Nike India Private Limited, Bangalore V. DCIT, Bangalore

ITA 804/BANG/2016

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 4967 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 5 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-10-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 03-12-2019
• Assessment Year: 2011-2012
• Appeal Filed On: 15-04-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MUZAFFAR HUSSAIN; RAJ
• Assessee Lawyers: N VENKATRAMAN K R VASUDEVAN
• Keywords: Reopening of assessment; Transfer pricing; Opportunity of being heard; International transaction; Rule of consistency; Retrospective amendment; Wholly owned subsidiary; Fair market value; Difference of opinion; Onus to prove; Reason to believe; Change of opinion; Set aside
• Section: 92C; 143(3); 92D; 92B; 92F; 92E; 37(1); 144C; 43; 48; 73; 13; 22; 92CA; 147; 148; 139

Judgement Text

IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH: BANGALORE BEFORE SHRI B. R. BASKARAN, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(TP)A NO.330/BANG/2015 ASSESSMENT YEAR: 2010-11 M/S. NIKE INDIA PRIVATE LIMITED NO.701, THE MILLENIA, TOWER-B MURPHY ROAD, ULSOOR BANGALORE-560 008 PAN NO : AABCN9612K VS. DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE-5(1)(2) BANGALORE APPELLANT RESPONDENT IT(TP)A NO. 804/BANG/2016 ASSESSMENT YEAR: 2011-12 M/S. NIKE INDIA PRIVATE LIMITED NO.701, THE MILLENIA, TOWER-B MURPHY ROAD, ULSOOR BANGALORE-560 008 VS. DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE-5(1)(1) BANGALORE APPELLANT RESPONDENT IT(TP)A NO. 356/BANG/2017 & IT(TP)A NO.739/BANG/2017 ASSESSMENT YEARS: 2007-08 & 2012-13 RESPECTIVELY M/S. NIKE INDIA PRIVATE LIMITED NO.701, THE MILLENIA, TOWER-B MURPHY ROAD, ULSOOR BANGALORE-560 008 VS. ACIT CIRCLE-5(1)(1) BANGALORE APPELLANT RESPONDENT IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 2 OF 55 IT(TP)A NO.3321/BANG/2018 ASSESSMENT YEAR: 2014-15 M/S. NIKE INDIA PRIVATE LIMITED NO.701, THE MILLENIA, TOWER-B MURPHY ROAD, ULSOOR BANGALORE-560 008 VS. DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE-5(1)(1) BANGALORE APPELLANT RESPONDENT APPELLANT BY : SHRI N VENKATRAMAN, K.R. VASUDEVAN, A.R. RESPONDENT BY : SMT. NEERA MALHOTRA AND SHRI MUZAFFAR HUSSAIN & SHRI RAJESH KUMAR JHA, D.RS. DATE OF HEARING : 30.09.2020 DATE OF PRONOUNCEMENT : 14.10.2020 O R D E R PER B.R. BASKARAN, ACCOUNTANT MEMBER: ALL THE APPEALS HAVE BEEN FILED BY THE ASSESSEE AND THEY RELATE TO THE ASSESSMENT YEARS 2007-08, 2010-11, 20 11-12, 2012- 13 AND 2014-15. ALL THESE APPEALS WERE HEARD TOGE THER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER, FOR THE SAK E OF CONVENIENCE. 2. THE ASSESSEE IS ENGAGED IS CARRYING ON WHOLESALE BU SINESS IN FOOTWEAR, APPAREL AND SUPPORT EQUIPMENTS OF NIKE BRAND IN INDIA. THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY O F NIKE HOLDING BV, NETHERLANDS, WHICH IN TURN IS HELD BY M/S. NIKE INC., USA. 3. WE SHALL FIRST TAKE UP THE APPEAL FILED BY THE ASSE SSEE FOR THE ASSESSMENT YEAR 2007-08, WHEREIN THE ASSESSEE I S CHALLENGING THE VALIDITY OF REOPENING OF ASSESSMENT. FACTS REL ATING TO THIS ISSUE ARE STATED IN BRIEF. THE ORIGINAL ASSESSMENT IN THE HANDS OF IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 3 OF 55 THE ASSESSEE FOR ASSESSMENT YEAR 2007-08 WAS COMPLE TED U/S 143(3) R.W.S. 144C OF THE ACT ON 10.10.2011. SUBSE QUENTLY, THE A.O. REOPENED THE ASSESSMENT BY ISSUING NOTICE U/S 148 OF THE ACT ON 26.3.2014 I.E. AFTER EXPIRY OF 4 YEARS FROM THE END OF THE ASSESSMENT YEAR. IN RESPONSE TO THE SAME, THE ASSE SSEE REQUESTED THE A.O. TO TREAT THE RETURN ORIGINALLY FILED U/S 1 39 OF THE ACT ON 31.10.2007 AS THE RETURN FILED IN RESPONSE TO THE N OTICE ISSUED U/S 148 OF THE ACT. THE ASSESSEE ALSO REQUESTED TH E A.O. TO FURNISH THE REASONS RECORDED FOR ISSUE OF NOTICE U/ S 148 OF THE ACT. IN RESPONSE TO THE SAME, THE A.O. FURNISHED R EASONS TO THE ASSESSEE, WHICH ARE EXTRACTED BELOW: THE ASSESSEE COMPANY M/S. NIKE INDIA PVT. LTD., IS ENGAGED IN THE BUSINESS OF IMPORTING FOOTWEAR, APPAREL, SPO RTS EQUIPMENT & ACCESSORIES FOR WHOLESALE TRADING IN INDIA. THE ASSESSEE HAS FILED RETURN OF INCOME DECLARING A LOSS OF RS.24,70 ,79,533/-. DURING THE SCRUTINY ASSESSMENT, AFTER ADDING THE AL P ADJUSTMENT OF RS.10,39,95,254/- THE LOSS WAS ASSESSED AT RS.14 ,30,84,279/-. THE HONBLE ITAT, IN THE CASE OF THE ASSESSEE, FOR AYS 2005-06 & 2006-07, UPHELD THE ADJUSTMENT WHICH THE TPO HAS MADE IN THESE TWO YEARS, TOWARDS REIMBURSEMENT OF E XPENSES WITHOUT MARK-UP BY THE ASSESSEE TO ITS AE. THE HON BLE ITAT HAS CONFIRMED THE TPOS FINDINGS THAT THESE EXPENDITURE S ARE IN FACT THE EXPENDITURES TO BE INCURRED BY NIKE INC. US AND NOT BY THE NIKE INDIA PVT. LTD., NIKE INDIA SHOULD NOT HAVE RE IMBURSED THE SAME. THESE EXPENDITURES WHICH WERE ON TRAVEL, ACC OMMODATION AND CONVEYANCE, SALARY PAYMENT TO EMPLOYEES OF NIKE INC., US AND COST OF SAMPLES ETC. ARE IN FACT THE LIABILITI ES OF NIKE INC., US AND IN VIEW OF THE FACT THAT, THE NATURE OF THESE E XPENSES ARE SUCH THAT THEY CANNOT BE ATTRIBUTED TO HAVE BEEN SOLELY AND EXCLUSIVELY INCURRED FOR THE DISTRIBUTION BUSINESS OF THE ASSES SEE COMPANY AND THAT THE ASSESSEE HAS NOT DERIVED ANY TANGIBLE BENEFIT FROM THESE EXPENSES. IN VIEW OF THE ABOVE, THESE EXPEND ITURES SHOULD NOT BE DEBITED TO THE P&L ACCOUNT BY THE ASSESSEE. FOR A.Y. 2007-08 ALSO THE ASSESSEE COMPANY HAS REIMBURSED SUCH EXPENDITURE AMOUNTING TO RS.4,75,49 ,193/- TO ITS AE M/S. NIKE INC, USA. THEREFORE, I HAVE REASON TO BELIEVE THAT IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 4 OF 55 THE INCOME CHARGEABLE TO TAX TO THE EXTENT OF RS.4, 75,49,193/- HAS ESCAPED ASSESSMENT WITHIN THE MEANING OF SEC.147 OF THE I.T ACT. 4. IT CAN BE NOTICED THAT THE REASONS FOR REOPENING WA S RELATED TO THE REIMBURSEMENT OF EXPENDITURE MADE BY THE A SSESSEE TO ITS ASSOCIATED ENTERPRISES. IN THE ORIGINAL ASSESSMENT PROCEEDINGS, THE AO/TPO HAD HELD THAT THE EXPENSES REIMBURSED WE RE INCURRED FOR THE PURPOSES OF BUSINESS OF THE ASSESSEE ONLY. IT WAS ACCEPTED TO BE AT ARMS LENGTH. HENCE NO TRANSFER PRICING ADJ USTMENT WAS MADE DURING THE COURSE OF ORIGINAL ASSESSMENT PROCE EDINGS. HOWEVER, THE AO HAS REOPENED THE ASSESSMENT OF AY 2 007-08 ON NOTICING A SUBSEQUENT DECISION RENDERED BY TRIBUNAL FOR ANOTHER YEAR, WHEREIN T.P ADJUSTMENT MADE IN RESPECT OF IDE NTICAL REIMBURSEMENT OF EXPENSES WAS UPHELD BY THE TRIBUNA L. 5. THE ASSESSEE OBJECTED TO THE REOPENING OF THE ASSES SMENT, WHICH WAS REJECTED BY THE AO. THEREAFTER, THE A.O. COMPLETED THE ASSESSMENT ON 14.12.2016 U/S 143(3) R.W.S.147 R.W.S . 144C(1) OF THE ACT. IT IS PERTINENT TO NOTE THAT THE LD. DRP DID NOT ACCEPT THE CONTENTIONS OF THE ASSESSEE THAT THERE WAS CHANGE O F OPINION AND ACCORDINGLY CONFIRMED THE VALIDITY OF THE REOPENING OF THE ASSESSMENT. 6. BEFORE US, THE LD. A.R. SUBMITTED THAT THE A.O. HAS REOPENED THE ASSESSMENT AFTER EXPIRY OF 4 YEARS FRO M THE END OF THE ASSESSMENT YEAR WITHOUT MENTIONING THAT THERE I S FAILURE ON THE PART OF THE ASSESSEE TO DISCLOSE TRULY AND CORR ECTLY ALL MATERIAL FACTS NECESSARY FOR ASSESSMENT. FURTHER, IN THE RE ASONS RECORDED FOR REOPENING, THE A.O HAS CLEARLY MENTIONED THAT T HE REOPENING WAS NECESSITATED ON ACCOUNT OF THE DECISION RENDERE D BY INCOME TAX APPELLATE TRIBUNAL IN THE CASE OF ASSESSEE FOR ASSESSMENT IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 5 OF 55 YEARS 2005-06 & 2006-07. THE LD. A.R. SUBMITTED TH AT THE ASSESSEE HAS SUBMITTED ALL THE DETAILS RELATING TO REIMBURSEMENT OF EXPENSES BEFORE THE A.O/TPO DURING THE COURSE O F ASSESSMENT PROCEEDINGS AND THE SAME HAS BEEN ACCEPTED TO BE AT ARMS LENGTH. HOWEVER, THE A.O. HAS REOPENED THE ASSESSMENT ONLY ON ACCOUNT OF A SUBSEQUENT DECISION RENDERED BY THE TRIBUNAL, MEANING THEREBY, THE AO HAS CHANGED HIS OPINION ON THE ISSU E OF REIMBURSEMENT OF EXPENSES AND ACCORDINGLY REOPENED THE ASSESSMENT. HOWEVER, THERE WAS NO FAILURE ON THE PA RT OF THE ASSESSEE TO DISCLOSE ALL MATERIAL FACTS DURING THE COURSE OF ORIGINAL ASSESSMENT PROCEEDINGS. HE SUBMITTED THAT THE SUBSE QUENT ORDER OF A COURT CANNOT BE TAKEN INTO CONSIDERATION TO CO ME TO THE CONCLUSION THAT THERE WAS FAILURE ON THE PART OF TH E ASSESSEE TO DISCLOSE ALL MATERIAL FACTS NECESSARY FOR ASSESSMEN T, AS HELD BY HONBLE BOMBAY HIGH COURT IN THE CASE OF SESAGOA LT D. VS JCIT(2008) 294 ITR 101. THE LD. A.R. FURTHER SUBMI TTED THAT IT IS IMPERATIVE ON THE PART OF THE A.O. TO MENTION IN TH E REASONS FOR REOPENING THAT THERE WAS FAILURE ON THE PART OF THE ASSESSEE TO DISCLOSE TRULY AND FULLY ALL MATERIAL FACTS, WHEN T HE REOPENING IS DONE AFTER EXPIRY OF 4 YEARS FROM THE END OF THE RE LEVANT ASSESSMENT YEAR, AS HELD BY HONBLE MADRAS HIGH COU RT IN THE CASE OF SHRI SHAKTI TEXTILES LTD. VS. JCIT (2010) 1 93 TAXMANN 216. FAILURE TO RECORD SO WILL VITIATE THE REASSES SMENT PROCEEDINGS. HE SUBMITTED THAT THE ASSESSEE HAD FU RNISHED ALL THE RELEVANT DETAILS TO THE AO DURING THE COURSE OF ORIGINAL ASSESSMENT PROCEEDINGS AND HENCE, THERE IS NO FAILU RE AS CONTEMPLATED IN THE PROVISO TO SEC. 147 OF THE ACT. THE LD. A.R. FURTHER SUBMITTED THAT THE HONBLE KARNATAKA HIGH C OURT HAS HELD IN THE CASE OF CIT VS. KARNATAKA BANK (2014) 52 TAM ANN.COM 526 THAT WHEN THERE IS NO CASE OF FAILURE ON THE PART O F THE ASSESSEE TO IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 6 OF 55 DISCLOSE FULLY AND TRULY ALL MATERIAL FACTS NECESSA RY FOR ASSESSMENT AND FURTHER WHERE THE ASSESSING AUTHORITY APPLIED I TS MIND AND BEING SATISFIED WITH THE CLAIM HAD ALLOWED THE CASE OF THE ASSESSEE, THE ASSESSING AUTHORITY COULD NOT HAVE IN ITIATED PROCEEDINGS U/S 147 OF THE ACT, AFTER THE END OF 4 YEARS. HE SUBMITTED THAT AN IDENTICAL VIEW HAS BEEN EXPRESSED BY COORDINATE BENCH IN THE CASE OF DCIT VS. N.N. DASTUR & COMPANY PVT. LTD. (ITA NO.300/BANG/2014). 7. THE LD. A.R. FURTHER SUBMITTED THAT THE TPO HAS SOU GHT ALL DETAILS IN RELATION TO REIMBURSEMENT OF EXPENSES DU RING THE COURSE OF ORIGINAL ASSESSMENT PROCEEDINGS AND THE ASSESSEE ALSO FURNISHED THE SAME, VIDE ITS LETTER DATED 12 TH APRIL, 2020. AFTER PERUSING THE DETAILS SO FURNISHED THE TPO/AO CAME T O THE CONCLUSION THAT THE COST TO COST REIMBURSEMENT OF EXPENSES INCURRED BY THE ASSESSEE WAS FOR ITS OWN BUSINESS P URPOSES AND ACCORDINGLY, THE TRANSACTION WAS CONSIDERED TO BE A T ARMS LENGTH. THE LD. A.R. SUBMITTED THAT THE TPO/AO HAD TAKEN A CONSCIOUS VIEW ON THE MATTER OF REIMBURSEMENT OF EXPENSES DUR ING THE COURSE OF ORIGINAL ASSESSMENT PROCEEDINGS. HOWEVER , THE AO HAS REOPENED THE ASSESSMENT FOR CONSIDERING THE VERY SA ME ISSUE, IN VIEW OF THE SUBSEQUENT DECISION RENDERED BY THE TRI BUNAL AGAINST THE ASSESSEE IN ASSESSMENT YEAR 2005-06 AND 2006-07 . HENCE, IT IS A CLEAR CASE OF CHANGE OF OPINION AND REOPENING IS NOT PERMISSIBLE AS HELD BY HONBLE SUPREME COURT IN THE CASE OF KELVINATOR INDIA LTD. (2010) 320 ITR 561. ACCORDIN GLY, THE LD. A.R. SUBMITTED THAT THE REOPENING IS BAD IN LAW AND ACCORDINGLY, THE IMPUGNED ASSESSMENT ORDER IS LIABLE TO BE QUASH ED. IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 7 OF 55 8. ON THE CONTRARY, THE LD. D.R. SUBMITTED THAT THE RE OPENING WAS DONE BY THE A.O. ON ACCOUNT OF FRESH FACTS COMI NG TO HIS NOTICE AS A RESULT OF ORDER PASSED BY THE TRIBUNAL AGAINST THE ASSESSEE IN ASSESSMENT YEAR 2005-06 & 2006-07. THE LD. D.R. SUBMITTED THAT THE TPO HAS HELD THE REIMBURSEMENT O F EXPENSES TO BE AT ARMS LENGTH IN THE ORIGINAL ASSESSMENT PR OCEEDINGS BASED ON THE EXPLANATIONS GIVEN BY THE ASSESSEE THAT THES E EXPENSES ARE RELATED TO THE BUSINESS OF THE ASSESSEE. HOWEVER, IN ASSESSMENT YEARS 2005-06 & 2006-07, THE TPO HAD NOTICED THAT T HESE EXPENSES ARE NOT RELATED TO THE BUSINESS ACTIVITIES OF THE ASSESSEE. THE VIEW OF THE TPO WAS UPHELD BY THE TRIBUNAL BY H OLDING THAT THE NATURE OF THESE EXPENSES IS SUCH THAT THEY CANN OT BE ATTRIBUTED TO HAVE BEEN SOLELY AND EXCLUSIVELY INCU RRED FOR THE DISTRIBUTION BUSINESS OF THE ASSESSEE. THE LD. D.R. SUBMITTED THAT THE ORDER SO PASSED BY THE TPO/ITAT HAS BROUGHT FRE SH FACTS, WHICH WERE NOT EARLIER CONSIDERED IN THE ORIGINAL A SSESSMENT PROCEEDINGS. THESE FRESH FACTS HAVE LED TO THE AO T O BELIEVE THAT THERE WAS ESCAPEMENT OF ASSESSMENT. ACCORDINGLY, TH E LD. D.R. SUBMITTED THAT THE REOPENING IS VALID. 