Marks and Spencer (India) Private Limited, Gurgaon V. ACIT, Circle-2(1), Gurgoan

ITA 9331/DEL/2019

AI Insights

Marks & Spencer (India) Pvt. Ltd., a subsidiary of Marks and Spencer Investments Pte. Ltd., engaged in the wholesale business of branded apparels, appealed against the order of the Assessing Officer (AO) which upheld the Transfer Pricing Officer's (TPO) adjustment of INR 11,06,15,455 to the assessee's income. This adjustment was based on the TPO's application of the CUP method, which set the royalty rate at 1% of sales, as per an earlier agreement, despite a revised agreement that increased the royalty rate to 6%. The Tribunal found that the TPO had not adequately justified the use of the CUP method or the specific royalty rate applied, leading to the decision to allow the appeal and direct a re-assessment of the ALP.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 121417 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 3 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-03-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 12-12-2022
• Assessment Year: 2015-2016
• Appeal Filed On: 03-12-2019
• Laws Referred To: Income Tax Act, Income Tax Rules, 1962
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction
• Section: 2; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘I’, NEW DELHI Before Dr. B. R. R. Kumar, Accountant Member Sh. Yogesh Kumar US, Judicial Member ITA No. 9331/Del/2019 : Asstt. Year : 2015-16 Marks & Spencer (India) Pvt. Ltd., Plot No. 64, 2 nd Floor, Holly Hocks, Sector-44, Gurgaon, Haryana-122002 Vs ACIT, Circle-2(1), Gurgaon-122001 (APPELLANT) (RESPONDENT) PAN No. AAECM3578J Assessee by : Sh. Ravi Sharma, Adv. Revenue by : Sh. Bhaskar Goswami, CIT DR Date of Hearing: 13.12.2022 Date of Pronouncement: 10.03.2023 ORDER Per Dr. B. R. R. Kumar, Accountant Member: The present appeal has been filed by the assessee against the order dated 30.10.2019 passed by the AO. 2. Following grounds have been raised by the assessee: “ 1 . T ha t i n the f a c ts a n d c ir c um st a n c e s o f t he c a se a n d i n l a w , t he o r de r p a s se d b y t he L e a r ne d Asse ss i ng O f f ice r (‘ AO ’ ) / T r a n sfe r Pr ic i ng O ff i ce r (‘ T PO ’ ) a nd to the e x te n t up h e ld b y the Ho n ’ b le D is pu te R e so lu t i o n Pa ne l (“ D R P” ) i s ba d in la w a n d e r r o ne o u s. 2 . T ha t i n the f a c ts a n d c ir c um st a n c e s o f t he c a se a n d in l a w , the L d. AO p ur s ua n t to t he d ir e ct io n s of the Ho n’ b le D R P e r r e d i n ma k in g a n a d di t io n o f R s.1 1 ,0 6 ,1 5 ,4 5 5 / - to t he i nco me o f t he a ppe l la nt o n a cco u nt o f in te r na t io n a l tr a n sa ct io n pe r ta i n in g to pa y me nt o f r o y a l ty e x pe n se fo r b us ine ss se r v i ce s a nd ITA No. 9331/Del/2019 Marks & Spencer (India) Pvt. Ltd. 2 l ice nse o f pr o pr ie ta r y tr a de m a r k s (‘ bu nd le d r i gh ts a n d se r v ice s ’ ) r e ce iv e d by the Asse sse e by e r r o ne o us ly a l le g i ng a r m' s le ng th r a te to be 1 pe r ce n t . In do ing so , t he L d . T PO /L d . AO a nd th e Ho n’ b le D R P ha ve gr o ss l y e r r e d in : 2 .1 . di sr e g a r d i n g t he a r m ’ s le n gt h pr i ce (“ AL P ” ), as de te r m ine d by t h e Ap pe ll a n t i n th e T P do c ume nt a t io n ma in t a i ne d by it in te r ms o f se c t io n 9 2 D o f t he Ac t r e a d w i t h R u le 1 0 D o f t he I nc o me T a x R u le s ,1 9 6 2 (“ the R u le s ” ) ; 2 .2 . a do p ti n g a n e r r o ne o us a n d a r bi tr a r y a p pr o a c h by si m pl y a p pl y in g r a te o f 1 pe r ce n t a s pe r e a r l ie r yea r a gr e e me n t a n d ig no r i ng the sub m is sio n s ma de , do c ume n ta r y e v i de n ce s fur n is he d a n d be n c hm a r k in g a na l ys is co nd u ct e d by t he A ppe l la nt ; 2 .3 . d i sr e g a r d i n g the co r r o bo r a t ive be nc h ma r k in g a na l ys is s ub m it te d by t he A p pe l la nt u si n g C o mp a r a b le Un co n tr o l le d Pr ice (“ C UP ” ) m e tho do lo g y w it h o ut pr o v i di ng a ny co ge n t r e a so ns ; 2 .4 . ho l d in g t ha t no