been accepted by both the parties before us that, companies having a broad functional profile of rendering skilled professional support services, should be taken as comparable companies, the proposition laid down in Rampgreen Solutions Pvt. Ltd.(supra), cannot be applied to the facts of the case on hand. In view of the above discussion we are of the considered opinion that Global Procurement Consulting Limited has rightly be taken as the comparable by the TPO. Hence we dismiss this argument of the assessee.”

Consistent with the view taken therein, we agree with the Ld.TPO that this company has to be taken as functionally comparable. But this company is also undertaking many other activities such as valuation etc. The issue for consideration would be as to whether segmental data is available. If such data is available then the company has to be taken as a comparable. As the argument of the Ld.Counsel for the assessee is that there are no segmental results available, this company is directed to be excluded as a comparable. (c) Quippo Valuers and Auctioneers Private Limited:- (QVAPL) The Ld.Counsel for the assessee submitted that this comparable needs to be rejected for the reason that the functional profile is different from the assessee company as the company is engaged in providing asset management services as an auctioneer and valuer for construction equipment, earth moving machineries, commercial vehicles and other assets. It was further submitted that the annual report of the comparable is not available in the public domain for quantitative analysis. The Ld.D.R. submits that this company is functionally comparable as it is providing large gamut of services including allied business services to its clients. He further submitted that the company also qualifies the quantitative filters.

ITA 1233/Del/2015 A.Y. 2010-11 Adidas Technical Services Ltd., Delhi On perusal of rival contentions, we find that the functional profile of the company Quippo Valuers and Auctioneers P.Ltd. is not similar to the functional profile of the assessee company. When a company is providing asset management services as an auctioneer and is also undertaking valuation of construction equipment, earth moving machineries etc. and when segmental data is not available, this company has to be, in our opinion, excluded from the list of comparables. (d) TSR Darashaw Ltd.:- The TPO included this company on the ground that the company is providing business out sourcing services to clients in India. These services are provided to local clients and not the foreign clients and hence they are not similar to ITES services. The TPO observed that ITES companies have the advantage of location savings, while the business service companies do not have advantage. Since in this case the services are predominantly provided in India, the company is a correct comparable. He also held that the assessee had not gone into the verticals or high end or low end distinctions while selecting the comparables and has selected companies operating in various verticals. The TPO has also selected comparables which are broadly engaged in the field of marketing support services which has similar to the services provided by the assessee. The Ld.Counsel for the assessee on the other hand submitted that the company is not functionally comparable. It is contended that there can be no comparison between a specific pay roll service rendered and marketing support service provided. It was contended that TSR Darashaw Ltd. is a broking and investment banking house and as 57.4% of its income is from the share registry services segment and hence not a comparable. Reliance is placed on the following decisions. i. Microsoft Corporation P.Ltd. vs. DCIT in ii. Premier Exploration Services P.Ltd. vs. ITO in ITA no.4935/Del/2011.

ITA 1233/Del/2015 A.Y. 2010-11 Adidas Technical Services Ltd., Delhi In our considered opinion TSR Darashaw Ltd. cannot be taken as a comparable as 57.4% of its income is from share registry services segment. This shows the functional profile of the assessee is different. In the case of Miscrosoft Corporation Ltd. (supra) at para 18 the Tribunal has held as follows. “Coming to the merits of comparability, we find that this company has three segments, which inter alia include: ‘Pay Roll and Trust Fund activity (Pay Roll)’. It is this segment which has been considered by the assessee as comparable. This company on an overview is a broking and investment banking house. Its other segments are : ‘Registrar and Transfer Agent activity (R&D)’ and ‘Records management activity (Records)’. The segment of ‘Pay Roll’ was considered by the assessee as comparable in its TP study report and the same is now assailed. Under the ‘Pay Roll’ segment, this company undertakes pay roll and employee trust fund administration and management. When we compare the nature of pay roll activity undertaken by this company with the marketing support services rendered by the assessee to its AEs, we find that both are way apart from each other. There can be no logical comparison between a specific pay roll services rendered by a company to its clients with the marketing support services rendered by the assessee to its AEs. This company is, therefore, directed to be excluded from the final set of comparables.” Consistent with the view taken in the above case, we direct the AO/TPO to exclude this comparable. 8.4. The assessee has not argued for the exclusion or inclusion of any other comparable.

ITA 1233/Del/2015 A.Y. 2010-11 Adidas Technical Services Ltd., Delhi He submitted that the DRP directed the AO/TPO to recomputed the margins of the comparables, in accordance with safe harbour rule, without appreciating that safe harbour rules are applicable from the A.Y. 2013-14. The Ld.Counsel for the assessee relied upon the following decisions and argued that foreign exchange loss/profit should be treated as an operating loss. He relied on the following case laws.