9. WE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECO RD. A PERUSAL OF REASONS FOR REOPENING RECORDED BY THE A. O., WHICH IS EXTRACTED ABOVE, WOULD SHOW THAT THE A.O. HAS REOPE NED THE ASSESSMENT AS A RESULT OF ORDER PASSED BY THE TRIBU NAL IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEARS 2005-06 & 2006-07, WHEREIN THE TRIBUNAL HAS UPHELD THE TRANSFER PRICIN G ADJUSTMENT MADE IN RESPECT OF REIMBURSEMENT OF EXPENSES. IT I S A FACT THAT DURING THE YEAR UNDER CONSIDERATION, THE TPO HAD HE LD IN THE ORIGINAL ASSESSMENT PROCEEDINGS THAT THE REIMBURSEM ENT OF EXPENSES IS RELATED TO THE BUSINESS ACTIVITIES OF T HE ASSESSEE AND IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 8 OF 55 HENCE ARE AT ARMS LENGTH. BE THAT AS IT MAY, THE UNDISPUTED FACT IS THAT REOPENING HAS BEEN DONE AFTER EXPIRY OF 4 Y EARS FROM THE END OF THE ASSESSMENT YEAR, IN WHICH CASE THE CONDI TIONS PRESCRIBED IN PROVISO TO SECTION 147 OF THE ACT HAS TO BE SATISFIED BY THE AO BEFORE REOPENING OF ASSESSMENT. THE PROV ISO TO SECTION 147 READS AS UNDER: PROVIDED THAT WHERE AN ASSESSMENT UNDER SUB-SECTIO N (3) OF SECTION 143 OR THIS SECTION HAS BEEN MADE FOR THE R ELEVANT ASSESSMENT YEAR, NO ACTION SHALL BE TAKEN UNDER THI S SECTION AFTER THE EXPIRY OF FOUR YEARS FROM THE END OF THE RELEVANT ASSESSMENT YEAR, UNLESS ANY INCOME CHARGEABLE TO TA X HAS ESCAPED ASSESSMENT FOR SUCH ASSESSMENT YEAR BY REAS ON OF THE FAILURE ON THE PART OF THE ASSESSEE TO MAKE A RETUR N UNDER SECTION 139 OR IN RESPONSE TO A NOTICE ISSUED UNDER SUB SECTION (1) OF SECTION 142 OR SECTION 148 OR TO DISCLOSE FU LLY AND TRULY ALL MATERIAL FACTS NECESSARY FOR HIS ASSESSMENT, FO R THAT ASSESSMENT YEAR. 10. HENCE, IT IS IMPERATIVE ON THE PART OF THE A.O. TO SHOW THAT THERE WAS FAILURE ON THE PART OF THE ASSESSEE TO DI SCLOSE FULLY AND TRULY ALL MATERIAL FACTS RELATING TO THE ASSESSMENT . ADMITTEDLY, NO SUCH ALLEGATION HAS BEEN MADE BY THE A.O. IN THE RE ASONS FOR REOPENING. THE HONBLE MADRAS HIGH COURT HAS HELD IN THE CASE OF SHRI SHAKTI TEXTILES LTD. (SUPRA) THAT THE A.O. SHO ULD HAVE RECORDED IN THE REASONS FOR REOPENING THAT THERE WA S FAILURE ON THE PART OF THE ASSESSEE TO MAKE TRUE AND FULL DISCLOSU RE. THE A.O. HAS NOT RECORDED THAT THERE WAS FAILURE ON THE PART OF THE ASSESSEE IN THE REASONS FOR REOPENING. WHEN THERE IS NO FAI LURE ON THE PART OF THE ASSESSEE, THE REOPENING AFTER EXPIRY OF FOUR YEARS IS BAD IN LAW AS HELD BY HONBLE JURISDICTIONAL KARNATAKA HIG H COURT IN THE CASE OF KARNATAKA BANK (SUPRA). IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 9 OF 55 11. IN ANY CASE, WE NOTICE THAT THE TPO/AO HAS TAKEN A CONSCIOUS DECISION ON THIS ISSUE ON THE BASIS OF EX PLANATIONS FURNISHED BY THE ASSESSEE. HAVING TAKEN A CONSCIOU S DECISION, IT IS NOT PERMISSIBLE FOR THE AO TO TAKE A DIFFERENT V IEW ON THE BASIS OF SUBSEQUENT DECISION OF THE TRIBUNAL, AFTER EXPIR Y OF FOUR YEARS FROM THE END OF THE RELEVANT ASSESSMENT YEAR. THE DECISION RENDERED BY HONBLE BOMBAY HIGH COURT IN THE CASE O F SESA GOA LTD (SUPRA) SUPPORTS THE CASE OF THE ASSESSEE. 12. ACCORDINGLY, WE FIND MERIT IN THE CONTENTIONS OF TH E ASSESSEE THAT THE REOPENING IS BAD IN LAW FOR MORE THAN ONE REASON AND HENCE THE ASSESSMENT ORDER IS LIABLE TO BE QUASHED. ACCORDINGLY, WE ALLOW THE LEGAL GROUND URGED BY THE ASSESSEE AND ACCORDINGLY THE IMPUGNED ASSESSMENT ORDER IS LIABLE TO BE QUASH ED. WE ORDER ACCORDINGLY. 13. WE SHALL NOW TAKE UP THE APPEALS FILED FOR ASSESSME NT YEAR 2010-11 TO 2012-13 & 2014-15.THE LD A.R ADVANCED HI S ARGUMENTS ON ISSUE WISE, SINCE IDENTICAL ADDITIONS HAVE BEEN MADE IN MORE THAN ONE YEAR. THE LD D.R ALSO FOLLOW ED THE SAME SEQUENCE. ACCORDINGLY, WE PROCEED TO DISPOSE OF TH E APPEALS ISSUE-WISE. 14. THE FIRST COMMON ISSUE RELATES TO THE T.P ADJUS TMENT MADE IN RESPECT OF ADVERTISEMENT AND MARKET PROMOTION (A MP) EXPENSES OTHER THAN THAT PAID TO BCCI FOR ADVERTISEMENT. TH IS ISSUE IS BEING CONTESTED IN AY 2010-11, 2011-12, 2012-13 AND 2014-15. 14.1 THE TPO TOOK THE VIEW THAT THE ASSESSEE IS SPENDING HUGE AMOUNT TOWARDS SELLING AND MARKETING EXPENSES. HE ALSO NOTICED IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 10 OF 55 THAT THE ASSESSEE WAS INCURRING LOSSES AND FURTHER NOTICED THAT THE LOSSES HAVE ARISEN MAINLY DUE TO INCURRING OF H UGE AMP EXPENSES. THE TPO FURTHER NOTICED THAT THE AVERAGE AMP EXPENSES INCURRED BY COMPARABLE COMPANIES WAS 0.76% OF THE SALES. ACCORDINGLY, THE TPO DETERMINED THE ABOVE S AID INDICATOR OF 0.76% AS THE BRIGHT LINE. THE AMP EXPENSES INCU RRED BY THE ASSESSEE INCLUDED THE EXPENSES INCURRED IN ACCORDAN CE WITH ADVERTISEMENT AGREEMENT ENTERED BY THE ASSESSEE WIT H BOARD OF CONTROL FOR CRICKET OF INDIA (BCCI). IN RESPECT OF THE SAID EXPENDITURE, THE ASSESSEE HAD ALSO RECEIVED A SHARE FROM ITS ASSOCIATED ENTERPRISES (AE). SINCE THE AMP EXPENSES INCURRED BY THE ASSESSEE WAS FAR IN EXCESS OF THE INDUSTRY AVER AGE, THE TPO TREATED THE EXCESS EXPENDITURE OVER AND ABOVE THE I NDUSTRY AVERAGE AS NON-ROUTINE EXPENSES. 14.2 THE TPO FURTHER NOTICED THAT THE ASSESSEE I S SOURCING ITS PRODUCTS FROM LOCAL MANUFACTURERS ONLY AND WAS USIN G BRAND NAME NIKE, BELONGING ITS AE. ACCORDINGLY, HE TOOK THE VIEW THAT THE NON-ROUTINE AMP EXPENSES HAVE BEEN INCURRED BY THE ASSESSEE FOR THE PURPOSES OF PROMOTING THE BRAND NA ME OF ITS AE. ACCORDINGLY, HE TOOK THE VIEW THAT THE ASSESSEE SHO ULD HAVE RECEIVED REIMBURSEMENT OF NON-ROUTINE AMP EXPENSES FROM ITS AE WITH A MARK-UP. THE TPO COMPUTED THE AVERAGE MARGI N DECLARED BY SOME COMPARABLE COMPANIES AND TOOK THE SAME AS T HE MARK- UP MARGIN. ACCORDINGLY HE ADDED THE MARK-UP TO TH E NON- ROUTINE EXPENSES AND COMPUTED THE AMOUNT THAT SHOUL D HAVE BEEN RECEIVED BY THE ASSESSEE FROM ITS AE. FROM TH E AMOUNT SO ARRIVED AT, HE REDUCED THE REIMBURSEMENT RECEIVED F ROM AE AND MADE T.P ADJUSTMENT OF REMAINING AMOUNT. IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 11 OF 55 14.3 THE WORKINGS MADE BY THE TPO IN VARIOUS YE ARS HAVE BEEN EXTRACTED BELOW:- (A) ASSESSMENT YEAR 2010-11:- (A) AMP EXPENSES INCURRED BY THE ASSESSEE - RS.69,26,82,429 (B) REIMBURSEMENT RECEIVED ON ACCOUNT OF BCCI RS.19,59,48,094 (C) AVERAGE SPEND ON AMP BY COMPARABLE COMPANIES - 0.76% (D) AVERAGE MARGIN EARNED BY COMPANIES IN BUSINESS MARKETING SUPPORT SERVICES - 24.80% 1. ALLOWABLE EXPENDITURE 0.76% OF RS.69,26,82,429** RS.52,64,386 2. EXPENDITURE TO BE DISALLOWED LESS:- RS.69,26,82,429 52,64,386 TOTAL (A) RS.68,74,18,043 3. MARK-UP ON EXPENDITURE (B) (RS.68,74,18,043 * 24.86% RS.17,04,79,675 4. REIMBURSEMENT TO BE RECEIVED WITH MARK- UP ((A) + (B)) RS.85,78,97,717 5. REIMBURSEMENT TO BE RECEIVED LESS:- AMOUNT RECEIVED RS.85,78,97,717 RS.19,59,48,094 T.P ADJUSTMENT RS.66,19,49,623 (** APPEARS TO BE A MISTAKE. THE TPO HAS TAKEN AMP EXPENSES INSTEAD OF SALES AMOUNT) IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 12 OF 55 (B) ASSESSMENT YEAR 2011-12:- THE TPO COMPUTED THE T.P ADJUSTMENT AS UNDER:- 1. ALLOWABLE EXPENDITURE 1.02% OF RS.231,12,21,724 RS.2,35,74,462 2. EXPENDITURE TO BE DISALLOWED LESS:- ADD:- SALARY OF SECONDED EXPATRATES RS.89,58,16,134 2,35,74,462 70,30,601 TOTAL (A) RS.87,92,72,273 3. MARK-UP ON EXPENDITURE (B) (RS.68,74,18,043 * 21.10% RS.18,55,26,450 4. REIMBURSEMENT TO BE RECEIVED WITH MARK- UP ((A) + (B)) RS.106,47,98,723 5. REIMBURSEMENT TO BE RECEIVED LESS:- AMOUNT RECEIVED RS.106,47,98,723 RS. 14,39,85,554 T.P ADJUSTMENT RS.92,08,13,169/- (C) ASSESSMENT YEAR- 2012-13:- THE TP ADJUSTMENT WAS WORKED OUT BY THE TPO AS UNDE R. IN THIS YEAR, THE ASSESSEE HAS NOT SPENT ON BCCI. IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 13 OF 55 1. ALLOWABLE EXPENDITURE 1% OF RS.337,38,63,131 RS.3,37,38,631 2. EXPENDITURE TO BE DISALLOWED LESS:- RS.90,90,34,786 3,37,38,631 TOTAL (A) RS.87,52,96,155 3. MARK-UP ON EXPENDITURE (B) (RS.87,52,96,155 * 13.27% RS.11,61,51,800 4. REIMBURSEMENT TO BE RECEIVED WITH MARK- UP ((A) + (B)) RS.99,14,47,955 T.P ADJUSTMENT RS.99,14,47,955 (D) ASSESSMENT YEAR 2014-15:- THE T.P ADJUSTMENT WAS WORKED OUT BY THE TPO IS AS UNDER. IN THIS YEAR ALSO, THE ASSESSEE HAS NOT SPENT ON BCCI. 1. ALLOWABLE EXPENDITURE 2.37% OF RS.604,86,36,830 RS.14,33,52,693 2. EXPENDITURE TO BE DISALLOWED LESS:- RS.90,48,56,110 14,33,52,693 TOTAL (A) RS.76,15,03,417 3. MARK-UP ON EXPENDITURE (B) (RS.76,15,03,417 * 10.78% RS. 8,20,90,068 4. REIMBURSEMENT TO BE RECEIVED WITH MARK- UP ((A) + (B)) RS.84,35,93,485 T.P ADJUSTMENT RS.84,35,93,485 IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 14 OF 55 14.4 IT WAS BROUGHT TO OUR NOTICE THAT THE ISSUE OF T.P ADJUSTMENT MADE IN RESPECT OF AMP EXPENSES WAS EXAM INED BY THE CO-ORDINATE BENCH IN THE ASSESSEES OWN CASE IN IT(TP)A NO.232/BANG/2014 AND IT(TP)A NO.260/BANG/2014 RELAT ING TO AY 2009-10. WE NOTICE THAT THE TRIBUNAL HAS BIFURCATE D THE AMP EXPENSES INTO TWO CATEGORIES, VIZ., (A) AMP EXPENSES OTHER THAN BCCI EXPENSES (B) AMP EXPENSES RELATING TO BCCI. WE NOTICE THAT THE TRIBUNAL HAS DECIDED THE FIRST C ATEGORY OF EXPENSES IN FAVOUR OF THE ASSESSEE. HOWEVER, THE S ECOND CATEGORY OF EXPENSES WAS RESTORED TO THE FILE OF AO/TPO WITH THE DIRECTION TO RE-EXAMINE THE AMP EXPENSES RELATING TO BCCI. THE ISSUE RELATING TO FIRST CATEGORY IS BEING CONTESTED IN AY 2010-11, 2011- 12, 2012-13 AND 2014-15. THE ISSUE RELATING TO AMP EXPENSES- BCCI IS BEING CONTESTED IN AY 2010-11 AND 2011-12. 14.5 WITH REGARD TO THE FIRST CATEGORY, THE CO-OR DINATE BENCH HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE IN AY 2 009-10 (SUPRA) WITH THE FOLLOWING OBSERVATIONS:- 9. AS REGARDS THE OTHER LOCAL AMP EXPENSES A PART FROM BCCI WE FIND THAT SUCH EXPENSES ARE INCURRED BY THE ASSESSEE FOR PROM OTION OF ITS ADVERTISEMENT AND PROMOTION OF ITS PRODUCTS AND THERE IS NO AGREE MENT OR ARRANGEMENT EITHER IN WRITING OR OTHERWISE WITH THE AE AS NOTHING HAS BEEN BROUGHT ON RECORD TO INDICATE THAT APART FROM THE EXPENSES OF BCCI THE A SSESSEE AND ITS AE HAS ANY UNDERSTANDING OR AGREEMENT FOR INCURRING OF AMP EX PENSES BY THE ASSESSEE. THEREFORE, EXCEPT THE BCCI EXPENSES OF RS.34.04 CRO RES THE REST OF THE EXPENSES OF AMP CANNOT BE CONSIDERED AS AN INTERNATIONAL TRA NSACTIONS IN VIEW OF THE DECISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF ESSILOR INDIA PVT. LTD. VS. DCIT (SUPRA) WHEREIN THE CO-ORDINATE BENCH OF THIS TRIB UNAL HAS DISCUSSED THIS ISSUE IN DETAIL IN PARAS 16 TO 22 AS UNDER : 16. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL ON RECORD. WE SHALL NOW DEAL WITH GROUNDS RELATING TO TP ADJUS TMENTS MADE BY THE TPO/AO AS CONFIRMED BY THE LD.DRP ON AMP EXPENDITURE. THE ISSUE THAT ARISES FOR CONSIDERATION IS WHETHER THE ADVERTISEMENT, MARKETI NG AND PROMOTION EXPENSES IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 15 OF 55 INCURRED BY THE ASSESSEE CAN BE SAID TO BE INCURRED NOT ONLY FOR THE BENEFIT OF THE ASSESSEE-COMPANY BUT ALSO BY WAY OF RENDERING SERVI CES OF PROMOTING THE BRAND OF FOREIGN AE VIZ. ESSILOR INTERNATIONAL SA, FRANCE . THE CASE OF THE ASSESSEE- COMPANY IS THAT THE EXPENDITURE WAS INCURRED ONLY F OR INCREASING THE SALES OF ITS PRODUCT AND NO BENEFIT ACCRUED TO ITS FOREIGN AE AN D THERE IS NO INTERNATIONAL TRANSACTION ON AMP EXPENDITURE AS ENVISAGED WITHIN THE MEANING OF SEC.92B OF THE ACT. THE LD.DRP CONFIRMED THE EXISTENCE OF INTE RNATIONAL TRANSACTION ON AMP EXPENDITURE FOLLOWING THE LAW LAID DOWN BY THE SPEC IAL BENCH OF TRIBUNAL IN THE CASE OF LG ELECTRONICS INDIA (P) LTD. & OTHERS (SU RA). HOWEVER, LD.DRP REMITTED THE MATTER TO THE FILE OF TPO FOR DETERMIN ATION OF ALP IN THE LIGHT OF LAW LAID DOWN THEREIN. THE CORRECTNESS OF THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF LG ELECTRONICS INDIA (P) LT D., (SUPRA) WAS CONSIDERED BY THE HONBLE DELHI HIGH COURT IN THE CASE OF SONY ER ICSSON MOBILE COMMUNICATION INDIA (P) LTD.