i ncr e me nt a l /a dd i t io n a l s u pp o r t ha s be e n de mo ns tr a te d fo r t he incr e a se i n r o y a l ty pa yo u t fr o m 1 % to 6 % , the r e by d i sa l lo w in g the di ffe r e n ti a l 5 pe r ce n t pa yme n t. 3 . T ha t i n the f a c ts a n d c ir c um st a n c e s o f t he c a se a n d in l a w , the L d . A O e r r e d i n pr o po si n g to l e vy in te r e s t u n de r se ct io n 2 3 4 A a n d 2 3 4 B o f t he a c t. 4 . W i t ho u t pr e j u di c e to the a bo ve , t ha t in t he f a c ts a n d c ir c um s ta nc e s o f t he ca se a nd in la w t he L d . AO ha s in a d ve r te n t l y co m pu te d the o ut s ta nd i ng de m a n d w i tho u t g iv i ng d ue cr e d i t to t he ta xe s p a id by the Ap pe ll a n t .” 3. M&S India is a subsidiary of Marks and Spencer Investments Pte. Ltd (‘M&S Singapore’), engaged in the wholesale business of procuring and selling branded apparels and accessories including leather products and toiletries. Under ITA No. 9331/Del/2019 Marks & Spencer (India) Pvt. Ltd. 3 the trading business of the Assessee, it procures branded apparels and accessories from third party suppliers who manufactures for and on behalf of it, for further resale to affiliate joint venture entity in India. The Assessee had entered into an agreement dated June 04, 2007 with Marks and Spencer pic, UK (‘M&S pic’ or ‘AE’) wherein royalty @ 1% of revenue was paid by the Assessee to AE on account of grant of trademark. 4. During the subject AY, the Assessee entered into a revised agreement dated July 10, 2014 with its AE for license of following valuable rights and business services for efficient conduct of business operations of the Assessee in India: - Right to use the M&S Trademark; - Assignment of contract and know-how of product specifications i.e. quality of material, design patterns, suppliers information, etc.; - Access to business network of M&S Pic thereby providing benefit to M&S India of obtaining discounted rates with supplier/ contract manufacturers on account of the large volume of business provided through M&S Pic purchases; and - Right to sell to the M&S Joint Venture in India. 5. For obtaining the bundled rights and services, the Assessee pays royalty @ 6% on revenue to its AE. 6. It was submitted that under the erstwhile agreement entered by the Assessee with its AE i.e. the trademark license agreement dated June 04, 2007, royalty was being paid at concessional rate of 1% only on the account of trademark. ITA No. 9331/Del/2019 Marks & Spencer (India) Pvt. Ltd. 4 7. Considering the fact that the Assessee is also receiving services in addition to the above mentioned trademark rights, the arm’s length remuneration for the bundled rights and services was determined to be at 6% on sales vide the revised agreement dated July 10, 2014. 8. The Assessee had benchmarked the international transactions pertaining to payment for bundled rights and services with the trading division using Transaction net margin method (‘TNMM’) as the most appropriate method (‘MAM’), since the same is closely linked to the Assessee’s primary business activity of trading of apparels and accessories. The results of the Company are tabulated below for your reference and records: Net profit indicator Tested Party’s operating margin Comparable’s margin/range OP/Sales 9% 0.65% to 2.42% 9. Based on the above analysis, the international transactions of the Assessee are considered to be at arm’s length from the Indian Transfer Pricing (‘TP’) regulations perspective. 10. During the course of assessment proceedings, the TPO, - rejected the benchmarking analysis carried out by the Assessee without providing any cogent reasons; - held that the Assessee did not receive any tangible benefit in lieu of receipt of services, thereby challenging the commercial wisdom of the Assessee; ITA No. 9331/Del/2019 Marks & Spencer (India) Pvt. Ltd. 5 - held that no benefit has been conferred upon the Assessee from availing the service sand the said services are either duplicative or incidental in nature, applied Comparable Uncontrolled Price Method (‘CUP’) restricting the amount of royalty to be paid at 1% of sales as per the erstwhile agreement. 