This legal case involves the dispute between DCIT Circle-1(1), New Delhi (Appellant) and Adidas India Marketing Pvt Ltd, located in Vasant Kunj, New Delhi (Respondent) regarding the assessment year 2015-16. The case number ITA 160/DEL/2021 was adjudicated by the Income Tax Appellate Tribunal, Delhi Bench ‘I’. The final tribunal order was pronounced on September 2, 2022.
The dispute centers on the transfer pricing adjustment pertaining to Advertisement, Marketing, and Promotion (AMP) expenses and the disallowance of buying commission. The appellant, DCIT, challenges the CIT(A)’s decision which sided with the respondent, Adidas, by dismissing the bright line approach used by the TPO in determining the arm’s length price for AMP expenses and deleting the disallowance of the buying commission.
The Tribunal in its detailed order discusses the application of judicial precedents and the principles of consistency. The Tribunal refers to its earlier decisions, notably relating to the respondent’s own cases from previous years where similar issues were addressed and resolved in favor of the taxpayer. The Tribunal emphasized the importance of consistency in judicial decisions, especially when dealing with recurring issues in tax litigation.
The Tribunal dismissed the appeal by the Revenue, upholding the CIT(A)’s order. It ruled that the adjustments proposed by the TPO on the AMP expenses were not sustainable in the eyes of the law. Additionally, the disallowance of the buying commission was also deleted, further aligning with earlier precedents which highlighted that such commission payments did not qualify as fees for technical services under the IT Act. This case sets a significant precedent for future cases involving similar disputes over AMP expenses and buying commissions in the context of transfer pricing.
This case exemplifies the intricate nature of transfer pricing disputes and the role of judicial precedents in achieving consistent and equitable outcomes in tax litigation. The decision reaffirms the Tribunal’s approach towards the treatment of AMP expenses and buying commissions, providing a clear guideline for similar cases.
These three appeals are filed by the Revenue against separate orders of the Commissioner of Income Tax (Appeals)–44, New Delhi dated 03/09/2020, 08/09/2020, and 08/09/2020 respectively for the Assessment Years 2013-14, 2014-15, and 2015-16.
Brief facts of the case: For the year under consideration, the assessee filed its return of income declaring an income of Rs. 6,82,34,060/-. An order u/s 92 CA (3) of the Act was passed by the TPO without drawing any adverse inference in relation to economic analysis concerning all international transactions. However, the Ld. TPO opined that excessive advertisement, marketing, and promotion expenses incurred by the assessee were international transactions and proposed an adjustment of Rs. 4,51,14,573/- on a substantive basis and Rs. 16,74,91,752/- on a protective basis concerning AMP expenditure incurred by the taxpayer. The Ld. A.O further disallowed Rs. 3,20,05,077/- u/s 40(a)(i) of the Act since the assessee did not deduct tax at source while making payment to Adidas International Trading BV on account of commission.
A draft assessment order was passed u/s 143(3) /144C (1) of the Act on 30/12/2016, wherein the aforesaid disallowance was proposed, and the final assessment order u/s 143(3) read with Section 144C (3) of the Act was passed on 14/02/2017, and the income of the assessee was computed as under:
Particulars | Amount |
---|---|
AMP Expense – protective adjustment | Rs. 16,74,91,752/- |
AMP Expense – substantive adjustment | Rs. 4,51,14,573/- |
Buying Commission | Rs. 3,20,05,077/- |
Total | Rs. 31,28,45,462/- |
Since the Ld. A.O considered the Transfer Pricing Adjustment on account of AMP Expenses to be Rs. 21,26,06,325/-, which includes an adjustment of Rs. 16,74,91,752/- proposed on a protective basis, the assessee filed an application for rectification of the mistake u/s 153/143 of the Act, which was allowed by the A.O reducing the Transfer Pricing Adjustment to Rs. 4,51,14,573/- (being AMP adjustment on a substantive basis).
As against the assessment order dated 14/02/2017, the assessee preferred an Appeal before CIT (A). The Ld. CIT(A) vide order dated 03/09/2020 allowed the Appeal by rejecting TPO’s bright line approach in determining the Arm’s Length Price for the AMP expenditure and deleted disallowance of buying commission amounting to Rs. 3,20,05,077/- paid by the A.O on account of non-deduction of TDS. The Ld.CIT(A) followed the Assessee’s own case for Assessment Years 2006-07, 2011-12 & 2012-13 on similar issues.
Aggrieved by the order dated 03/09/2020 passed by CIT(A), the Revenue filed the present appeal on the following grounds:
After hearing the parties and perusing the materials on record, the Tribunal gave thoughtful consideration. The Grounds No. 1 and its sub-grounds are concerning Transfer Pricing Adjustment with respect to AMP expenditure amounting to Rs. 4,51,14,573/- on a substantive basis. During the course of transfer pricing proceedings, the Ld. TPO opined that the AMP Expenditures incurred by the assessee are to promote the brand/trade name owned by the AE’s and expenditure has resulted in brand building and increased awareness of products bearing brand/trading. Accordingly, under the comparability adjustment, the excess AMP was determined by identifying the excess intensity of AMP expenditure incurred by the assessee and comparable companies. Thus, a substantive adjustment of Rs. 4,51,14,573/- was proposed.
It is not in dispute that in the Assessee’s own case for Assessment Year 2006-07, 2011-12, and 2012-13, the very same issue was dealt with and decided in favor of the assessee by dismissing the Appeal of the Revenue in ITA No. 953/Del/2016 (A.Y 2011-12) and ITA No. 729/Del/2019 (AY 2012-13) vide order dated 31/07/2019, wherein it is held as follows:
We don’t deny that there would be incidental benefit to the foreign AE, being, Adidas-Saloman AG, which is the ultimate parent of the assessee. However, the expenditure towards advertisement and marketing incurred by the assessee in India is mainly for its own benefit to market products manufactured by it in India. The main purpose of incurring such huge AMP expenses has largely benefited the assessee in India, with an incidental benefit arising to the foreign AE. Unless the Ld. TPO can establish a direct benefit accruing to the foreign AE, it is very difficult to accept the existence of an international transaction, under the present facts of the case. We rely upon the decision of Hon’ble Delhi High Court in the case of Sony Ericson Mobile Communication India Pvt. Ltd (supra) in support of aforestated observations.
Further, it was submitted by both sides that facts and circumstances in the present appeal are no different from those of Maruti Suzuki India Ltd. Reported in 381 ITR 117; and Sony Ericson Mobile Communications (supra), wherein the Hon’ble High Court held that the existence of an international transaction must be established de hors the Bright Line Test before undertaking benchmarking of AMP expenses. We, therefore, respectfully follow the view taken by this Hon’ble Delhi High Court in Sony Ericson Mobile Communications (supra), and delete the adjustment made in respect of AMP expenses.
However, we appreciate the concern raised by the Ld. Sr. DR that the decision of the Hon’ble Supreme Court will be binding upon the assessee as well as the revenue.
After considering the legal position as discussed in the preceding paragraphs, we are of the considered opinion that the ALP of an international transaction involving AMP expenses, the adjustment made by the TPO/DRP/AO is not sustainable in the eyes of law. At the same time, we cannot ignore the submission of the learned DR that the matter is pending before the Hon’ble Apex Court and the decision of the Hon’ble Apex Court would be binding upon all the authorities. In view of the above, we set aside the orders of authorities below and restore the matter to the file of the Assessing Officer. We hold that as per the facts of the case and the legal position as of now and discussed above in this order, the adjustment made by the TPO/DRP/AO in respect of AMP expenses is not sustainable. However, if the above decisions of Hon’ble Jurisdictional High Court which is under consideration before the Hon’ble Apex Court is modified or reversed by the Hon’ble Apex Court, then the Assessing Officer would pass the order afresh considering the decision of the Hon’ble Apex Court. In those circumstances, he will also allow the opportunity of being heard to the assessee.
Accordingly, Grounds 2 to 2.24 stand allowed for statistical purposes.
The above ratio laid down by the Coordinate Bench of the Tribunal is squarely applicable to the issue in hand, but the Ld. DR submitted that the said issue is pending consideration before the Supreme Court and the same is yet to be adjudicated, therefore submitted that the present Appeal has to be decided against the assessee. In our opinion, mere pendency of the above issue before the Hon’ble Supreme Court cannot be a ground to allow the present appeal filed by the Revenue. By following the rule of consistency and judicial discipline, we are inclined to follow the binding precedent orders of the Tribunal in the Assessee’s own case (supra). Accordingly, we dismiss the Revenue’s Grounds of Appeal No. 1 and its sub-grounds.
