Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “C” BENCH : KOLKATA
Before: Hon’ble Sri N.V.Vasudevan, JM & Shri Waseem Ahmed, AM]
IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : KOLKATA
[Before Hon’ble Sri N.V.Vasudevan, JM & Shri Waseem Ahmed, AM] I.T.A No. 365/Kol/2012 Assessment Year : 2004-05
D.C.I.T., Circle-2, -vs.- M/s. Bata India Ltd. Kolkata Kolkata [PAN : AABCB1043Q) (Appellant) (Respondent)
I.T.A No. 327/Kol/2012 Assessment Year : 2004-05 M/s. Bata India Ltd. D.C.I.T., Circle-2, Kolkata Kolkata [PAN : AABCB1043Q) (Appellant) (Respondent)
For the Department : Shri G.Mallikarjuna,CIT For the Assessee : Shri Ajay Vohra, Sr.Advocate & Shri Neeraj Jain, Advocate
Date of Hearing : 14.03.2016. Date of Pronouncement : 06.04.2016. ORDER ITA No.365/Kol/2012 is an appeal by the Revenue while ITA No.327/Kol/2012 is an appeal by the Assessee. Both the appeals are directed against the order dated 30.12.2011 of CIT(A)-I, Kolkata, relating to AY 2004-05.
ITA No.327/Kol/2012 (Assessee’s appeal): 1.Ground No.1 raised by the assessee was not pressed and the same is dismissed as not pressed.
2 ITA No.365 & 327/Kol/2012 M/s.Bata India Ltd.. A.Yr.2004-05 2. Ground No.2 raised by the assessee and ground no.3 raised by the revenue can be conveniently decided together. These grounds read as follows : By the assessee : “2. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred in not allowing any relief on account of delay in payment of ESI contribution of Rs.3,34,393/- although he adjudicated on the said ground and allowed relief in respect of delayed contribution to P.F. being part of the same ground of appeal before him.” By the revenue :
“3. That on the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of Rs.27,43,614/- on account of delayed deposit of ‘Employees ‘contribution towards PF. “ 3. The Assessee is a company. It is engaged in the business of manufacturing and marketing of footwear and its accessories. In the course of assessment proceedings, the assessee claimed deduction of sums which were paid to Provident Fund (PF) and Employees State Insurance (ESI) authorities as employees share of contribution belatedly i.e., payments of employees share of contribution was paid by the Assessee beyond the due date of payment as prescribed in the respective legislation governing PF and ESI. The assessee claimed before AO that though the aforesaid contribution were paid belatedly to the concerned authorities they were allowable as deduction because the contribution had been paid on or before the due date for filing the return of income u/s 139(1) of the Income Tax Act, 1961 (Act). 4. The AO however was of the view that u/s 36(1)(va) of the Act any contribution of employees shares to ESI and PF cannot be allowed as deduction if the contribution is paid on or before the due date prescribed under the relevant PF and ESI laws.
On appeal by the assessee CIT(A) agreed with the submissions of the assessee that even employees shares of contribution to PF if the same is paid on or before filing of return the same has to be allowed as deduction. The following are the relevant observations of CIT(A) :-
3 ITA No.365 & 327/Kol/2012 M/s.Bata India Ltd.. A.Yr.2004-05 “6.2 From the above observation of the A.O. it appears that he has disallowed the appellant’s claim of deduction of Rs.27,43,614 relying solely on the provisions of Sec. 36(6)(va) of the I.T. Act. But this provision has to be read along with the provisions Sec.2(24)(x) and Sec.43B of the LT. Act. After examining these provisions, the Hon'ble Supreme Court and High Court have held that if the contribution is deposited y the appellant before the due date of submission of its Return, it will be entitled to deduction - vide the Apex Court decision in CIT vs Vinay Cement Ltd. (213-CTR-268) and CIT vs Alom Extrusions Ltd. (319-ITR- 306), Delhi High Court decisions in the cases of CIT vs P. M. Electronics Ltd. (313-ITR-161) and CIT vs Dharmendra Sharma (297-ITR-320).
6.3 Keeping in view the judicial decisions referred to above, the A.O. is directed to delete the disallowance of Rs.27,43,614. It may be mentioned that a similar dispute arose in the appellant's own case in Asstt. Year 2007-08 and the CIT(A) allowed its claim in that year.”
As can be seen from the above observations of the CIT(A), the CIT(A) has made a reference only to the employees shares of contribution to PF and there is no reference to the employees share of contribution to ESI. Hence ground no.2 has been raised by the assessee before the Tribunal.
The learned counsel for the Assessee pointed out that whatever reasons were given for deleting the addition made of belated payment of PF employees contribution would equally apply to belated payment of ESI employees contribution and therefore the addition in respect of employees contribution to ESI paid belatedly should also be directed to be deleted. The learned DR relied on the order of the AO.
We have considered the rival submissions. We are of the view that the reasoning applied by CIT(A) for deleting the disallowance of employees shares of contribution to PF would equally apply to the contribution to ESI even also. Accordingly we direct the AO to delete the disallowance in respect of payment of employees contribution to ESI even also. Ground no.2 raised by the assessee is accordingly allowed.
4 ITA No.365 & 327/Kol/2012 M/s.Bata India Ltd.. A.Yr.2004-05 8. The other grounds are general and do not call for any adjudication.
In the result the appeal of the assessee is partly allowed.
As far as ground no.3 raised by the revenue is concerned we are of the view that in the light of the judicial pronouncements referred to by CIT(A) in his order there is no merit in the ground raised by the revenue. Accordingly ground no.3 by the revenue is dismissed. ITA NO.365/Kol/2012 (Revenue’s appeal):
Ground No.1 raised by the revenue reads as follows :- “1. That on the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of Rs.66,96,560/- on account of contribution to Bata Workers Sickness Benefit Society.”
The assessee contributed a sum of Rs.66,96,560/- to Bata Workers Sickness Benefit Society (BWSBS) and claimed deduction of the same. The AO made a reference to the provisions of Sec.40A(9) & (10) of the Act which provides as follows: “40A(9): No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards the setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals, society registered under the Societies Registration Act, 1860 (21 of 1860), or other institution for any purpose, except where such sum is so paid for the purposes and to the extent provided by or under clause (iv) or clause (v) of sub-section (1) of section 36, or as required by or under any other law for the time being in force” 10.Notwithstanding anything contained in sub-section (9), where the Assessing Officer is satisfied that the fund, trust, company, association of persons, body of individuals, society or other institution referred to in that sub-section has, before the 1st day of March, 1984, bonafide laid out or expended any expenditure (not being in the nature of capital expenditure) wholly and exclusively for the welfare of the employees of the assessee referred to in sub-section (9) out of the sum referred to in that sub-section, the amount of such expenditure shall in case no deduction has been allowed to the assessee in respect of such sum and subject to the other provisions of this Act, be deducted in computing the income referred to in section 28 of the assessee of the previous year in
5 ITA No.365 & 327/Kol/2012 M/s.Bata India Ltd.. A.Yr.2004-05 which such expenditure is so laid out or expended, as if such expenditure had been laid out or expended by the assessee.”