11. Thus, the TPO disallowed the incremental royalty i.e. 5% on revenue and proposed an adjustment of INR 11,06,15,455 vide order dated October 31, 2018. 12. The assessee submitted the following evidence to justify the payment made by the Assessee to its AE for the services received by it: • Screenshot of internal intranet and platforms demonstrating that various designs patterns, material quality etc. in the form of developments sheets, tech pack manuals, sample photos are uploaded for the reference of local teams. • Communications between M&S India’s team and the global buying team of the AE clearly reflecting that the Assessee receives time-to-time assistance from the global teams on a regular basis for merchandising related functions. • Mail communications highlighting assistance provided by Global IT team for resolving IT issues. • Policies/ guidelines provided by M&S to define standard procedures and processes for manufacturing function like needle and metal contamination, thread ends, buttons & poppers, zipper selection & insertion, regular maintenance of machines to ensure that the manufacturing activity is ITA No. 9331/Del/2019 Marks & Spencer (India) Pvt. Ltd. 6 carried out smoothly and the quality standards are being maintained. • Communications between M&S India’s team and the global team managing insurance function highlighting that a global insurance has been taken by M&S Pic for goods in transit and any loss of goods by the local entity may be covered under the global transit insurance policy. • Business travel policy designed and put in place by to streamline HR policies and procedures for the Group entities. • Group Treasury Policies documenting procedures for identifying, monitoring and managing treasury related financial risks such as interest rate risk, surplus cash management risk, funding risk, counterparty credit risk etc. 13. The Panel directed the TPO to consider the additional evidence furnished by the Assessee. Vide remand report dated June 04, 2019, the TPO rejected the documents furnished by the Assessee. Relevant extract of the remand report is reproduced below: “ It is pe r t ine n t to me n t io n he r e t ha t t he a s se ss e e i tse lf a l so r e nde r s the su p po r t se r v i ce s fo r i ts A E a n d pr o vi des va r io us se r v ice s in c lu d i ng ide nt i f ica t io n o f lo ca l s u pp l ie rs . If the a sse sse e is pr o v i di n g t he su pp l ie r i nfo r ma t io n to its AE a s pe r tr a ns fe r p r i c in g s tu dy , i t be co me s un u n de r s ta nd a ble w h y i t h a d to r e ce ive t he sa me se r v i ce fr o m i ts AE . As pe r T P st ud y r e po r t , i t is t he a s se s se e w ho is i n r e gu l a r to u ch w i th & co m mu n ic a te s o n da y to d a y b a s is w i t h the su pp l ie r s , i t is t he as se sse e o n ly ITA No. 9331/Del/2019 Marks & Spencer (India) Pvt. Ltd. 7 w ho co mm un i ca t e s the s pe c i fi ca t i o n a n d c ha nge s to be m a de i n the i te m s /a pp a r e ls be in g pr e pa r e d a nd a s su ch w o u ld be in a be t te r po s it io n to ne go t ia te w it h t he su p pl ie r s . Most o f t he su pp l ie r s a r e lo c a l s up p l ie r s ha v i ng t he ir ba se in In di a . I n s uc h a sce na r io i t is mo s t l ik e l y th a t t he a sse s se e is the o ne w ho mu st be he l pi n g the A E in se le c t io n , ne go t ia t io n a nd a lso co m mu n ic a t i ng t he r e q u ir e me nt s o f t he A E to v a r i o us su pp l ie r s w h ic h i s a l so c le a r fr o m the fu nc t io n o f pr o c ur e m e nt a c ti v it ie s , a c ti v it y o f i de n t if ic a t io n o f s up p lie r s pe r fo r me d by the a s se sse e . T he r e e xi st s no do u bt th a t the li st o f the s u p pl ie rs fo r t he a sse sse e a n d th e AE w o u l d be mo r e o r le s s s i mi l a r as no o ne w o u ld l ik e to i nve s t so mu ch ti me , mo ne y a n d e ffo r t in pe r fo r m in g sa m e ta sk o f ide n t ify i ng s u pp l ie r s w he n t he r e a lr e a d y e x is t s a l is t o f s up p l ie r s w i th w ho m t he y ha ve