(SUPRA). THE FOLLOWING QUESTIONS WERE ADDRESSED BY THE HONBLE DELHI HIGH COURT: (I) WHETHER THE ADDITIONS SUGGESTED BY THE TRANSFE R PRICING OFFICER ON ACCOUNT OF ADVERTISING/MARKETING AND PRO MOTION EXPENSES (AMP EXPENSES' FOR SHORT) WAS BEYOND JURIS DICTION AND BAD IN LAW AS NO SPECIFIC REFERENCE WAS MADE BY THE ASSESSING OFFICER, HAVING REGARD TO RETROSPECTIVE AMENDMENT T O SECTION 92CA OF THE INCOME TAX ACT, 1961 BY FINANCE ACT, 20 12. (II)WHETHER AMP EXPENSES INCURRED BY THE ASSESSEE I N INDIA CAN BE TREATED AND CATEGORIZED AS AN INTERNATIONAL TRAN SACTION UNDER SECTION 92B OF THE INCOME TAX ACT, 1961? (III) WHETHER UNDER CHAPTER X OF THE INCOME TAX ACT , 1961, A TRANSFER PRICING ADJUSTMENT CAN BE MADE BY THE TRAN SFER PRICING OFFICER/ ASSESSING OFFICER IN RESPECT OF EXPENDITUR E TREATED AS AMP EXPENSES AND IF SO IN WHICH CIRCUMSTANCES? (IV) IF ANSWER TO QUESTION NOS.2 AND 3 IS IN FAVOUR OF THE REVENUE, WHETHER THE INCOME TAX APPELLATE TRIBUNAL WAS RIGHT IN HOLDING THAT TRANSFER PRICING ADJUSTMENT IN RESPECT OF AMP EXPENSES SHOULD BE COMPUTED BY APPLYING COST PLUS METHOD. (V) WHETHER THE INCOME TAX APPELLATE TRIBUNAL WAS R IGHT IN DIRECTING THAT FRESH BENCH MARKING/COMPARABILITY AN ALYSIS SHOULD BE UNDERTAKEN BY THE TRANSFER PRICING OFFICER BY AP PLYING THE PARAMETERS SPECIFIED IN PARAGRAPH 17.4 OF THE ORDER DATED 23.01.2013 PASSED BY THE SPECIAL BENCH IN THE CASE OF LG ELECTRONICS INDIA (P) LTD.? 17. THE CONCLUSIONS OF THE DIVISION BENCH IN SONY ERICSSON (SUPRA) ARE AS UNDER: IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 16 OF 55 (I) THE COURT CONCURRED WITH THE MAJORITY OF THE SP ECIAL BENCH OF THE ITAT IN THE LG ELECTRONICS CASE QUA THE APPLICA BILITY OF 92CA(2B) AND HOW IT CURED THE DEFECT INHERENT IN 92 CA(2A). THE ISSUE CONCERNING RETROSPECTIVE INSERTION OF 92CA(2B ) WAS DECIDED IN FAVOUR OF THE REVENUE. (II) AMP EXPENSES WERE HELD TO BE INTERNATIONAL TRA NSACTION AS THIS WAS NOT DENIED AS SUCH BY THE ASSESSEES. (III) CHAPTER X AND SECTION 37(1) OF THE ACT OPERAT ED INDEPENDENTLY. THE FORMER DEALT WITH THE ALP OF AN INTERNATIONAL TRANSACTION WHEREAS THE LATTER DEALS WITH THE ALLOWABILITY/DISALLOWABILITY OF BUSINESS EXPENDITUR E. ALSO, ONCE THE CONDITIONS FOR APPLICABILITY OF CHAPTER X WERE SATISFIED NOTHING SHALL IMPEDE THE LAW CONTAINED THEREIN TO C OME INTO PLAY. (IV) CHAPTER X DEALT WITH ALP ADJUSTMENT WHEREAS SE CTION 40A(2)(B) DEALT WITH THE REASONABILITY OF QUANTUM O F EXPENDITURE. (V) TNMM APPLIED WITH EQUAL FORCE ON SINGLE TRANSAC TION AS WELL AS MULTIPLE TRANSACTIONS AS PER THE SCHEME OF CHAPT ER X AND THE TP RULES. THUS, THE WORD TRANSACTION WOULD INCLUD E A SERIES OF CLOSELY LINKED TRANSACTIONS. (VI) THE TPO/AO COULD OVERRULE THE METHOD ADOPTED BY THE ASSESSEE FOR DETERMINING THE ALP AND SELECT THE MOS T APPROPRIATE METHOD. THE REASONS FOR SELECTING OR ADOPTING A PAR TICULAR METHOD WOULD DEPEND UPON FUNCTIONAL ANALYSIS COMPAR ISON, WHICH REQUIRED AVAILABILITY OF DATA OF COMPARABLES PERFORMING OF SIMILAR OR SUITABLE FUNCTIONAL TASKS IN A COMPARABL E BUSINESS. WHEN SUITABLE COMPARABLES RELATING TO A PARTICULAR METHOD WERE NOT AVAILABLE AND FUNCTIONAL ANALYSIS OR ADJUSTMENT WAS NOT POSSIBLE, IT WOULD BE ADVISABLE TO ADOPT AND APPLY ANOTHER METHOD. (VII) ONCE THE AO /TPO ACCEPTED AND ADOPTED THE TNM M, BUT CHOOSES TO TREAT A PARTICULAR EXPENDITURE LIKE AMP AS A SEPARATE INTERNATIONAL TRANSACTION WITHOUT BIFURCATION/SEGRE GATION, IT WOULD LEAD TO UNUSUAL AND INCONGRUOUS RESULTS AS AM P EXPENSES WAS THE COST OR EXPENSE AND WAS NOT DIVERSE. IT WAS FACTORED IN THE NET PROFIT OF THE INTER-LINKED TRANSACTION. THE TNMM PROCEEDED ON THE ASSUMPTION THAT FUNCTIONS, ASSETS AND RISKS BEING BROADLY SIMILAR AND ONCE SUITABLE ADJUSTMENTS HAVE BEEN MADE, ALL THINGS GET TAKEN INTO ACCOUNT AND STAND R ECONCILED WHEN COMPUTING THE NET PROFIT MARGIN. ONCE THE COMPARABL ES PASS THE FUNCTIONAL ANALYSIS TEST AND ADJUSTMENTS HAVE BEEN MADE, THEN THE PROFIT MARGIN AS DECLARED WHEN MATCHES WITH THE COM PARABLES IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 17 OF 55 WOULD RESULT IN AFFIRMATION OF THE TRANSFER PRICE A S THE ARMS LENGTH PRICE. THEN TO MAKE A COMPARISON OF A HORIZO NTAL ITEM WITHOUT SEGREGATION WOULD BE IMPERMISSIBLE. (VIII) THE BRIGHT LINE TEST WAS JUDICIAL LEGISLATIO N. BY VALIDATING THE BRIGHT LINE TEST THE SPECIAL BENCH IN LG ELECTR ONICS CASE (SUPRA) WENT BEYOND CHAPTER X OF THE ACT. EVEN INTE RNATIONAL TAX JURISPRUDENCE AND COMMENTARIES DO NOT RECOGNISE BLT FOR BIFURCATION OF ROUTINE AND NON-ROUTINE EXPENSES. (IX) SEGREGATION OF AGGREGATED TRANSACTIONS REQUIRE S DETAILED SCRUTINY WITHOUT WHICH THERE SHALL BE NO SEGREGATIO N OF A BUNDLED TRANSACTION. SET OFF OF TRANSACTIONS SEGREGATED AS A SINGLE TRANSACTION IS JUST AND EQUITABLE AND NOT PROHIBITE D BY SECTION 92(3). SET-OFF IS ALSO RECOGNIZED BY INTERNATIONAL TAX EXPERTS AND COMMENTARIES. (X) SEGREGATION OF BUNDLED TRANSACTIONS SHALL BE DO NE ONLY IF EXCEPTIONS LAID DOWN IN CIT V. EKL APPLIANCES LTD. [2012] 345 ITR 241 (DEL) ARE JUSTIFIED. RE-CATEGORISATION AND SEGREGATION OF TRANSACTIONS ARE DIFFERENT EXERCISES; FORMER WOULD REQUIRE SEPARATE COMPARABLES AND FUNCTIONAL ANALYSIS. (XI) ECONOMIC OWNERSHIP OF A BRAND WOULD ONLY ARISE IN CASES OF LONGTERM CONTRACTS AND WHERE THERE IS NO NEGATIVE S TIPULATION DENYING ECONOMIC OWNERSHIP. ECONOMIC OWNERSHIP OF A BRAND OR A TRADE MARK WHEN PLEADED CAN BE ACCEPTED IF IT IS PROVED BY THE ASSESSEE. THE BURDEN IS ON THE ASSESSEE. IT CANNOT BE ASSUMED. (XII) AFTER THE ORDER OF THE SUPREME COURT IN THE MARUTI SUZUKI CASE, THE JUDGMENT OF THE DELHI HIGH COURT DOES NOT CONTINUE TO BIND THE PARTIES. THIS POSITION WAS MISUNDERSTOOD B Y THE MAJORITY OF THE SPECIAL BENCH IN THE LG ELECTRONICS CASE. (XIII) THE RP METHOD LOSES ITS ACCURACY AND RELIABI LITY WHERE THE RESELLER ADDS SUBSTANTIALLY TO THE VALUE OF THE PRO DUCT OR THE GOODS ARE FURTHER PROCESSED OR INCORPORATED INTO A MORE S OPHISTICATED PRODUCT OR WHEN THE PRODUCT/SERVICE IS TRANSFORMED. RP METHOD MAY REQUIRE FEWER ADJUSTMENTS ON ACCOUNT OF PRODUCT DIFFERENCES IN COMPARISON TO THE CUP METHOD BECAUSE MINOR PRODU CT DIFFERENCES ARE LESS LIKELY TO HAVE MATERIAL EFFECT ON THE PROFIT MARGINS AS THEY DO ON THE PRICE. (XIV) DETERMINATION OF COST OR EXPENSE CAN CAUSE DI FFICULTIES IN APPLYING COST PLUS (CP) METHOD. CAREFUL CONSIDERATI ON SHOULD BE GIVEN TO WHAT WOULD CONSTITUTE COST I.E. WHAT SHOUL D BE INCLUDED OR EXCLUDED FROM COST. A STUDIED SCRUTINY OF CP MET HOD WOULD INDICATE THAT WHEN THE SAID METHOD IS APPLIED BY TR EATING AMP IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 18 OF 55 EXPENSES AS AN INDEPENDENT TRANSACTION, IT WOULD NO T MAKE ANY DIFFERENCE WHETHER THE SAME ARE ROUTINE OR NON-ROUT INE, ONCE FUNCTIONAL COMPARABILITY WITH OR WITHOUT ADJUSTMENT IS ACCEPTED. (XV) THE TASK OF ARMS LENGTH PRICING IN THE CASE O F TESTED PARTY MAY BECOME DIFFICULT WHEN A NUMBER OF TRANSACTIONS ARE INTERCONNECTED AND COMPENSATED BUT A TRANSACTION IS BIFURCATED AND SEGREGATED. CP METHOD, WHEN APPLIED TO THE SEGR EGATED TRANSACTION, MUST PASS THE CRITERIA OF MOST APPROPR IATE METHOD. IF AND WHEN SUCH DETERMINATION OF GROSS PROFIT WITH RE FERENCE TO AMP TRANSACTION IS REQUIRED, IT MUST BE UNDERTAKEN IN A FAIR, OBJECTIVE AND REASONABLE MANNER. (XVI) THE MARKETING OR SELLING EXPENSES LIKE TRADE DISCOUNTS, VOLUME DISCOUNTS, ETC. OFFERED TO SUB-DISTRIBUTORS OR RETAILERS ARE NOT IN THE NATURE AND CHARACTER OF BRAND PROMOTION. THEY ARE NOT DIRECTLY OR IMMEDIATELY RELATED TO BRAND BUILDING E XERCISE, BUT HAVE A LIVE LINK AND DIRECT CONNECT WITH MARKETING AND INCREASED VOLUME OF SALES OR TURNOVER. THE BRAND BUILDING CON NECT IS TOO REMOTE AND FAINT. TO INCLUDE AND TREAT THE DIRECT M ARKETING EXPENSES LIKE TRADE OR VOLUME DISCOUNT OR INCENTIVE AS BRAND BUILDING EXERCISE WOULD BE CONTRARY TO COMMON SENSE AND WOULD BE HIGHLY EXAGGERATED. DIRECT MARKETING AND SALE RE LATED EXPENSES OR DISCOUNTS/CONCESSIONS WOULD NOT FORM PA RT OF THE AMP EXPENSES. (XVII) THE PRIME LENDING RATE CANNOT BE THE BASIS F OR COMPUTING MARKUP UNDER RULE 10B(1)(C) OF THE RULES, AS THE CA SE SET UP BY THE REVENUE PERTAINS TO MARK-UP ON AMP EXPENSES AS AN INTERNATIONAL TRANSACTION. MARK UP AS PER SUB-CLAUS E (II) TO RULE 10B(1)(C) WOULD BE COMPARABLE GROSS PROFIT ON THE C OST OR EXPENSES INCURRED AS AMP. THE MARK-UP HAS TO BE BEN CHMARKED WITH COMPARABLE UNCONTROLLED TRANSACTIONS OR TRANSA CTIONS FOR PROVIDING SIMILAR SERVICE/PRODUCT. (XVIII) THE EXCEPTIONS LAID DOWN IN EKL APPLIANCES CASE (SUPRA) WERE NEITHER INVOKED IN THE PRESENT CASE NOR WERE T HE CONDITIONS SATISFIED. (XIX) AN ORDER OF REMAND TO THE ITAT FOR DE NOVO CO NSIDERATION WOULD BE APPROPRIATE BECAUSE THE LEGAL STANDARDS OR RATIO ACCEPTED AND APPLIED BY THE ITAT WAS ERRONEOUS. ON THE BASIS OF THE LEGAL RATIO EXPOUNDED IN THIS DECISION, FACTS H AVE TO BE ASCERTAINED AND APPLIED. IF REQUIRED AND NECESSARY, THE ASSESSED AND THE REVENUE SHOULD BE ASKED TO FURNISH DETAILS OR TABLES. THE ITAT, IN THE FIRST INSTANCE, WOULD TRY AND DISPOSE OF THE APPEALS, RATHER THAN PASSING AN ORDER OF REMAND TO THE AO /T PO. AN IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 19 OF 55 ENDEAVOUR SHOULD BE TO ASCERTAIN AND SATISFY WHETHE R THE GROSS/NET PROFIT MARGIN WOULD DULY ACCOUNT FOR AMP EXPENSES. WHEN FIGURES AND CALCULATIONS AS PER THE TNM OR RP METHOD ADOPTED AND APPLIED SHOW THAT THE NET/GROSS MARGINS ARE ADEQUATE AND ACCEPTABLE, THE APPEAL OF THE ASSESSED SHOULD BE ACCEPTED. WHERE THERE IS A DOUBT OR THE OTHER VIEW IS PLAUSIBLE, AN ORDER OF REMAND FOR RE-EXAMINATION BY THE AO/TPO WO ULD BE JUSTIFIED. A PRACTICAL APPROACH IS REQUIRED AND THE ITAT HAS SUFFICIENT DISCRETION AND FLEXIBILITY TO REACH A FA IR AND JUST CONCLUSION ON THE ALP. IMPUGNED ORDER OF THE ITAT 2 1. THE ASSESSEE THEN FILED APPEALS BEING ITA NOS. ITA NO. 3861/DEL/2010, 4924/DEL/2011, 6580/DEL/2013 AND 6382/DEL/2012 FOR THE SAID FOUR AYS IN QUESTION. TH E ABOVE FOUR APPEALS WERE DISPOSED OF BY THE COMMON IMPUGNED ORD ER DATED 23RD MAY 2014 BY THE ITAT. 18. IT IS IMPORTANT TO NOTE THAT IN THE CASES D EALT BY THE HONBLE DELHI HIGH COURT ALONG WITH SONY ERICSSON MOBILE COMMUNICATION INDIA (P) LTD.(SUPRA), THE ASSESSEES WERE DISTRIBUTORS OF PRODUCTS MANUFAC TURED BY THE FOREIGN AE. THE SAID ASSESSEES THEMSELVES WERE NOT MANUFACTURERS. MORE OVER NONE OF THE SAID ASSESSES APPEARS TO HAVE QUESTIONED THE VERY EXISTE NCE OF INTERNATIONAL TRANSACTION WITH FOREIGN AE. IT WAS ALSO NOT DISPUT ED THAT THE SAID INTERNATIONAL TRANSACTION OF INCURRING AMP EXPENDITURE COULD BE S UBJECT MATTER OF TP ADJUSTMENTS IN TERMS OF SEC.92 OF THE ACT. 19. IN THE PRESENT CASE, THE ASSESSEE-COMPANY I MPORTS THE LENS FROM ITS FOREIGN AE AND AFTER SOME PROCESSING, SELLS THE PRODUCTS ON ITS OWN. HOWEVER, THE AMOUNT OF VALUE ADDITION ON ACCOUNT OF PROCESSING I N TERMS OF TOTAL REVENUE IS NOT CLEAR FROM THE MATERIAL ON RECORD. THAT APART, THE ASSESSEE-COMPANY HAS BEEN THROUGHOUT CONTESTING BEFORE ALL THE AUTHORITI ES THE VERY EXISTENCE OF INTERNATIONAL TRANSACTION ON ACCOUNT OF INCURRING A MP EXPENDITURE BETWEEN ASSESSEE-COMPANY AND ITS AE AND THEREFORE, THE CONT ENTIONS THAT THE LAW LAID DOWN BY THE HONBLE DELHI HIGH COURT IN SONY ERICSS ON MOBILE COMMUNICATION INDIA (P) LTD. (SUPRA) SHOULD BE APPLIED TO THE CAS E ON HAND, IS NOT CORRECT. THEREFORE, THE SUBMISSION OF THE LEARNED DEPARTMENT AL REPRESENTATIVE THAT THE MATTER BE REMANDED TO THE FILE OF TPOD FOR FRESH D ECISION IN THE LIGHT OF LAW LAID DOWN BY THE HONBLE DELHI HIGH COURT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATION INDIA (P) LTD.(SUPRA), CANNOT BE ACCE DED TO. 20. SUBSEQUENT TO THE DECISION IN THE CASE OF S ONY ERICSSON MOBILE COMMUNICATION INDIA (P) LTD.(SUPRA), THE HONBLE DE LHI HIGH COURT HAD RENDERED FIVE DECISIONS ON THE SAME ISSUE. THOSE D ECISIONS ARE: (I) MARUTI SUZUKI INDIA LTD. VS. CIT (282 CTR 1), (II) CIT VS. WHIRLPOOL OF INDIA LTD. (129 DTR (169), IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 20 OF 55 (III) BAUSCH & LOMB EYECARE (INDIA) (P) LTD. VS. ADDL.CIT (129 DTR 201) AND (IV) YUM RESTAURANTS (INDIA) PVT. LTD. VS. ITO (ITA NO.349/2015 DATED 13/01/2016) AND (V) HONDA SEIL PRODUCTS IN THE ABOVE-MENTIONED DECISIONS, THE ISSUE OF THE VERY EXISTENCE OF INTERNATIONAL TRANSACTION ON INCURRING AMP EXPENDITURE AND THE ME THOD OF DETERMINATION OF ALP WAS THE SUBJECT MATTER OF APPEAL BEFORE THE HON BLE DELHI HIGH COURT. THE HONBLE DELHI HIGH COURT HAD CATEGORICALLY HELD THA T IN THE ABSENCE OF AGREEMENT BETWEEN INDIAN ENTITY AND FOREIGN AE WHER EBY THE INDIAN ENTITY WAS OBLIGED TO INCUR AMP EXPENDITURE OF A CERTAIN LEVEL FOR FOREIGN ENTITY FOR THE PURPOSE OF PROMOTING THE BRAND VALUE OF THE PRODUCT S OF THE FOREIGN ENTITY, NO INTERNATIONAL TRANSACTION CAN BE PRESUMED. IT WAS F URTHER HELD THAT THE FACT THAT THERE WAS AN INCIDENTAL BENEFIT TO THE FOREIGN AE, IT CANNOT BE SAID THAT AMP EXPENDITURE INCURRED BY AN INDIAN ENTITY WAS FOR PR OMOTING BRAND OF FOREIGN AE. ONE MORE ASPECT HIGHLIGHTED BY THE HONBLE HIGH COU RT IS THAT IN THE ABSENCE OF MACHINERY PROVISIONS, BRINGING AN IMAGINED TRANSACT ION TO TAX WAS NOT POSSIBLE. WHILE COMING TO THIS CONCLUSION, THE HONBLE HIGH C OURT HAD PLACED RELIANCE ON THE DECISIONS OF THE HONBLE APEX COURT IN THE CASE S OF CIT VS. B.C.SRINIVASASETTY (128 ITR 294) AND PNB FINANCE LT D. VS. CIT (307 ITR 75). THE HONBLE DELHI HIGH COURT AFTER REFERRING TO ITS EARLIER DECISION IN THE CASE OF MARUTI SUZUKI INDIA LTD (SUPRA) AND WHIRLPOOL OF INDIA (P) LTD.,(SUPRA) HAD CONSIDERED THE QUESTION OF EXISTENCE OF THE INTERNA TIONAL TRANSACTION AND COMPUTATION OF ALP THEREON IN THE CASE OF BAUSCH & LOMB EYECARE (INDIA) (P) LTD.(SUPRA) VIDE PARA 51 TO 65 AS UNDER: 51. THE CENTRAL ISSUE CONCERNING THE EXISTENCE OF AN INTERNATIONAL TRANSACTION REGARDING AMP EXPENSES REQUIRES THE INT ERPRETATION OF PROVISIONS OF CHAPTER X OF THE ACT, AND TO DETERMIN E WHETHER THE REVENUE HAS BEEN ABLE TO SHOW PRIMA FACIE THE EXIST ENCE OF INTERNATIONAL TRANSACTION INVOLVING AMP BETWEEN THE ASSESSEE AND ITS AE. 52. AT THE OUTSET, IT MUST BE POINTED OUT THAT T HESE CASES WERE HEARD TOGETHER WITH ANOTHER BATCH OF CASES, TWO OF WHICH HAVE ALREADY BEEN DECIDED BY THIS COURT. THE TWO DECISIONS ARE THE JU DGEMENT DATED 11TH DECEMBER 2015 IN ITA NO. 110/2014 (MARUTI SUZU KI INDIA LTD. V. COMMISSIONER OF INCOME TAX) AND THE JUDGMENT DAT ED 22ND DECEMBER 2015 IN ITA NO. 610 OF 2014 (THE COMMISSIO NER OF INCOME TAX-LTU V. WHIRLPOOL OF INDIA LTD.) AND MANY OF THE POINTS URGED BY THE COUNSEL IN THESE APPEALS HAVE BEEN CON SIDERED IN THESE TWO JUDGMENTS. 53. A READING OF THE HEADING OF CHAPTER X ['COMPU TATION OF INCOME FROM INTERNATIONAL TRANSACTIONS HAVING REGARD TO AR M'S LENGTH PRICE'] IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 21 OF 55 AND SECTION 92 (1) WHICH STATES THAT ANY INCOME ARI SING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ALP AND SECTION 92C (1) WHICH SETS OUT THE DIFFEREN T METHODS OF DETERMINING THE ALP, MAKES IT CLEAR THAT THE TRANSF ER PRICING ADJUSTMENT IS MADE BY SUBSTITUTING THE ALP FOR THE PRICE OF THE TRANSACTION. TO BEGIN WITH THERE HAS TO BE AN INTER NATIONAL TRANSACTION WITH A CERTAIN DISCLOSED PRICE. THE TRA NSFER PRICING ADJUSTMENT ENVISAGES THE SUBSTITUTION OF THE PRICE OF SUCH INTERNATIONAL TRANSACTION WITH THE ALP. 54. UNDER SECTIONS 92B TO 92F, THE PRE-REQUISIT E FOR COMMENCING THE TP EXERCISE IS TO SHOW THE EXISTENCE OF AN INTE RNATIONAL TRANSACTION. THE NEXT STEP IS TO DETERMINE THE PRIC E OF SUCH TRANSACTION. THE THIRD STEP WOULD BE TO DETERMINE T HE ALP BY APPLYING ONE OF THE FIVE PRICE DISCOVERY METHODS SP ECIFIED IN SECTION 92C. THE FOURTH STEP WOULD BE TO COMPARE THE PRICE OF THE TRANSACTION THAT IS SHOWN TO EXIST WITH THAT OF THE ALP AND MAKE THE TP ADJUSTMENT BY SUBSTITUTING THE ALP FOR THE CONTR ACT PRICE. 55. SECTION 92B DEFINES INTERNATIONAL TRANSACTIO N AS UNDER: MEANING OF INTERNATIONAL TRANSACTION. 92B.(1) FOR THE PURPOSES OF THIS SECTION AND SECTIONS 92, 92C , 92D AND 92E , ' INTERNATIONAL TRANSACTION' MEANS A TRANSACTION BETWEEN TWO OR MOR E ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON-RESIDEN TS, IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBL E PROPERTY, OR PROVISION OF SERVICES, OR LENDING OR BORROWING MONE Y, OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME , LOSSES OR ASSETS OF SUCH ENTERPRISES, AND SHALL INCLUDE A MUTUAL AGR EEMENT OR ARRANGEMENT BETWEEN TWO OR MORE ASSOCIATED ENTERPRI SES FOR THE ALLOCATION OR APPORTIONMENT OF, OR ANY CONTRIBUTION TO, ANY COST OR EXPENSE INCURRED OR TO BE INCURRED IN CONNECTION WI TH A BENEFIT, SERVICE OR FACILITY PROVIDED OR TO BE PROVIDED TO A NY ONE OR MORE OF SUCH ENTERPRISES. (2) A TRANSACTION ENTERED INTO BY AN ENTERPRISE WITH A PERSON OTHER THAN AN ASSOCIATED ENTERPRISE SHALL, FOR THE PURPOSES OF SUB-SECTION (1), BE DEEMED TO BE A TRANSACTION E NTERED INTO BETWEEN TWO ASSOCIATED ENTERPRISES, IF THERE EXISTS A PRIOR AGREEMENT IN RELATION TO THE RELEVANT TRANSACTION BETWEEN SUC H OTHER PERSON AND THE ASSOCIATED ENTERPRISE, OR THE TERMS OF THE RELE VANT TRANSACTION ARE DETERMINED IN SUBSTANCE BETWEEN SUCH OTHER PERSON A ND THE ASSOCIATED ENTERPRISE. 56. THUS, UNDER SECTION 92B(1) AN 'INTERNATIONAL T RANSACTION' MEANS- (A) A TRANSACTION BETWEEN TWO OR MORE AES, EITHER O R BOTH OF WHOM ARE NON-RESIDENT (B) THE TRANSACTION IS IN THE NATU RE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY OR PROV ISION OF SERVICE OR IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 22 OF 55 LENDING OR BORROWING MONEY OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOMES OR LOSSES OF SUCH E NTERPRISES, AND (C) SHALL INCLUDE A MUTUAL AGREEMENT OR ARRANGEMENT BET WEEN TWO OR MORE AES FOR ALLOCATION OR APPORTIONMENT OR CONTRIB UTION TO THE ANY COST OR EXPENSES INCURRED OR TO BE INCURRED IN CONN ECTION WITH THE BENEFIT, SERVICE OR FACILITY PROVIDED OR TO BE PROV IDED TO ONE OR MORE OF SUCH ENTERPRISES. 57. CLAUSES (B) AND (C) ABOVE CANNOT BE READ DISJ UNCTIVELY. EVEN IF RESORT IS HAD TO THE RESIDUARY PART OF CLAUSE (B) T O CONTEND THAT THE AMP SPEND OF BLI IS 'ANY OTHER TRANSACTION HAVING A BEARING' ON ITS 'PROFITS, INCOMES OR LOSSES', FOR A 'TRANSACTION' T HERE HAS TO BE TWO PARTIES. THEREFORE FOR THE PURPOSES OF THE MEANS PART OF CLAUSE (B) AND THE 'INCLUDES PART OF CLAUSE (C), THE REVENUE HAS TO SHOW THAT THERE EXISTS AN 'AGREEMENT' OR 'ARRANGEMENT' OR 'UN DERSTANDING' BETWEEN BLI AND B&L, USA WHEREBY BLI IS OBLIGED TO SPEND EXCESSIVELY ON AMP IN ORDER TO PROMOTE THE BRAND OF B&L, USA. AS FAR AS THE LEGISLATIVE INTENT IS CONCERNED, IT IS S EEN THAT CERTAIN TRANSACTIONS LISTED IN THE EXPLANATION UNDER CLAUSE S (I) (A) TO (E) TO SECTION 92B ARE DESCRIBED AS AN 'INTERNATIONAL TRAN SACTION'. THIS MIGHT BE ONLY AN ILLUSTRATIVE LIST, BUT SIGNIFICANT LY IT DOES NOT LIST AMP SPENDING AS ONE SUCH TRANSACTION. 58. IN MARUTI SUZUKI INDIA LTD. (SUPRA) ONE OF THE SUBMISSIONS OF THE REVENUE WAS: 'THE MERE FACT THAT THE SERVICE OR BENEFIT HAS BEEN PROVIDED BY ONE PARTY TO THE OTHER WOULD BY ITSELF CONSTITUTE A TRANSACTION IRRESPECTIVE OF WHETHER THE CONSIDERATI ON FOR THE SAME HAS BEEN PAID OR REMAINS PAYABLE OR THERE IS A MUTU AL AGREEMENT TO NOT CHARGE ANY COMPENSATION FOR THE SERVICE OR BENE FIT.' THIS WAS NEGATIVED BY THE COURT BY POINTING OUT: 'EVEN IF TH E WORD 'TRANSACTION' IS GIVEN ITS WIDEST CONNOTATION, AND NEED NOT INVOLVE ANY TRANSFER OF MONEY OR A WRITTEN AGREEMENT AS SUGGEST ED BY THE REVENUE, AND EVEN IF RESORT IS HAD TO SECTION 92F ( V) WHICH DEFINES 'TRANSACTION' TO INCLUDE 'ARRANGEMENT', 'UNDERSTAND ING' OR 'ACTION IN CONCERT', 'WHETHER FORMAL OR IN WRITING', IT IS STI LL INCUMBENT ON THE REVENUE TO SHOW THE EXISTENCE OF AN 'UNDERSTANDING' OR AN 'ARRANGEMENT' OR 'ACTION IN CONCERT' BETWEEN MSIL A ND SMC AS REGARDS AMP SPEND FOR BRAND PROMOTION. IN OTHER WOR DS, FOR BOTH THE MEANS PART AND THE INCLUDES PART OF SECTION 92B (1) WHAT HAS TO BE DEFINITELY SHOWN IS THE EXISTENCE OF TRANSACT ION WHEREBY MSIL HAS BEEN OBLIGED TO INCUR AMP OF A CERTAIN LEVEL FO R SMC FOR THE PURPOSES OF PROMOTING THE BRAND OF SMC.' 59. IN WHIRLPOOL OF INDIA LTD. (SUPRA), THE COUR T INTERPRETED THE EXPRESSION 'ACTED IN CONCERT' AND IN THAT CONTEXT R EFERRED TO THE DECISION OF THE SUPREME COURT IN DAIICHI SANKYO COM PANY LTD. V. JAYARAM CHIGURUPATI 2010(6) MANU/SC/0454/2010, WHIC H AROSE IN IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 23 OF 55 THE CONTEXT OF ACQUISITION OF SHARES OF ZENOTECH LA BORATORY LTD. BY THE RANBAXY GROUP. THE QUESTION THAT WAS EXAMINED W AS WHETHER AT THE RELEVANT TIME THE APPELLANT, I.E., DAIICHI SANK YO COMPANY AND RANBAXY WERE ACTING IN CONCERT WITHIN THE MEANING OF REGULATION 20(4) (B) OF THE SECURITIES AND EXCHANGE BOARD OF I NDIA (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 1 997. IN PARA 44, IT WAS OBSERVED AS UNDER: THE OTHER LIMB OF THE CONCEPT REQUIRES TWO OR MORE PERSONS JOINING TOGETHER WITH THE SHARED COMMON OBJECTIVE AND PURPO SE OF SUBSTANTIAL ACQUISITION OF SHARES ETC. OF A CERTAIN TARGET COMPANY. THERE CAN BE NO 'PERSONS ACTING IN CONCERT' UNLESS THERE IS A SHARED COMMON OBJECTIVE OR PURPOSE BETWEEN TWO OR MORE PER SONS OF SUBSTANTIAL ACQUISITION OF SHARES ETC. OF THE TARGE T COMPANY. FOR, DE HORS THE ELEMENT OF THE SHARED COMMON OBJECTIVE OR PURPOSE THE IDEA OF 'PERSON ACTING IN CONCERT' IS AS MEANINGLESS AS CRIMINAL CONSPIRACY WITHOUT ANY AGREEMENT TO COMMIT A CRIMIN AL OFFENCE. THE IDEA OF 'PERSONS ACTING IN CONCERT' IS NOT ABOUT A FORTUITOUS RELATIONSHIP COMING INTO EXISTENCE BY ACCIDENT OR C HANCE. THE RELATIONSHIP CAN COME INTO BEING ONLY BY DESIGN, BY MEETING OF MINDS BETWEEN TWO OR MORE PERSONS LEADING TO THE SHARED C OMMON OBJECTIVE OR PURPOSE OF ACQUISITION OF SUBSTANTIAL ACQUISITION OF SHARES ETC. OF THE TARGET COMPANY. IT IS ANOTHER MA TTER THAT THE COMMON OBJECTIVE OR PURPOSE MAY BE IN PURSUANCE OF AN AGREEMENT OR AN UNDERSTANDING, FORMAL OR INFORMAL; THE ACQUIS ITION OF SHARES ETC. MAY BE DIRECT OR INDIRECT OR THE PERSONS ACTIN G IN CONCERT MAY COOPERATE IN ACTUAL ACQUISITION OF SHARES ETC. OR T HEY MAY AGREE TO COOPERATE IN SUCH ACQUISITION. NONETHELESS, THE ELE MENT OF THE SHARED COMMON OBJECTIVE OR PURPOSE IS THE SINE QUA NON FOR THE RELATIONSHIP OF 'PERSONS ACTING IN CONCERT' TO COME INTO BEING. 60. THE TRANSFER PRICING ADJUSTMENT IS NOT EXPEC TED TO BE MADE BY DEDUCING FROM THE DIFFERENCE BETWEEN THE 'EXCESSIVE ' AMP EXPENDITURE INCURRED BY THE ASSESSEE AND THE AMP EX PENDITURE OF A COMPARABLE ENTITY THAT AN INTERNATIONAL TRANSACTION EXISTS AND THEN PROCEEDING TO MAKE THE ADJUSTMENT OF THE DIFFERENCE IN ORDER TO DETERMINE THE VALUE OF SUCH AMP EXPENDITURE INCURRE D FOR THE AE. IN ANY EVENT, AFTER THE DECISION IN SONY ERICSSON (SUP RA), THE QUESTION OF APPLYING THE BLT TO DETERMINE THE EXISTENCE OF AN I NTERNATIONAL TRANSACTION INVOLVING AMP EXPENDITURE DOES NOT ARIS E. 61. THERE IS MERIT IN THE CONTENTION OF THE ASSE SSEE THAT A DISTINCTION IS REQUIRED TO BE DRAWN BETWEEN A 'FUNC TION' AND A 'TRANSACTION' AND THAT EVERY EXPENDITURE FORMING PA RT OF THE FUNCTION CANNOT BE CONSTRUED AS A 'TRANSACTION'. FURTHER, TH E REVENUE'S ATTEMPT AT RE-CHARACTERISING THE AMP EXPENDITURE IN CURRED AS A TRANSACTION BY ITSELF WHEN IT HAS NEITHER BEEN IDEN TIFIED AS SUCH BY THE ASSESSEE OR LEGISLATIVELY RECOGNISED IN THE EXPLANA TION TO SECTION 92 IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 24 OF 55 B RUNS COUNTER TO LEGAL POSITION EXPLAINED IN CIT V . EKL APPLIANCES LTD. (SUPRA) WHICH REQUIRED A TPO 'TO EXAMINE THE INTERNATIONAL TRANSACTION AS HE ACTUALLY FINDS THE SAME. 62. IN THE PRESENT CASE, THE MERE FACT THAT B&L, USA THROUGH B&L, SOUTH ASIA, INC HOLDS 99.9% OF THE SHARE OF THE ASS ESSEE WILL NOT IPSO FACTO LEAD TO THE CONCLUSION THAT THE MERE INCREASI NG OF AMP EXPENDITURE BY THE ASSESSEE INVOLVES AN INTERNATION AL TRANSACTION IN THAT REGARD, WITH B&L, USA. A SIMILAR CONTENTION BY THE REVENUE, NAMELY, THAT EVEN IF THERE IS NO EXPLICIT ARRANGEME NT, THE FACT THAT THE BENEFIT OF SUCH AMP EXPENSES WOULD ALSO ENSURE TO T HE AE IS ITSELF SUFFICIENT TO INFER THE EXISTENCE OF AN INTERNATION AL TRANSACTION HAS BEEN NEGATIVED BY THE COURT IN MARUTI SUZUKI INDIA LTD. (SUPRA) AS UNDER: '68. THE ABOVE SUBMISSIONS PROCEED PURELY ON SURMIS ES AND CONJECTURES AND IF ACCEPTED AS SUCH WILL LEAD TO SE NDING THE TAX AUTHORITIES THEMSELVES ON A WILD-GOOSE CHASE OF WHA T CAN AT BEST BE DESCRIBED AS A 'MIRAGE'. FIRST OF ALL, THERE HAS TO BE A CLEAR STATUTORY MANDATE FOR SUCH AN EXERCISE. THE COURT IS UNABLE T O FIND ONE. TO THE QUESTION WHETHER THERE IS ANY 'MACHINERY' PROVISION FOR DETERMINING THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOL VING AMP EXPENSES, MR. SRIVASTAVA ONLY REFERRED TO SECTION 9 2F (II) WHICH DEFINES ALP TO MEAN A PRICE 'WHICH IS APPLIED OR PR OPOSED TO BE APPLIED IN A TRANSACTION BETWEEN PERSONS OTHER THAN AES IN UNCONTROLLED CONDITIONS'. SINCE THE REFERENCE IS TO PRICE AND TO UNCONTROLLED CONDITIONS IT IMPLICITLY BRINGS INTO PLAY THE BLT. IN OTHER WORDS, IT EMPHASISES THAT WHERE THE PRICE IS SOMETHING OTHER THAN WHAT WOULD BE PAID OR CHARGED BY ONE ENTITY FR OM ANOTHER IN UNCONTROLLED SITUATIONS THEN THAT WOULD BE THE ALP. THE COURT DOES NOT SEE THIS AS A MACHINERY PROVISION PARTICULARLY IN LIGHT OF THE FACT THAT THE BLT HAS BEEN EXPRESSLY NEGATIVED BY THE CO URT IN SONY ERICSSON. THEREFORE, THE EXISTENCE OF AN INTERNATIO NAL TRANSACTION WILL HAVE TO BE ESTABLISHED DE HORS THE BLT. ........... 70. WHAT IS CLEAR IS THAT IT IS THE 'PRICE' OF AN I NTERNATIONAL TRANSACTION WHICH IS REQUIRED TO BE ADJUSTED. THE V ERY EXISTENCE OF AN INTERNATIONAL TRANSACTION CANNOT BE PRESUMED BY ASS IGNING SOME PRICE TO IT AND THEN DEDUCING THAT SINCE IT IS NOT AN ALP, AN 'ADJUSTMENT' HAS TO BE MADE. THE BURDEN IS ON THE R EVENUE TO FIRST SHOW THE EXISTENCE OF AN INTERNATIONAL TRANSACTION. NEXT, TO ASCERTAIN THE DISCLOSED 'PRICE' OF SUCH TRANSACTION AND THERE AFTER ASK WHETHER IT IS AN ALP. IF THE ANSWER TO THAT IS IN THE NEGATIVE THE TP ADJUSTMENT SHOULD FOLLOW. THE OBJECTIVE OF CHAPTER X IS TO MAK E ADJUSTMENTS TO THE PRICE OF AN INTERNATIONAL TRANSACTION WHICH THE AES INVOLVED MAY SEEK TO SHIFT FROM ONE JURISDICTION TO ANOTHER. AN 'ASSUMED' PRICE CANNOT FORM THE REASON FOR MAKING AN ALP ADJUSTMENT .' IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 25 OF 55 71. SINCE A QUANTITATIVE ADJUSTMENT IS NOT PERMI SSIBLE FOR THE PURPOSES OF A TP ADJUSTMENT UNDER CHAPTER X, EQUALL Y IT CANNOT BE PERMITTED IN RESPECT OF AMP EXPENSES EITHER. AS ALR EADY NOTICED HEREINBEFORE, WHAT THE REVENUE HAS SOUGHT TO DO IN THE PRESENT CASE IS TO RESORT TO A QUANTITATIVE ADJUSTMENT BY FIRST DETERMINING WHETHER THE AMP SPEND OF THE ASSESSEE ON APPLICATION OF THE BLT, IS EXCESSIVE, THEREBY EVIDENCING THE EXISTENCE OF AN I NTERNATIONAL TRANSACTION INVOLVING THE AE. THE QUANTITATIVE DETE RMINATION FORMS THE VERY BASIS FOR THE ENTIRE TP EXERCISE IN THE PR ESENT CASE. ......... 74. THE PROBLEM WITH THE REVENUE'S APPROACH IS THAT IT WANTS EVERY INSTANCE OF AN AMP SPEND BY AN INDIAN ENTITY WHICH HAPPENS TO USE THE BRAND OF A FOREIGN AE TO BE PRESUMED TO INVOLVE AN INTERNATIONAL TRANSACTION. AND THIS, NOTWITHSTANDING THAT THIS IS NOT ONE OF THE DEEMED INTERNATIONAL TRANSACTIONS LISTED UNDER THE EXPLANATION TO SECTION 92B OF THE ACT. THE PROBLEM DOES NOT STOP H ERE. EVEN IF A TRANSACTION INVOLVING AN AMP SPEND FOR A FOREIGN AE IS ABLE TO BE LOCATED IN SOME AGREEMENT, WRITTEN (FOR E.G., THE S AMPLE AGREEMENTS PRODUCED BEFORE THE COURT BY THE REVENUE) OR OTHERW ISE, HOW SHOULD A TPO PROCEED TO BENCHMARK THE PORTION OF SUCH AMP SPEND THAT THE INDIAN ENTITY SHOULD BE COMPENSATED FOR? 63. FURTHER, IN MARUTI SUZUKI INDIA LTD. (SUPRA) THE COURT FURTHER EXPLAINED THE ABSENCE OF A 'MACHINERY PROVISION QUA AMP EXPENSES BY THE FOLLOWING ANALOGY: '75. AS AN ANALOGY, AND FOR NO OTHER PURPOSE, IN TH E CONTEXT OF A DOMESTIC TRANSACTION INVOLVING TWO OR MORE RELATED PARTIES, REFERENCE MAY BE MADE TO SECTION 40 A (2) (A) UNDER WHICH CER TAIN TYPES OF EXPENDITURE INCURRED BY WAY OF PAYMENT TO RELATED P ARTIES IS NOT DEDUCTIBLE WHERE THE AO 'IS OF THE OPINION THAT SUC H EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS.' IN SUCH EVENT, 'SO MUCH OF THE EXPENDIT URE AS IS SO CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE S HALL NOT BE ALLOWED AS A DEDUCTION.' THE AO IN SUCH AN INSTANCE DEPLOYS THE 'BEST JUDGMENT' ASSESSMENT AS A DEVICE TO DISALLOW WHAT HE CONSIDERS TO BE AN EXCESSIVE EXPENDITURE. THERE IS NO CORRESP ONDING 'MACHINERY' PROVISION IN CHAPTER X WHICH ENABLES AN AO TO DETERMINE WHAT SHOULD BE THE FAIR 'COMPENSATION' AN INDIAN ENTITY WOULD BE ENTITLED TO IF IT IS FOUND THAT THERE IS A N INTERNATIONAL TRANSACTION IN THAT REGARD. IN PRACTICAL TERMS, ABS ENT A CLEAR STATUTORY GUIDANCE, THIS MAY ENCOUNTER FURTHER DIFF ICULTIES. THE STRENGTH OF A BRAND, WHICH COULD BE PRODUCT SPECIFI C, MAY BE IMPACTED BY NUMEROUS OTHER IMPONDERABLES NOT LIMITE D TO THE NATURE IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 26 OF 55 OF THE INDUSTRY, THE GEOGRAPHICAL PECULIARITIES, EC ONOMIC TRENDS BOTH INTERNATIONAL AND DOMESTIC, THE CONSUMPTION PATTERN S, MARKET BEHAVIOUR AND SO ON. A SIMPLISTIC APPROACH USING ON E OF THE MODES SIMILAR TO THE ONES CONTEMPLATED BY SECTION 92C MAY NOT ONLY BE LEGALLY IMPERMISSIBLE BUT WILL LEND ITSELF TO ARBIT RARINESS. WHAT IS THEN NEEDED IS A CLEAR STATUTORY SCHEME ENCAPSULATI NG THE LEGISLATIVE POLICY AND MANDATE WHICH PROVIDES THE NECESSARY CHE CKS AGAINST ARBITRARINESS WHILE AT THE SAME TIME ADDRESSING THE APPREHENSION OF TAX AVOIDANCE.' 64. IN THE ABSENCE OF ANY MACHINERY PROVISION, B RINGING AN IMAGINED TRANSACTION TO TAX IS NOT POSSIBLE. THE DE CISIONS IN CIT V. B.C. SRINIVASA SETTY (1981) 128 ITR 294 (SC) AND PN B FINANCE LTD. V. CIT (2008) 307 ITR 75 (SC) MAKE THIS POSITION EX PLICIT. THEREFORE, WHERE THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING AMP EXPENSE WITH AN ASCERTAINABLE PRICE IS UNABLE TO BE SHOWN TO EXIST, EVEN IF SUCH PRICE IS NIL, CHAPTER X PROVISIONS CAN NOT BE INVOKED TO UNDERTAKE A TP ADJUSTMENT EXERCISE. 65. AS ALREADY MENTIONED, MERELY BECAUSE THERE I S AN INCIDENTAL BENEFIT TO THE FOREIGN AE, IT CANNOT BE SAID THAT T HE AMP EXPENSES INCURRED BY THE INDIAN ENTITY WAS FOR PROMOTING THE BRAND OF THE FOREIGN AE. AS MENTIONED IN SASSOON J DAVID (SUPRA) 'THE FACT THAT SOMEBODY OTHER THAN THE ASSESSEE IS ALSO BENEFITTED BY THE EXPENDITURE SHOULD NOT COME IN THE WAY OF AN EXPEND ITURE BEING ALLOWED BY WAY OF A DEDUCTION UNDER SECTION 10 (2) (XV) OF THE ACT (INDIAN INCOME TAX ACT, 1922) IF IT SATISFIES OTHER WISE THE TESTS LAID DOWN BY THE LAW. 21. RESPECTFULLY FOLLOWING THE RATIO OF THE DEC ISION OF THE HONBLE DELHI HIGH COURT IN THE ABOVE CASES, WE HOLD THAT NO TP ADJUST MENT CAN BE MADE BY DEDUCING FROM THE DIFFERENCE BETWEEN AMP EXPENDITUR E INCURRED BY ASSESSEE- COMPANY AND AMP EXPENDITURE OF COMPARABLE ENTITY, I F THERE IS NO EXPLICIT ARRANGEMENT BETWEEN THE ASSESSEE-COMPANY AND ITS FO REIGN AE FOR INCURRING SUCH EXPENDITURE. THE FACT THAT THE BENEFIT OF SUC H AMP EXPENDITURE WOULD ALSO ENURE TO ITS FOREIGN AE IS NOT SUFFICIENT TO INFER EXISTENCE OF INTERNATIONAL TRANSACTION. THE ONUS LIES ON THE REVENUE TO PROVE THE EXISTENCE OF INTERNATIONAL TRANSACTION INVOLVING AMP EXPENDITURE BETWEEN THE A SSESSEE-COMPANY AND ITS FOREIGN AE. WE ALSO HOLD THAT THAT IN THE ABSENCE OF MACHINERY PROVISIONS TO ASCERTAIN THE PRICE INCURRED BY THE ASSESSEE-COMPAN Y TO PROMOTE THE BRAND VALUES OF THE PRODUCTS OF THE FOREIGN ENTITY, NO TP ADJUSTMENT CAN BE MADE BY INVOKING THE PROVISIONS OF CHAPTER X OF THE ACT. 22. APPLYING THE ABOVE LEGAL POSITION TO THE FAC TS OF THE PRESENT CASE, IT IS NOT A CASE OF REVENUE THAT THERE EXISTED AN ARRANGEMENT A ND AGREEMENT BETWEEN THE ASSESSEE-COMPANY AND ITS FOREIGN AE TO INCUR AMP EX PENDITURE TO PROMOTE IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 27 OF 55 BRAND VALUE OF ITS PRODUCTS ON BEHALF OF THE FOREIG N AE, MERELY BECAUSE THE ASSESSEE-COMPANY INCURRED MORE EXPENDITURE ON AMP C OMPARED TO THE EXPENDITURE INCURRED BY COMPARABLE COMPANIES, IT CA NNOT BE INFERRED THAT THERE EXISTED INTERNATIONAL TRANSACTION BETWEEN ASSESSEE- COMPANY AND ITS FOREIGN AE. THEREFORE, THE QUESTION OF DETERMINATION OF ALP ON SUCH TRANSACTION DOES NOT ARISE. HOWEVER, THE TRANSACTION OF EXPENDITURE ON AMP SHOULD BE TREATED AS A PART OF AGGREGATE OF BUNDLE OF TRANSACTIONS ON WHIC H TNMM SHOULD BE APPLIED IN ORDER TO DETERMINE THE ALP OF ITS TRANSACTIONS W ITH ITS AE. IN OTHER WORDS, THE TRANSACTION OF EXPENDITURE ON AMP CANNOT BE TREATED AS A SEPARATE TRANSACTION. IN THE PRESENT CASE, WE FIND FROM THE TP STUDY THAT THE OPERATING PROFIT COST TO THE TOTAL OPERATING COST WAS ADOPTED AS PROFIT LEVEL IN DICATOR WHICH MEANS THAT THE AMP EXPENDITURE WAS NOT CONSIDERED AS A PART OF THE OPERATING COST. THIS GOES TO SHOW THAT THE AMP EXPENDITURE WAS NOT SUBSUMED I N THE OPERATING PROFITABILITY OF THE ASSESSEE-COMPANY. THEREFORE, IN ORDER TO DETERMINE THE ALP OF INTERNATIONAL TRANSACTION WITH ITS AE, IT IS SIN E QUA NON THAT THE AMP EXPENDITURE SHOULD BE CONSIDERED AS A PART OF THE O PERATING COST. THEREFORE, WE RESTORE THE ISSUE OF DETERMINATION OF ALP, ON THE A BOVE LINES, TO THE FILE OF THE AO/TPO. THE GROUNDS OF APPEAL RAISED BY THE ASSESSE E-COMPANY ON THIS ISSUE ARE PARTLY ALLOWED. THUS IT IS CLEAR THAT THE TRIBUNAL HAS ANALYSED ALL THE PRECEDENCE ON THIS ISSUE AND BY FOLLOWING THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATION INDIA (P) LTD. VS. CI T 374 ITR 118 HAS HELD THAT THE AMP EXPENDITURE INCURRED BY THE ASSESSEE M ORE THAN THE COMPARABLE COMPANIES CANNOT LEAD TO THE CONCLUSION THAT THERE EXISTS ANY INTERNATIONAL TRANSACTIONS BETWEEN THE ASSESSEE AND ITS FOREIGN A E IN THE ABSENCE OF ANY ARRANGEMENT, UNDERSTANDING OR AGREEMENT BETWEEN THE ASSESSEE AND ITS AE TO INCUR AMP EXPENSES TO PROMOTE THE BRAND VALUE OF TH E AE. ACCORDINGLY, TO MAINTAIN THE RULE OF CONSISTENCY, WE FOLLOW THE DEC ISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL SO FAR AS THE AMP EXPENDITURE, OTH ER THAN BCCI EXPENSES INCURRED BY THE ASSESSEE AND DIRECT THE A.O/TPO NOT TO CONSIDER THE SAME AS AN INDEPENDENT INTERNATIONAL TRANSACTIONS BUT THE SAME WOULD BE PART OF OTHER INTERNATIONAL TRANSACTIONS . 14.6 WITH REGARD TO THE SECOND CATEGORY RELATING TO BCCI EXPENSES, THE CO-ORDINATE BENCH HAS RESTORED THE MA TTER TO THE FILE OF AO/TPO WITH THE FOLLOWING OBSERVATIONS:- 10. AS REGARDS THE BCCI EXPENDITURE, IT HAS T O BE ASCERTAINED WHETHER THERE WAS ANY BRAND BUILDING AND PROMOTION EXPENSES FOR THE BRAND NAME NIKE AS A RESULT OF THE AGREEMENT BETWEEN TH E ASSESSEE AND ITS AE AS WELL AS WITH BCCI WOULD AMOUNTS TO AN ARRANGEMENT, UNDERSTANDING OR AGREEMENT BETWEEN THE ASSESSEE AND ITS AE FOR INCUR RING AMP EXPENDITURE BY IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 28 OF 55 THE ASSESSEE TO PROMOTE AND ENHANCE THE BRAND VALUE OF NIKE. IT REQUIRES TO ANALYSE THE AGREEMENT BETWEEN THE ASSESSEE AND BCCI AND FURTHER THE AGREEMENT BETWEEN THE ASSESSEE AND ITS AE. THE ASS ESSEE HAS ENTERED INTO AN AGREEMENT DT.23.12.2005 WITH BCCI WHEREBY THE ASSES SEE SECURED RIGHTS TO SUPPLY AND SPONSOR THE NATIONAL CRICKET TEAM OF IND IA THROUGH BCCI. THE RELEVANT TERMS AND CONDITIONS AS WELL AS THE PURPOS E OF THE AGREEMENT ENUMERATED IN THE RECITAL AND OTHER CLAUSES ARE AS UNDER : RECITALS CLAUSE 1 (G) TERRITORY SHALL MEAN WORLDWIDE. (H) CONTRACT YEAR SHALL MEAN THE 12-MONTH PERIOD FROM JANUARY 1 THROUGH DECEMBER 31 DURING THE TERM OF THIS AGREEMENT. (I) NIKE TRADEMARKS SHALL MEAN THE NIKE NAME A ND ITS BRANDS. (M) NIKE PRODUCTS SHALL MEAN ALL PRODUCTS ON OR IN CONNECTION WITH WHICH ANY OF THE NIKE TRADEMARKS APPEAR. (N) LICENSED PRODUCTS SHALL MEAN THOSE NIKE P RODUCTS UTILIZING THE LICENSED MARKS AND SOLD BY NIKE PURSUANT TO THE TER MS OF PARAGRAPH 9 BELOW. IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 29 OF 55 (V) RIGHTS SHALL MEAN THE ADVERTISING AND PROMOTIONAL RIGHTS LICENSED TO NIKE BY THE BCCI. (W) SPONSORSHIP SHALL MEAN THE RIGHT LICENSED TO NIKE TO SPONSOR THE INDIAN TEAM IN ALL MATCHES AND TO PUT LOGO ON TEAM CLOTHIN G. CLAUSE 2. TERM : THE TERM OF THIS AGREEMENT SHALL COMMENC E ON JANUARY 1, 2006 AND SUBJECT TO THE TERMS HEREOF, SHALL CONTINU E IN FULL FORCE AND EFFECT FOR A PERIOD OF FIVE (5) YEARS, THROUGH DECEMBER 31, 2010 , UNLESS THE AGREEMENT IS SOONER TERMINATED OR FURTHER EXTENDED IN ACCORDANCE WITH THE TERMS AND CONDITIONS HEREOF (THE TERM). IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 30 OF 55 THUS IT IS CLEAR FROM THE TERMS OF THE CONTRACT BE TWEEN THE ASSESSEE AND BCCI THAT THE ASSESSEE SECURED WORLDWIDE RIGHT TO USE IN CONNECTION WITH ADVERTISEMENT AND PROMOTION OF NIKE PRODUCTS AND NI KE BRAND THROUGH VARIOUS PHOTOGRAPHS, VIDEOTAPE/FILM FOOTAGE OF THE NATIONAL CRICKET TEAM AND ITS OFFICIALS WHO REQUIRE TO USE NIKE BRAND NAME O N THE UNIFORM AND OTHER ACCESSORIES DURING THE MATCHES. AS PER THE ARRANGE MENT BETWEEN THE ASSESSEE AND BCCI, THE NATIONAL CRICKET TEAM AND THE OFFICIA LS OF THE NATIONAL CRICKET TEAM INCLUDING COACH HAVE TO USE THE NIKE NAME ON THEIR UNIFORM AND OTHER ACCESSORIES. THIS USE OF NIKE NAME DOES NOT INDICA TE ANY SPECIFIC PRODUCT BUT CLEARLY PROMOTES BRAND NAME OF NIKE. THE ASSESSEE AND ITS AE NIKE INTERNATIONAL LTD. ALSO ENTERED INTO AN AGREEMENT DT.1.1.2006. THE RECITALS AND OTHER RELEVANT CLAUSES ARE REPRODUCED AS UNDER : IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 31 OF 55 RECITALS THE PARTIES UNDERSTAND THAT CRICKET IS A WIDEL Y-POPULAR SPORT IN INDIA AND IN ORDER FOR THE NIKE BRAND TO SUCCEED IN THE TERRITOR Y, NIKE INDIA MUST ESTABLISH A PRESENCE IN THE CRICKETING MARKET. IN THIS REGAR D, AND AFTER CONSIDERABLE EFFORT, NIKE INDIA HAS SECURED WORLDWIDE RIGHTS TO SUPPLY A ND SPONSOR THE NATIONAL CRICKET TEAM OF INDIA THROUGH THE BCCI AGREEMENT A ND HAS RECEIVED THE CORRESPONDING RIGHTS TO RETAIL PRODUCT BEARING BOTH THE NIKE MARKS AND THE BCCI MARKS. BOTH PARTIES AGREE THAT THE BCCI AGREEMENT WIL L PROVIDE CONSIDERABLE BENEFITS FOR THE NIKE BRAND IN THE TERRITORY. NIL UNDERSTANDS THAT THE COSTS ASSOCIATED WIT H SPONSORING THE NATIONAL CRICKET TEAM OF INDIA AS VERY HIGH AND NIKE INDIA, AS A NEW PARTICIPANT IN THE MARKET, IS UNABLE TO SUPPORT THOSE COSTS UNAIDED. UNDERSTANDING THAT THE BCCI AGREEMENT WILL GENERATE CONSIDERABLE RETAIL SALES F OR NIKE ASSIST NIKE INDIA WITH THE COSTS OF THE BCCI AGREEMENT FOR A LIMITED PERIOD OF TIME UNTIL NIKE INDIA CAN SUPPORT THE COSTS OF ITS RELATIONSHIP WIT H BCCI INDEPENDENTLY. NIKE INDIA AGREES TO USE BEST EFFORTS TO EXPAN D THE NIKE BUSINESS IN THE TERRITORY THROUGH THE BCCI AGREEMENT, AND TO MAXIMI ZE SALES OF NIKE PRODUCTS THROUGH ITS RELATIONSHIP WITH BCCI, THEREBY MAXIMIZ ING ROYALTY SALES TO NIL AND ENHANCING THE VALUE OF THE NIKE BRAND WITHIN THE TE RRITORY. IN CONSIDERATION FOR THE BENEFITS THAT THE NI KE BRAND WILL RECEIVE THROUGH NIKE INDIAS ASSOCIATION WITH BCCI THROUGH THE BCCI AGREEMENT, NIL AGREES TO PAY TO NIKE INDIA FIFTY PERCENT (50%) OF THE COS TS OF THE BCCI AGREEMENT IN ACCORDANCE WITH THE TERMS OF THIS SECTION 3. AS IT IS CLEAR FROM THE CONJOINED REGARDING OF THE TWO AGREEMENTS THAT THE EXPENDITURE IN RESPECT OF SECURING WORLD RIGHTS TO SUPPLY AND SPONSOR THE INDIAN CRICKET TEAM WAS FOR THE PURPOSE OF PROMOTION OF T HE BRAND OF NIKE BY USE OF NIKE MARKS ON THE UNIFORM OF THE INDIAN CRICKET TEA M AND ALL ITS OFFICIALS AS WELL AS OTHER ACCESSORIES AND PLAYING KITS. THIS PURPOSE HAS BEEN ACKNOWLEDGED BY THE PARTIES IN THE AGREEMENT BETWEEN THE ASSESSE E AND ITS AE THAT THE BCCI AGREEMENT WILL PROVIDE SUITABLE BENEFIT FOR NIKE B RANDS IN THE TERRITORY. THE AE OF THE ASSESSEE AGREED TO SHARE THE COST OF THE BCCI AGREEMENT TO THE EXTENT OF 50% AND IT WAS IN CONSIDERATION FOR THE BENEFIT TO BE RECEIVED BY THE NIKE BRAND UNDER THE ARRANGEMENT WITH BCCI. FURTHER AS PER CLAUSE 3 OF THE AGREEMENT, THE AE OF THE ASSESSEE HAS PAID THIS AMO UNT AGAINST THE INVOICE OF THIS EXPENDITURE ISSUED BY THE ASSESSEE WHICH CLEA RLY SHOWS THAT THIS PAYMENT OF 50% OF THE AMOUNT BY THE AE WAS IN RESPECT OF THE E XPENDITURE INCURRED BY THE ASSESSEE PERTAINING TO THE AE FOR BRAND BUILDING AN D PROMOTION OF NIKE BRANDS. THEREFORE WE ARE OF THE CONSIDERED VIEW THAT THE P AYMENT OF 50% OF THE COST PAID TO THE BCCI BORN BY THE AE OF THE ASSESSEE IS UNDER CONSCIOUS IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 32 OF 55 UNDERSTANDING AND AGREEMENT BETWEEN THE PARTIES TO PROMOTE AND ENHANCE THE BRAND VALUE OF NIKE WHICH BELONGS TO THE AE OF THE ASSESSEE. ACCORDINGLY, THIS TRANSACTION OF INCURRING THE EXPENDITURE OF SECURIN G THE SPONSORSHIP OF THE INDIAN CRICKET TEAM THROUGH BCCI IS AN INTERNATIONA L TRANSACTION AND HAS TO BE BENCHMARKED AS PER THE PROVISIONS OF THE TRANSFER PRICING IN TERMS OF CHAPTER X OF THE INCOME TAX ACT. 11. AS PER THE DEFINITION OF THE INTERNATIO NAL TRANSACTIONS AS CONTEMPLATED UNDER SECTION 92B R.W.S. 92F(V) IT DOES NOT NECESSA RILY REQUIRE TRANSFER OR ASSIGNING OF PROPERTY OR CREATING ANY RIGHT OR INT EREST IN THE PROPERTY BUT EVEN AN ARRANGEMENT, UNDERSTANDING OR AN ACTION IN CONC ERT HAVING A BEARING ON THE PROFIT, INCOME, LOSSES OR ASSETS OF THE ENTERPRISES WOULD FALL IN THE TERM OF INTERNATIONAL TRANSACTION. SINCE THE TPO HAS CONS IDERED THE ENTIRE EXPENDITURE AS INTERNATIONAL TRANSACTIONS WHICH WE HAVE REVERSE D TO THE EXTENT OF THE EXPENDITURE INCURRED IN NORMAL COURSE WITHOUT ANY A GREEMENT, UNDERSTANDING OR ACTION IN CONCERT THEREFORE, THE DETERMINATION OF A LP OF THE INTERNATIONAL TRANSACTIONS TO THE EXTENT OF THE SHARING OF COST BETWEEN THE ASSESSEE AND AE PAID TO THE BCCI IS REQUIRED TO BE RECONSIDERED AND READJUDICATED. ACCORDINGLY, WE SET ASIDE THIS ISSUE TO THE RECORD OF THE TPO.A.O FOR DETERMINATION OF ALP AFRESH. THE OTHER AMP EXPENSE S SHOULD BE CONSIDERED AS PART OF THE OPERATING COST. ACCORDINGLY, FOLLOWING THE DECISION RENDERED BY THE CO-ORDINATE BENCH IN AY 2009-10 IN THE ASSESSEES OWN CASE, WE DECIDE THE ISSUE RELATING TO FIRST CATEGORY IN FAVOUR OF THE A SSESSEE IN AY 2010-11, 2011-12, 2012-13 AND 2014-15. WE RESTORE THE ISSUE RELATING TO SECOND CATEGORY TO THE FILE OF AO/TPO W ITH SIMILAR DIRECTIONS IN AY 2010-11 AND 2011-12. 15. THE NEXT ISSUE URGED BY THE ASSESSEE RELATES TO T.P ADJUSTMENT IN RESPECT OF REIMBURSEMENT OF EXPENSES. THE DETAILS OF EXPENSES AND THE YEAR IN WHICH THEY ARE BEING CO NTESTED ARE GIVEN BELOW:- (A) PURCHASE OF TRADE SAMPLES - AY 2010-11, 2011 -12 (B) PAYMENT OF SALARY TO EXPATRIATES AY 2010-11, 2012-13, 2014-15 IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 33 OF 55 (C) EXPENSES INCURRED ON SPORTING EVENTS AY 2010- 11, 2011-12 (D) EXPENSES RELATING TO FREIGHT AND INSURANCE A Y 2010-11. THE VIEW TAKEN BY TPO IN RESPECT OF EACH OF THE ITE M ARE DISCUSSED BELOW. (A)IN RESPECT OF PURCHASE OF SAMPLES, THE AO NOTI CED THAT THE ASSESSEE HAS PURCHASED SAMPLES FROM ITS AE AND ALSO INCURRED FREIGHT CHARGES RELATING TO SAMPLES. THE TPO TOOK THE VIEW THAT THE SAMPLES SUPPLIED TO THE RETAILERS WOULD BENEFIT THE AE ONLY. ACCORDINGLY, HE DETERMINED TH E ALP OF SAMPLES (INCLUDING THE FREIGHT CHARGES) AS NIL. (B) THE TPO NOTICED THAT THE AE HAS SENT ITS EMPL OYEES ON SECONDMENT BASIS TO THE ASSESSEE AND THE ASSESSEE H AS INCURRED SALARY EXPENSES ON THEM. THE TPO TOOK THE VIEW THAT THE SERVICES PERFORMED BY THESE EXPATRIATES WI LL BENEFIT ONLY ITS AE IN THE FORM OF INCREASED SALES AND IT W ILL NOT BENEFIT ANY ROUTINE DISTRIBUTOR. THE TPO ACCORDING LY DETERMINED THE ALP AS NIL. (C) EXPENSES INCURRED ON SPORTING EVENTS ARE IN TH E NATURE OF COSTS INCURRED ON PURCHASING PROMOTIONAL PRODUCT FOR SPONSORING EVENTS LIKE HUMAN RACE, NSW PRODUCT LAUN CH AND MANCHESTER UNITED CUP. THE TPO NOTICED THAT TH E ASSESSEE COULD NOT DEMONSTRATE AS TO HOW THESE EXPE NSES ARE RELATED TO INDIAN MARKET AND FURTHER HOW IT IS RELATED TO THE ASSESSEE, WHO IS A ROUTINE DISTRIBUTOR. ACCORD INGLY THE TPO DETERMINED THE ALP OF THIS EXPENSES AS NIL. IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 34 OF 55 (D) EXPENSES RELATING TO FREIGHT AND INSURANCE WE RE RELATED TO IMPORT OF TRADE SAMPLES PURCHASED FROM ITS AE. THE TPO HELD THAT THESE ARE NOT RELATED TO THE BUSINESS ACT IVITIES OF THE ASSESSEE. ACCORDINGLY HE DETERMINED THE ALP OF THIS EXPENSE AS NIL. 15.1 BEFORE US, THE ASSESSEE SUBMITTED AS UNDER:- REIMBURSEMENT OF EXPENSES ASSESSMENT YEAR GROUND OF APPEAL IN FORM 36B/FORM 36 2010 - 11 GROUND NO.16 TO GROUND NO.20 2011-12 GROUND NO.20 TO GROUND NO.21 AND GROUND NO. 23 TO GROUND NO.25 2012 - 13 GROUND NO.22 2014 - 15 GROUND NO.10 TO GROUND NO.12 YEARS FOR WHICH TRANSFER PRICING ADJUSTMENT WAS UNDERTAKEN FOR REIMBURSEMENT OF EXPENSE NATURE OF REIMBURSEMENT OF EXPENSES AY 2010-11 AY 2011-12 AY 2012-13 AY 2014-15 PURCHASE OF TRADE SAMPLES FROM THE AE PAYMENT OF SALARY TO EXPATRIATES EXPENSES INCURRED ON SPORTING EVENTS EXPENSES RELATING TO FREIGHT AND INSURANCE NATURE OF EXPENSES REIMBURSED PURCHASE OF TRADE SAMPLES FROM THE AE ASSESSMENT YEAR REFERENCE TO PAPERBOOK 2010 - 11 PAGE 73 2011 - 12 PAGE 61 IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 35 OF 55 NIPL BEING AN ENTREPRENEUR DISTRIBUTOR BEARS ALL RI SKS IN RELATION TO ITS DISTRIBUTION ACTIVITY IN INDIA. THE SAMPLES, DISPLAYED BY NIPL TO THIRD PARTY DISTRIBUTORS ARE NEW PRODUCTS PROPOS ED TO BE INTRODUCED BY NIKE GROUP INTO THE MARKET. GIVEN THA T THE DISTRIBUTION OF PRODUCTS ARE SEASONAL AND THE PRODU CTION SCHEDULING HAPPENS WELL IN ADVANCE, DISPLAY OF SAMP LES TO THIRD PARTY DISTRIBUTORS WOULD ENABLE NIPL TO RECEIVE SAL ES ORDER FROM THE THIRD PARTY DISTRIBUTORS FOR THE COMING SEASONS . ACCORDINGLY, NIPL INCURS INCIDENTAL AIR FREIGHT COST / WAREHOUSI NG COST IN RELATION TO THE SALES SAMPLES WHICH IS REQUIRED IN NIPL'S ORDINARY COURSE OF BUSINESS TO DERIVE ITS SALES REVENUE. THE LEARNED TPO ADOPTED THE APPROACH FOLLOWED IN TH E EARLIER YEARS FOR THE TREATMENT OF THE COST INCURRED WITH RESPECT TO SAMPLES FROM NIKE INC. THE APPELLANT HAS CLEARLY DEMONSTRATED DU RING THE SUBMISSIONS MADE BEFORE THE LEARNED TPO THAT THESE EXPENSES WERE INCIDENTAL IN NATURE AND DID NOT CONSTRUE AN EXPENS E INCURRED IN RELATION TO PAYMENT FOR THE SAMPLES. GIVEN THIS, THE ASSESSEE FINDS NO REASON FOR THESE EXPENSES NOT TO BE CONSIDERED AT ARM'S LENGTH AS THESE ARE ONLY FREIGH T AND RELATED COSTS IN RELATION TO THE SAMPLES WHICH ARE ABSOLUTE LY RELEVANT FOR NIPL TO RECEIVE SALES ORDER FROM THIRD PARTY DISTRI BUTORS AND THUS DERIVE SALES REVENUE. FURTHER, THE ASSESSEE WISHES TO SUBMIT THAT THE LEA RNED TPO ERRED IN HOLDING THAT THE PERSON PLACING THE ORDER ON THE THIRD PARTY FACTORY SUPPLIER IS THE AE WITHOUT APPRECIATI NG THE FACT THAT, IT IS NIPL WHICH PLACES A PURCHASE ORDER ON T HE THIRD PARTY FACTORY SUPPLIER. IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 36 OF 55 PAYMENT OF SALARY TO EXPATRIATES: ARGUMENTS ASSESSMENT YEAR REFERENCE TO PAPER BOOK KEY TERMS OF THE SECONDMENT AGREEMENT 2010 - 11 PAGE 81 2012 - 13 PAGE 39 TO PAGE 46 2014 - 15 PAGE 319 A COPY OF TAXES PAID BY THE EXPATS ARE PROVIDED AS EVIDENCES BEFORE THE LEARNED TPO/AO/DRP 2010 - 11 PAGE 83 2012 - 13 PAGE 39 TO PAGE 46 2014-15 PAGE 319 NIKE INC. SECONDED ITS EMPLOYEES TO NIPL FOR THE BE NEFIT OF THE BUSINESS OF NIPL. THE SECONDED EMPLOYEES WERE EXPER TS IN THEIR RELATED FIELDS ANDTHESE EMPLOYEES WERE REQUESTED BY THE APPELLANT TO BE DEPUTED TO INDIA FOR THE PURPOSE OF ASSISTING TH E APPELLANT IN THE BUSINESS. THE SALARY COST INCURRED BY NIKE INC., US AND OTHER EXPENDITURE INCURRED IN RESPECT OF THESE EMPLOYEES DEPUTED IS CROSS- CHARGED TO THE APPELLANT. THESE EXPATRIATES ARE PAY ING PERSONAL TAXES IN INDIA AND ARE DULY FILING THEIR RESPECTIVE INCOM E TAX RETURNS. THE SECONDMENT OF EMPLOYEE TO NIPL WAS PURELY FOR T HE BENEFIT OF NIPL AND THAT IT ENJOYS ALL ASSOCIATED BENEFITS WIT H IT AND THEREFORE CAN BE TERMED AS THE 'ECONOMIC OWNER' OF THE SECOND ED EMPLOYEES. IN RELATION TO THE ABOVE, RELIANCE IS PLACED ON THE FOLLOWING RULINGS OF IDS SOFTWARE SOLUTIONS (I) PVT LTD. (ITA NO. 87/13A NG/2008) AND CATERPILLAR INDIA PRIVATE LIMITED (ITA 630/BANG/201 0). FURTHER RELIANCE IS PLACED ON THE JUDICIAL DECISION IN THE CASE OF CAPARO ENGINEERING INDIA PVT. LTD [TS-325-ITAT-2018 (DEL)-TP] WHEREIN IT WAS HELD THAT WHERE THE EMPLOYEES HAVE B EEN DEPLOYED FOR THE BUSINESS OPERATIONS OF THE ASSESSEE, THE ALP CA NNOT BE DETERMINED AS NIL ON THE BASIS OF FAILING BENEFIT TEST. THEREFORE, IT IS CLEAR FROM THE ABOVE THAT THE EMPL OYEES SECONDED TO NIPL WERE PURELY FOR THE BENEFIT OF NIPL AND THAT I T ENJOYS ALL ASSOCIATED BENEFITS WITH IT AND THEREFORE CAN BE TE RMED AS THE 'ECONOMIC OWNER' OF THE SECONDED EMPLOYEES. THE APPELLANT WISHES TO SUBMIT THAT NIPL IS A FULL- FLEDGED DISTRIBUTOR AND THE SERVICES RENDERED BY THE SECONDED EMPLOYEES BENEFIT NIPL AND ACCORDINGLY IT IS THE DUTY OF NIPL TO INCUR SUCH CO ST. IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 37 OF 55 EXPENSES INCURRED ON SPORTING EVENTS ASSESSMENT YEAR REFERENCE TO PAPER BOOK 2010 - 11 PAGE 87 2011 - 12 PAGE 68 THE REIMBURSEMENTS OF EXPENSES PAID ALSO INCLUDE EX PENSES INCURRED ON PURCHASING PROMOTIONAL PRODUCT FOR SPONSORING EV ENTS LIKE HUMAN RACE, NSW PRODUCT LAUNCH AND MANCHESTER UNITE D CUP. EXPENSES RELATING TO FREIGHT AND INSURANCE ASSESSMENT YEAR REFERENCE TO PAPER BOOK 2010 - 11 PAGE 88 IN THIS RESPECT, THE ASSESSEE WISHES TO SUBMIT THAT FREIGHT AND INSURANCE COST IS INCURRED IN RESPECT OF SAMPLES OB TAINED FROM AE. IN OTHER WORDS, THESE COSTS ARE INCURRED BY NIKE IN C., US AND THEREAFTER CROSS-CHARGED TO NIPL. 15.2 HOWEVER, WE NOTICE THAT AN IDENTICAL ISSUE H AS BEEN EXAMINED BY THE CO-ORDINATE BENCH IN THE ASSESSEES 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 NOTIC E THAT THIS ISSUE HAS BEEN DECIDED AGAINST THE ASSESSEE WITH TH E 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 B Y THE PARENT COMPANY, NIKE INC., USA CAN BE ATTRIBUTED SOLELY AND TOTALLY TO T HE BUSINESS OF DISTRIBUTION UNDERTAKEN BY THE ASSESSEE. IT IS THE CONTENTION O F 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 T HE BUSINESS OF THE ASSESSEE IN INDIA. PER CONTRA, REVENUES VIEW IS THAT THE ASSE SSEE HAS FAILED TO ESTABLISH AND DEMONSTRATE THAT THESE EXPENSES ARE TO BE ATTRIBUTE D TO THE BUSINESS OPERATIONS OF THE ASSESSEE. 5.5.2 TO UNDERSTAND AND APPRECIATE THE ROLE AND BUS INESS 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 IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 38 OF 55 THE ASSESSEE IS BOTH INFORMATIVE AND USEFUL. IN TH E TRANSFER PRICING REPORT, UNDER THE HEADING BRIEF ON THE BUSINESS, IT IS ME NTIONED THAT 1.2.3 NIKE INDIA, A WHOLLY OWNED SUBSIDIARY OF NI KE HOLDINGS INC., IS RESPONSIBLE FOR DISTRIBUTION OF FOOTWEAR, SPORTS AP PAREL AND EQUIPMENT. IN ADDITION, NIKE INDIA PROVIDES ADMINISTRATIVE SUPPOR T IN RELATION TO THE MARKETING AND BRAND PROMOTION INITIATIVES OF NIKE G ROUP IN INDIA. 1.2.4 THE DEVELOPMENT OF ARMS LENGTH PRICE IN THI S 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 REFLECT S THE PROVISIONS OF THE OECD GUIDELINES CONCLUDING THAT, AT ARMS LENGTH, COMPAN IES ENGAGED IN PROVIDING SUCH VALUE ADDED SERVICES ARE ENTITLED TO RECEIVE COMPEN SATION APPROPRIATE TO THE SERVICES PERFORMED AND THE CAPITAL INVESTED IN THEIR BUSINESSES, BUT ARE NOT ENTITLED TO SHARE IN ANY RETURNS ATTRIBUTABLE TO TH E MARKETING OR COMMERCIAL INTANGIBLES THAT BELONG TO THE ENTREPRENEUR. 1.2.5 NIKE GROUP OWNS VIRTUALLY ALL THE VALUABLE I NTELLECTUAL PROPERTY RIGHTS (KNOW HOW, COPY RIGHTS, ETC.) AND OTHER COMMERCIAL OR MARKETING INTANGIBLES (BRAND NAMES, TRADE MARKS, ETC.) AND IS INVOLVED IN COMPLE X 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 FUNCT IONS PERFORMED AND RISKS ASSUMED, WE CONCLUDE THAT NIKE GROUP HAS MORE COMPLEX OPERAT IONS AND BEARS GREATER SHARE OF RISKS.' 5.5.3WHAT EMERGES FROM A PERUSAL OF THE ABOVE PARAG RAPHS OF THE TRANSFER PRICING STUDY REPORT SUBMITTED BY THE ASSESSEE IS T HAT; I) NIKE GROUP, THE PARENT COMPANY, DOES CERTAIN MAR KETING BRAND PROMOTION INITIATIVES, WITH SOME ADMINISTRATIVE SUP PORT FROM THE ASSESSEE; II) THE ASSESSEE IS MERELY A WHOLESALE DISTRIBUTOR AND IS ONLY AN INTERMEDIARY BETWEEN NIKE GROUP AND THE ULTIMATE CU STOMER. IT IS ONLY A SERVICE PROVIDER, IS COMPENSATED FOR ITS SERVICES A ND HAS ABSOLUTELY NO STAKE IN THE MARKETING AND COMMERCIAL INTANGIBLES, WHICH BELONG ONLY TO THE PARENT COMPANY. III)- THE BUSINESS RISK OF PRODUCT ACCEPTABILITY AN D PERFORMANCE IN THE MARKET IS BORNE BY NIKE GROUP, THE PARENT COMPANY A ND THE ASSESSEE DOES NOT OWN ANY INTEREST IN THE SAME. IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 39 OF 55 5.5.4 ADMITTEDLY, AS PER THE SUBMISSIONS OF THE ASS ESSEE, 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 INTERMED IARY BETWEEN THE ENTREPRENEUR AND THE CUSTOMER, SHOULD BEAR THE EXPENSES RELATED TO I NCREASING THE PRODUCT AWARENESS AND PRODUCT ACCEPTABILITY IN THE MARKET. THE SUBMISSION S MADE BY THE ASSESSEE BEFORE US AND BEFORE THE AUTHORITIES BELOW HAVE BEEN CONTRADI CTORY TO WHAT IS STATED IN THE ASSESSEE'S TRANSFER PRICING STUDY AND THIS IS NOT A CCEPTABLE. FURTHER, AS POINTED OUT BY THE TPO, THE ASSESSEE HAS SEPARATELY BOOKED SUBSTAN TIAL EXPENSES AMOUNTING TO APPROX. RS.2.42 CRORES TOWARDS ADVERTISING, MARKETING AND S ALES 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 TH AT 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, WHI CH 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 INITIATI VES IN INDIA, IT IS BUT NATURAL TO CONCLUDE THAT THE EXPENSES INCURRED BY NIKE INC., U SA ARE TOWARDS CREATION OF BRAND AWARENESS, FOR WHICH THE PARENT HAS THE RESPONSIBIL ITY. IN THIS VIEW OF THE MATTER, THE EXPENSES ON COST OF SAMPLES, ETC., HAVE TO BE ATTRI BUTED TO THE PARENT, NIKE INC., USA AND THEREFORE IT IS NOT CORRECT TO CONCLUDE THAT TH ESE 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 UND ER: 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 HIRE AND RETAIN GOOD PERSONNEL. HOWEVER, RECRUITMENT OF KEY EMPLOYEES 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 RE CRUITMENT OF KEY EMPLOYEES AT HIGHER LEVELS IN THE ASSESSEE COMPANY ARE GUIDED BY THE PA RENT GROUP, NEGATING THE CLAIM OF THE ASSESSEE MADE BEFORE US THAT THESE EMPLOYEES AR E TOTALLY UNDER THE CONTROL OF THE ASSESSEE. FURTHER, FROM THE SECONDMENT AGREEMENT SU BMITTED BY THE ASSESSEE BEFORE US, IT IS SEEN THAT THE PERSONNEL DEPUTED FROM THE PARENT COMPANY ARE WORKING AS IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 40 OF 55 GENERAL MANAGER, INDIA SALES DIRECTOR, MANUFACTURIN G LEADER, CATEGORY BUSINESS DIRECTOR AND THE LIKE. 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 INCONCE IVABLE 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 A SSESSEE HAS NOT FURNISHED ANY EVIDENCE TO SUBSTANTIATE ITS CLAIM THAT THESE PERSO NS, INDEED ONLY WORK IN THE DISTRIBUTION ACTIVITIES WHICH IS THE SOLE WORK UNDE RTAKEN BY THE ASSESSEE. THE ONUS FOR PROVIDING EVIDENCE TO SUBSTANTIATE ITS CLAIM RE STS WITH THE ASSESSEE WHICH, IN THE FACTS AND CIRCUMSTANCES AS DISCUSSED ABOVE, THE ASS ESSEE 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 FORT H ONLY A GENERAL EXPLANATION THAT THESE REPRESENT COURIERING EXPENSES, ETC. NO F URTHER DETAILS AS TO THE NATURE OF EXPENSES, THE PURPOSE FOR WHICH THEY WERE EXPEND ED ETC. HAS BEEN FORTHCOMING FROM THE ASSESSEE. THE ASSESSEE HAS ALSO NOT FURNIS HED 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 T HE ASSESSEE REMAIN UNSUBSTANTIATED. 55.7 ANOTHER CONTENTION OF THE ASSESSEE IS THAT S INCE 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 ACCE PT THE CONTENTION THAT THE TRANSFER PRICING ADJUSTMENT MADE IN THE TWO YEARS U NDER CONSIDERATION HAS TO BE NEGATED ONLY ON THE GROUND THAT SUCH AN ADJUSTME NT WAS NOT MADE IN THE SUBSEQUENT YEAR. IT IS A WELL SETTLED POSITION IN L AW THAT THE ASSESSMENT OF EVERY YEAR STANDS ON ITS OWN LEGS AND THE 'PRINCIPLE OF R ES 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 INDIV IDUAL YEARS AND NO COMMON PROPOSITION CAN BE PROPOUNDED FOR ALL THE YEARS. AS MENTIONED EARLIER, FOR THE TWO YEARS UNDER CONSIDERATION BEFORE US, THE ASSESS EE HAS NOT FURNISHED ANY EVIDENCE TO SUBSTANTIATE ITS CLAIM THAT THESE PERSO NS WORK ONLY FOR THE DISTRIBUTION ACTIVITY UNDERTAKEN BY THE ASSESSEE. T HE ONUS FOR BRINGING SUCH EVIDENCE ON RECORD TO SUBSTANTIATE THE CLAIM RESTS WITH THE ASSESSEE AND WE- FIND THAT SUCH ONUS HAS NEITHER BEEN DISCHARGED BEF ORE US NOR BEFORE THE AUTHORITIES BELOW. IF THESE EXPENSES WERE HELD TO B E AT ARMS LENGTH IN THE SUBSEQUENT YEAR, THEN THE ASSESSEE MUST HAVE FURNIS HED 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 VARIOU S FACTORS AND STAGE OF THE ASSESSEES BUSINESS AND REQUIRE TO BE VIEWED DIFFER ENTLY. FROM THE COPIES OF SECONDMENT AGREEMENT SUBMITTED TO US, WE FIND THAT THE EMPLOYEES SECONDED ARE DIFFERENT FOR DIFFERENT YEARS PERFORMING DIFFER ENT 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 T O BE DELETED MERELY BE SIMILAR IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 41 OF 55 15 ADJUSTMENT WAS NOT MADE IN THE SUBSEQUENT YEAR IS N OT ACCEPTABLE. WE FIND THAT THE FACTS APPLICABLE TO THE TWO YEARS UNDER CONSIDERATI ON DO NOT SUPPORT THE CASE OF THE ASSESSEE. IN FACT, AS EXPLAINED EARLIER, THE STATEM ENTS, AVERMENTS, ADMISSIONS MADE IN THE TRANSFER PRICING STUDY SUBMITTED BY THE ASSE SSEE 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 COS TS AND CONTRACTOR CHARGES CLAIMED AS REIMBURSEMENTS TO THE PARENT COMPANY, NI KE 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 CAN NOT 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 TANGI BLE BENEFIT FROM THE EXPENDITURE HAS NOT BEEN SUBSTANTIATED WITH EVI DENCE. III) THERE IS NO EVIDENCE OR LIKELIHOOD OF ANY INDEPENDE NT ENTITY DEALING IN SIMILAR CIRCUMSTANCES BEARING SUCH EXPEN DITURE. IV) 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. 16. THE NEXT ISSUE RELATES TO THE T.P ADJUSTMENT MA DE IN RESPECT OF THIRD PARTY ROYALTY. THIS ISSUE IS BEIN G 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 T HE WORLD ON THE BASIS ITS SALES TURNOVER IN INDIA. THE TPO NOT ICED THAT THE ASSESSEE HAS NOT FURNISHED ANY AGREEMENT IN RESPECT OF THIS IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 42 OF 55 ARRANGEMENT. THE ASSESSEE COULD NOT ALSO FURNISH WO RKINGS AS TO HOW IT IS ALLOCATED TO IT. FURTHER, THE ASSESSEE W AS SEEN PAYING ROYALTY @ 1% ON THE SALES, IN ADDITION TO THE PAYME NT OF THIRD PARTY ROYALTY, IN ACCORDANCE WITH THE AGREEMENT ENT ERED BY IT WITH M/S NEON, AN ASSOCIATED ENTERPRISES, WHICH MANAGES ENDORSEMENT CONTRACTS WITH WORLD CLASS ATHLETES. A CCORDINGLY, THE TPO TOOK THE VIEW THAT THE PAYMENT OF THIRD PARTY R OYALTY WOULD AMOUNT TO DUPLICATION OF PAYMENT. THE TPO ALSO NO TICED THAT THE ASSESSEE HAS NOT OBTAINED APPROVAL FROM RBI FOR MAK ING THIS PAYMENT. ACCORDINGLY, HE TOOK THE VIEW THAT THE TH IRD PARTY ROYALTY IS NOT AN EXPENDITURE RELATED TO THE ASSESS EE. ACCORDINGLY THE TPO DETERMINED THE ALP OF THIS EXPENDITURE AT N IL. 16.2 THE LD A.R SUBMITTED THAT THERE IS NO DUPLI CATION OF ROYALTY PAYMENT AS PRESUMED BY THE TPO. HE SUBMITT ED THAT THE ASSESSEE IS PAYING ROYALTY OF 1% FOR USING THE BRAN D NAME NIKE IN ITS PRODUCTS. IN ADDITION TO THAT, THE ASSOCIATED ENTERPRISE NEON ENTERS INTO CONTRACTS WITH CELEBRITIES FOR P ROMOTION OF THE PRODUCT, WHICH WOULD IN TURN WOULD INCREASE THE SAL ES. THE THIRD PARTY ROYALTY SIMPLY REPRESENTS CROSS CHARGING OF R OYALTIES PAID BY AE BACK TO THE DISTRIBUTORS. 16.3 WE HEARD LD D.R ON THIS ISSUE AND PERUSED T HE RECORD. AS OBSERVED BY THE CO-ORDINATE BENCH IN THE CASE OF TH E ASSESSEE IN AY 2005-06, THE ONUS TO PROVE THAT THE EXPENSES INC URRED 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 IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 43 OF 55 OF CALCULATION ETC., HAVE NOT BEEN FURNISHED. HENC E, THE TPO HAS TAKEN THE VIEW THAT THIS EXPENDITURE IS NOT RELATED TO THE BUSINESS OF THE ASSESSEE AND ACCORDINGLY HE HAS DETERMINED T HE 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 INFIRMIT Y IN THE ORDER SO PASSED BY THE TPO/AO. 17. THE NEXT ISSUE RELATES TO TP ADJUSTMENT MADE IN RESPECT OF PAYMENT OF TRADE MARK ROYALTY. THIS ISSUE IS BEING URGED IN ASSESSMENT YEAR 2010-11 AND 2011-12. THE TPO NOTIC ED THAT THE ROYALTY DEBITED IN P&L ACCOUNT IS MORE THAN THE ROY ALTY PAID TO THE A.E. IT WAS EXPLAINED THAT THE DIFFERENCE REPR ESENTED SERVICE TAX PAYABLE ON ROYALTY. IT WAS SUBMITTED THAT THE ASSESSEE HAS BORNE THE SERVICE TAX COMPONENT PAYABLE ON THE ROYA LTY. THE TPO NOTICED THAT THE CLAUSE 10.4 OF THE LICENSE AGREEME NT ENTERED BY THE ASSESSEE WITH THE A.E. PROVIDE FOR DEDUCTION OF TAXES, IF ANY PAYABLE ON ROYALTY. ACCORDINGLY, THE TPO TOOK THE VIEW THAT THE SERVICE TAX PAYMENT IS THE LIABILITY OF THE A.E. AN D NOT THAT OF TAX PAYER. ACCORDINGLY, THE TPO MADE TRANSFER PRICING ADJUSTMENT TO THE EXTENT OF SERVICE TAX COMPONENT AND THE SAME WA S UPHELD BY DRP ALSO. 17.1 THE LD. AR SUBMITTED THAT THE SERVICE TAX WAS PAID BY THE ASSESSEE UNDER REVERSE CHARGE MECHANISM AND HENCE I T WAS BORNE BY THE ASSESSEE. HE FURTHER SUBMITTED THAT IDENTIC AL ISSUE WAS EXAMINED BY THE TPO IN ASSESSMENT YEAR 2012-13 AND DID NOT MAKE ANY TRANSFER PRICING ADJUSTMENT. 17.2 WE HEARD LD. D.R. ON THIS ISSUE AND PERUSED THE RECORD. HAVING REGARD TO THE FACT THAT THE TPO HAS ACCEPTED SERVICE TAX IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 44 OF 55 COMPONENT AS ASSESSEES EXPENDITURE IN ASSESSMENT Y EAR 2012-13 AND CONSEQUENTLY DID NOT MAKE ANY TRANSFER PRICING ADJUSTMENT, WE ARE OF THE VIEW THAT THIS ISSUE MAY BE RESTORED TO THE FILE OF TPO FOR EXAMINING IT AFRESH. ACCORDINGLY, WE SET A SIDE THE ORDER PASSED BY A.O. ON THIS ISSUE AND RESTORE THE SAME T O THE FILE OF AO/TPO. 18. THE NEXT ISSUE RELATES TO TRANSFER PRICING ADJU STMENT MADE IN RESPECT OF INTEREST PAID ON COMPULSORILY CONVERT IBLE DEBENTURES (CCD). THIS ISSUE IS BEING CONTESTED BY THE ASSESSEE IN AY 2012-13 AND 2014-15. 18.1 DURING THE YEAR RELEVANT TO AY 2012-13, T HE ASSESSEE HAD ISSUED DEBENTURES TO THE TUNE OF RS.527.54 CRORES T O M/S NIKE INDIA HOLDING B V (NETHERLANDS). THE DEBENTURES CA RRIED INTEREST RATE @ 12% P.A. THE TPO NOTICED THAT THE AVERAGE B ASE RATE OF INTEREST DETERMINED BY STATE BANK OF INDIA DURING T HE FINANCIAL YEAR 2011-12 WORKED OUT TO 9.31%. ACCORDINGLY HE P ROPOSED TO MAKE TRANSFER PRICING ADJUSTMENT BY ADOPTING THE RA TE OF INTEREST @ 9.31% UNDER CUP METHOD BY TAKING THE BASE LENDING RATE DETERMINED BY STATE BANK OF INDIA. THE ASSESSEE SU BMITTED THAT THE BASE RATE IS THE MINIMUM RATE SET BY RESERVE BA NK OF INDIA AND THE BANK IS FREE TO CHARGE HIGHER RATE OF INTER EST DEPENDING UPON CREDIT RISK OF THE CUSTOMER. IT ALSO SUBMITTE D THAT THE BANK LENDING RATE CANNOT BE CONSIDERED TO BE COMPARABLE WITH THE RATE CHARGED ON DEBENTURES. THE TPO DID NOT ACCEPT THE CONTENTIONS OF THE ASSESSEE AND ACCORDINGLY MADE TRANSFER PRICI NG ADJUSTMENT OF RS.4,09,95,719/- BY ADOPTING THE RATE OF INTERES T @ 9.31%. IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 45 OF 55 18.2 IN AY 2014-15, THE TPO TOOK THE VIEW THAT T HE COMPULSORILY CONVERTIBLE DEBENTURES IS A CONTROVERS IAL FINANCIAL PRODUCT CALLED HYBRID INSTRUMENT. HE FURTHER OBS ERVED THAT THE CCD SUFFER DIFFERENT TAX TREATMENT IN DIFFERENT JUR ISDICTIONS,, I.E., IT IS TREATED AS LOAN IN ONE COUNTRY AND DIVIDEND RECE IPTS IN ANOTHER COUNTRY. SUCH HYBRID INSTRUMENTS ARE CRITICIZED ST RONGLY BY ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPME NT. THE TPO REFERRED TO CERTAIN CASE LAWS AND HELD THAT THE CCD IS IN THE NATURE OF EQUITY. ACCORDINGLY HE HELD THAT THE ALP OF INTEREST PAYABLE ON CCD AT NIL. 18.3 THE LD DRP UPHELD BOTH THE VIEWS TAKEN BY T PO IN THE ABOVE SAID YEARS. 18.4 THE LD A.R SUBMITTED THAT THE TPO HAS CONS IDERED THE INTEREST PAYMENT MADE IN THE YEAR RELEVANT TO AY 20 15-16 AND HELD IT TO BE AT ARMS LENGTH. IN THIS REGARD, THE TPO HAS MADE ENQUIRIES WITH FOREIGN AUTHORITIES AND IT WAS ASCER TAINED THAT THE INTEREST PAID BY THE ASSESSEE HAS BEEN OFFERED AS I NCOME BY THE AE IN ITS HANDS. 18.5 WE NOTICE THAT THE TPO HAS BEEN TAKING DI FFERENT STAND IN DIFFERENT YEARS. WHILE HE ACCEPTED THE CCD AS DEBE NTURES IN AY 2012-13 AND REDUCED THE RATE OF INTEREST ONLY, THE TPO TREATED CCD AS EQUITY IN AY 2014-15. HOWEVER, IN AY 2015-1 6, THE TPO HAS ACCEPTED THE RATE OF INTEREST OF 12% TO BE AT A RMS LENGTH. WE NOTICE THAT THE TPO HAS MADE CERTAIN ENQUIRIES IN A Y 2015-16 AND ACCORDINGLY CAME TO THE CONCLUSION THAT THE INT EREST PAYMENT IS AT ARMS LENGTH. THE BENEFIT OF THOSE ENQUIRIES WAS NOT AVAILABLE WITH THE TPO IN THE TWO YEARS UNDER CONSIDERATION. SINCE THE IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 46 OF 55 ISSUE IS THE SAME IN ALL THE YEARS AND FURTHER, IN VIEW OF THE CONFLICTING STANDS TAKEN BY TPO, WE ARE OF THE VIEW THAT THIS ISSUE REQUIRES FRESH EXAMINATION AT THE END OF TPO. ACCO RDINGLY, WE RESTORE THIS ISSUE IN BOTH THE YEARS UNDER CONSIDER ATION TO THE FILE OF AO/TPO FOR EXAMINING IT AFRESH. 19. THE NEXT ISSUE RELATES TO THE TRANSFER PRIC ING ADJUSTMENT MADE IN RESPECT OF SOURCING COMMISSION PAYMENT. TH IS ISSUE IS BEING URGED IN AY 2014-15. 19.1 DURING THE YEAR RELEVANT TO THE ASSESSMENT Y EAR 2014-15, THE ASSESSEE HAS PAID SOURCING COMMISSION OF RS.22. 24 CRORES TO ITS ASSOCIATED ENTERPRISE NAMED M/S NIKE GLOBAL TRA DING PTE., SINGAPORE (NGTPS). THE RATE OF COMMISSION PAID BY THE ASSESSEE WAS 7% OF THE VALUE OF PRODUCTS SOURCED. THE ASSES SEE BENCHMARKED THE SAME UNDER CUP METHOD BY SELECTING CERTAIN COMPARABLE COMPANIES, WHICH HAD PAID SOURCING COMMI SSION IN THE RANGE OF 5% TO 12%. ACCORDINGLY, THE ASSESSEE CLAIMED THE PAYMENT TO BE AT ARMS LENGTH. 19.2 THE TPO OBSERVED THAT THE COMPARABLE COMPANI ES SELECTED BY THE ASSESSEE HAS NOT BEEN PROVED TO BE REALLY CO MPARABLE. 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 S HOW THAT NGTPS DID ALL THOSE ACTIVITIES AS MENTIONED IN THE AGREEMENTS. IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 47 OF 55 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 PA Y ANY COMMISSION TILL AY 2013-14 AND DID NOT MENTION ABOU T ANY SOURCING AGENT TILL THAT YEAR. IN THE ABSENCE OF E VIDENCES PROVING THAT THE SERVICES WERE PROVIDED BY THE SOURCING AGE NTS, THE TPO DETERMINED THE ALP AT NIL. ACCORDINGLY HE MADE TRA NSFER PRICING ADJUSTMENT OF RS.22.24 CRORES. THE LD DRP ALSO CON FIRMED 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 AS SESSEE HAS UTILIZED SERVICES OF ONE USA ENTITY AND ONE SINGAPO RE ENTITY. HOWEVER, THE ASSESSEE HAS PAID COMMISSION ONLY TO T HE SINGAPORE ENTITY. HE SUBMITTED THAT THE ASSESSEE HAS FURNISH ED COPIES OF AGREEMENTS ENTERED WITH THE AGENTS, CONFIRMATION LE TTER 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 IMPORT ANT EVIDENCES, BUT CAME TO THE CONCLUSION THAT THE AGEN T HAS NOT PROVIDED SERVICES TO THE ASSESSEE. ACCORDINGLY HE PRAYED THAT THIS ISSUE MAY BE RESTORED TO THE FILE OF TPO FOR EXAMIN ING IT AFRESH BY DULY CONSIDERING VARIOUS EVIDENCES FURNISHED BY THE ASSESSEE. 19.4 WE HEARD LD D.R. HAVING REGARD TO THE SUB MISSIONS MADE BY LD A.R, WE ARE OF THE VIEW THAT THIS ISSUE REQUI RES FRESH EXAMINATION AT THE END OF TPO. ACCORDINGLY WE REST ORE THIS ISSUE TO THE FILE OF AO/TPO FOR EXAMINING IT AFRESH BY DU LY CONSIDERING THE VARIOUS EVIDENCES FURNISHED BY THE ASSESSEE. A FTER AFFORDING IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 48 OF 55 ADEQUATE OPPORTUNITY OF BEING HEARD, THE AO/TPO MAY TAKE APPROPRIATE DECISION IN ACCORDANCE WITH LAW. 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 BE ING URGED IN AY 2012-13 AND 2014-15. 20.1 THIS EXPENDITURE WAS DISALLOWED BY WAY OF TR ANSFER PRICING ADJUSTMENT IN THE EARLIER YEARS. IN THE ASSESSMENT YEAR 2012-13 AND 2014-15, THE ASSESSING OFFICER HAS DISALLOWED T HE EXPENDITURE INCURRED ON PURCHASE OF SAMPLES AND INCIDENTAL EXPE NSES HOLDING THAT THIS EXPENDITURE IS TO BE BORNE BY THE MANUFAC TURER ONLY AND NOT BY THE ASSESSEE, AS THE ASSESSEE IS ONLY DISTRI BUTOR OF PRODUCTS. 20.2 THE AE OF THE ASSESSEE, VIZ., NIKE INC., HA S INTRODUCED NEW PRODUCTS AND ACCORDINGLY SENT SAMPLES TO THE ASSESS EE FOR GIVING THE SAME TO THE THIRD PARTY DISTRIBUTORS, WHO ARE R EQUIRED 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 T HE VIEW THAT THE ASSESSEE IS ONLY A DISTRIBUTOR OF THE NIKE PRODUCTS AND HENCE THE EXPENDITURE ON SAMPLES SHOULD BE BORNE BY THE MANUF ACTURER ONLY. ACCORDINGLY THE AO TOOK THE VIEW THAT THE MA NUFACTURER SHOULD NOT PASS ON THE BURDEN TO THE ASSESSEE. ACC ORDINGLY, THE AO TOOK THE VIEW THAT THE EXPENDITURE ON PURCHASE O F SAMPLES AND INCIDENTAL EXPENSES ARE NOT RELATED TO THE BUSI NESS ACTIVITIES IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 49 OF 55 OF THE ASSESSEE. ACCORDINGLY HE DISALLOWED THE SAM E. THE LD DRP ALSO CONFIRMED THE SAME. 20.3 THE LD A.R SUBMITTED THAT THE ASSESSING OFF ICER CANNOT SIT IN THE ARM CHAIR OF THE ASSESSEE AND DECIDE THE MOD E OF CONDUCTING BUSINESS. HE SUBMITTED THAT THE ASSESSE E HAS INCURRED EXPENDITURE ON SAMPLES ON COMMERCIAL CONSI DERATIONS AND HENCE THE SAME SHOULD BE ALLOWED. THE LD A.R P LACED HIS RELIANCE ON THE DECISION RENDERED BY HONBLE SUPREM E COURT IN THE CASE OF CIT VS. DHANRAJGIRJI RAJA NARASINGIRJI (1973)(94 ITR 544), WHEREIN THE HONBLE APEX COURT HAS OBSERVED A S 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. EV ERY BUSINESSMAN KNOWS HIS INTEREST BEST. SO FAR AS THE APPORTIONMENT IS CONCERNED WE ARE NOT TOLD WHY WE S HOULD 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 TRANS FER PRICING ADJUSTMENT IN AY 2010-11 AND 2011-12, WHEREIN WE HA VE CONFIRMED THE TRANSFER PRICING ADJUSTMENT BY FOLLOW ING THE DECISION RENDERED BY THE CO-ORDINATE BENCH IN THE A SSESSEES OWN CASE IN AY 2005-06 & 2006-07. IN THOSE YEARS, THE TRIBUNAL HAS DECIDED THE ISSUE AGAINST THE ASSESSEE WITH THE FOL LOWING 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 N OT DISCHARGED BY THE ASSESSEE. ALSO CONSIDERING THAT THE ASSESSEE ITSELF HAS ADMITTED THAT THE PARENT, NIKE INC. USA HAS BRAND MARKETING AND PROMO TION INITIATIVES IN INDIA, IT IS BUT NATURAL TO CONCLUDE THAT THE EXPENSES INC URRED BY NIKE INC., USA ARE IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 50 OF 55 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 YEA RS UNDER CONSIDERATION ALSO. THERE IS NO DISPUTE THAT THE P ARENT COMPANY NIKE INC., HAS INTRODUCED NEW PRODUCTS AND THE SAMP LES ARE SUPPLIED TO THIRD PARTY DISTRIBUTORS IN ORDER TO CR EATE AWARENESS OF NEW PRODUCTS AMONGST THE PUBLIC. THE ASSESSEE HERE IN 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 W HOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS OF THE ASS ESSEE. 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 EXPEND ITURE HAS BEEN EXPENDED WHOLLY AND EXCLUSIVELY FOR THE BUSINESS OF THE ASSESSEE. THE LD A.R CONTENDED THAT THE ASSESSING OFFICER CAN NOT QUESTION THE NECESSITY OF INCURRING THE EXPENDITURE. HOWEVE R, IN OUR VIEW, WHEN THE TRANSACTION IS BETWEEN RELATED PARTIES, TH E ACT PLACES MORE BURDEN ON THE SHOULDERS OF THE ASSESSEE TO PRO VE THAT THE EXPENDITURE IS RELATED TO THE BUSINESS OF THE ASSES SEE. FURTHER, IN TRADE CIRCLES ALSO, IT IS KNOWN FACT THAT THE EXPEN DITURE ON SAMPLES ARE BORNE BY THE MANUFACTURERS ONLY. HENCE THIS CLAIM OF EXPENDITURE IS AGAINST THE TRADE PRACTICE AND THE A SSESSEE APPEARS TO HAVE BORNE THE EXPENSES ONLY ON THE REASONING TH AT THE SAME WAS CHARGED UPON IT BY ITS PARENT COMPANY. HENCE, WE ARE OF THE IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 51 OF 55 VIEW THAT THE AO WAS JUSTIFIED IN HOLDING THAT THE BURDEN TO INCUR THIS EXPENDITURE IS THAT OF PARENT COMPANY AND IS N OT RELATED TO THE BUSINESS ACTIVITIES OF THE ASSESSEE. ACCORDING LY, WE CONFIRM THE DISALLOWANCE MADE BY THE AO. 21. THE NEXT ISSUE URGED BY THE ASSESSEE RELATES TO THE DISALLOWANCE OF PROVISION FOR SALES RETURN. THIS ISSUE IS BEING URGED IN AY 2012-13 AND 2014-15. 21.1 THE AO NOTICED THAT THE ASSESSEE HAS CLAIMED DEDUCTION FOR PROVISION FOR SALES RETURNS. WHEN ENQUIRED, THE ASSESSEE SUBMITTED THAT IT CREATES A PROVISION FOR ANTICIPAT ED SALES RETURNS BASED ON A PERCENTAGE OF THE SALES MADE EACH MONTH. IT WAS FURTHER SUBMITTED THAT THE PROVISION IS CREATED ONL Y TOWARDS THE MARGIN OF THE ANTICIPATED SALES RETURNS. IT WAS EX PLAINED THAT IN THE SUBSEQUENT YEAR, THE ACTUAL SALES RETURNS ARE C OMPARED WITH THE PROVISION MADE IN THE BOOKS AND THE EXCESS PROV ISION, IF ANY, IS REVERSED. THE AO TOOK THE VIEW THAT THE PROVISI ON SO MADE IS NOT TOWARDS AN ASCERTAINED LIABILITY AND HENCE IT I S CONTINGENT IN NATURE. THE AO ALSO OBSERVED THAT THE ASSESSEE IS E STIMATING THE PROBABLE SALES RETURN ON THE BASIS OF ITS OWN DATA. ACCORDINGLY, HE HELD THAT THE PROVISION FOR SALES RETURN IS NOT ALLOWABLE AS DEDUCTION U/S 37 OF THE ACT. THE LD DRP ALSO CONFI RMED THE SAME IN BOTH THE YEARS. 21.2 THE LD A.R SUBMITTED THAT THE PROVISION I S CREATED ON THE BASIS OF RELIABLE ESTIMATE MADE ON SCIENTIFIC BASIS AND HENCE IT IS ALLOWABLE AS DEDUCTION. IN THIS REGARD, HE PLACED HIS RELIANCE ON THE DECISION RENDERED BY HON'BLE SUPREME COURT IN T HE CASE OF ROTORK CONTROLS INDIA (P) LTD (2009)(180 TAXMANN 42 2) AND THE IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 52 OF 55 DECISION RENDERED BY HON'BLE KARNATAKA HIGH COURT I N THE CASE OF APPLE INDIA PRIVATE LTD (ITA NO.204/2008). HE ALSO RELIED UPON THE DECISION RENDERED BY HON'BLE KARNATAKA HIGH COU RT IN THE CASE OF WIPRO GE MEDICAL SYSTEMS (ITA NOS. 438, 444 /2002), WHEREIN IT WAS HELD THAT THE PROVISION FOR WARRANTY IS NOT A CONTINGENT LIABILITY AND IS ALLOWABLE AS DEDUCTION. HE FURTHER SUBMITTED THE ASSESSEE IS REQUIRED TO PROVIDE FOR L IABILITY AS PER ACCOUNTING STANDARD 29 TITLED AS PROVISIONS, CONTI NGENT LIABILITIES AND CONTINGENT ASSETS. HE SUBMITTED THAT IF THE PROVISION IS ESTIMATED BY USING SUBSTANTIAL DEGREE OF ESTIMATION, THE SAME IS ALLOWABLE AS DEDUCTION. HE SUBMITTED T HAT THE ASSESSEE IS ESTIMATING THE PROVISION FOR SALES RETU RNS ON A SCIENTIFIC BASIS AND THE PROVISION IS RESTRICTED TO MARGIN PORTION OF THE ANTICIPATED SALES RETURNS. THE LD A.R SUBMITTE D THAT THE ASSESSEE, WHILE MAKING SALES, GIVES UNLIMITED RIGHT OF RETURN. HENCE IT WOULD BE APPROPRIATE TO MAKE A SUITABLE PR OVISION FOR RETURNS BASED ON PREVIOUS EXPERIENCE. ACCORDINGLY H E SUBMITTED THAT THE PROVISION FOR SALES RETURN IS ALLOWABLE AS DEDUCTION U/S 37(1) OF THE ACT. 21.3 WE HEARD LD D.R ON THIS ISSUE AND PERUSED THE RECORD. IT IS THE SUBMISSION OF THE ASSESSEE THAT IT IS PROVID ING FOR SALES RETURNS ON A SCIENTIFIC BASIS ON SUBSTANTIAL DEGREE OF ESTIMATION. IT HAS TAKEN SUPPORT OF ACCOUNTING STANDARD 29 (AS 29) RELATING TO PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS. AS 29 EXPLAINS THAT A PROVISION SHOULD BE RECOGNIZED WH EN - AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RESUL T OF PAST EVENT. - IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES EMBOD YING ECONOMIC BENEFIT WILL BE REQUIRED TO SETTLE THE OBL IGATION AND IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 53 OF 55 - A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION. 21.4 A CAREFUL PERUSAL OF THE ABOVE SAID DEFINI TION OF PROVISION GIVEN IN AS 29 WOULD SHOW THAT THERE SHOULD EXIST A PRESENT OBLIGATION AS A RESULT OF PAST EVENT . THE QUESTION HERE IS WHETHER THE PROVISION FOR SALES RETURN WOULD SATI SFY ABOVE SAID REQUIREMENT? 21.5 WHETHER PROVISION FOR SALES RETURN CAN FA LL UNDER THE CATEGORY OF PRESENT OBLIGATION AS A RESULT OF PAST EVENT?. THE PRESENT OBLIGATION AS A RESULT OF PAST EVENT CONTEM PLATES THAT THERE HAS OCCURRED SOME EVENT IN THE PAST AND THE S AME WOULD GIVE RISE TO SOME OBLIGATION TO THE ASSESSEE AND FU RTHER THE SAID OBLIGATION SHOULD EXIST AS ON THE BALANCE SHEET DAT E. THE PRUDENCE PRINCIPLE IN ACCOUNTING CONCEPTS MANDATES THAT AN ASSESSEE SHOULD PROVIDE FOR ALL KNOWN LOSSES AND EX PENSES, EVEN THOUGH THE EXACT QUANTUM OF LOSS/EXPENSE IS NOT KNO WN. 21.6 HOWEVER, WE NOTICE THAT THE FACTS AVAILABLE IN THE INSTANT CASE ARE DIFFERENT. THE ASSESSEE HAS EFFECTED SALE OF PRODUCTS AND ACCORDINGLY, RECOGNIZED REVENUE ARISING ON SUCH SAL ES. BY MAKING PROVISION FOR SALES RETURN, WHAT THE ASSESSEE SOU GHT TO DO IS TO DE-RECOGNISE THE REVENUE SO RECOGNIZED BY IT EARLIE R. THERE SHOULD NOT ANY DISPUTE THAT THE PAST EVENT IN THE INSTANT CASE IS SALES AND NOT SALES RETURN. WHEN THERE IS NO P AST EVENT, THE QUESTION OF PRESENT OBLIGATION OUT OF SUCH PAST EV ENT DOES NOT ARISE. HENCE, WE ARE OF THE VIEW THAT THE PROVISION FOR SALES RETURN DOES NOT REPRESENT PRESENT OBLIGATION ARISING AS A RESULT OF PAST EVENT. RATHER, IT IS AN EXPECTED OBLIGATION THAT MA Y ARISE AS A IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 54 OF 55 RESULT OF A FUTURE EVENT. ACCORDINGLY, WE ARE OF T HE VIEW THAT THE PROVISION FOR SALES RETURN WOULD NOT FALL UNDER T HE CATEGORY OF PRESENT OBLIGATION AS A RESULT OF PAST EVENTS. HENCE VARIOUS CASE LAWS RELIED UPON BY THE ASSESSEE AND THE ACCOU NTING STANDARD 29 WOULD NOT SUPPORT THE CASE OF THE ASSES SEE. ACCORDINGLY, WE ARE OF THE VIEW THAT THE ASSESSING OFFICER IS JUSTIFIED IN HOLDING THE PROVISION FOR SALES RETUR N AS CONTINGENT LIABILITY. ACCORDINGLY WE CONFIRM THE DISALLOWANCE MADE BY THE ASSESSING OFFICER ON THIS ISSUE IN BOTH THE YEARS R EFERRED ABOVE. 22. THE LAST ISSUE URGED BY THE ASSESSEE RELAT ES TO THE DISALLOWANCE MADE U/S 40(A) OF THE ACT AND THIS ISS UE ARISES FOR CONSIDERATION IN AY 2012-13. 22.1 ACCORDING TO THE ASSESSEE, PROVISION FOR E XPENSES MADE BY IT IN THE EARLIER WAS DISALLOWED IN EARLIER YEARS FOR NON- DEDUCTION OF TAX AT SOURCE. DURING THE YEAR RELEVA NT TO AY 2012- 13, THE ASSESSEE HAD DEDUCTED AND PAID TAX AT SOURC E AND HENCE THE PROVISION AMOUNT IS ALLOWABLE AS DEDUCTION. TH E AO NOTICED THAT THE CLAIM OF THE ASSESSEE IS NOT VERIFIABLE FR OM THE RECORD AND ACCORDINGLY REJECTED THE CLAIM OF THE ASSESSEE. 22.2 IT IS THE SUBMISSION OF LD A.R THAT THE ASS ESSEE COULD NOT FURNISH THE RELEVANT DETAILS BEFORE THE AO FOR WANT OF TIME AND ACCORDINGLY PRAYED THAT THIS ISSUE MAY BE RESTORED TO THE FILE OF THE AO FOR EXAMINING IT AFRESH. 22.3 WE HEARD LD D.R AND PERUSED THE RECORD. HAVING REGARD TO THE SUBMISSIONS MADE BY LD A.R AND ALSO T HE OBSERVATIONS MADE BY THE AO IN THE ASSESSMENT ORDER , WE ARE OF IT(TP)A NOS.330/BANG/2015, 804/BANG/2016 356/BANG/2017, 739/BANG/2017 & 3321/BANG/2018 M/S. NIKE INDIA PRIVATE LIMITED, BANGALORE PAGE 55 OF 55 THE VIEW THAT THIS ISSUE REQUIRES FRESH EXAMINATION AT THE END OF THE AO. ACCORDINGLY, WE SET ASIDE THE ORDER PASSED BY THE AO ON THIS ISSUE AND RESTORE THE SAME TO HIS FILE FOR EXA MINING IT AFRESH IN ACCORDANCE WITH LAW. 23. IN THE RESULT, THE APPEAL OF THE ASSESSEE FOR AY 2007-08 IS ALLOWED AND ALL OTHER APPEALS OF THE ASSESSEE ARE T REATED AS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 14 TH OCT, 2020 SD/- (BEENA PILLAI) JUDICIAL MEMBER SD/- (B.R. BASKARAN) ACCOUNTANT MEMBER BANGALORE, DATED 14 TH OCT, 2020. VG/SPS COPY TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.