The Ground No. 2 is in respect of deleting the disallowance by CIT(A) of the buying commission amounting to Rs. 3,20,05,077/- made by the A.O on account of non-deduction of TDS.
The Ld. DR submitted that the Ld. CIT(A) has committed an error in relying on the decision of Assessee’s own case for AY 2011-12 and 2012-13 without appreciating the fact that the matter is sub-judice before the Hon’ble High Court. Therefore, submitted that the present appeal deserves to be allowed.
Per contra, the Ld. Counsel for the assessee submitted that the said disallowance is in respect of the buying commission paid to the foreign entity on the ground that the payment made to the foreign entity is in the nature of ‘FTS’ under Section 9 (1)(vii) of the Act as well as Article 12(5) and the sums chargeable to tax in the hands of recipients. The assessee paid sourcing/buying commission to Adidas International Trading BV Neitherland, under a ‘buying agency agreement’ in respect of procurement services rendered from outside India and the said issue has also already been considered by the Coordinate Bench of the Tribunal in Assessee’s own case in ITA No. 950/Del/2019 (Assessment Year 2010-11), ITA No. 953/Del/2016, (Assessment Year 2011-12) and ITA No. 729/Del/2017 (Assessment Year 2012-13). The relevant portions of the order in ITA No. 953/Del/2016 dated 31/07/2019 are hereunder:
We have heard the rival submissions and perused the relevant material on record. The main issue for consideration is whether the consideration received by the assessee from AIMPL under the Buying Agency Services Agreement (‘BAS’) could be characterized as ‘fees for technical services’ under section 9 (1)(vii) of the Act and accordingly taxed under the provisions of section 115A of the Act. Explanation 2 to section 9(1)(vii) defines ‘fees for technical services’ as any consideration for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head ‘Salaries’. It is evident that for a particular stream of income to be characterized as ‘fees for technical services’, it is necessary that some sort of ‘managerial’, ‘technical’ or ‘consultancy’ services should have been rendered in consideration.
The Tribunal further noted that the Department has only interpreted these services to be amounting to ‘Fees for Technical Services’, whereas these are routine services offered in procurement assistance. The agreements demonstrate that the assessee was to receive a commission for procuring the products of AIMPL and rendering incidental services for purchases. The primary services provided by the assessee to AIMPL in terms of the Buying Agency Services agreement include coordinating between AIMPL and manufacturers for buying merchandise, assisting in negotiations, procurement of samples, maintaining relationships with manufacturers, supplying credit reports, and providing translation services.
The Tribunal concluded that the services rendered by the assessee in this case were purely in the nature of procurement services and cannot be characterized as ‘managerial’, ‘technical’, or ‘consultancy’ services. Accordingly, the consideration received by the assessee was appropriately classified as ‘commission’ rather than ‘fees for technical services’.
The Ld. DR has not disputed this factual matrix but submitted that the Department has filed an Appeal before the High Court as against the order made in the assessee’s own case for Assessment Years 2010-11, 2011-12 & 2012-13 and submitted that the matter is sub-judice. However, the Tribunal held that mere pendency of the appeal before the Hon’ble High Court for previous Assessment Years on similar issues cannot be a ground to allow the present appeal filed by the Revenue. The principle of consistency and judicial discipline requires following the binding precedents of the Tribunal. Therefore, the Tribunal dismissed Ground No. 2 of the Revenue.
Ground No. 3 being general in nature required no adjudication. In the result, the appeal filed by the Revenue in ITA No. 158/Del/2021 is allowed. Further, in ITA No. 159/Del/2021 (AY 2014-15) and ITA No. 160/Del/2021 (AY 2015-16), the Revenue raised similar grounds as in ITA No. 158/Del/2021. Accordingly, the Tribunal dismissed the Revenue’s Grounds of Appeal by disposing of the above Appeals as decided in ITA No. 158/Del/2021.
In the result, ITA No. 159/Del/2021 (AY 2014-15) and ITA No. 160/Del/2021 (AY 2015-16) filed by the Revenue are dismissed. Order pronounced in the open court on 02nd September, 2022.
Signatories:
G. S. PANNU (PRESIDENT)
YOGESH KUMAR U.S. (JUDICIAL MEMBER)
Dated: 02/09/2022
Assistant Registrar, ITAT New Delhi
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