be e n in r e gu la r to uc h w it h a nd w ho a l so u nde r st a n d the r e quir e me n ts o f the M& S In d ia a n d o ve r a l l gr o up . T he mo o t po i nt i s t ha t be in g a lo c a l e n t it y w hi c h u n de r s ta nd s th e co n di t io ns , m a r ke t a nd o t he r fa c to r s be t te r a nd w hi ch is a ls o i nvo l ve d i n i de n t if yi ng the su pp l ie r s i t is t he I nd i a n e n ti ty w h ic h w o ul d b e in a be t te r po s i tio n to ba r g a i n w i t h su p pl ie r s a n d o b ta i n t he ir se r vi ce s . T he r e e xi s ts a d e fi n ite po s si b i li t y o f d up l ic a tio n in the l is t o f su pp l ie r s i n t he se nse t ha t t he li st o f s up p lie r w hic h h a ve be e n ide n ti f ie d by t he a sse sse e fo r t h e AE w o u ld be t he o ne s fr o m w ho m the a s se ss e e is c la i m in g to ha ve r e ce ive d fr o m i ts AE a nd o bt a ine d pr e fe r e nt i a l r a te s. F ur the r , the a sse s se e ha d no t pr o v i de d t he l is t o f su pp l ie r s pr o v i de d b y t he AE to the a sse s se e e ve n a fte r a sk i ng spe c if ic a l l y f o r t he s a me . I n a bse nce o f co n cr e te do cu me nt a tio n /i n fo r m a t i o n, the se se r v ice s a r e he l d to be d u pl i ca ti ve in n a t ur e . F ur t he r , t he a sse s se e ha s no t su bm i t te d a n y do cu me n ta r y e v i de nce i n s u ppo r t o f i ts c la i m t h a t ITA No. 9331/Del/2019 Marks & Spencer (India) Pvt. Ltd. 8 the s up p l ie r in fo r m a t io n i nc lu de s a s s is ta nce i n o b ta i ni ng pr e fe r e nt ia l / di sc o un te d r a te s fo r e nte r in g i nto c o ntr a c ts w i th suc h s up p l ie r s .” “ F ur t he r , i n r e s pe c t o f qu a li t y o f pr o du c ts a n d de sig ns , the a sse sse e ha s me r e ly su b mi t te d s o me s cr e e n sho ts , w hic h i n no w a y co nf ir m s t he r e ce i p t o f se r v ic e s. T he r e i s no de scr ip t io n o r a ny o t he r i nfo r m a t io n i n t he se s cr e e ns ho ts th a t the de s ig n in g a n d r e la te d w o r k h a s be e n do ne b y the AB o f t he a sse s se e .” 14. The Assessee filed a rejoinder to remand report. The assessee submitted a fresh benchmarking analysis considering the original set was rejected by the TPO. 15. Subsequently, the Panel issued its directions dated September 18, 2019 wherein, adjustment determined by the TPO was upheld by the Panel in entirety. Relevant extract of the DRP directions is reproduced below: “ 4 .6 .1 . In vie w o f t he r e m a n d r e po r t a n d the r e jo inde r , d ur in g the he a r in g o n 2 1 .0 8 .2 0 1 9 , the A sse s se e w a s s pe ci fica l ly a sk e d a s to w ha t a d d i t io n a l se r vi ce s /r i gh ts w e r e pr o v id e d b y t he A E fo r t hi s s ub st a n t ia l i ncr e a se in t he r a te o f r o ya l ty fr o m 1 % to 6 % . T he As se s s e e r e pe a te d i ts r e spo nse s a bo u t t he na t ur e o f va lu a b le se r vi ce s a nd i nt a n g ib le s be i ng pr o v i de d b y t he AE d ue to w h ic h the ye a r o n ye a r sa le s k e pt o n i ncr e a s i ng . Ho w e ve r t he AR co u ld no t po in t o u t a n y pa r t ic u la r ch a n ge i n t he se r vi ce s be i ng pr o v ide d b y t he A E. I t w a s a l so r e ite r a te d b y t he a s se sse e th a t the e a r l ie r a gr e e me n t (1 % o f s a le s) w a s a t co nce s sio na l r a te a nd a n ap pr o pr i a te a r m’ s le n g th r a te us i n g co mpa r a b le a gr e e me n ts w a s de te r m i ne d by the As se s se e a t t he t ime o f ITA No. 9331/Del/2019 Marks & Spencer (India) Pvt. Ltd. 9 e nte r i ng in to a r e vi se d a gr e e me n t (6 % o f s a le s ) fo r r e ce i vi n g the b u nd le d r ig h t s a n d se r v ice s ” 16. Pursuant to above, a final assessment order dated October 30, 2019 was passed by the AO confirming the addition determined by the TPO and confirmed by the Panel, 17. Before us, it was contended that the revenue used CUP method inappropriate for benchmarking. The TPO adopted 1% of sales i.e. royalty paid as per the erstwhile agreement as an arbitrary CUP. Further, for the application of CUP method, a comparable uncontrolled transaction in comparable circumstances is a necessary condition. It was argued that the TPO was duty bound to provide details of comparable uncontrolled transaction based on which the arm’s length price has been arrived but the TPO in his order has not provided details of any comparable uncontrolled transaction while applying the CUP method. The TPO has not furnished details of uncontrolled transactions based on which it was concluded that the ALP for transaction should be restricted to 1% of the sales. ITA No. 9331/Del/2019 Marks & Spencer (India) Pvt. Ltd. 10 18. The Assessee submitted that the TPO has disregarded the benchmarking analysis conducted by the Assessee which is as under: S. No. Licensor Licensee Description of agreement Royalty base Royalty rate 1 Donna Karan Studio Broadway Jeanswear Holdings, Inc., Broadway Jeanswear Company, Inc. and Broadway Jeanswear Sourcing, Inc. Exclusive license to use the "DKNY JEANS” trademark and logo to manufacture, distribute and sell basic and traditional core items of a denim- based jeans wear collection, and fashion articles for inclusion in a particular seasonal collection. Net Sales 7.00% 2 Marker, Ltd. and Marker Internation al, Inc. Ski & Sports Recreation Company, LLC Exclusive license to use the "Marker" trademark to manufacture, market and sell men's, ladies', and children's outerwear, skiwear, suits, shells, vests, pants, bib pants, fleece jackets and vests, velour jackets, vests and pants, sweaters, pile jackets and vests, T-necks, shirts, hats, caps and head gear, gloves, bags and packs, other accessories. Net Sales 5.00% ITA No. 9331/Del/2019 Marks & Spencer (India) Pvt. Ltd. 11 3 Aris Industries, Inc., XOXO Clothing Company, Incorporate d, BP Clothing Company, Inc., Europe Craft Imports, Inc. and Marcade Realty Corp. Grupo Extra of New York, Inc. Exclusive license to use the "XOXO" and the "Fragile” trademark to manufacture, market, advertise, promote, sell and distribute women's clothing, jeans wear and sportswear. Net Sales 8.oo% 4 Lotto S.p.A. Aarica Holding Inc. Exclusive license to use the "Lotto" and "Double Diamond" trademarks to manufacture, promote and sell men's, ladies' and children's shoes, apparel and accessories. Net Selling Price 5.00% 5 Everlast Worldwide Inc. Jacques Moret, Inc. Exclusive trademark license to manufacture, import, advertise, distribute and sell men's apparel, including active wear, sportswear, jeans, swimwear, and outerwear, but specifically excluding boys, infant, and toddler apparel, and professional and amateur boxing apparel. Net Sales 5.00% Count 5 Mean 6.00% 19. It was alternatively requested to consider the above and allow royalty at the rate of 6% in the instant case. ITA No. 9331/Del/2019 Marks & Spencer (India) Pvt. Ltd. 12 20. Further, it was submitted that the assessee operates in an industry which involves intense computation from organized and unorganized players which requires rapid changes in design to deliver quality experience to the end user customers. Hence, the importance bundled rights and services cannot be ignored. It was further submitted that the commercial expediency and the benefit test cannot be ignored. It was also submitted that in the A.Y. 2018-19, the revenue determined royalty expenses as percentage of sales @ 3.38% after comparing the most comparable companies namely, Jockey International, SSIPL Lyfestyle, Benetton India Pvt. Ltd. 21. From the entire factum, we find that the revenue has derived ALP without resorting to any method prescribed as per the Income Tax Rules. The disallowance of 6% during the current year has been merely made on the pretest that in the earlier year, the royalty paid was @ 1%. Hence, it is directed that the TPO/AO shall undertake appropriate TP study and determine Arm’s Length Price. 22. In the result, the appeal of the assessee is allowed for statistical purpose. Order Pronounced in the Open Court on 10/03/2023. Sd/- Sd/- (Yogesh Kumar US) (Dr. B. R. R. Kumar) Judicial Member Accountant Member Dated: 10/03/2023 *Subodh Kumar, Sr. PS* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR