Corp Attire, Bengaluru V. The Income Tax Officer, Ward-5(3)(1), Bangalore

ITA 202/BANG/2022

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 0668 (ITAT-BANGALORE)
• Duration Of Justice: 2 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-05-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2019-2020
• Appeal Filed On: 28-03-2022
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Additional evidence; Wholly owned subsidiary; Commercial expediency; Onus to prove; Capital expenditure; Set aside
• Section: 37; 92C; 92B; 234B; 234E; 144C; 13; 22; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : BANGALORE BEFORE SHRI N. V. VASUDEVAN, VICE PRESIDENT AND MS. PADMAVATHY S, ACCOUNTANT MEMBER IT(TP)A No.202/Bang/2021 Assessment Year :2015-16 M/s. NIKE India Pvt.Ltd., Ground and First Floor, Olympia Building, No.66/1, Bagmane Tech Park, C. V. Raman Nagar, Bengaluru – 560 093. PAN : AABCN9612 K Vs. DCIT, Circle – 3(1)(1), Bengaluru. APPELLANT RESPONDENT Assessee by :Shri.K. R. Vasudevan, Advocate Revenue by:Smt.Susan Dolores George,CIT(OSD)(ITAT), Bengaluru. Date of hearing:21.07.2022 Date of Pronouncement:26.07.2022 O R D E R Per N. V. Vasudevan, Vice President : This is an appeal filed by the assessee against the final Order of Assessment dated 30.03.2021passed by theNational e-Assessment Centre, Delhi, [DCIT Circle-3(1)(1), Bangalore or Assessing Officer (AO)]under section 144(3) r.w.s. 144C of the Income Tax Act 1961 (hereinafter called ‘the Act’) in relation to Assessment Year 2015-16. 2. The parties agreed that the revised grounds of appeal filed by the assessee may be taken up for consideration. Ground No.1 raised by the assessee in the revised grounds of appeal is general in nature and does not call for any specific adjudication. Ground Nos.2 to 8 raised by the assessee reads as follows: IT(TP)A No.202/Bang/2021 Page 2 of 38 Adjustment pertaining to Advertisement Marketing and Promotional (“AMP”) expenses 2. The Learned AO / Learned TPO / Hon'ble DRP erred in considering the AMP expenses of the Appellant as an international transaction even though these expenses were paid to unrelated parties and thereby proposing an adjustment of INR 61,17,77,592. In doing so, the Learned TPO erred in determining the non-routine AMP expenses by applying the bright line test, which is not one of the prescribed methods under section 92C of the Act and has been disallowed in various High Court Rulings. 3. The Learned AO / Learned TPO / Hon'ble DRP has erred in not accepting the order passed by the ITAT in its own case for AY 2009- 10 as well as the combined order of AY 2007-08, AY 2010-11 to AY 2014-15, wherein it was held that absence of an agreement, AMP expenses cannot be characterised as an international transactionwhichis applicable in Appellant's case for AY 2015-16. 4. The Learned AO / Learned TPO / Hon'ble DRP has grossly erred in not appreciating the fact that there was no "agreement" or "arrangement" or - understanding" between the Appellant and AE for incurring AMP expenses on behalf of the latter. 5. The Learned AO / Learned TPO / Hon'ble DRP erred on facts and in law in not appreciating the business model of the appellant and ignoring the fact that the Appellant, being a licensed distributor assuming normal business risk, was required to incur the AMP expenses in the ordinary course of business to boost sales of products, and not to increase the brand value and the benefit resulting from such expenditure were attributable to its own account (in the form of increased product sales and market share) and any benefit to the overseas AE's if at all, was purely ancillary and incidental which does not require any separate compensation. 6. The Learned AO / Learned TPO / Hon'ble DRP erred on facts and in law by not considering the detailed analysis in relation to the Development, Enhancement, Maintenance, Protection and Exploitation ("DEMPE function") furnished by the Appellant which demonstrates that Appellant is not contributing to the development or enhancement of the NIKE brand. 7. The Learned AO / Learned TPO / Hon'ble DRP erred in not considering the fact that the AMP expenses are incurred for promoting popular sports ( such as cricket) which are purely for the benefit of the Appellant. 8. The Learned AO / Learned TPO / Hon'ble DRP erred in selecting companie which are not engaged in distribution activities for determining the mark-up on the AMP expenses IT(TP)A No.202/Bang/2021 Page 3 of 38 3. In so far as the aforesaid grounds of appeal is concerned, the facts are that the assessee is a wholly owned subsidiary of the assessee Holdings BV Netherlands which in turn is held by Nike Inc. The assessee distributes footware, sports apparel and equipment in India through its distribu6tion network and franchise partners and has obtained licence from its AE for manufacturing and selling Nike products in India. The assessee Operates as a distributor for the Indian market and its principal activities include the promotion. and sale of NIKE products in India. The assessee purchases products primarily from third party factory suppliers and on-sells products primarily to third party customers in India.Examples of functions performed by the assessee in its capacity as a distributor include; Sales - sourcing for retailers and maintaining relationships with them to enhance performance and revenue growth in India. Marketing - executing advertising campaigns and promotional activities in accordance with the global concepts. Logistics - managing orders placed by retailers in India and product delivery. Warehousing - managing any extra inventory carried by The Assesseeand enhance the sale of these products; Finance and; Human Resources. Finally, the assessee pays a royalty to NEON for the right to exploit NIKE's Intellectual Property in its territory. 4. The assessee incurred an expenditure of Rs.95,75,22,732/- on advertisement, marketing and promotion (AMP) in the previous year relevant to Assessment Year 2015-16. The assessee did not consider the incurring of AMP as an international transaction and did not file any transfer pricing analysis bench marking the AMP expenses. The Transfer Pricing Officer IT(TP)A No.202/Bang/2021 Page 4 of 38 (TPO) to whom a reference was made by the AO in terms of Sec.92CA of the Act, for determining Arm’s Length Price (ALP) of international transactions entered into by the assessee called upon the assessee to explain as to why no bench marking has been done in respect of incurring the AMP. The assessee in reply submitted that the Income Tax Appellate Tribunal (ITAT) in assessee’s own case viz., The AssesseePvt Ltd - ITS-1034-ITAT- 2016 (Bang) - TPJ, has held that, AMP expenses should not be considered as an international transaction because there was no arrangement or agreement in writing or otherwise with the AEs for incurring AMP expense. The relevant excerpts from, the ruling are provided below. “9. As regards the other local AMP expenses apart from BCCI we find that such expenses are incurred by the Assessee for promotion of its advertisement and promotion of its products and there is no agreement or arrangement either in writing or otherwise with the AR as nothing has been brought on record to indicate that apart from the expenSes of BCCI the Assesseeand its AB has any understanding or agreement for incurring of AMP expenses by the Assessee. Therefore, except the BCCI expenses of Rs.34.04 Crams the rest of the expenses of MU' cannot be considered as an international transaction in view of the decision of the co-ordinate bench of this Tribunal in the case of Essilor India Put. Ltd. vs. DC1T." Placing reliance on the above ruling, the assessee submitted that AMP expenses incurred by the assessee does not qualify as an international transaction. 5. The TPO however proceeded to analyze the AMP expenses. The TPO firstly concluded that the incurring of AMP expenses is an international transaction and in this regard, the TPO referred to an agreement between the assessee and Nike European Operation, Netherlands, B. V. (NEON) titled “Intellectual Property License and Exclusive Distribution Agreement dated 01.06.2008”. The TPO referred to clause 4 of the said agreement where it has been provided that the assessee will take reasonable efforts to sell and promote the sale of Nike goods in India. In clause 4.2 of the agreement, there IT(TP)A No.202/Bang/2021 Page 5 of 38 is a reference to the licensor acknowledging the fact that the licensee i.e., the assessee incurs significant marketing expenses which directly impacts the assessee’s net operating margin. According to the TPO, this clause in the agreement is sufficient to conclude that the assessee was bound to incur marketing expenses. The TPO therefore concluded that there had been an agreement to incur AMP expenses and therefore incurring AMP expense was an international transaction. Thereafter, the TPO made a reference to OECD commentaries and concluded that when another party of the MNE group has participated in the Development, Enhancement, Maintenance, Protection and Exploitation “DEMPE functions”hence a separate transaction dealing with that activity must also be considered. Thereafter, the TPO determined the ALP of AMP expenses and made an addition of Rs.61,77,77,592/- as an adjustment on account of determination of ALP of incurring of AMP expenses as follows: “6.16 Computation of Adjustment: The transfer pricing adjustment in respect of AMP, being the amount payable by the AE to the taxpayer, for rendering DEMPE services, is computed as under: Particulars Am oun Excess AMP incurred for the benefit of the AE 54,62,29,993 Arm's length Margin 11.2% Arm's Length Price (54,62,29,993*112%) 61,17,77,592 Support for Advertisement expenses received NIL Adjustment 61,17,77,592 Accordingly, transfer pricing adjustmentproposed in respect of non-routine AMP expenses incurred by the taxpayer, works out to Rs. 61,17,77,592/-. It is interesting to note that if the taxpayer has been compensated to the extent of the adjustment proposed, the losses incurred would reduce to that extent. IT(TP)A No.202/Bang/2021 Page 6 of 38 The adjustment proposed on the issue of AMP Expenditure in the immediate preceeding assessment year has been upheld by the ld. DRP.” 6. The assessee filed objections u/s.144C of the Act before the Dispute Resolution Panel (DRP) to the draft Order of Assessment wherein the additions suggested by the TPO as above was incorporated by the AO. The DRP however upheld the conclusions of the TPO. The DRP when confronted with the decision of the ITAT in the assessee’s own case in the Assessment Year 2009-10 on an identical issue holding that incurring of AMP expenses cannot be construed as an international transaction observed that the issue was highly debatable and two opinions existed. The DRP also observed that no finality has been reached on the issue. The DRP agreed with the conclusions of the TPO. 7. Aggrieved by the order of the AO incorporating the direction of the DRP in the final Order of Assessment, the assessee has raised ground Nos.2 to 8 before the Tribunal. On this issue, we find that the ITAT, Bengaluru Benches, has been consistently taking a stand that incurring of AMP expenses in the case of the assessee cannot be construed as an international transaction. The following decisions: IT (TP) A No. 2809/Bang/2017 order dated 30.06.2021 for AY. 2013-14 IT (TP) ANos.330/Bang/2015, 804/Bang/2016,356 & 739/Bang/2017, 3321/Bang/2018 order dated 14.10.2020 for AY. 2007-08, 2010-11, 2011-12, 2012-13 & 2014-15 8. In the decision rendered in the Assessment Year 2013-14, the Tribunal held as follows: “The next issue relates to transfer pricing adjustment made in respect of Advertisement, Marketing and Promotion expenses (AMP expenses). IT(TP)A No.202/Bang/2021 Page 7 of 38 The assessee had incurred expenditure of Rs.83.13 crores towards AMP expenses. The A.O. made an adjustment of Rs.85.58 crores in respect of this expenditure. The Ld. A.R. submitted that an identical adjustment was made by the TPO in other years also and this issue was examined by the coordinate bench in assessment year 2014-15. He submitted that the assessee was having an agreement with it's A.E. with regard to the expenses incurred during Cricket Tournaments conducted by BCCI. The agreement was relevant to the assessment years 2010-11 & 201112. The Tribunal passed a common order dated 14.10.2020 for assessment years 2012-13 86 2014-15. For deciding this issue, the AMP expenses were divided into two categories, viz., (a)AMP expenses other than BCCI expenses and (b)AMP expenses relating to BCCI. The Ld. A.R. submitted that the second category "AMP expenses relating to BCCI" actually referred to the years in which the assessee had an agreement with its AE for reimbursing part of expenses incurred on BCCI tournaments. The TP adjustment with regard to the- first category of expenses was deleted by the tribunal and the TP adjustment in respect of AMP expenses relating to BCCI, which arose in 2010-11 86 2011-12 was restored to the file of the A.O. The Ld. A.R. submitted that in assessment years 2010-11 86 2011-12, the assessee had an agreement with its A.E. for reimbursement of 50% of the expenses incurred on the tournaments held by BCCI. In view of the existence of the agreement, the issue was restored to the file of AO/TPO. The Ld A.R. submitted that the assessee does not have any agreement with its A.E. for reimbursement of BCCI cost from assessment years 2012-13 onwards. Accordingly, the Ld. A.R. submitted that the expenses incurred by the assessee during the year under consideration on BCCI tournaments would fall under the first category only.In the cases, where no agreement exists with the AE, the coordinate bench has decided the issue in A.Y. 2010-11, 201112, 2012- 13 &, 2014-15 in favour of the assessee. He submitted that, in this regard, the Tribunal has followed the decision rendered by it in assessment year 2009-10, wherein the Tribunal had followed the decision rendered by Hon'ble Delhi High Court in the case of Maruti Suzuki Ltd. (282 ITR 1). Accordingly, the Ld. A.R. submitted that the facts prevailing in the current year are akin to the facts that prevailed in assessment year 2009-10. Accordingly, he submitted that the entire TP adjustment should be deleted. 7.1 We heard Ld. D.R. on this issue and perused the record. We notice that the AMP expenses incurred by the assessee in the years, other than IT(TP)A No.202/Bang/2021 Page 8 of 38 the year in which there was partial reimbursement of expenses by A.E. of the assessee, has been held to be fully allowable by the coordinate bench. Those years are A.Y. 2009-10, 2010-11, 2011-12, 2012-13 86 2014-15. Accordingly, the TP adjustment made in those years has been deleted by the Tribunal. Only in the years relevant to assessment year 2010-11 86 2011-12, there was an agreement between the assessee and its A.E for reimbursement of 50% of the BCCI expenses. The TP adjustment made in those years has been restored to the file of AO/TPO. Since the facts available in the present year is akin to A.Y. 2009-10 and since it is stated that there is no agreement between the assessee and its A.E. for reimbursement of expenses, we are of the view that the decision rendered by Hon'ble Delhi High Court in the case of Maruti Suzuki Ltd. (supra) is applicable to the facts of the present case. Accordingly, following the decision rendered by the coordinate bench in other years, we hold that the TP adjustment made in respect of AMP expenses is not justified. Accordingly, we direct the A.O. to delete the same.” 9. In this Assessment Year, there was no expense incurred on advertisement relating to BCCI. In these circumstances, the decision rendered by the Tribunal is squarely applicable to the facts of the present Assessment Year also. Learned DR however strongly urged that the conclusions of the TPO on this issue should be accepted. 10. We have carefully considered the rival submissions and we find that the law with regard to incurring of AMP expenses and the applicability of the TP provisions of the same has been expounded in several decisions rendered by the Hon’ble High Courts. The Hon’ble Delhi High Court in the case of Maruti Suzuki India Ltd. (MSIL) v. Addl. CIT, TPO [2010] 328 ITR 210 (Delhi), in the case of a licensed manufacturer incurring AMP expenses it was held that it incurring of AMP expenses would be an international transaction and the issue of determination of ALP was remanded. This decision was however overruled in Maruti Suzuki India Ltd. v. Addl. CIT [2011] 335 ITR 121 (SC) wherein the Hon’ble Supreme Court IT(TP)A No.202/Bang/2021 Page 9 of 38 left the question whether AMP expenses gives raise to international transaction or not open with the following observations: “In this case, the High Court has remitted the matter to the Transfer Pricing Officer ("the TPO" for short) with liberty to issue fresh show- cause notice. The High Court has further directed the Transfer Pricing Officer to decide the matter in accordance with law. Further, on going through the impugned judgment of the High Court dated July 1, 2010, we find that the High Court has not merely set aside the original show cause notice but it has made certain observations on the merits of the case and has given directions to the Transfer Pricing Officer, which virtually conclude the matter. In the circumstances, on that limited issue, we hereby direct the Transfer Pricing Officer, who, in the meantime, has already issued a show cause notice on September 16, 2010, to proceed with the matter in accordance with law uninfluenced by the observations/directions given by the High Court in the impugned judgment dated July 1, 2010. The Transfer Pricing Officer will decide this matter on or before December 31, 2010. The civil appeal is, accordingly, disposed of with no order as to costs." 11. The Hon’ble Delhi High Court in the case of Maruti Suzuki India Ltd. Vs. CIT 381 ITR 117 (Delhi) held that the fact that the benefit of such AMP expenses would also ensure to the AE is itself insufficient to infer the existence of an international transaction. Similar decision was also rendered by the Hon’ble Delhi High Court in the case of CIT (LTU) v. Whirlpool of India Ltd., 381 ITR 154. The bright line test which was applied by the AO in the present case was also applied by the AO in the aforesaid cases. The bright line test which was accepted by the Special Bench of ITAT in the case of L.G. Electronics India Pvt. Ltd. v. ACIT (2013) 22 ITR (Trib.) 1 (Del)(SB) was held by the Hon’ble Delhi High Court to be not correct. In the case of Maruti Suzuki (supra), the facts were Maruti Suzuki India Ltd. (MSIL) was engaged in the manufacture of passenger cars in India. It was a subsidiary of SMC, a Japanese company. MSIL started its business in 1982 as a Government of India owned IT(TP)A No.202/Bang/2021 Page 10 of 38 company. SMC was selected as the business partner independently by MSIL. The co-branded trade mark "Maruti-Suzuki" was used since the inception of MSIL. A licence agreement was entered into between MSIL and SMC in October 1982 for its models M-800, Omni and Gypsy. By the agreement, MSIL was permitted to use the co-branded trade mark "Maruti-Suzuki" on the vehicles. In the assessment of MSIL for assessment year 2005-06, the AO invoked the provisions of section 92CA(1) of the Act and referred the case to the Transfer Pricing Officer for determination of the arm's length price in relation to the international transactions undertaken by MSIL with its associated enterprise, SMC. The Transfer Pricing Officer passed an order making an adjustment of Rs. 154.12 crores towards the advertisement, marketing and sales promotion expenses imputing a notional arm's length compensation towards the advertisement, marketing and sales promotion expenses incurred by MSIL for SMC. On the above facts, the Hon’ble Delhi High Court held as follows: “.... when the licence agreements were originally entered into in 1982, MSIL was known as MUL and SMC did not hold a single share in MUL. In 2003 SMC acquired the controlling interest in MSIL. There were various models of Suzuki motor cars manufactured by MSIL and each model was covered by a separate licence agreement. Under these agreements, granted licence to MSIL to manufacture that particular car model and provided technical know-how and information and right to use Suzuki's patents and technical information. It also gave MSIL the right to use Suzuki's trade mark and logo on the product. Pursuant to this agreement, MSIL was using the co-brand, i.e., Maruti Suzuki trade mark and logo for more than 30 years. This co-brand could not be used by SMC and was not owned by it. The clauses in the agreement between MSIL and SMC indicated that permission was granted by SMC to MSIL to use the co-brand "Maruti Suzuki" name and logo. The mere fact that the cars manufactured by MSIL bore the symbol "S" was not decisive as the advertisements were of a particular model of the car with the logo "Maruti-Suzuki". The Revenue had been unable to contradict the submission of MSIL that the co-brand mark "Maruti-Suzuki" in fact did not belong to SMC and could not be used by SMC either in India or anywhere else. The decision in the case of Sony Ericsson requires that the mark or brand should belong to the foreign associated enterprise. IT(TP)A No.202/Bang/2021 Page 11 of 38 The Revenue also did not deny that as far as the brand "Suzuki" was concerned its legal ownership vested with the foreign associated enterprise, i.e., SMC. Moreover as MSIL was concerned, its operating profit margin was 11.19 per cent. which was higher than that of the comparable companies whose profit margin was 4.04 per cent. Therefore, applying the transactional net margin method it must be stated that there was no question of a transfer pricing adjustment on account of advertisement, marketing and sales promotion expenditure. The advertisement, marketing and sales promotion expenses incurred by MSIL could not be treated and categorised as an international transaction under section 92B of the Act.” 12. In the case of Whirlpool of India Ltd. (supra), it was held that there had to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the arm's length price. The transfer pricing adjustment was not expected to be made by deducing from the difference between the excessive advertising, marketing and sales promotion expenditure incurred by the assessee and the advertising, marketing and sales promotion expenditure of a comparable entity that an international transaction existed and then proceeding to make the adjustment of the difference in order to determine the value of such advertising, marketing and sales promotion expenditure incurred for the associated enterprise. Thus, the bright line test had been rejected as a valid method for either determining the existence of an international transaction or for the determination of the arm's length price of such transaction. Although under section 92B read with section 92F(v), an international transaction could include an arrangement, understanding or action in concert, this could not be a matter of inference. There had to be some tangible evidence on record to show that two parties had acted in concert. It was also held that the provisions under Chapter X envisaged a separate entity concept. In other words, there could not be a presumption that the assessee was a subsidiary of the foreign company and that all the activities of the assessee were in fact dictated by the foreign company. Merely because the foreign company had a financial interest, it could not IT(TP)A No.202/Bang/2021 Page 12 of 38 be presumed that advertising, marketing and sales promotion expenses incurred by the assessee were at the instance or on behalf of the foreign company. The initial onus was on the Revenue to demonstrate through some tangible material that the two parties acted in concert and further that there was an agreement to enter into an international transaction concerning advertising, marketing and sales pro-motion expenses.” 13. The sum and substance of the same is that there should be existence of an agreement to incur AMP expense between the assessee and the foreign AE either expressed or there must be circumstances indicating compulsion to incur AMP expenses. On this aspect, the TPO in his order has made reference to Intellectual Property License and Exclusive Distribution Agreement dated 01.06.2008 and the terms of the said agreement referred to the order of the AO can be no basis to conclude existence of any understanding between the assessee and the foreign AE for incurring of AMP expenses. As rightly contended by the assessee, this agreement cannot be construed as an arrangement for incurring AMP expenses for the following reasons: “a. The agreement pertains to sale of licensed products in Indian Territory for which the Assessee pays a royalty of 10 percent of its sales; b. The agreement defines the terms "actual net sales revenues" and "forecasted net sales revenues" and the agreement mentions that in the event the actual net sales revenues of Assessee is less than 70 percent of the forecasted net sales revenues, then 1 percent of such shortfall, subject to the discretion of NEON, will either be reimbursed to Assessee or reduced from the royalty payable by Assessee to NEON; c. The clause merely is a computation mechanism for determination of royalty payable by Assessee and does not in any way construe a mandate from NEON to incur marketing expenses; d. Further, the agreement mentions the NEON "at its discretion" shall reimburse or adjust the shortfall- the same cannot be interpreted as a IT(TP)A No.202/Bang/2021 Page 13 of 38 mandate that NEON will reimburse or adjust the shortfall. Further, the reimbursement is on account of the differences between the actual net sales revenue and the forecasted net sales revenue and is not an explicit reimbursement of AMP expenses of Assessee. e. A mere acknowledgement by NEON that the Assessee incurs marketing expenses, cannot be construed to be as an arrangement between Assessee and NEON for incurring such expenses. Further, the agreement states that "the licensor acknowledges that licensee incurs significant marketing expenses which directly impacts licensee's net operating margin” – the same further strengthens the fact that the assessee is a full fledged distributor requiring to incur marketing related expenses to operate in a competitive market and does not in any way indicate a mandate from NEON to assessee to incur such expenses.Accordingly, we hold that no clause of the royalty agreement requires the assessee to mandatorily incur any AMP expenses in the absence of which it is very clear that no written agreement exists between the assessee and its AE requiring the assessee to incur the AMP expenses. We therefore hold that the incurring of AMP expenses cannot be regarded as an international transaction at all and therefore the impugned addition cannot be sustained and the same is directed to be deleted. 14. Grounds 9 to 13 raised by the assessee reads as follows: 9.The Learned AO / Learned TPO / Hon'ble DRP erred in considering the arm's length price of sourcing commission as nil and proposed an adjustment of INR 27,65,51,262 towards payment of sourcing commission, thereby disregarding the commercial expediency of the Appellant. 10.The Learned AO / Learned TPO / Hon'ble DRP erred in disregarding the evidences furnished by the Assessee to substantiate the receipt of services and erred in concluding that the Assessee was doing sourcing on its own until AY 2013-14 despite the evidences furnished to the contrary. 11.The Learned AO / Learned TPO / Hon'ble DRP erred in rejecting the Comparable Uncontrolled Price ("CUP") method adopted by the Appellant and the comparable agreements furnished without IT(TP)A No.202/Bang/2021 Page 14 of 38 appreciating that the same was obtained from reliable database i.e. KtMine. 12.The Learned AO / Learned TPO / Hon'ble DRP erred in not considering the fact that the Appellant, in good faith, had undertaken the search process before the Learned TPO during the course of the assessment proceedings to demonstrate that there is no cherry picking and the same is in conformity with the arm's length principle. 13.The Learned AO / Learned TPO / Hon'ble DRP erred in concluding that companies selected as comparable don't pay sourcing commission on the basis that there is no disclosure of sourcing commission paid in the audited financial statement thereby disregarding the following: There is no statutory requirement to disclose payment of sourcing commission separately in the audited financial statements; The business model of companies are different and the companies may have in-house sourcing team, details of which are not available in the audited financial statement. 15. The facts as far as the aforesaid ground of appeal is concerned are that the assessee paid as outsourcing commission a sum of Rs.27,65,51,262/- to Nike Global Trading Pvt. Ltd., Singapore (NGTPS) which was 7% on the FOB value of products sourced by the assessee from Nike Global Trading Pvt. Ltd., Singapore (NGTPS). The functions performed by NGTPS for which the commission was paid was explained by the assessee that NGTPS ensures that Nike products adhering to Nike standards are delivered to the assessee in timely manner and in this regard NGTPS consolidates the orders received from various Nike group entities and assessed the requirements against the production scale of the third party suppliers. NGTPS also ensures that third party factory suppliers adhere to the standards and ensure control over the cost of products. NGTPS also identifies third party factory suppliers based on lead time, type of product to be manufactured, etc. It also negotiates and assists in fixing price. IT(TP)A No.202/Bang/2021 Page 15 of 38 16. According to the TPO, the assessee in support of the proof of rendering of services filed several emails and these details are set out by the TPO in para 7.4 at pages 25 and 26 of his order. According to the TPO, the aforesaid emails do not establish any kind of services having been rendered by NGTPS. The TPO thereafter concluded that in the absence of evidence substantiating the claim of receipt of services, the entire payment has to be considered as excessive and accordingly the TPO proceeded to treat the entire payment as an addition on account of determination of ALP. The DRP confirmed the order of the TPO. 17. Learned Counsel for the assessee brought to our notice the decision of the Tribunal in assessee’s own case for Assessment Year 2013-14 wherein on identical facts, the Tribunal remanded the issue to the TPO for consideration afresh. Following were the relevant observations of the Tribunal. “3.2 We heard Ld. D.R. on this issue and perused the record. We notice that an identical issue has been examined in the assessee's own case by the coordinate bench in A.Y. 2014-15 and the matter has been restored to the file of the AO/TPO for examining it afresh. The relevant observations made by the coordinate bench in 2014-15 are extracted below. "19. The next issue relates to the Transfer pricing adjustment made in respect of Sourcing Commission payment. This issue is being urged in AY 2014-15. 19.1 During the year relevant to the assessment year 2014-15, the assessee has paid sourcing commission of Rs.22.24 crores to its Associated Enterprise named M/s Nike Global Trading Pte., Singapore (NGTPS). The rate of commission paid by the assessee was 7% of the value of products sourced. The assessee benchmarked the same under CUP method by selecting certain comparable companies, which had paid sourcing commission in the range of 5% to 12%. Accordingly, the assessee claimed the payment to be at arms length. IT(TP)A No.202/Bang/2021 Page 16 of 38 19.2 The TPO observed that the comparable companies selected by the assessee has not been proved to be really comparable. The TPO has also analysed the agreements entered by the comparable companies with their respective agents and took the view that they are materially different. Accordingly, the TPO took the view that the CUP method adopted by the assessee is not suitable to the assessee. Hence he called for various details from the assessee. After considering those details, the TPO came to the conclusion that the assessee has not been able to show that NGTPS did all those activities as mentioned in the agreements. Accordingly he came to the conclusion that that the agreements are nothing but make belief arrangements. The TPO reinforced his views by observing that the assessee did not pay any commission till AY 2013-14 and did not mention about any sourcing agent till that year. In the absence of evidences proving that the services were provided by the sourcing agents, the TPO determined the ALP at NIL. Accordingly he made transfer pricing adjustment of Rs.22.24 crores. The Ld DRP also confirmed the same. 19.3 The Ld A.R submitted that the assessee has furnished various evidences to prove that the sourcing agent has provided services to the assessee. He submitted that the assessee has utilized services of one USA entity and one Singapore entity. However, the assessee has paid commission only to the Singapore entity. He submitted that the assessee has furnished copies of agreements entered with the agents, confirmation letter obtained from the agents, e-mail communications, summary of e- mail communications etc., before the TPO in this regard. He submitted that the TPO, however, did not examine these important evidences, but came to the conclusion that the agent has not provided services to the assessee. Accordingly he prayed that this issue may be restored to the file of TPO for examining it afresh by duly considering various evidences furnished by the assessee. 19.4 We heard Ld D.R. Having regard to the submissions made by Ld A.R, we are of the view that this issue requires fresh examination at the end of TPO. Accordingly we restore this issue to the file of AO/TPO for examining it afresh by duly considering the various evidences furnished by the assessee. After affording adequate opportunity of being heard, the AO/TPO may take appropriate decision in accordance with law. 3.3 Consistent with the view taken by the coordinate bench, we remand this issue to the file of the AO/TPO with similar directions for examining this issue afresh.” IT(TP)A No.202/Bang/2021 Page 17 of 38 18. Learned Counsel for the assessee also brought to our notice that in addition to the evidence already on record, the assessee would like to place the following documents as additional evidence: Email reference number Email evidence furnished by NIKE India Nature of support extended by NIKE Global Trading and NSIPL Explanation 1. Mail from Jenny Chia to third party manufacturing factory: January 2015 Costing and budget requirements In this e-mail, NIKE Global Trading communicates the update in the Cost Break Down documentation which are to be furnished by the third party manufacturing factories. This documentation enables NIKE Group to have standardized costing process, wherein standard format of cost break down has to communicated by the manufacturers which also helps NIKE Global Trading in reviewing the wastage, fabric material, colour scheme and styling specifications in the markers for the NIKE products. 2. E-mail from Lynn Piongto NIKE affiliates Styling Specifications related internal communication It is evident from this e-mail that NIKE Global Trading corresponds both internally and with third-party factories on the style requirements. Such requirements include explanation of color schemes, sewing pattern, and other relevant apparel requirements in order to procure the best quality products. IT(TP)A No.202/Bang/2021 Page 18 of 38 NIKE Global Trading also ensures that verified styling specifications are updated in the marker of the products and also the cost sheet document the additional cost incurred due to shrinking/contraction of the fabric in the manufacturing process. Th is em a i l p ro vi de s e vi de n ce th at N I KE G l ob a l T ra d in g co mm un ic a t es t he s ty le re qui r em e nt s t o t hi rd p a rt y ma nu fa c tu ri ng f ac t or ie s. Suc h re qui r em e nt s i nc l ude ex pl a na ti o n o f se w i ng pa t t er n, an d o th er re l e va nt a pp ar el re qui r em e nt s i n o rd er t o pro cu re th e b est qu al i t y pro duc t s. T he se pa ra m et e rs a re cr it i c a l fo r ma nu f a c tu ri ng o f NIKE p rod uc t s a nd i s pro pr ie t a ry t o NIKE Gr ou p. Th e Asse sse edoes no t hav e the ex perti se to ana ly se an d co mmun ica te sp eci fic re quire ment s to t he ma nufac turer . 3. E-mail from third party manufacturer to NIKE Global Trading: July 2014 to April 2015 This e -mail thread demon strates tha t NIKE Global Tr ading c ommunica tes the st yle requirements to third party man ufact uring factorie s [MAS Active Trading (Pvt) Ltd] before they proc eed manufacturi ng the NIKE produc ts. Further, the NIKE Global Trading seeks update from third party manufacturer on any unfavourable deviation observed in the sample batch IT(TP)A No.202/Bang/2021 Page 19 of 38 of NIKE products manufactured from the NIKE standards set. It is important to reiterate that The Assesseedoes not have the expertise/ capability, time and resources to undertake such activities. Hence, The Assesseeis heavily dependent on NIKE Global Trading for such analyses in order to make informed decisions about procuring best quality products. 19. Learned Counsel for the assessee prayed that the issue may be restored to the file of the TPO as was done in the earlier Assessment Year after admitting the additional evidence. 20. Learned DR however submitted that the mere production of emails do not prove rendering of services by the AE. The learned DR drew our attention to the paragraph 7.6.1 of the TPO’s order in which the TPO has made the following observations: “7,6.1 The taxpayer has submitted a letter from. NIKE Global Trading Pte. Ltd. Singapore (NGTPS) dated 28.08.2017 ,signed by Mr.Neal A .Bieker ,Director wherein it is stated that NIPL has been receiving sourcing services from NIKE affiliates from the inception of operations of NIPL. It further states that until FY 10, the sourcing services were rendered by NIKE. Inc. and from FY 11, NGTPS has been providing these services. NIKE affiliates had not charged for the sourcing services considering that NIPL was incurring operational losses. Further once the cash flow issues were reduced, NIKE affiliates started charging the sourcing from FY 12- 13. But the facts as per the Audited financials produced by the taxpayer clearly indicates that the claim of the taxpayer is not correct, as the taxpayer still continues to incur losses, which is evident from the following table. IT(TP)A No.202/Bang/2021 Page 20 of 38 Particulars FY 2014-15FY 2013-14FY 2012-13FT 2011-12FY 2010-11 Turnover784,52,43,9886,035,654,6814,495,522,6023,373,863,1312,311,221,724 Gross Profit264,59,64,4051,955,684,2881,370,309,0121,158,770,729928,804,703 Net profit/tLoss) -101,57,68,259-47,20,15,655-86,51,58,515-395,454,257-381,802,506 Percentageof33.7332.4030.4834.34 40.18 Gross profit and Net Profit -12.96% -7.82% -19.24% -11.72% -16.5% Sourcing Commission paid 27,65,51,262 22,24,30,862NILNILNIL So, the logic of not charging earlier, but being charged now is without basis in view of the facts as shown in the table above. This has not been rebutted by the taxpayer. So, the arguments of the taxpayer are without basis.” 21. According to the learned DR, the payment of outsourcing commission was one way by which profits that accrues to the assessee in India are shifted out of India. The learned DR also drew our attention to the agreement dated 01.06.2014 between the assessee and Nike European Operation, Netherlands B V for licence to use Intellectual Property License and Exclusive Distribution Agreement wherein in clause 13.1, the assessee has right to sub contract for the manufacture of licenced goods and shall be free to engage sub contractors for contract manufacturing and such a clause is contrary to the claim of the Assessee that it paid commission for outsourcing services. 22. We have carefully considered the rival submissions. In so far as the argument of the learned DR with reference to clause 13.1 of the distribution agreement, we find that as a matter of prudence, the assessee has agreed with NGTPS for out sourcing of various activities. The fact that the assessee was free to choose its own contract manufacturers is no bar to the assessee adhering to the standards of the Nike products and approaching the NGTPS for such services. We are also of the view that the proof of rendering of IT(TP)A No.202/Bang/2021 Page 21 of 38 services has to be analyzed based on the available evidence and also the additional evidence now filed by the assessee. The fact that for similar services no payment was made in the past cannot be the basis to hold that the payment in question was not warranted and commercially not expedient. The TPO is free to demand any other evidence that he may wish to be produced before being satisfied with the rendering of services by the foreign AE. Thereafter the exercise of benchmarking the payment on the touchstone of Arm’s length price, will have to be carried out in accordance with the requirements of Sec.92 of the Act. We are therefore of the view that in tune with the decision of the Tribunal in assessee’s own case for Assessment Year 2013-14, the issue should be remanded to the TPO for consideration denovo. We hold and direct accordingly. 23. Ground Nos. 14 to 17 raised by the assessee reads as follows: 14. The Learned AO / Learned TPO / Hon'ble DRP erred in making an adjustment towards salary paid, expenses incurred on behalf of expatriates, cost of trade samples and other miscellaneous expenses for an amount of INR 12,17,18,235 and erred in merely determining the arm's length price at nil, without adopting one of the prescribed methods. 15. The Learned AO / Learned TPO / Hon'ble DRP erred in not taking cognizance of the Form 16 submitted by the Appellant detailing the Tax Deducted at Source deducted on such salary payments to expatriates. Further, Learned TPO erred in placing reliance on Hon'ble Bangalore Tribunal's order of AY 2005-06 and AY 200607 in Appellant's own case, without appreciating that in AY 2005-06 and AY 2006-07 the Appellant was erroneously categorized as a service provider rather than a licensed distributor assuming normal business risk. 16. The Learned AO / Learned TPO / Hon'ble DRP erred in not considering the commercial expediency of the Appellant in making such reimbursements when such expenses pertain to activities which IT(TP)A No.202/Bang/2021 Page 22 of 38 are essential for running the Appellant's business operations, and that such expenditure has resulted in tangible benefit. 17. The Learned TPO / Hon'ble DRP erred in not acknowledging that the jurisdiction of the Learned TPO under Section 92CA of the Act is only to determine whether the international transaction is at arm's length and that he has no jurisdiction to decide on whether the transaction was required to be entered into or whether the Company derived any benefit from the transaction, and accordingly, the commercial expediency of the Appellant cannot be questioned by the Learned TPO. 24. Learned Counsel for the assessee admitted that the issue raised by the assessee in the aforesaid grounds has already been decided against the assessee by the Tribunal in the Assessment Year 2013-14 in paragraphs 5 to 5.4 of its order, which reads as follows: “5. The next issue relates to transfer pricing adjustment of Rs.5.33 crores in respect of reimbursement of expenses. 5.1 The Ld. A.R. fairly admitted that an identical issue was decided against the assessee by the Tribunal in the assessee' own case in assessment year 2010-11, 2012-13 & 2014-15. 5.2 The TPO noticed that the reimbursement of expenses of Rs.5.33 crores are in the nature of salary cost of the employees deputed by the parent company, which has been cross charged by the parent company. The TPO noticed that the jurisdictional ITAT, Bengaluru bench has examined an identical issue in assessment year 2005-06 and 2006-07 and has held that the nature of these expenses is such that they cannot be attributed solely and exclusively incurred by parent company for distribution business of the assessee. Accordingly, the TPO, following the decision of ITAT, determined the ALP of reimbursement of expenses at NIL. Accordingly, he made transfer pricing adjustment of Rs.5.33 crores. 5.3 We notice that an identical issue was examined in A.Y. 2010- 11, 2012- 13 & 2014-15 and the Tribunal following the decision rendered by the coordinate bench in A.Y. 2005-06 & 2006-07 has decided this issue against the assessee. The relevant observations made by the Tribunal in 2014-15 are extracted below: IT(TP)A No.202/Bang/2021 Page 23 of 38 "15.2 However, we notice that an identical issue has been examined by the co- ordinate bench in the assessee's own case in IT(TP)A Nos.653 & 654/Bang/2011 relating to AY 2005-06 & 2006-07 - Order dated 10-05-2013. We further notice that this issue has been decided against the assessee with the following observations:- "5.5.1 We have heard both the parties and carefully perused and considered the rival contentions and the material on record. The main issue for consideration before us is whether or not the expenses incurred by the parent company, Nike Inc., USA can be attributed solely and totally to the business of distribution undertaken by the assessee. It is the contention of the assessee that these expenses incurred towards cross payment charges in the relevant period amounting to Rs.4,79,96,697 are solely related to the business of the assessee in India. Per Contra, revenue's view is that the assessee has failed to establish and demonstrate that these expenses are to be attributed to the business operations of the assessee. 5.5.2 To understand and appreciate the role and business of the assessee and the interplay it has with its parent company, Nike Inc., USA, in respect of its operations, an examination of the Transfer Pricing Study/Report submitted by the assessee is both informative and useful. In the Transfer Pricing report, under the heading "Brief on the Business", it is mentioned that - "1.2.3 Nike India, a wholly owned subsidiary of NIKE Holdings Inc., is responsible for distribution of footwear, sports apparel and equipment. In addition, NIKE India Provides administrative support in relation to the marketing and brand promotion initiatives of NIKE Group in India. 1.2.4 The development of arm's length price in this analysis recognizes that NIKE India acts as a wholesale distributor and is primarily engaged in the business of providing value added services, acting as an intermediary between entrepreneurs and customers. This analysis reflects the provisions of the OECD Guidelines concluding that, at arm's length, companies engaged in providing such value added services are entitled to receive compensation appropriate to the services performed and the capital invested in their businesses, but are not entitled to share in any returns attributable to the marketing or commercial intangibles that belong to the entrepreneur. 1.2.5 NIKE group owns virtually all the valuable intellectual property rights (know how, copy rights, etc.) and other IT(TP)A No.202/Bang/2021 Page 24 of 38 commercial or marketing intangibles (brand names, trade marks, etc.) and is involved in complex operations of developing proprietary technologies NIKE group also bears all the significant business and entrepreneurial risks of product acceptability and performance in the market: On the other hand, NIKE India does not own any interest in these intangibles and is a mere service provider. Eased on an analysis of the functions performed and risks assumed, we conclude that NIKE group has more complex operations and bears greater share of risks." 5.5.3What emerges from a perusal of the above paragraphs of the TransferPricing Study report submitted by the assessee is that; i) NIKE Group, the parent company, does certain marketing brand promotion initiatives, with some administrative support from the assessee; ii) The assessee is merely a wholesale distributor and is only an intermediary between Nike Group and the ultimate customer. It is only a service provider, is compensated for its services and has absolutely no stake in the marketing and commercial intangibles, which belong only to the parent company. iii)- The business risk of product acceptability and performance in the market is borne by Nike Group, the parent company and the assessee does not own any interest in the same. 5.5.4 Admittedly, as per the submissions of the assessee, the cost of samples is incurred to increase and improve the product awareness, the responsibility for which vests with the parent company, Nike Inc., USA. In this factual matrix, there is no reason why a mere service provider, merely acting as an intermediary between the entrepreneur and the customer, should bear the expenses related to increasing the product awareness and product acceptability in the market. The submissions made by the assessee before us and before the authorities below have been contradictory to what is stated in the assessee's Transfer Pricing Study and this is not acceptable. Further, as pointed out by the TPO, the assessee has separately booked substantial expenses amounting to approx. Rs.2.42 Crores towards advertising, marketing and sales promotion which is approx.. 8% of sales turnover and these have been allowed as expenses incurred towards promotion of product sales. The onus for proving that the expense! incurred by the parent, Nike Inc, USA, are towards the sales of the products and not for the purpose of creating brand awareness IT(TP)A No.202/Bang/2021 Page 25 of 38 is on the assessee, which onus is not discharged by the assessee. Also considering that the assessee itself has admitted that the parent, Nike Inc. USA has brand marketing and promotion initiatives in India, it is but natural to conclude that the expenses incurred by Nike Inc., USA are towards creation of brand awareness, for which the parent has the responsibility. In this view of the matter, the expenses on cost of samples, etc., have to be attributed to the parent, Nike Inc., USA and therefore it is not correct to conclude that these expenses have to be borne by the assessee. 5.5.5 As regards the expenses related to employees, of the parent company who have been deputed to the assessee, the FAR analysis in the Transfer Pricing Study/Report related to the employees states as under: Risk Category and Description Exposure to NIKE India Exposure to NIKE Group Manpower Risk: Any enterprise, which is largely dependent for its success, upon quality personnel with superior technical knowledge is faced with this risk. Competitive market forces expose such an enterprise to the risk of losing its trained personnel NIKE India has to hireand retain goodpersonnel. However,recruitment of keyemployees at higher levels are guided by Bike Group NIKE Group bears a greater degree of this risk as it needs to retain key employees and trained technical people. As is stated in the Transfer Pricing Study, the recruitment of key employees at higher levels in the assessee company are guided by the parent group, negating the claim of the assessee made before us that these employees are totally under the control of the assessee. Further, from the secondment agreement submitted by the assessee before us, it is seen that the personnel deputed from the parent company are working as General Manager, India Sales Director, Manufacturing leader, Category Business Director and the like. IT(TP)A No.202/Bang/2021 Page 26 of 38 There is no plausible reason put forth to justify why a mere service provider, who is only an intermediary between the entrepreneur viz. Nike Inc., USA and the customer should incur costs related to manufacturing leader, category business director, etc. Also it is inconceivable why a third party unrelated entity would employ people from the entrepreneur to man such key senior positions in its organization. Further, we also find that the assessee has not furnished any evidence to substantiate its claim that these persons, indeed only work in the distribution activities which is the sole work undertaken by the assessee. The onus for providing evidence to substantiate its claim rests with the assessee which, in the facts and circumstances as discussed above, the assessee has not discharged. 5.5.6 In respect of the expenses amounting to Rs.1,74,93,025 claimed in *Miscellaneous Expenses", the assessee has put forth only a general explanation that these represent couriering expenses, etc. No further details as to the nature of expenses, the purpose for which they were expended etc. has been forthcoming from the assessee. The assessee has also not furnished any evidence to establish that these expenses were indeed incurred for and on behalf of the assessee. In the absence of these details, the claims put forth by the assessee remain unsubstantiated. 5.5.7 Another contention of the assessee is that since the same set of expenses has been held to be at arm's length in the assessee's own case for Assessment Year 2008-09, therefore, they should be treated as arm's length in the year under consideration. We are unable to accept the contention that the transfer pricing adjustment made in the two years under consideration has to be negated only on the ground that such an adjustment was not made in the subsequent year. It is a well settled position in law that the assessment of every year stands on its own legs and the 'principle of res judicata' does not apply to income tax assessment proceedings. The ALP for each year is determined based on the set of facts applicable to each of the individual years and no common proposition can be propounded for all the years. As mentioned earlier, for the two years under consideration before us, the assessee has not furnished any evidence to substantiate its claim that these persons work onlyfor the distribution activity undertaken by the assessee. The onus for bringing such evidenceon record to substantiate the claim rests with the assessee and we- find that such onus hasneither been discharged before us nor before the authorities below. If these expenses were held to be at arm's length in the subsequent year, then the assessee IT(TP)A No.202/Bang/2021 Page 27 of 38 must have furnished evidence before the TPO to show that these persons had contributed for the distribution activities of the assessee for that year. The facts could be different for each year be different for the same assessee depending on various factors and stage of the assessee's business and require to be viewed differently. From the copies of secondment agreement submitted to us, we find that the employees seconded are different for different years performing different functions, as seen from their designations. In this view of the matter the contention that the adjustment made in the two years under consideration require to be deleted merely be similar adjustment was not made in the subsequent year is not acceptable. We find that the facts applicable to the two years under consideration do not support the case of the assessee. In fact, as explained earlier, the statements, averments, admissions made in the Transfer Pricing Study submitted by the assessee does not support the stand urged by the assessee before us. 5.5.8 In view of the facts and circumstances of the case, as discussed above, on the issue of payment of cross charges of expats costs and contractor charges claimed as reimbursements to the parent company, Nike Inc., USA, we are of the considered opinion that the TPO has been right in holding that: i) the nature of these expenses are such that they cannot be attributed to have been solely and exclusively for the distribution business of the assessee; ii) the claim of the assessee that it had derived tangible benefit from the expenditure has not been substantiated with evidence. iii) there is no evidence or likelihood of any independent entity dealing in similar circumstances bearing such expenditure. We, therefore, uphold the finding in the orders of the authorities below in making the T.P. adjustment of Rs.4,79,96,697 for assessment year 2005-06 and dismiss the grounds raised by the assessee." Accordingly, following the decision rendered by the co-ordinate bench referred above, we decide this issue against the assessee and confirm the Transfer Pricing adjustment made by the TPO." IT(TP)A No.202/Bang/2021 Page 28 of 38 5.4 Consistent with the view taken by the coordinate bench on this issue in the other years, we decide his issue against the assessee and confirm the transfer pricing adjustment made by TPO/AO.” Respectfully following the aforesaid decision of the Tribunal rendered in assessee’s own case, we dismiss Ground Nos. 14 to 17. 25. Grounds 18 to 20 raised by the assessee reads as follows: 18. The Learned AO / Learned TPO / Hon'ble DRP erred in disallowing reimbursement of third party royalty transaction for an amount of INR 2,53,52,270 and determining the arm's length price to be nil without adopting one of the prescribed methods. Further, it erred in failing to appreciate that the royalty payable to third parties were paid by the AE and then cross-charged to NIKE entities all over the world depending on the sale of products that were subject to third party royalty since the entities benefit from such licensing arrangements through sale of the products bearing licensed rights. 19. The Learned AO / Learned TPO / Hon'ble DRP erred in not considering the commercial expediency of the Appellant in making such reimbursements towards third party royalty when such expenses pertain to activities which are essential for running the Appellant's business operations, and that such expenditure has resulted in tangible benefit and that the expenditure was incurred in normal course of distribution business of the Appellant. 20. The Learned TPO / Hon'ble DRP erred in not acknowledging that the jurisdiction of the Learned TPO under Section 92CA of the Act is only to determine whether the international transaction is at arm's length and that he has no jurisdiction to decide on whether the transaction was required to be entered into or whether the Company derived any benefit from the transaction, and accordingly, the commercial expediency of the Appellant cannot be questioned by the Learned TPO. 26. Learned Counsel for the assessee admitted that the issue raised by the assessee in the aforesaid grounds has already been decided against the IT(TP)A No.202/Bang/2021 Page 29 of 38 assessee by the Tribunal in the Assessment Year 2013-14 in paragraphs 6 to 6.4 of its order, which reads as follows: “6. The next issue relates to transfer pricing adjustment in respect of royalty payment amount to Rs.12.02 crores. 6.1 The ld. A.R. fairly admitted that an identical issue has been decided against the assessee by the coordinate bench in other years. 6.2 The assessee has paid royalty of Rs.2.02 crores. The TPO noticed that the ITAT has confirmed the transfer pricing adjustment made in respect of royalty payment in A.Y. 2005-06 & 2006-07. Following the same, TPO determined the ALP of royalty payment as Nil and accordingly, made transfer pricing adjustment of Rs.2.02 crores. 6.3 We notice that an identical issue has been examined by the coordinate bench in A.Y. 2014-15 and this issue has been decided against the assessee by following the decision rendered by the coordinate bench in A.Y. 2005-06. The observations made in this regard by the Tribunal in AY 2014-15 are extracted below:- "16. The next issue relates to the T.P adjustment made in respect of third party royalty. This issue is being contested by the assessee in AY 2010-11, 2012-13 and 2014-15. 16.1 The TPO noticed that the assessee was paying royalty on goods endorsed by celebrity sports persons around the world on the basis its sales turnover in India. The TPO noticed that the assessee has not furnished any agreement in respect of this arrangement. The assessee could not also furnish workings as to how it is allocated to it. Further, the assessee was seen paying royalty @ 1% on the sales, in addition to the payment of third party royalty, in accordance with the agreement entered by it with M/s NEON, an Associated Enterprises, which manages endorsement contracts with world class athletes. Accordingly, the TPO took the view that the payment of third party royalty would amount to duplication of payment. The TPO also noticed that the assessee has not obtained approval from RBI for making this payment. Accordingly, he took the view that the third party royalty is not an expenditure related to the assessee. Accordingly the TPO determined the ALP of this expenditure at NIL. IT(TP)A No.202/Bang/2021 Page 30 of 38 16.2 The Ld A.R submitted that there is no duplication of royalty payment as presumed by the TPO. He submitted that the assessee is paying royalty of 1% for using the brand name NIKE in its products. In addition to that, the Associated Enterprise "NEON" enters into contracts with celebrities for promotion of the product, which would in turn would increase the sales. The third party royalty simply represents cross charging of royalties paid by AE back to the distributors. 16.3 We heard Ld D.R on this issue and perused the record. As observed by the co-ordinate bench in the case of the assessee in AY 2005-06, the onus to prove that the expenses incurred by the AE was towards sale of products and not for purpose of creating brand awareness lies upon the assessee. We notice that this onus has not been discharged by the assessee. The basic details like the agreement if any for reimbursing this expenses, RBI approval, business necessity/expediency in making the payment, the basis of calculation etc., have not been furnished. Hence, the TPO has taken the view that this expenditure is not related to the business of the assessee and accordingly he has determined the ALP at NIL. Before us also, no further details were furnished. In view of the above, we are of the view that there is no infirmity in the order so passed by the TPO/AO." 6.4 Following the decision rendered by the coordinate bench in A.Y 2005- 06, we decide this issue against the assessee and confirm the TP adjustment made by the TPO/AO.” Following the order of the Tribunal rendered on identical facts, in Assessee’s own case, we dismiss grounds 18 to 20. 27. Grounds 21 to 26 raised by the assessee reads as follows: 21. The learned AO/ Hon'ble DRP erred in disallowing expenses incurred towards purchase of trade samples from Nike Inc. and Nike USA Inc. 22. The learned AO/ Hon'ble DRP ought to have appreciated the fact that the Appellant has incurred such expenses for the purpose of its business and hence, allowable under section 37 of the Act. IT(TP)A No.202/Bang/2021 Page 31 of 38 23. The learned AO/ Hon'ble DRP erred in failing to appreciate the following: it is not open to the Revenue to question the necessity of an expense which the management believes is necessary to run the business. commercial expediency for incurring such expense. 24. The learned AO/ Hon'ble DRP has erred in holding that the distributor cannot be burdened with the cost of samples and incidental expenses especially when royalty is being charged for the new designs without appreciating that the appellant runs its business on entrepreneur model and it was Appellant's responsibility to create demand, market and advertise the products. 25. The Hon'ble DRP has erred in placing reliance on Hon'ble Bangalore Tribunal's order foi earlier years without appreciating that in those orders the Appellant was erroneously categorized as a service provider rather than a licensed distributor assuming normal business risk. 26. Notwithstanding and without prejudice to the above, the Hon'ble DRP erred in not deleting the double disallowance of the aforesaid expense, since the same has been considered by the TPO under TP adjustment. 28. Learned Counsel for the assessee admitted that the issue raised by the assessee in the aforesaid grounds has already been decided against the assessee by the Tribunal in the Assessment Year 2013-14 in paragraphs 8 to 8.1 of its order, which reads as follows: “8. The next issue relates to the disallowance of claim of purchase of samples. An identical issue has been decided against the assessee in assessment year 2012-13 & 2014-15. For the sake of convenience, we extract below the decision rendered by the coordinate bench on this issue:- "20. The remaining issues are corporate issues and the additions have been made by the assessing officer. The first corporate issue urged by the assessee relates to the "disallowance of purchase of samples and incidental expenses". This issue is being urged in AY 2012-13 and 2014- 15. 20.1 This expenditure was disallowed by way of Transfer pricing adjustment in the earlier years. In the assessment year 2012-13 and 2014-15, the assessing officer has disallowed the expenditure incurred on purchase of samples and incidental expenses holding IT(TP)A No.202/Bang/2021 Page 32 of 38 that this expenditure is to be borne by the manufacturer only and not by the assessee, as the assessee is only distributor of products. 20.2 The AE of the assessee, viz., Nike Inc., has introduced new products and accordingly sent samples to the assessee for giving the same to the third party distributors, who are required to display the same in their premises. The objective is apparently promotion of the new products. The AE has charged the assessee towards cost of samples given to it. The AO took the view that the assessee is only a distributor of the NIKE products and hence the expenditure on samples should be borne by the manufacturer only. Accordingly the AO took the view that the manufacturer should not pass on the burden to the assessee. Accordingly, the AO took the view that the expenditure on purchase of samples and incidental expenses are not related to the business activities of the assessee. Accordingly he disallowed the same. The Ld DRP also confirmed the same. 20.3 The Ld A.R submitted that the assessing officer cannot sit in the arm chair of the assessee and decide the mode of conducting business. He submitted that the assessee has incurred expenditure on samples on commercial considerations and hence the same should be allowed. The Ld A.R placed his reliance on the decision rendered by Hon'ble Supreme Court in the case of CIT vs. Dhanrajgirji Raja Narasingirji (1973)(94 ITR 544), wherein the Hon'ble Apex Court has observed as under:- "It is not open to the department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. Every businessman knows his interest best. So far as the apportionment is concerned we are not told why we should not consider the same as a reasonable estimate." 20.4 We heard Ld D.R and perused the record. We have noticed earlier that this expenditure was a matter of transfer pricing adjustment in AY 2010-11 and 2011-12, wherein we have confirmed the transfer pricing adjustment by following the decision rendered by the co-ordinate bench in the assessee's own case in AY 2005-06 & 2006-07. In those years, the Tribunal has decided the issue against the assessee with the following observations:- "The onus for proving that the expense! incurred by the parent, Nike Inc, USA, are towards the sales of the products and not for the purpose of creating brand awareness is on the assessee, which onus is not discharged by the assessee. Also considering that the assessee IT(TP)A No.202/Bang/2021 Page 33 of 38 itself has admitted that the parent, Nike Inc. USA has brand marketing and promotion initiatives in India, it is but natural to conclude that the expenses incurred by Nike Inc., USA are towards creation of brand awareness, for which the parent has the responsibility. In this view of the matter, the expenses on cost of samples, etc., have to be attributed to the parent, Nike Inc., USA and therefore it is not correct to conclude that these expenses have to be borne by the assessee." In our view, the view expressed by the co-ordinate bench can be taken as guidance for deciding the issue in the years under consideration also. There is no dispute that the parent company Nike Inc., has introduced new products and the samples are supplied to third party distributors in order to create awareness of new products amongst the public. The assessee herein is merely an intermediary between M/s Nike Inc and the public. Hence, it is the responsibility of the assessee, first of all, to show that the expenditure on samples &incidental expenditure was incurred for the purposes of business of the assessee. Under sec.37(1), expenditure should have been laid out or expended wholly and exclusively for the purposes of business of the assessee. In the context of AMP expenses, the co-ordinate bench has taken the view that the sample expenses are related to brand promotion and marketing initiatives of the parent company of the assessee, meaning thereby, it cannot be said that this expenditure has been expended wholly and exclusively for the business of the assessee. The Ld A.R contended that the assessing officer cannot question the necessity of incurring the expenditure. However, in our view, when the transaction is between related parties, the Act places more burden on the shoulders of the assessee to prove that the expenditure is related to the business of the assessee. Further, in trade circles also, it is known fact that the expenditure on samples are borne by the manufacturers only. Hence this claim of expenditure is against the trade practice and the assessee appears to have borne the expenses only on the reasoning that the same was charged upon it by its parent company. Hence, we are of the view that the AO was justified in holding that the burden to incur this expenditure is that of parent company and is not related to the business activities of the assessee. Accordingly, we confirm the disallowance made by the AO." 8.1 Consistent with the view taken in the above said years, we decide this issue against the assessee and accordingly, confirm the disallowance made by the A.O. on this issue.” IT(TP)A No.202/Bang/2021 Page 34 of 38 Respectfully following the aforesaid decision of the Tribunal rendered in Assessee’s own case, we dismiss Ground Nos. 21 to 25.The learned Counsel for the assessee however made a prayer that in so far as ground 26 is concerned, the disallowance on purchase of trade samples was also subject matter of TP adjustment by the TPO and to that extent there should be a direction to ensure that there is no double taxation of the same income. We accept the prayer of the learned Counsel for the assessee and direct the AO/TPO to consider the plea of the assessee in this regard and allow necessary relief in the event of the same income getting doubly taxed. 29. Ground Nos.27 to 29 raised by the assessee reads as follows: 27. The learned AO/ Hon'ble DRP erred in not appreciating the submissions placed on record and disallowing provision for sales returns under section 37 of the Act contending that the same is not an ascertained liability. 28. The learned AO/ Hon'ble DRP failed to appreciating that the Appellant has recognized provision for sales return based on principles laid down by the Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd. ([2009] 180 TAXMAN 422 [SC]) and Accounting Standard ["AS"] 29 and hence, ought to be allowed under section 37 of the Act. 29. The learned AO, despite concluding that the provision was based on historical data, has erred in not allowing the expense which is contrary to the position upheld by the Hon'ble Supreme Court in the case of Rotork (supra) and Hon'ble Karnataka High Court in the case of Wipro GE Medical Systems (ITA Nos. 438, 444/2002). 30. Learned Counsel for the assessee admitted that the issue raised by the assessee in the aforesaid grounds has already been decided against the assessee by the Tribunal in the Assessment Year 2013-14 in paragraphs 21 and 26 of its order. Respectfully following the aforesaid decision of the Tribunal rendered in Assessee’s own case, we dismiss Ground Nos. 27 to 29. IT(TP)A No.202/Bang/2021 Page 35 of 38 31. Grounds 30 and 31 raised by the assessee reads as follows: 30.The learned AO/ Hon'ble DRP has erred in disallowing expense on account of "Retail fixtures for stores" under section 37 of the Act contending that the same is capital and not revenue in nature. 31.The learned AO/ Hon'ble DRP ought to have appreciated the fact that these are product marketing materials provided to franchise/ retail stores with the purpose and intent of advertisement or promotion, and these are not the assets that remain with the Appellant, hence, the same is allowable under section 37 of the Act. 32. In so far as the aforesaid grounds of appeal are concerned, the material facts are that the assessee claimed deduction of a sum of Rs.14,45,55,444/- as revenue expenditure. These expenses were incurred by the assessee for furnishing the retail showrooms where the assessee’s products are sold by the retailers i.e., franchisees. On perusal of the ledger of these expenses, the AO found that expenses include furniture for the stores, designs of the stores, etc. The AO on perusal of the agreement between the assessee and one of the franchisees viz., Pioneer Sports Company, New Delhi, found that all cots of refurbishment of the shop including and not limited to the cost of any new hardware and software solution shall be borne by the Nike i.e., the Assessee. According to the AO, these items of expenses cannot be regarded as revenue expenses as they endure for a longer period of time. The AO also made a reference to clause 12 of the agreement whereby the franchisee has to bear the insurance of goods and fixtures supplied by the assessee. Considering all these aspects, the AO concluded that the expenditure as a capital expenditure and he accordingly disallowed the claim of the assessee for deduction. The DRP agreed with the conclusions of the AO. 33. The learned Counsel for the assessee submitted that expenses are purely revenue in nature and the intention was to ensure that the franchisee IT(TP)A No.202/Bang/2021 Page 36 of 38 showrooms confirmed to certain standards. It was submitted that the expenses do not add any value to existing assets and they are revenue in nature. Alternatively, it was claimed that the assessee should be allowed depreciation in the event the expenditure is treated as capital in nature. Learned Counsel for the assessee placed reliance on the decision of the ITAT, Bengaluru Bench, in the case of Emdee Apparel in ITA Nos.576, 577/Bang/2007, order dated 21.09.2012. In the aforesaid case, the question arose in the context of identical expenditure incurred in the case of retail trader of Reebok Footware and Shoes incurring expenses which was disallowed as capital expenditure by the Revenue authorities. The Tribunal, after considering the various decisions cited on behalf of the assessee, finally concluded as follows: “Coming to question No.2, we find that in a catena of decisions relied upon by the learned counsel for the assessee (cited supra), it has been held that when any expenditure is incurred by an assessee on leasehold premises, even though it may give an enduring benefit, it would not amount to capital expenditure as no capital asset is being created in favour of the assessee. In some of the cases, the expenditure is on civil and electrical works also. In the case before us, we find that the AO has erroneously held that there was no termination clause in the agreement of lease and that the lease is permanent. We find that the lease is for a period of 4 years only and the assessee was to pay for lease rental as well interest-free security deposit for the lease and also that the assessee is required to incur the expenditure for interior and exterior works for carrying on the business as per 'brand'specifications. In such a situation, it cannot be said that the assessee is deriving an enduring benefit nor can it be said that any capital asset has been created in favour of the assessee. The quantum of expenditure cannot determine the nature of the expenditure. Therefore, respectfully following the decisions relied upon by the learned counsel for the assessee we hold that this e x p e n d i t u r e i s r e v e n u e i n n a t u r e . T h i s g r o u n d o f a p p e a l i s accordingly allowed.” IT(TP)A No.202/Bang/2021 Page 37 of 38 34. Learned DR placed reliance on the order of the AO and also made a reference on the decision of the ITAT, Delhi Bench, in the case of Carrier Airconditioning and Refrigeration Ltd., in ITA No.5244/Delhi/2015, order dated 13.07.2018. 35. We have given a careful consideration to the rival submissions. The decision rendered by the ITAT Delhi in the case of Carrier Air-conditioning (supra) was a case of renovation to a leased premises and the finding was that it was a complete replacement of the existing premises. In this case we are concerned with refurbishing a show room to make it attractive for customers to visit and purchase assessee’s products. In the given circumstances, we are of the view that the decision in the case of Emdee Apparels (supra) is applicable. Consequently, the claim made by the assessee is directed to be accepted and the relevant grounds of appeal are allowed. 36. Ground No.32 raised by the assessee with regard to not granting credit for brought forward losses is the issue which require examination by the AO and if the contention of the assessee is found correct, the assessee should be given credit for brought forward of losses. 37. Ground Nos.33 to 34 with regard to charge of interest under section 234A, 234B is purely consequential. Learned Counsel for the assessee however made a prayer that the charging of interest under section 234E is not in accordance with law. The AO is therefore directed to consider the claim of the assessee in this regard while giving effect to this order. IT(TP)A No.202/Bang/2021 Page 38 of 38 38. In the result, appeal of the assessee is partly allowed. Pronounced in the open court on the date mentioned on the caption page. Sd/- Sd/- Bangalore. Dated: 26.07.2022. /NS/* Copy to: 1.Appellants2.Respondent 3.CIT4.CIT(A) 5.DR6.Guard file By order Assistant Registrar, ITAT, Bangalore. (PADMAVATHY S) (N. V. VASUDEVAN) Accountant Member Vice President