According to the AO, the Bata Workers Sickness Benefit Society is not a body referred to u/s 36(1)(iv) or (v), and hence this expenditure is not allowable u/s 40A(9). The AO also held that no evidence has been produced before him by the Assessee to arrive at a satisfaction as enjoined upon in sub section 10 of section 40A. As such, the said body is neither a trust nor in anyway controlled by the company as such in the circumstances, the sum of Rs.66,96,560/- was disallowed.
On appeal by the assessee the CIT(A) deleted the addition made by AO following the decision of the Tribunal identical issue in assessee’s own case decided by the Hon’ble Calcutta High Court in the case of Bata India Ltd. 249 ITR 491 (Cal) which w followed by ITAT in assessee’s own case for A.Y.2005-06 and 2006-07 in ITA Nos 1826 1828/Kol/2012 dated 23.05.2013. Following the aforesaid decision the CIT(A) deleted the addition made by AO.
Aggrieved by the order of CIT(A) the Revenue has preferred ground no.1 before the Tribunal.
We have heard the rival submissions. We find that identical ground raised by the revenue for A.Y.2005-06 and 2006-07 has been decided by this Tribunal as follows :- “6. In regard to ground no.1 of the revenue’s appeal against the action of the ld. CIT(A) in holding that the contribution made by the assessee to Bata Workers Sickness Benefit Society is an allowable expenditure, it was fairly agreed by both the sides that the issue is squarely covered by the decision of the Co-ordinate Bench of this Tribunal in assessee’s own case for A.Yrs.1990-91 and 1991-92 in ITA No.329/Cal/1996 and ITA No.99/Cal/1997 dated 24th September, 2002 wherein in para 17 of the order the Coordinate Bench of this Tribunal has held as follows :- “17. In view of the above judicial decisions and considering the facts that there was a valid agreement entered into by the parties and enforceable in law against each other. It becomes legal obligation of the assessee company to make the contribution to the society and as such we are of the considered view that the 5
6 ITA No.365 & 327/Kol/2012 M/s.Bata India Ltd.. A.Yr.2004-05 contribution to the society is not hit by section 40A(9) of the Act as such an obligation falls within the last part of the said section that the contribution was made by the assesee company to a fund required to be set up by or under any other law for the time being in force. Besides, there is no dispute that the fund was constituted bonafidely for the welfare of its employees in the smooth running of the business and hence the said contribution is to be allowed u/s 37(1) of the Act.”
As it is noticed that the issue is covered by the decision of the coordinate bench of this Tribunal referred to supra and the ld. CIT(A) has only followed the decision of the Coordinate Bench of this Tribunal in assessee’s own case. We find no error in the findings of the ld. CIT(A) which call for any interference.”
In AY 1990-91& 1991-92 this Tribunal on identical issue held as follows: “It is clear from section 40A(9) that any payment made towards a fund, trust, institution, etc., is to be disallowed unless the amount paid is towards recognised provident fund or approved superannuation fund as mentioned in section 36(1)(iv), or approved gratuity fund as mentioned in section 36(1)(v), or as required by or under any other law for the time being in force. In the instant case, there was no dispute that the contribution made by the assessee was not towards a recognised fund or approved superannuation fund or approved gratuity fund. Hence, the question was whether the payment made by the assessee to the society was required by or under any other law for the time being in force. As per the constitution of the society, all employees of the company other than the managerial staff must become its members during their employment and they were required to make the contribution as per the scale stated in clause 6 thereof. All the monies received on account of contribution or otherwise to the fund of the society would be applied, inter alia, to meet the expenses for the maintenance and purchase of medicines, medical appliances, maintenance of hospital and dispensaries, maintenance and payment to the staff including the medical officers, nurses, attendants, etc. The beneficiaries of the fund would be entitled to the payment in accordance with the rules. The said medical benefits to be provided by the assessee to its workers formed a part of the standing orders and rules. The said standing orders and rules had been duly certified under the provisions of the Industrial Employment (Standing Orders) Act, 1946. As per section 5 of the said Act, the standing orders have statutory force and any contravention thereof is liable to be punished. It was further observed on a perusal of the memorandum of settlement entered into between the assessee-company and its workmen that medical benefit was specifically provided and the settlements were arrived at to which the Labour Commissioner and Conciliation Officer were also the 6
7 ITA No.365 & 327/Kol/2012 M/s.Bata India Ltd.. A.Yr.2004-05 party. As per section 2(p) of the Industrial Disputes Act, 1947, it is provided that ‘settlement’ means a settlement arrived at in the course of conciliation proceedings and includes a written agreement between the employer and the workmen arrived at otherwise than in the course of a conciliation proceeding and where such agreement has been signed by the parties thereto and a copy thereof has been sent to an Officer authorised in this behalf by the appropriate Government and the Conciliation Officer. As per section 18 of the Industrial Disputes Act, a settlement arrived at by agreement between the employer and the employees otherwise than in the course of conciliation proceeding shall be binding on the parties to the agreement. Further, it is provided by section 19 of the Industrial Disputes Act that a settlement comes into operation on such date as is agreed upon by the parties to the dispute, and if no date is agreed upon, on the date on which the memorandum of settlement is signed by the parties to the dispute. Section 29 of the Industrial Disputes Act provides penalty for breach of any term of any settlement which is binding on the parties under the Industrial Disputes Act and the same shall be punishable with the imprisonment or with fine or both. In view of the above, there was a valid agreement entered into between the parties and enforceable in law against each other. Therefore, it became legal obligation of the assessee-company to make the contribution to the society and as such the contribution to the society was not hit by section 40A(9) as such an obligation fell within the last part of the said section that the contribution was made by the assessee-company to a fund required to be set up by or under any other law for the time being in force. Besides, there was no dispute that the fund was constituted bona fidely for the welfare of its employees in the smooth running of the business and, hence, the said contribution was to be allowed under section 37(1). In view of the above, the orders of the authorities below were to be reversed on that issue.” The decision of the Tribunal has since been upheld by the Hon’ble Calcutta High Court in the decision referred to by the learned counsel for the Assessee. In the light of the aforesaid judicial pronouncement we are of the view that order of CIT(A) on this issue does not call for any interference. Accordingly ground no.1 raised by the revenue is dismissed. 17. Ground No.2 raised by the revenue reads as follows :- “2. That on the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of Rs.11,23,02,859/- on account of payment of technical collaboration fees paid to a company incorporated in Canada.”
8 ITA No.365 & 327/Kol/2012 M/s.Bata India Ltd.. A.Yr.2004-05 18. During the Asstt. year 2004-05 the Assessee paid a sum of Rs.11,23,02,859 as technical collaboration fees to M/s Bata Ltd. Canada, a company incorporated in Canada, pursuant to a 'Technical Collaboration Agreement' (TCA). This has been referred to as “Payment of Royalty” by the Transfer Pricing Officer (TPO) in his order. Since M/s Bata Ltd., Canada, was an Associated Enterprise (AE) within the meaning of Sec.92A of the Act, the A.O. made a reference u/s.92CA to the Transfer Pricing Officer (TPO), to determine whether the said transaction was made at arm's length price(ALP). As we have already seen the assessee is engaged in the business of manufacturing leather, canvas, synthetic and rubber footwear. Bata Ltd., Canada ("associated enterprise") is engaged, inter alia, in the business of providing comprehensive advisory services in relation to production and distribution of footwear and associated products to clients across the world. The associated enterprise has valuable knowledge expertise and experience and possesses secret and specialized know- how, information and data in the field of production and distribution of footwear and associated products.
The assessee has entered into a technical collaboration agreement dated 29-12- 2000 for availing the following services from Bata Ltd., Canada: (i) Engineering services (ii) Purchasing services (iii) Construction and architectural services (iv) Research and development services (v) Testing and quality control services (vi) Footwear technology and general technical services (vii) Brand development services (viii) Market research services (ix) Store location, design and layout services (x) Administration and accounting services (xi) Product development, footwear design and construction services 8
9 ITA No.365 & 327/Kol/2012 M/s.Bata India Ltd.. A.Yr.2004-05 (xii) Information system services (xiii) Pension services (xiv) Risk and insurance services In terms of the agreement, in consideration of the aforesaid services, the assessee paid royalty at the rate of 1.5% on domestic as well as export sales to the associated enterprise. Accordingly, during the year under consideration, the assessee, made payment of royalty amounting to Rs. 11,23,02,859 to Bata Ltd., Canada.
Since the payment of royalty was an international transaction with an Associated Enterprise (AE), the price paid by the Assessee has to satisfy the Arm’s Length Price (ALP) criteria laid down in Sec.92 of the Act. In the Transfer Pricing Documentation, for the purpose of benchmarking, the assessee applied Comparable Uncontrolled Price ("CUP") method as the most appropriate method. For application of CUP, the assessee identified following four comparable companies from the Secretariat for Industrial Assistance (SIA) database engaged in providing similar services paying an average rate of royalty of 3.95% and 3.5% on domestic sales and export sales respectively: S. No. Name of foreign Name of Indian Royalty Ratio Collaborator company Domestic Exports (%) (%) 1. Super Rifle, Indus Clothing Ltd. 0.8 0.5 S.P.A.Italy
Nike International Sterra Industrial 5 5 Ltd. Enterprises Pvt. Ltd.
Florsheim Group Inc. Unico Leather 5 0 USA Products Pvt. Ltd. 4. Start Rite Shoes Sarup Tanneries 5 5 Ltd., UK Ltd.
Average 3.95% 3.5%
10 ITA No.365 & 327/Kol/2012 M/s.Bata India Ltd.. A.Yr.2004-05 Since, the rate of royalty paid by the assessee at 1.5% was lower than the rate of royalty paid by the comparable uncontrolled enterprises in a similar condition, the Assessee claimed that the price paid in the transaction was to be regarded as having been undertaken at arms length price.
Before the TPO, the assessee also submitted detailed replies and explanation with respect to the aforesaid international transaction of payment of royalty to Bata Ltd., Canada, from time to time.
The TPO, however, following the Transfer Pricing assessment order for assessment year 2003-04, determined the arm's length price of payment of royalty as 'nil' allegedly holding that no services were actually received by the assessee. The entire amount paid to Bata Ltd., Canada was therefore added to the total income of the Assessee by way of adjustment to the ALP.
Before CIT(A) the Assessee submitted the details of the services that were rendered by Bata Ltd., Canada for which royalty in question was paid.
(a) Technical information relating to design methods and manufacturing techniques including drawings, tracings, etc.: In respect of the same the appellant submitted that the AE provided regular advice to Bata India on maters relating to manufacturing operations. It also assisted in development and design of new types of footwear by advising on matters connected with product development such as materials, design methods, colour, etc.
(b) Brand development services: With respect to this, it was submitted that it had got brand development services to enable it to compete against international brands and imported products. 10
11 ITA No.365 & 327/Kol/2012 M/s.Bata India Ltd.. A.Yr.2004-05
(c) Management support: The AE was assisting the appellant in identifying key personnel who had global experience and were experts in their own fields to manage the operations of the appellant. These managers were providing assistance in product development, quality control and distribution management, which were essential for success in the footwear industry.
(d) Training of Bata India’s personnel to enhance their competence: The appellant submitted details of training programme undertaken by it with the help of Bara Canada.
(e) In support of its contention that the transaction with Bata Canada was bona fide and genuine, the appellant also submitted that the Technical Collaboration agreement had the approval of RBI and Ministry of Finance."
The CIT(A) accepted the contention of the assessee and deleted the Transfer Pricing adjustment holding as under: "4.11. I have carefully considered the TPO's orders u/s 92CA dt. 0.12.06 on the basis of which the A. O. has disallowed the appellant's claim of royalty payment to Bata Canada. I have also perused the jurisdictional Tribunal order on this issue in the case of the appellant for Asst. years 2002-03 and 2003-04 as well as the submission of the A. R. of the appellant. Respectfully following the orders of the Ld. Tribunal as well as fact that in Asst. years 2007-08 and 2008-09 the TPO has not made any adjustment on the issue, the A. O. is directed to delete the disallowance of Royalty payment of Rs. 9,35,85,670 and TDS of Rs. 1,87,17,189 in respect of this transaction of royalty or fee payment. The appellant gets relief on this issue.
Aggrieved by the order of the CIT(A), the Revenue has preferred Gr.No.2 before the Tribunal. At the time of hearing it was brought to our notice that in the present AY 04-05, the TPO made the adjustment to ALP by following his own order on identical payment made by the Assessee in AY 03-04. It was further brought to our notice that in AY 2003-04 in ITA Nos. 1920 & 1921/Kol/2007 for AY 200-03 & 2003-04, this Tribunal by its order dated 28.3.2008 was pleased to hold that the price paid in the 11
12 ITA No.365 & 327/Kol/2012 M/s.Bata India Ltd.. A.Yr.2004-05 international transaction by the Assessee to its AE on account of Royalty was at Arms Length. It was brought to our notice that the nature of services rendered were identical and that observations of the Tribunal in the aforesaid order would equally apply to the present AY 2004-05 also. The learned DR could not controvert the above submission but relied on the order of the TPO. The learned counsel for the assessee drew our attention to the various evidence filed in support of the nature of the services rendered by the AE for which payment of royalty was made by the Assessee. It was further contended that it is the assessee’s prerogative to decide whether to incur any expenditure or not for the purpose of business and the revenue authorities cannot sit in judgment over the same. In this regard attention was drawn to several judicial pronouncements some of which are as follows :- a) CIT vs Malabar Plantations 53 ITR 140 b) Madhav Prasad Jhatia vs CIT 118 ITR 200 Reference was also made to the decision of the ITAT, Kolkata Bench in the case of NLC Nalco India Ltd. Vs DCIT in ITA NO.529/Kol/2008 order dated 03.02.2016 wherein this Tribunal held on identical transfer pricing adjustment that the disallowance made cannot be sustained.
We have considered the rival submissions. At the outset we observe In the case of Dresser Rand India Pvt.Ltd. Vs. ACIT ITA No.8753/Mum/2010 AY 2006-07 order dated 7.9.2011, the Hon’ble Mumbai Tribunal had an occasion to examine as to what is the approach that has to be adopted for determining ALP in the case of cost contribution agreement which is akin to the arrangement in the present case between the Assessee and its parent company. The assessee in case of Dresser Rand (supra) entered into a ‘cost contribution agreement’ with its parent company pursuant to which it paid a sum of Rs. 10.55 crores as its share of the costs. The TPO, AO & DRP disallowed the expenditure on the ground that the ALP was ‘Nil’ as no real services had been availed
13 ITA No.365 & 327/Kol/2012 M/s.Bata India Ltd.. A.Yr.2004-05 by the assessee and the arrangement was not genuine. On further appeal by the Assessee, the Tribunal held as follows: “8. We find that the basic reason of the Transfer Pricing Officer’s determination of ALP of the services received under cost contribution arrangement as ‘NIL’ is his perception that the assessee did not need these services at all, as the assessee had sufficient experts of his own who were competent enough to do this work. For example, the Transfer Pricing Officer had pointed out that the assessee has qualified accounting staff which could have handled the audit work and in any case the assessee has paid audit fees to external firm. Similarly, the Transfer Pricing Officer was of the view that the assessee had management experts on its rolls, and, therefore, global business oversight services were not needed. It is difficult to understand, much less approve, this line of reasoning. It is only elementary that how an assessee conducts his business is entirely his prerogative and it is not for the revenue authorities to decide what is necessary for an assessee and what is not. An assessee may have any number of qualified accountants and management experts on his rolls, and yet he may decide to engage services of outside experts for auditing and management consultancy; it is not for the revenue officers to question assessee’s wisdom in doing so. The Transfer Pricing Officer was not only going much beyond his powers in questioning commercial wisdom of assessee’s decision to take benefit of expertise of Dresser Rand US, but also beyond the powers of the Assessing Officer. We do not approve this approach of the revenue authorities. We have further noticed that the Transfer Pricing Officer has made several observations to the effect that, as evident from the analysis of financial performance, the assessee did not benefit, in terms of financial results, from these services. This analysis is also completely irrelevant, because whether a particular expense on services received actually benefits an assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can have any role in determining arm’s length price of that service. When evaluating the arm’s length price of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. ………… 9……….. 10. In case the Assessing Officer comes to the conclusion that the assessee has indeed received the services from the AE the next question which we have to decide is as to what is the arm’s length price of these services received under cost contribution agreement. It hardly needs to be emphasized that even cost contribution arrangement should be consistent with arm’s length principle, which, in plain words, requires that assessee’s share of overall contribution to the costs is
14 ITA No.365 & 327/Kol/2012 M/s.Bata India Ltd.. A.Yr.2004-05 consistent with benefits expected to be received, as an independent enterprise would have assigned to the contribution in hypothetically similar situation. ..” 27. The Hon’ble High Court of Delhi in the case of EKL Appliances Limited [(2012) 209 Taxman 200] as well as Cushman & Wakefield India Private Limited ITA No.475/2012 dated 23.5.2014 367ITR 730 (Del), rendered similar ruling as was rendered in the case of Dresser Rand (supra). In the case of Cushman & Wakefield (supra), the Hon’ble Delhi High Court observed that whether a third party – in an uncontrolled transaction with the Taxpayer would have charged amounts lower, equal to or greater than the amounts claimed by the AEs, has to perforce be tested under the various methods prescribed under the Indian TP provisions. In the context of cost sharing arrangement, the Hon’ble High Court opined that concept of base erosion is not a logical inference from the fact that the AEs have only asked for reimbursement of cost. This being a transaction between related parties, whether that cost itself is inflated or not only is a matter to be tested under a comprehensive transfer pricing analysis. The basis for the costs incurred, the activities for which they were incurred, and the benefit accruing to the Taxpayer from those activities must all be proved to determine first, whether, and how much, of such expenditure was for the purpose of benefit of the Taxpayer, and secondly, whether that amount meets ALP criterion. In the present case however, the arrangement between the AE and the Assessee is not a cost sharing arrangement but a payment for specific services rendered. To this extent the above observations of the Hon’ble High Court may not be relevant to the present case. 28. The following aspects would require consideration in order to identify intra group services requiring arm’s length remuneration: * Whether services were received from related party.
* Nature of services including quantum of services received by the related party.
* Services were provided in order to meet specific need of recipient of the services.
15 ITA No.365 & 327/Kol/2012 M/s.Bata India Ltd.. A.Yr.2004-05 * The economic and commercial benefits derived by the recipient of intra group services.
* In comparable circumstances an independent enterprise would be willing to pay the price for such services?
* An independent third party would be willing and able to provide such services?
Whether payment made to AE meets ALP criterion will be determined, keeping in mind all the above factors, as well.
Keeping in mind the principles emanating from the aforesaid decisions, we shall now proceed to examine the material on record to see the nature of services received by the Assessee and as to whether the same were at Arm’s Length.
The material on record shows that the assessee entered into a "Technical Collaboration Agreement" ("TCA") with Bata Ltd., Canada, (successor of Bata Lim) with effect from January 1, 2001 to avail the desired advisory and technical services. A copy of the said agreement is placed at page 85 to 99 of the Assessee’s paper book. The said agreement has been approved by Government of India, Secretariat for Industrial Assistance vide approval letter No. 120(2000)/564(2000)PAB-EL dated October 23, 2000. Bata Limited, Canada along with its other subsidiaries (herewith referred to as "AE") is engaged inter-alia in the business of providing comprehensive advisory services relating to production and distribution of footwear and associated products to clients across the world. The said company is stated to possess valuable knowledge expertise and experience and is stated to possess secret and specialized know-how, information and data in the field of production and distribution of footwear and associated products. 31. The following are instances of the technical and managerial support received by Bata India:
16 ITA No.365 & 327/Kol/2012 M/s.Bata India Ltd.. A.Yr.2004-05 32. (i) Technical Information relating to design methods and manufacturing techniques including drawings, tracings, etc: 32.1. It was the contention of the Assessee that the AE provided regular advice to Bata India on matters relating to manufacturing operations. It also assisted in development and design of new types of footwear by advising on matters connected with product development, such as materials, designs, design methods, colours, etc. Further, it reports to Bata India on important developments in the main fashion centres around the world, analyzes fashion trends and makes recommendations to Bata India based on the analysis. Sample copies of sole designs, quality of material, quality of material to be used, etc., provided by the associated enterprise (AE") are at pages 484-697 of the paper book filed by the Assessee before the Tribunal.
32.2The TPO was of the view that there was no indication as to wherefrom these drawings have originated or what procedures were to be followed for implementing the said designs in the footwear to be manufactured by the assessee company in India. Neither any indication was available as to when these 'designs' were created specifically for the assessee company nor was it discernible, whether these designs were created. He therefore concluded that no services were rendered in the nature of the technical information relating to design method and manufacturing technique, etc., as claimed by the assessee. He was also of the view that forging of global alliance with other footwear companies, might have resulted in some benefit for the assessee, but such measures by the parent company were clearly in the nature of their ownership interests and not specifically directed only towards the assessee. He concluded that there were no services rendered in the nature of - Brand related services - as claimed by the assessee.
32.3. It was submitted by the learned counsel for the Assessee that royalty was paid as consideration for the right to use certain design, drawings and technical know-how etc. which are owned by the licensor. Detailed design and drawings were provided by the 16
17 ITA No.365 & 327/Kol/2012 M/s.Bata India Ltd.. A.Yr.2004-05 associated enterprise to enable the assessee to implement the know-how and manufacture shoes using such technology. Such technical know-how and design drawings etc have been used by the assessee for its benefit. It was submitted that as long as the technology which is owned and provided by the associated enterprise is used by the assessee for manufacture of footwear products, whether such technology was developed exclusively for the assessee is irrelevant. It would be appreciated that without the payment of royalty, the assessee would not have been in a position to use such technical know-how.
32.4. It was further submitted that even under arm's length circumstances a licensor may license a technology to various licensees and charge royalty for granting such license. Accordingly, the contention of the TPO that it is not known if such technology was developed specifically for the assessee is flawed and baseless.
(ii) Brand development services: 33.1. It was submitted that in order to compete against international brands and imported products, Bata India has, under the guidance of the associated enterprise, undertaken a revamp of the Bata brand in India. The AE advised Bata India on the development of the brand, brand marketing plans, brand policies, etc., in accordance with the Indian market conditions. A strategic alliance had also been formed with other major global brands, like, Nike, Reebok, Adidas, Lee Cooper, ID, Warner, etc. for marketing their products from Bata outlets in India. This strategy had given a big boost to Bata India by attracting the new generation of customers in Bata stores, resulting in an enhanced acceptability of Bata products. It was submitted that Bata India, with its established brand name, enjoyed an edge over its competitors and this has given it an acceptability and reach that all other brands can only aspire to achieve.
18 ITA No.365 & 327/Kol/2012 M/s.Bata India Ltd.. A.Yr.2004-05 33.2. The associated enterprise advised the assessee on the development of the brand, brand marketing plans, brand policies, etc. in accordance with the Indian market conditions. Products introduced by the assessee on the basis of advisory services provided of the associated enterprise are Badminton master, Patapata, North Star and B- First. On the basis of the advisory services provided by the associated enterprise, the assessee was able to introduce new products in the Indian market and attract the new generation of customers in the Bata store, resulting in an enhanced acceptability of Bata products over the country. Manual of products introduced by the assessee on the basis of the advisory services provided by the associated enterprise were placed on record. [ page 323 - 362 of the paper book)
33.3. On the above submission of the Assessee the TPO was of the view that none of the brand related work was specifically directed towards the assessee. In any case, the assessee was in India for more than 70 years and was an established brand in itself. He held that the Assessee’s brand in India does not need any brand enhancement through Bata Canada.
33.4. On the above conclusion of the TPO, it was submitted that the associated enterprise has provided the assessee with strategic marketing insights in connection with set up, aesthetics and appearance of the showrooms. It was submitted that in order to meet the requirements of a highly competitive market characterized by the presence of various global players, it was imperative for the assessee to adopt global best practices. The associated enterprise, as a result of its global presence was abreast with prevailing trends and practices. The services provided by the associated enterprise plays a vital role in the survival of the assessee in a highly competitive market. The aforesaid services were specifically requisitioned by the Assesee and were rendered pursuant to the agreement entered into with the associated enterprise. It was submitted that the
19 ITA No.365 & 327/Kol/2012 M/s.Bata India Ltd.. A.Yr.2004-05 contention of the TPO that none of the brand related work were specifically directed towards the assessee, is incorrect and not borne out from the record.
(iii) Management support: 34.1. It was the plea of the Assessee that in order to meet the requirements of a highly competitive market characterized by the presence of various global players, it was imperative for the assessee to adopt global best practices. The associated enterprise, as a result of its global presence was abreast with prevailing trends and practices. The services provided by the associated enterprise played a vital role in the survival of the assessee in a highly competitive market. The aforesaid services were specifically requisitioned by the assessee and were rendered pursuant to the agreement entered into with the associated enterprise. The contention of the TPO that none of the brand related work were specifically directed towards the assessee, was incorrect and not borne out from the record.
We have given a careful consideration to the submissions of the learned counsel for the Assessee in the light of the observations of the TPO. Perusal of pages-484 to 523 of the paper book shows that it is a brand book and contains several instructions called “Bata and more Brand”. The manual gives all the characteristics and technical specifications in order to realize the labeling of Bata Non-Footwear lines. The brand book contains sections like corporate identity, logo of Bata how to construct and reproduce the same. There is another section like packaging and product line extensions like, belt holders, pack socks, product labels, packaging of belt, and accessories etc. Copyright in this handbook is held by Global Footwear Services Pte.ltd., (Singapore), which is part of the Bata Shoe Organization of which group the Assessee is a part. In the agreement between the Assessee and Bata Limited, Canada dated 29th December, 2000, it has been specifically provided that “Confidential Information” which Bata Limited Canada has to provide to the Assessee in the course of rendering various 19
20 ITA No.365 & 327/Kol/2012 M/s.Bata India Ltd.. A.Yr.2004-05 services include information which is obtained lawfully by Bata Limited Canada, from a third party. It is therefore not correct on the part of the TPO to say that origin of these documents is not known.
Similarly there are brand books called “Badminton Master Brand Book” (Pages 532 to 555 of paper book), “Patapata Brand book”(Pages 556 to 583 of paper book) “North Star Brand Book”(pages 584 to 658 of paper book) and “B-first Brand Book” (pages 659 to 697 of paper book). Copyright in these handbooks are held by Global Footwear Services Pte.ltd., (Singapore), which is part of the Bata Shoe Organization of which group the Assessee is a part.
Similarly the Manual at pages 323to 362 of the Assessee’s paper book is guidelines to set up “Bata Syperstore”. It again contains directions as to the way in which “Bata” store has to be laid-out. It’s objective is to give value to the Bata trademark in the area of price, plus a winning quality/price ration-in step with fashion and consumer need. At pages 363 to 466 contains manual of drawings and designs of the furniture and fixtures to be installed at Bata stores. At pages 467 to 483 are guidelines provided by Bata Ltd., Canada relating to the display and position of footwear, boards, hoardings, window display etc. It cannot be disputed that the material contained in the brand books have in fact been practiced in reality. The Tribunal takes judicial notice of the existence of directions contained in the brand book and holds that they were in fact put in practice in the various Bata stores in India. We therefore hold that services in the form of technical information relating to design methods and manufacturing techniques were in fact provided by the AE to the Assessee. So also Brand Development services were provided by the AE to the Assessee.
(iii) Management support :
21 ITA No.365 & 327/Kol/2012 M/s.Bata India Ltd.. A.Yr.2004-05 38.1. It was the contention of the Assessee that since financial year 2000-01, the AE has been assisting Bata India in identifying key personnel who have global experience and are experts in their own fields, to manage the operations of Bata India. These managers/directors have been assigned tasks of spearheading initiatives in product development, quality control and distribution management, all of which are critical determinants of success in the footwear industry. The AE played an instrument al role in the voluntary retirement scheme taken out by the Bata India in 2004 which was taken by over 1500 employees. It resulted in a total outgo of Rs. 377 million in 2004. However, the resultant savings from the voluntary retirement scheme was around Rs. 180 million per annum.
38.2. During 2004, Bata India restructured pension plans of senior employees, due to increase in annuity cost, resulting in deficit of Rs. 3.3 crores in the pension funds. AE provided constructive advise and guidance in the matter to restructure the plan and the deficit was brought under control. In 2004, AE had carried out a retail store analysis, in order to understand the different categories of retail stores operated by Bata India, how they operate and which are the must cost effective. The analysts studied the functions performed, risks assumed and returns earned at different categories of stores and thus assisting Bata India in deciding which on the most efficient category of retail stores and the category in which new stores should be opened. Based on AEs advice Bata has developed its retail stores in different niche categories in line with the customer profile at each location. AE advised on possible option for reduction of insurance costs. In light of this advise, Bata India management appointed Marsh India Private Limited to reduce its insurance costs.
38.3. On the above claim of the Assessee, the TPO was of the view that neither any specific instance was cited, nor the assessee furnished any detail of expenditure incurred by Bata Ltd. Canada in providing such service. Therefore, he held that there was no 21
22 ITA No.365 & 327/Kol/2012 M/s.Bata India Ltd.. A.Yr.2004-05 service rendered to the assessee by the AE in the nature of management support as claimed. It was submitted by the learned counsel for the Assessee that specific instances of services such as advise upon opening of new retail stores, reduction in insurance costs etc were cited before the TPO. However, the TPO arbitrarily held that no specific instances in connection with provision of management support services have been provided by the assessee. The aforesaid services were specifically requisitioned by the assessee and were rendered pursuant to the agreement entered into with the associated enterprise. The contention of the TPO that none of the brand related work were specifically directed towards the assessee, is incorrect and not borne out from the record.
38.4. We have considered the rival contentions. It is seen from the record that since financial year 2000-01 the AE has been assisting the Assessee in identifying key personnel who have global experience and are experts in their own fields, to manage the operations of the Assessee. Instances have been given in the submission dated 5-12- 2005 by the Assessee before the Assessing officer/TPO in the proceedings for AY 2003-04. Mr.Chandhu Morzaria, Senior Vice-President and Executive Director of Commercial Servoces at Bata World Headquarters, Canda was appointed as Director of the Assessee on 30.8.2001 and is stated to have assisted the Assessee in the aggressive expansion of the retail division of the Assessee. He had continued till March, 2004 and resigned thereafter. One Mr.S.J.Daives was the Managing Director of the Assessee from September, 2002 to January, 2005. Prior to joining the Assessee he was Manging Director and Deputy Chariman of Bata Shoe Company, Bangaladesh. Other instances of several key managerial personnel who were deputed to work for the Assessee have been given in the submissions referred to above. None of these averments were disputed or denied by the AO/TPO. It cannot be disputed that though these personnel were from the same Bata group, but the decision to relocate them in a specific country keeping in mind commercial interest of the AEs is taken by the intra group service 22
23 ITA No.365 & 327/Kol/2012 M/s.Bata India Ltd.. A.Yr.2004-05 provider. The Assessee in our view has thus established that services of the nature of management support were in fact provided by the AE to the Assessee.
(iv) Training of Bata India personnel to enhance their competencies: 39.1.It was the contention of the Assessee that the AE has been undertaking regular trainings, seminars, conferences, etc., for the development of Bata India's personnel. Knowledge is the key in manufacturing and operational efficiency. The best practices have been transferred to Bata India through those trainings and conferences. Knowledge transfer has been a continuous process and Bata India has been able to significantly enhance the value of its human capital through such trainings. Under the said guideline, the associated enterprise provided services in relating to selection, recruitment and assessment of people for current and future roles within the assessee. Further, the associated enterprise also provided other human resource related services, such as identification and awareness of dress code of the employee, training of employee, awareness of code of ethics, etc. Management training guidelines provided by the associated enterprise is placed on record. [page 698 - 787 of the paper book]
39.2. On the above submission of the Assessee, the TPO was of the view that if the courses claimed to have been held by the AE were being paid for separately, then how could these be claimed as technical services rendered under TCA for which another payment was made to the AE in the form of royalty. The activities claimed as "Training of Bata India's personnel" by the AE fail on the touchstone of the arm's length principle according to which one has to examine whether an independent enterprise in comparable circumstances would have paid for such activity it performed for it by another independent enterprise. He therefore concluded that it was clear that no services were rendered by the AE for which any independent enterprise would have paid
24 ITA No.365 & 327/Kol/2012 M/s.Bata India Ltd.. A.Yr.2004-05 anything over and above the expenses of course fee, etc., which, in any case, were borne by the assessee company whenever its employees attended such trainings /seminars.
39.3. On the above conclusion of the TPO, it was submitted that the services rendered by the associated enterprise in this regard relates to assistance in selection, recruitment and assessment of people for current and future roles within the assessee company and other HR related services. These services are aimed at enabling the assessee company in selection of right people and development of leadership and operational skills of the employees of the assessee. Further, the associated enterprise also provided guidance in establishing model store to set the standard and institute a "Best in Class" model for all stores to follow. The associated enterprise inter-alia provides support in terms of developing sample evaluation sheets for store managers, district managers, sales person etc. and also supports the assessee in developing an effective in-house training programme. Accordingly, the conferences and training programmes referred in the order by the TPO are different from the services rendered by the associated enterprise under the TCA.
We have considered the rival contentions. Perusal of the page 698 to 787 of the Assessee’s paper book shows that it is a complete guideline on selection recruitment and assessment of the personnel to be appointed by the Assessee. In fact these instructions are universal and are being followed by the Bata entities across the globe. The manual contains goals to be achieved which includes effective recruitment and selection of qualified people using behavioral interview guide, job descriptions and personal success profiles. The manual gives guidelines regarding Understanding and establishing leadership skills, laying down guidelines for improving sales performance, dress code, code of ethics in regard to business and personal conduct in relation to the position of the employee within the organization etc. As has been rightly contended on behalf of the Assessee the organizing of seminars, conferences, meetings etc., for which 24
25 ITA No.365 & 327/Kol/2012 M/s.Bata India Ltd.. A.Yr.2004-05 costs are incurred separately by the Assessee is different and has nothing to do with the training services of the Assessee provided by the AE.
(v) Administration and accounting services : 41.1. It was the plea of the Assessee that the AE has been providing administrative and accounting assistance in Bata India by designing various management and accounting reporting packages based on new administration and accounting systems and technologies and making recommendation on the implementation and use thereof and advise on matters connected thereto. The AE reviews the budgets prepared by Bata India and provides feedback on the same before they are finalized. Further, Bata India provides information to the AE on the proposed weekly business plan for the next year. The AE reviews the performance of Bata India from time to time and has played a" crucial role in determination of Bata India's growth plan, Such actions are undertaken so that the AE can help provide any assistance regarding business strategies to be undertaken in the next year and also analyze the financial performance of Bata India compared to its business plans. The AE has also presented Bata India with its own accounting system in order to ensure that Bata India has the necessary tools for financial planning, control of assets and liabilities and management information systems, viz., Monthly Information Package (MIP), Business Plan, Finpack, Accounting manual.
(vi) Financial services. 42.1. AE has also provided Bata India with various formulae devised by AE for calculation of ratio (on cash flow planning, assets management, etc.) and business indicators (like stock turns, forward weeks inventory etc.) which are essential for controlling the shoe business (placed on record). It would assist the company in analyzing its financial performance and provide guidance in formulating future business plans and strategies. In 2003, a study was conducted by AE in order to review Bata India's performance and achievement on capex invested in 2002 as against 25
26 ITA No.365 & 327/Kol/2012 M/s.Bata India Ltd.. A.Yr.2004-05 commitments made to justify investment. Details of the study were placed on record. Support from AE enabled Bata India to obtain a better credit rating in 2004 from CRISIL, enabling the company to obtain WCDL loan of Rs. 500 million at a rate of 5.8% from State Bank of India instead of 11.75%. The same was possible after meetings held by officials of AE with representative of CRISIL in this regards and after commitment from AE, CRISI did not downgrade Bata India, thereby enabling the company to obtain the loan at a cheaper rate. Further, the AE had assisted Bata India in 2004 for obtaining a short term loan of Rs. 300 million from the State Bank of India. The same was done by a guarantee from AE that the loan would be repaid from the proceeds of the rights issue to be raised by Bata India in 2005. AE assisted Bata India in formulating the growth plan for 2004 of Bata India. As part of the growth plan for 2004, Bata India with assistance from AE, worked out several combinations to achieve an optimum mix between in-house production and outsourcing, in an attempt in minimize under recoveries in factories, minimize mark-downs of slow movers, etc. [ page 808- 809 of the paper book]
(vii) Information system services: 43.1. AE has developed a diverse range of information systems for use by different departments for improving business efficiency. These systems have been adopted by Bata India under guidance of AE for installing and implementing of these information systems. Further, these systems have been modified to suit Indian conditions by the AE. It has also made recommendations to Bata India on their hardware and software to be used by Bata India to meet the requirements of the various information systems. The associated enterprise has developed a diverse range of information systems for use by different departments for improving business efficiency. These systems have been adopted by the assessee under the guidance of associated enterprise for installation and implementation. Further, these systems have been modified to suit Indian conditions by the associated enterprise. During the financial year 2003-04, the associated enterprise 26
27 ITA No.365 & 327/Kol/2012 M/s.Bata India Ltd.. A.Yr.2004-05 also provided advisory services in relation the hardware and software to be used by the assessee. Documentary evidences in relation to two global management information systems provided by the associated enterprises are provided as under:
43.2. Point of Sale ("POS") It is a store management and retail sale accounting system for the retail stores. This system enables the store manager to evaluate the performance of the store and also keep a check on the cash, billing and stock of the store on a daily basis. It also provides a feedback to the sales department on the demands, trends and requirements of the customers. The pas software was designed, developed and written by the associated enterprise through extensive collaboration, taking into account the best of the existing systems in the world. It required internal and external programming, consulting skills from various countries and obtaining various software development licenses.
43.3. Retail Integrated Merchandising System ("RIMS")' RIMS provides meaningful sales and stock information of the store and the products. It assists the assessee in achieving greater business and customer service with lower stock and costs by replacing the goods sold in the shortest possible time. Accordingly, it keeps assists the assessee in achieving greater business and customer service with lower stock and costs by replacing the goods sold in the shortest possible time. Accordingly, it keeps a control on the funds blocked in inventory and assists the management in improving profitability [ page 249 - 322, 810-811, 812-818 & 819- 822 of the paper book]
43.4. On the above submission of the Assessee, the TPO was of the view that from the details submitted, it is seen that some of the activities performed by Bata Limited, Canada were continuing from past and no royalty payment was made for the same. One such example is that of accounting manual which were continuing since 1994 as is evident from the manual itself. The further reasoning of the TPO was that the activities 27
28 ITA No.365 & 327/Kol/2012 M/s.Bata India Ltd.. A.Yr.2004-05 related to provision of accounting and other IT package and other financial monitoring activities are nothing but the owner shareholder's activity to monitor the financial performance of its subsidiary company, i.e., the assessee company. These cannot be considered as services requiring payments as these were mere activities performed bny the parent company ("Bata Limited, Canada"), as was done in the past also without necessitating payment of royalty, etc., to protect and enhance its interests in the entity (the assessee company) owned by it. He also held that no specific or discernible services were rendered by the AE to the assessee company in the nature of "Administration and Accounting Services' of 'Information System Services' or 'Financial Services', which were more than mere owner-shareholder activity.
43.5. The plea of the Assessee with reference to the above conclusion of the TPO was that the fact that no royalty was charged by the associated enterprise in the earlier years cannot be an estoppel against charging a fair or arm's length rate of royalty in the subsequent years. Reliance was palced in this regard on the decision of the judgment of Hon’ble Supreme Court in the case of Shahzada Nand and Sons vs. CIT 1977 CTR (SC) 246 : (1977) 108 ITR 358 (SC) and CIT vs. Laxmi Cement Distributors (P) Ltd. 1976 CTR (Guj) 338 : 104 ITR 711 (GuJ), wherein it has been held that remuneration paid for services rendered could not be disallowed merely because no remuneration for such services was paid in the past. Similarly, in the case of Addl CIT vs Nestle India Ltd (2005) 94 TT J 53 (Del) the Hon'ble Tribunal held that it is not relevant that no royalty was paid in the past. Similarly in the case of Dresser Rand India Pvt Ltd vs Addl. CIT (ITA No 8753/Mum/2010) the Hon'ble Mumbai Bench of the Tribunal held that, whether the AE gave the same services to the assessee in the preceding years without any consideration or not is irrelevant. The AE may have given the same service on gratuitous basis in the earlier period, but that does not mean that arm's length price of these services is 'nil'." It was further submitted that such services can, by no stretch of imagination, be regarded as shareholder services. 28
29 ITA No.365 & 327/Kol/2012 M/s.Bata India Ltd.. A.Yr.2004-05
43.6. In particular attention was drawn to the OECD Transfer Pricing Guidelines which defines the shareholder activity as under:
"Shareholder activity An activity which is performed by a member of an MNE group (usually thft parent company or a regional holding company) solely because Of its ownership interest in one or more other group members, i.e. in its capacity as shareholder."
Further attention was drawn to para 7.10 of the OECD Transfer Pricing Guidelines further provides the following examples of shareholder activity: '7.10 The following examples (which were described in the 1984 Report) will constitute shareholder activities, under the standard set forth in paragraph 7.6:
a) Costs of activities relating to the juridical structure of the parent company itself, such as meetings of shareholders of the parent, issuing of shares in the parent company and costs of the supervisory board; b) Costs relating to reporting requirements of the parent company including the consolidation of reports; c) Costs of raising funds for the acquisition of its participations."
It was thus submitted that shareholder activity is an activity which is performed by an entity solely because of its ownership interest in other company i.e. in the capacity of shareholder. It was thus submitted that specific services rendered by the associated enterprises in the domain of IT, Finance and Accounts cannot be regarded as provided by the associated enterprise in the capacity of a shareholder.
We have given a careful consideration to the rival contentions. None of the reasons given by the TPO for disregarding the contentions put forth by the Assessee can be sustained. As rightly contended by the learned counsel for the Assessee, the fact that no remuneration was paid for similar services rendered by the AE in the past is no ground to reject payment in a later financial year as for non business consideration. The activities performed by the AE were not in the capacity of a shareholder and for specific 29
30 ITA No.365 & 327/Kol/2012 M/s.Bata India Ltd.. A.Yr.2004-05 services. The conclusions of the TPO therefore that the activities performed by the AE were more in the nature of share holder activity cannot be sustained. We therefore hold that Information system services were in fact provided by the AE to the Assessee.
(viii) Store location, design and layout services / construction and architectural services. 45.1. The associated enterprise supports the assessee on location, design and layout of a store. Special focus is on the layout of the store so as to ensure efficient utilization of space. The associated enterprise had provided assistance to the assessee in developing the Bata city store concept which targets to meet the needs of a typical urban neo- traditional and contemporary consumer. Manual on development of city store concept along with its layout was placed on record. [ page 323 -369 of the paper book] It was pointed out that during the relevant previous year, the associated enterprise also provided guidelines for setting up furniture and fixtures including drawings and designs of the furniture which should be installed at all Bata stores across the country. Drawings and designs provided by the associated enterprise were placed on record. [ Page 363 - 466 of the paper book} Further, the associated enterprise has advised and provided guidelines to the assessee relating to the display and positioning of footwear, boards, hoardings, window display, etc., which were placed on record. [Ref Reply dated 05-12- 2005, page 467 - 483 of the paper book filed in the course of assessment proceedings for AY 2003-04]
On the above submission of the Assessee the TPO was of the view that the services were directed towards protecting or improving interest of the ownership - shareholder. We have while dealing with similar conclusion held that the conclusion of the TPO/AO in this regard cannot be sustained. The reasons given for such conclusions will equally apply here also.
31 ITA No.365 & 327/Kol/2012 M/s.Bata India Ltd.. A.Yr.2004-05 47. In the light of the discussion in paragraphs 30 to 46, We hold that the Assessee has
established the nature of services including quantum of services received by the related
party, that services were provided in order to meet specific need of the Assessee for
such services, the economic and commercial benefits derived by the Assesseee of intra
group services.
The next question is as to whether the consideration paid to the AE is at Arm’s length. On this aspect we have already seen in para-20 of this order that the Assessee in its Transfer Pricing Documentation, for the purpose of benchmarking, applied Comparable Uncontrolled Price ("CUP") method as the most appropriate method. For application of CUP, the assessee identified following four comparable companies from the Secretariat for Industrial Assistance (SIA) database engaged in providing similar services paying an average rate of royalty of 3.95% and 3.5% on domestic sales and export sales respectively. It was claimed by the Assessee that since, the rate of royalty paid by the assessee at 1.5% was lower than the rate of royalty paid by the comparable uncontrolled enterprises in a similar condition, the Assessee claimed that the price paid in the transaction was to be regarded as having been undertaken at arms length price. The TPO, however, following the Transfer Pricing assessment order for assessment year 2003-04, determined the arm's length price of payment of royalty as 'nil' allegedly holding that no services were actually received by the assessee. The entire amount paid to Bata Ltd., Canada was therefore added to the total income of the Assessee by way of adjustment to the ALP. The TPO has not disputed the most appropriate method for determination of ALP chosen by the Assessee viz., CUP method and comparability of the companies set out in the TP study of the Assessee with the Assessee. The arithmetic mean of the comparables chosen by the Assessee in its TP study was average rate of royalty of 3.95% and 3.5% on domestic sales and export sales respectively. The claim of the Assessee that the rate of royalty paid by the assessee at 1.5% was lower than the 31
32 ITA No.365 & 327/Kol/2012 M/s.Bata India Ltd.. A.Yr.2004-05 rate of royalty paid by the comparable uncontrolled enterprises in a similar conditions has therefore to be accepted. The price paid by the Assessee to its AE has therefore to be held as at Arm’s Length. 49. For the reasons given above we uphold the order of the CIT(A) and dismiss Gr.No. 2 raised by the Revenue.
In the result, the appeal by the Assessee is partly allowed while the appeal by the Revenue is dismissed.
Order pronounced in the Court on 06.04.2016.
Sd/- Sd/- [Waseem Ahmed] [ N.V.Vasudevan ] Accountant Member Judicial Member
Dated : 06.04.2016. [RG PS] Copy of the order forwarded to:
1.M/s. Bata India Ltd., 6A, S.N.Banerjee Road, Kolkata-700013. 2. D.C.I.T., Circle-2, Kolkata. 3. CIT(A)-I Kolkata 4. CIT-I, Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata.