Applicability of TDS on Payment of buying agency commission to non-resident

short overview : Services rendered by non-resident outside India were purely in the nature of procurement services and could not be characterized as ‘managerial’, ‘technical’ or ‘consultancy’ services and thus, could not be taxed in absence of a permanent establishment in India, accordingly, liability to withhold tax under section 195 did not arise.

Assessee entered into ‘buying agency agreement’ with non-resident and claimed deduction of commission paid on account of procurement of goods from outside India. AO treated the payment to be in the nature of ‘fee for technical services’ and accordingly disallowed deduction for want of TDS under section 195.

it is held that  Services rendered by non-resident were purely in the nature of procurement services and could not be characterized as ‘managerial’, ‘technical’ or ‘consultancy’ services and thus, could not be taxed in absence of a permanent establishment in India, accordingly, liability to withhold tax under section 195 did not arise.

Decision: In assessee’s favour.

IN THE ITAT, DELHI BENCH

AMIT SHUKLA, J.M. & O.P. KANT, A.M.

Adidas India Marketing (P) Ltd. v. ITO

ITA No. 953/Del/2016, ITA No. 729/Del/2017

31 July, 2019

Assessee by: Kanchan Kaushal, Authorised Representatives

Department by: Sanjay I. Bara, Commissioner–Departmental Representative

ORDER

O.P. Kant, A.M.

These two appeals by the assessee are directed against two separate Orders, dated 29-1-2016 and 26-12-2016 passed by the Income Tax Officer, Ward-1(3), New Delhi (in short ‘the assessing officer’) for assessment years 2011-12 and 2012-13 respectively in pursuant to the direction issued by the learned Dispute Resolution Panel (Disputes Resolution Panel) for the relevant assessment years.

As the issues-in-dispute involved in these appeals are identical under common set of facts, these appeals were heard together and disposed off by way of this consolidated order for convenience.

ITA No. 953/Del/2016 for AY:2011-12

2. First, we take up the appeal havingITA No. 953/Del/2016 for assessment year 2011-12, grounds of which are reproduced as under :–
3. On the facts, in law and in the peculiar circumstances of the present case, the Learned Dispute Resolution Panel (‘learned Disputes Resolution Panel’) has grossly erred in making certain observations by exceeding its powers as detailed under section 144C(8) of the Act, by directing certain new additions on issues which neither arose out of the assessment proceedings, nor were in relation to the proposed variations as made by the learned assessing officer at the draft order stage and hence, for this reason alone, it is prayed that such additions so made, may be ordered to be deleted.

Transfer Pricing Grounds

2. On the facts, in law, and in the circumstances of the case, the Panel erred in sustaining the basis of addition of INR 8,87,80,971 on account of import of finished goods proposed by the learned Transfer Pricing Officer.

2.1. On the facts, in law, and in the circumstances of the case, the learned Assessing officer/Transfer Pricing Officer and the Panel erred in selecting the Transactional Net Margin Method (‘TNMM’) as the most appropriate method (‘MAM’) as against the Comparable Uncontrolled Price (‘CUP’) method, which is direct and most reliable under the specific facts of the case.

2.2. On the facts, in law, and in the circumstances of the case, the learned Assessing officer/Transfer Pricing Officer erred the Panel erred in making adjustment by not selecting appropriate comparable companies for determination of arm’s length margin.

2.3. On the facts, and in the circumstances of the case, the learned Assessing officer/Transfer Pricing Officer erreci in not applying the Disputes Resolution Panel directions appropriately by selecting wrong comparable and taking incorrect computation of the operating margins of such comparable.

3. On the facts, in law, and in the circumstances of the case, the learned Assessing officer/Transfer Pricing Officer and the Panel erred in making an addition of INR 38,97,45,132 by allegedly assuming the expenditure on account of Advertisement, Marketing and Promotional (“AMP”) to be an international transaction in the present case.

3.1. On the facts, in law, and in the circumstances of the case, the Panel erred in enhancing the income of the Appellant by making a separate adjustment on account of AMP when such adjustment was not warranted in the instant case.

3.2 On the facts, in law, and in the circumstances of the case, the learned Assessing officer/Transfer Pricing Officer and the Panel erred in not appreciating that the AMP expenses could not be regarded as a ‘transaction’, much less than an international transaction under section 92B of the Act, in the absence of any understanding/ arrangement/agreement between the Appellant and its associated enterprises (‘AEs’) thereby making the transfer pricing provisions inapplicable.

4. On the facts, in law, and in the circumstances of the case, the learned Assessing officer/Transfer Pricing Officer and the Panel erred in applying the bright line test (AMP/Sales), for establishing the existence of international transaction and computing the value of adjustment on account AMP adjustment completely disregarding the binding decisions of the Jurisdictional High Court in the case ofMaruti Suzuki India Ltd. v. CIT (ITA 710/2015)and Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT (2015) 374 ITR 118 (Del) : 2015 TaxPub(DT) 1653 (Del-HC).
5. On the facts, and in the circumstances of the case, the learned Assessing officer/Transfer Pricing Officer and the Panel erred in not appreciating that the AMP expenses were incurred by the Appellant for its own benefits for which no compensation was required from the AE’s.
6. On the facts, and in the circumstances of the case, the learned Assessing officer/Transfer Pricing Officer and the Panel erred in proceeding with an incorrect understanding of the functional profile of the Appellant, thereby characterizing it as a distributor of finished goods and not as manufacturer.
7. Without prejudice to the above, on the facts, in law, and in the circumstances of the case, the learned Assessing officer/Transfer Pricing Officer and the Panel erred in imputing mark-up of 32.25% on the alleged excessive AMP expenses which represents the Gross profit on sales earned by the applicant from its manufacturing and distribution activities.
8. That on the learned Panel gravely erred in directing the learned Assessing officer/Transfer Pricing Officer to apply a mark-up of 32.25% which is excessive, arbitrary and devoid of economic and commercial realities of business.

Corporate Tax Grounds

9. On the facts and circumstances of the case and in law, the Panel erred in directing to disallow fee for ‘buying agency services under section 40(a)(i) of the Income Tax Act, 1961 (‘the Act’) paid by the Appellant to Adidas International Trading B. V. by holding the same to fall within the definition of “Fees for technical services” under section 9(1)(vii) of the Act and Article 12(5) of the India-Nether lands Double Taxation Avoidance Agreement (“the DTAA”).

9.1 On the facts and circumstances of the case and in law, the Panel gravely erred in enhancing the income of the Appellant by directing disallowance of fee for “buying agency services”.

9.2 Without prejudice to the above, the Panel erred in law by reading into the meaning of “Fees for technical services” contained in section 9(1)(vii) of the Act for the purpose of interpreting the definition of “Fees for technical services” provided under Article 12(5) of the India-Netherlands DTAA.

9.3 Without prejudice to the above, the Panel grossly erred in categorizing the services rendered by Adidas International Trading B.V. into the scope of “make available” as provided in Article 12(5) of the India-Netherlands DTAA.

10. Without prejudice to the above, on the facts and circumstances of the case, while computing the assessed income, the learned assessing officer erred in not allowing set of brought forward losses available with the Appellant as per section 72 of the Act.
11. That the learned assessing officer erred in levying interest under section 234D and withdrawal of interest under section 244A of the Act.
12. That the learned assessing officer erred in initiating penalty proceedings under section 271(l)(c) of the Act.)

The above grounds are without prejudice to each other.

3. Briefly stated facts of the case are that the assessee, i.e., Adidas India Marketing Private Limited, is a domestic company engaged in the business of trading of sports goods, i.e., footwear, apparel, accessories, equipment etc. The products are sold mostly under the brand name of “Adidas”. Those goods are manufactured for the assessee by the third party contract manufacturers. During the year under consideration, apart from the trading operations, the assessee also imported finished goods from Associated Enterprises (AEs) for resale in India. For the year under consideration, the assessee filed return of income on 30-11-2011, declaring Nil income under the normal provisions of the Income Tax Act, 1961 (in short ‘the Act’) and book profit of Rs. 7,26,83,681 under the provisions of section 115JB of the Act (minimum alternative tax). The book profit declared under section 115JB of the Act, was subsequently revised to Rs. 75,94,096 in the revised return of income filed. The assessee benchmarked its international transaction of import of finished goods using Comparable Uncontrolled Price (CUP) method taking price charged by the third-party manufacturer from the AEs as CUP to the price charged by the AE from the assessee. The case of the assessee was selected for scrutiny and the assessing officer referred the matter for benchmarking of the International transaction to the learned Transfer Pricing Officer (Transfer Pricing Officer). Learned Transfer Pricing Officer, however, rejected the CUP method for benchmarking adopted by the assessee. According to the learned Transfer Pricing Officer the assessee was also engaged in providing Advertising, Marketing and sales Promotion (AMP) for the brand of the AE and thus, international transaction of the AMP existed in the case of the assessee. The learned Transfer Pricing Officer benchmarked both the International transaction of import of the finished goods and AMP expenses on aggregated basis applying Transactional Net Margin Method (TNMM) accepting five companies engaged in promotion of the brand owned by AEs or by themselves as comparable companies and made an adjustment of Rs. 8,87,80,971 to the purchase of the finished goods.

3.1 Pursuant to the order of the learned Transfer Pricing Officer, the assessing officer issued draft assessment order confirming the adjustment proposed by the learned Transfer Pricing Officer. In the draft assessment order, the learned assessing officer also proposed disallowance of buying commission expenses in terms of section 40(a)(i) for non-deduction of the tax at source.

3.2 Aggrieved by the draft assessment order passed by the learned assessing officer, the assessee filed objection before the learned Disputes Resolution Panel. The learned Disputes Resolution Panel, however, followed segregated matter for benchmarking of the International transaction of purchase of the finished goods and AMP transactions. Regarding the transaction of purchase of finished goods, the learned Disputes Resolution Panel found defect in the criteria for search of the comparables by the learned Transfer Pricing Officer and directed to undertake a fresh benchmarking following certain filters. The learned Disputes Resolution Panel also directed to compute the operating margins of the comparable companies correctly on the basis of the Annual Report of those companies. The learned Disputes Resolution Panel also directed to benchmark the AMP transactions separately.

Pursuant to the direction of the learned Disputes Resolution Panel, the learned Transfer Pricing Officer in his letter, dated 28-1-2016 computed the adjustment on account of excessive AMP at Rs. 38,97,45,132. The adjustment on account of purchase of finished goods was retained at Rs. 8,87,80,971. In this manner total adjustment of Rs. 47,85,26,103 was proposed pursuant to the direction of the learned Disputes Resolution Panel. The assessing officer, in the impugned final assessment order passed, made addition of Rs. 47,85,26,103 as transfer pricing adjustment and disallowance of Rs. 3,84,52,472 in terms of section 40(a)(ia) of the Act.

4. The ground No. 1 of the appeal was specifically not pressed before us and accordingly, same is dismissed as infructuous.
5. The grounds No. 2 to 2.3 of the appeal relates to transfer pricing adjustment of Rs. 8,87,80,971 to the International transaction of import of finished products.

5.1 The learned counsel of the assessee before submitted that in the final assessment order, the learned assessing officer was required to compute the adjustment in view of the direction of the learned Disputes Resolution Panel, however, the learned Transfer Pricing Officer/assessing officer has not followed the direction of the learned Disputes Resolution Panel for making fresh search of the comparable. The learned counsel submitted that even the rectification application filed by the assessee has been rejected by the assessing officer and therefore there was no alternative with assessee except to make request before the Tribunal by way of raising this ground. The learned counsel submitted that matter may be restored to the file of the assessing officer with the direction to follow the finding of the learned Disputes Resolution Panel.

5.2 The learned Departmental Representative could not controvert the above submission of the learned counsel of the assessee.

5.3 We have heard the submission of the parties on the issue in dispute in the light of the order of the lower authorities. We find that the learned Disputes Resolution Panel directed the learned Assessing officer/Transfer Pricing Officer on the choice of comparables for TNMM analysis of distribution function as under :–

“Disputes Resolution Panel’s findings–The Transfer Pricing Officer has discussed the issue in regard to selection of comparables on page 4 & 12 on the order. The Comparables that were selected by the Transfer Pricing Officer were from the ones that were suggested by the assessee to benchmark its distribution function. As the functions/segment’ that was being benchmarked was primarily the distribution function therefore, the-Transfer Pricing Officer held the comparables proposed by the assessee as valid comparables. The Transfer Pricing Officer out of 30 comparables of the assessee selected 5 comparables, on the basis that

–The assessee is engaged in promotion of brand name which is not owned by it but is owned by its AEs which leads to creation of marketing intangibles for its AEs;

–The Transfer Pricing Officer selected 5 companies out of 10 comparables which neither own a brand nor were they incurring AMP expensed for brands owned by some other person or entity

From the order of the Transfer Pricing Officer, it is observed that the taxpayer had submitted 30 comparables before him. Neither the taxpayer in its submissions nor the Transfer Pricing Officer in his analysis has mentioned the search criteria for selection of these 30 comparables. Out of these 30 comparables the Transfer Pricing Officer has rejected 25 companies and retained the balance 25 which are not owners of any brand: The list of such companies has already been reproduced in earlier paras while incorporating the relevant paras of the Transfer Pricing Officer’s order. Since, neither the search criteria nor other functional details of these comparables have been provided. This Panel is at a loss to benchmark or adjudicate them as the correct set of comparables. Further, the TPQ while rejecting the comparables has benchmarked the AMP function rather than the distribution function. Thus, the Transfer Pricing Officer has not considered the distribution function at the time of rejection of the comparables, most of the comparables have been rejected on-the sole basis that they are brand owners. Brand ownership is an important criteria for consideration while benchmarking the AMP function. The business of the taxpayer which is being benchmarked is the activity of sourcing and, distribution and marketing of a range of Adidas and Taylor Made branded athletic and life style products.

These products include athletic footwear, sports apparel and accessories such as bags, balls, socks, wrist-and headbands. AIMPL’s operations in India are largely similar to the operations of adidas’ distribution companies worldwide. Thus, appropriate comparables out of the list provided by the taxpayer would be those which are carrying put similar functions but are not brand owners in the sense that they are manufacturers, however, comparables retailing brand owned by other parties would be an appropriate comparable. The Transfer Pricing Officer is directed to re-examine the above comparables after applying the following functional filters :–

–Reject companies which financial year ending other than March, 2011

–Reject companies having sales less than Rs. 1 cr.

–Reject companies having negative net-worth

–Reject companies having related party transaction to sales more than 25%

And accordingly compute the ALP adjustment

5.4 The learned Disputes Resolution Panel also directed the learned Assessing officer/Transfer Pricing Officer to recompute the Profit Level Indicator (OP/Sale) of the comparables as under :–

“Disputes Resolution Panel’s Findings–The assessee has pointed out error in the competition of OP/Sale % by the Transfer Pricing Officer and has submitted rectified margin for five comparables. The Transfer Pricing Officer had rejected the above calculation of operating margins from the annual report on the premise that the assessee earlier submitted the operating margin calculations using Prowess/Capitaline database. The assessee submits that the annual report is a vital document which is considered to be the most reliable source of qualitative as quantitative information about a company. This view has been upheld in various judicial pronouncements. There are major difference in the competition of the OP/Sales % by the assessee and that by the Transfer Pricing Officer. The Transfer Pricing Officer is directed to re-compute the OP/Sale % and rectify any omission or mistake in the calculation as ideally there should not be any difference in the two computations.”

5.5 We find that while giving effect to the order of the learned Disputes Resolution Panel, the learned Transfer Pricing Officer in letter, dated 28-1-2016 has recomputed only AMP adjustment and adjustment in respect of International transaction of import of finished goods was retained at Rs. 8,87,80,971. The relevant paragraph of the said letter is reproduced as under :–

“6. As per Hon’ble Disputes Resolution Panel direction to give an opportunity to the taxpayer for examining the expense and exclude selling expenses a letter issued to assessee on 9-12-2015 and hearing fixed for 16-12-2015. Its response, Authorised Representatives of assessee file his reply vide letter, dated 21-1-2016. On perusal of reply and Disputes Resolution Panel order adjustment resulted as under :–

Adjustment on account of excessive AMP

Particular	Reference	Amount
Total Safes of the Assessee	A	4,897,213,000
AMP/Sales of the comparables	B	2.20%
Arm’s length AMP expenses	C = A*B	107,738,686
Total AMP expense of the Assessee	D	402,442,000
Excessive AMP expenses of the Assessee	E = D-C	294,703,314
Mark up @	F	32.25%
Amount of adjustment on account of excessive AMP	G = E +(E*F)	389,745,132

7. The cumulative adjustment made in this case is as under :–

Adjustment on account of shortfall in net operating margin	88,780,971
Adjustment on account of excessive AMP	389,745,132
TOTAL ADJUSTMENT	478,526,103

5.6 The learned assessing officer in the impugned order has adopted the value of the transfer pricing adjustment to Rs. 47,85,26,103 as worked out by the learned Transfer Pricing Officer.

5.7 Thus, it is evident that learned Transfer Pricing Officer/Assessing officer has not considered the direction of learned Disputes Resolution Panel. As per the provisions of section 144C(13) of the Act, the assessing officer is bound to pass the final assessment order in conformity with the direction of the Disputes Resolution Panel. The relevant provision of the Act is reproduced as under :–

“Reference to Dispute Resolution Panel.–144C (13) Upon receipt of the directions issued under sub-section (5), the assessing officer shall, in conformity with the directions, complete, notwithstanding anything to the contrary contained in section 153 or section 153B, the assessment without providing any further opportunity of being heard to the assessee, within one month from the end of the month in which such direction is received.”

5.8 In view of the above provision there is no scope for the assessing officer/Transfer Pricing Officer for any deviation from the direction issued by the learned Disputes Resolution Panel. In the instant case, the learned Transfer Pricing Officer/Assessing officer ought to have followed the direction of the learned Disputes Resolution Panel and this omission on the part of the learned Assessing officer/Transfer Pricing Officer should have been rectified by them at the earliest. This omission in the impugned order, which is against the rule of law, cannot be continued. The impugned order to the extent of addition of Rs. 8,87,80,971 made in respect of adjustment to International transaction of import of finished goods is set aside and matter is remitted back to the learned Assessing officer/Transfer Pricing Officer to comply with the direction of the learned Disputes Resolution Panel on the issue of adjustment to the International transaction of import of finished goods. The grounds No. 2 to 2.3 of the appeal are accordingly allowed for statistical purposes.

6. In grounds No. 3 to 8 of the appeal, the assessee has raised the issue of AMP adjustment of Rs. 38,97,45,132 made in the case of the assessee.

6.1 Before us, both the parties agreed that issue in dispute is covered by the direction of the Tribunal in assessment year 2006-07 in ITA No. 3727/Del/2014 and this may be decided accordingly.

6.2 We have heard the submission of the parties and perused the relevant material on record. The issue whether incurring of expenditure on advertisement, marketing and sales promotion by the assessee, amounts to International transaction and determination of its arms length price, has been decided by the Tribunal in assessment year 2006-07 The relevant finding of the Tribunal is reproduced as under :–

“8.1.2. We don’t deny that there would be incidental benefit to foreign AE, being, Adidas-Saloman AG, which is ultimate parent of assessee. However, expenditure towards advertisement and marketing incurred by assessee in India is mainly for its own benefit to market products manufactured by it in India. Main purpose of incurring of such huge AMP expenses has largely benefited assessee in India, with an incidental benefit arising to foreign AE. Unless learned Transfer Pricing Officer can establish direct benefit accruing to foreign AE, it is very difficult to accept existence of international transaction, under present facts of the case. We rely upon decision of Hon’ble Delhi High Court in case of Sony Ericson Mobile Communication India (P) Ltd. (supra) in support of aforestated observations.

8.2. Further it has been submitted by both sides that facts and circumstances in present appeal are no manner different with that of Maruti Suzuki Inida Ltd. reported in (2016) 381 ITR 117 (Del) : 2015 TaxPub(DT) 5219 (Del-HC); and Soney Ericson Mobile Communications (supra), wherein Hon’ble High Court has held that existence of international transaction must be established de hors the Bright Line Test before undertaking bench marking 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 adjustment made in respect of AMP expenses.

8.3 However, we appreciate the concern raised by learned Sr. Departmental Representative that decision of Hon’ble Supreme Court will be binding upon assessee as well as revenue.

“19. 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 Transfer Pricing Officer/Disputes Resolution Panel/Assessing officer is not sustainable in the eyes of law. At the same time, we cannot ignore the submission of the learned Departmental Representative that the matter is pending before Hon’ble Apex Court and the decision of 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 Transfer Pricing Officer/Disputes Resolution Panel/Assessing officer 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 Hon’ble Apex Court. In those circumstances, he will also allow opportunity of being heard to the assessee.”

Accordingly Grounds 2 to 2.24 stand allowed for statistical purposes.”

6.3 We note that the Tribunal in assessment year 2010-11 in ITA No. 1431/Del/2015 has also restored the matter to the assessing officer to decide in view of the finding in assessment year 2006-07.

6.4 Respectfully following the finding of the Tribunal (supra), the issue in dispute of determination of AMP adjustment is restored to the file of the assessing officer for deciding in accordance with the direction given by the Tribunal in assessment year 2006-07. It is needless to mention that the assessee shall be afforded adequate opportunity of being heard. The grounds of the appeal from 3 to 8 are accordingly allowed for statistical purposes.

7. The grounds No. 9 to 9.3 of the appeal relates to disallowance under section 40(a)(i) of the Act in respect of buying agency services. According to the lower authorities, the expenditure on buying agency services are in the nature of “fee for technical services” in terms of section 9(1)(vii) of the Act and therefore, the assessee was required to deduct tax at source on such payment and failure to do so resulted in disallowance under section 40(a)(i) of the Act. The learned Disputes Resolution Panel in their order has listed the activities carried out by the Adidas International Trading BV in relation to procurement of goods as under :–

“a. Finding manufacturers for the goods concerned and making arrangements for their manufacture;

1. Sourcing samples.
2. placing orders for and/or purchase goods,
3. Managing payment for goods made by manufacturers on behalf of the Principal;
4. Inspecting materials, components and goods, both during and on completion of manufacture,
5. rejecting those goods that do not conform to such terms and standards;
6. sign manufacturing agreements (“Manufacturing Agreement”)
7. Facilitating obtaining relevant documentation, particularly with regards to invoices, export licences, certificates of origin and/or GSP/EURI documentation, etc.;
8. Arranging, the insurance, transport and delivery of goods j. to arrange storage of goods until “requirement” date;
9. Liaise with manufacturers to ensure that confirmed ex-factory dates are met;
10. Liaise with manufacturers with regards left-over material, mould management, tooling and late deliveries aiming to settle such issues as directed by the Principal, and; m. Liaise with courier and logistics companies as required to facilitate the delivery of orders placed by the Principal. “

7.1 Before us, the learned counsel of the assessee submitted that the assessee made payment of commission to Adidas International Trading BV (ITBV) on account of procurement of goods from outside India and for that purpose it has entered in a ‘buying agency agreement’ with said associated concern, which is placed on page 144-145 of the paper-book. The activities of ITBV include the contacting the manufacture, sourcing the sample and many other activities but the primary purpose was procurement of goods only. According to the learned counsel, the buying commission to ITBV was not account of any services but for procuring goods from global manufacturer, which are entrepreneurial activities and cannot be taxed in absence of a permanent establishment. The learned counsel submitted that issue in dispute is squarely covered by the decision of the Tribunal Delhi bench in the case of a Adidas Sourcing Ltd. v. ADIT (2012) 150 TTJ 801 (Del) : 2013 TaxPub(DT) 303 (Del-Trib), wherein it is held that buying commission paid does not fall within the ambit of the fee for technical services.

7.2 The learned Departmental Representative, on the other hand, relied on the order of the lower authorities.

7.3 We have heard the rival submission of the parties on the issue in dispute. The identical issue of buying commission in the case of sister concern of the assessee has been decided by the Tribunal (supra) as commission and not fee for technical services.

The relevant finding of the Tribunal is reproduced as under :–

“5. We have heard the rival contentions and perused the submissions made by the parties in detail. 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 by taxed under the provisions of section 115A of the Act. Explanation 2 to section 9(1)(vii) defines ‘fees for technical services’ as under :–

Explanation 2.–For the purposes of this clause, ‘fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) hut 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”.

5.1. 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 terms ‘managerial’, ‘technical’ or ‘consultancy’ do not find a definition in the Income Tax Act, 1961 and it is a settled law that they need to be interpreted based on their understanding in common parlance. Let us examine the meaning of each of these words :–

Managerial : the Delhi High Court in the case of J.K. (Bombay) Ltd. v. CBDT & Anr. (1979) 118 ITR 312 (Del) : 1979 TaxPub(DT) 888 (Del-HC) referred to an article on ‘Management Sciences’ in Encyclopaedia 747, wherein it is stated that the management in organizations include at least the following: (a) discovering, developing, defining and evaluating the goals of the organization and the alternative policies that will lead towards the goals; (b) getting the organization to adopt the policies; (c) scrutinizing the effectiveness of the policies that are adopted and (d) initiating steps to change policies when they are judged to be less effective than they ought to be. Management thus pervades all organizations.

Technical : In the case of Skyccll Communications Ltd. v. DCIT (2001) 251 ITR 53 (Mds) : 2001 TaxPub(DT) 1189 (Mad-HC), the Hon’ble High Court has held that the popular meaning associated with the word ‘technical’ is ‘involving or concerning applied and industrial science’.

Consultancy : consultancy is generally understood to mean an advisory services. Further, it may be fair to state that not all kind of advisory could qualify as technical services. For any consultancy to be treated as a technical services, it would be necessary that an technical element is involved in such advisory. Thus, the consultancy should be rendered by someone who has special skills and expertise in rendering such advisory.

5.2. Our attention was also brought to the decision of the Mumbai bench of the ITAT in the case of Linde AG v. ITO (1997) 62 ITD 330 (MUM.) : 1997 TaxPub(DT) 1032 (Mum-Trib) wherein it is observed that :–

“In the definition for ‘fees for technical services’ the consideration has to be for rendering technical, managerial or consultancy service. By making purchase for the Indian concern no consultancy services is provided as no advice is given to them. It is a simple procurement of equipments by the assessee for them. It is also not a technical service in the sense of technical education is concerned with leaching applied sciences and special training in applied sciences, technical procedures and skills required for practice of trade or profession, especially those involving the use of machinery or scientific equipment. If the information is given for the use of the machinery or scientific equipment it would partake the character of fees for technical services hut when it is only for the procurement of the scientific equipments it would be a simple service of commercial and industrial nature. It, therefore, cannot he termed as a technical service for which the procurement fees charged by the assessee cannot he a consideration for technical services. The third category is managerial service. The managerial service, as aforesaid, is towards the adoption and carrying out the policies of an organization. It is of permanent nature for the organization as a whole. In making the stray purchases, it cannot he said that the assessee has been managing the affairs of the Indian concern or was rendering managerial services to the assessee. “

5.3. The copies of the Buying Agency Services agreement are placed on record, the nature of services have not been disputed.

Department has only interpreted them to be amounting to ‘ Fees for Technical Services’, in our considered opinion these are not technical services but routine services offered in the procurement assistance.

The agreements demonstrate that the assessee was to receive 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 are as under :–

(i) Co-ordinate between AIMPL and manufacturers for the purpose of buying the merchandise,

(ii) assisting in negotiations,

(iii) assist in procurement of samples and sending them to AIMPL,

(iv) maintain relationship with the manufacturers and search for new manufacturers,

(v) supply credit reports and other marketing information concerning manufacturers and

(vi) provide translation services as required for communication between AIMPL and the manufacturers.

5.4. Applying the principles and case laws discussed above to the facts of the present case, we arc of the view 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’ as against ‘fees for technical.”

7.4 Since identical issue of buying commission paid in response to buying agency agreement for activities of coordination with the manufacture for procurement of goods by the assessee is involved in the instant case, respectfully following the finding of the Tribunal (supra), we hold that consideration paid by the assessee cannot be classified as fee for technical services and accordingly, not liable for deduction of tax at source and disallowance under section 40(a)(i) is not warranted. The ground of the appeal from 9 to 9.3 are accordingly allowed.

8. In ground No. 10 the assessee requested for allowing brought forward losses in accordance with section 72 of the Act.

8.1 We have heard the submission of the parties on this issue and we direct the assessing officer to examine the claim of the assessee of brought forward losses in accordance with the law.

The ground of the appeal is accordingly allowed for statistical purposes.

9. The ground No. 11 of the appeal is consequential in nature, and accordingly we are not required to adjudicate this ground.
10. The ground No. 12 of the appeal is premature and cannot be adjudicated at this stage, accordingly it is dismissed.
11. In the result, the appeal of the assessee is allowed partly for statistical purposes.

ITA No. 729/Del/2017 for AY: 2012-13

12. Now we take up the appeal of the assessee for assessment year 2012-13, grounds of which are reproduced as under :–

Transfer Pricing Grounds–1. On the facts, in law, and in the circumstances of the case, the Panel erred in sustaining the adjustment on account of Advertisement, Marketing and Promotional (“AMP”) on both protective and substantive basis.

2. On the facts, in law, and in the circumstances of the case, the learned Assessing officer/learned Transfer Pricing Officer erred in enhancing the income of the assessee by INR 68,35,11,040 as a substantive adjustment on transfer pricing issues by allegedly assuming the expenditure on account of AMP to be an international transaction in the present case.
3. On the facts, in law, and in the circumstances of the case, the learned Assessing officer/learned Transfer Pricing Officer erred in concluding the existence of international transaction without providing any cogent finding to establish an existence of an understanding/arrangement/action in concert between the Appellant and its associated enterprises (‘AEs’) and proceeded to make an adjustment by disregarding various judgments pronounced by the Honourable Jurisdictional High Court, thereby not following the judicial discipline as mandated by law.
4. Without prejudice to ground 2 and 3 above, even if an understanding/arrangement/action in concert were to exist, the learned Assessing officer/Transfer Pricing Officer erred on the facts, in law, to make an adjustment in the absence of any machinery provisions under the Act to determine the value of international transaction in the present case.
5. Without prejudice to above, the learned Assessing officer/Transfer Pricing Officer erred on the facts and in law in making an adjustment on the entire value of AMP spent incurred by the Appellant.
6. Without prejudice to the above, the learned Transfer Pricing Officer/learned assessing officer on the facts, in law, and in the circumstances of the case, in including the selling and distribution expenses of the Appellant in computing the value of AMP spent.
7. Without prejudice to above, the learned Transfer Pricing Officer/learned assessing officer erred on the facts, and in the circumstances of the case, in not appreciating that the AMP expenses were incurred by the Appellant for its own benefits for which no compensation was required from the AE’s. Also, similar AMP expenses are incurred by AE’s outside India for which no reimbursement have been charged to India.
8. Without prejudice to above, the learned Transfer Pricing Officer/learned assessing officer erred on the facts, and in the circumstances of the case, in proceeding with an incorrect understanding of the functional profile of the Appellant, thereby characterizing it as a distributor of finished goods and not as manufacturer.
9. Without prejudice to the above, the learned Transfer Pricing Officer/learned assessing officer erred on the facts, and in the circumstances of the case, in increasing the AMP spent of the Appellant by imputing mark-up of 28% which represents the Gross profit on sales earned by the applicant from its manufacturing and distribution activities.
10. Without prejudice to the above, the learned Transfer Pricing Officer/learned assessing officer erred on the facts, and in law, in incorrectly computing the adjustment amount by considering incorrect value of AMP expense incurred by the taxpayer.
11. On the facts, in law, and in the circumstances of the case, the learned Transfer Pricing Officer/learned assessing officer erred in making protective adjustment of Rs. 8,87,80,971 on account of AMP expenses.
12. Without prejudice to Ground 11 above, he learned Transfer Pricing Officer/learned assessing officer erred on the facts, in law, and in the circumstances of the case, by selecting the incorrect comparable companies to make protective adjustment.
13. Without prejudice to the above grounds, on the facts in the circumstances of the case and in law, the learned assessing officer has erred in raising a demand against the protective addition made by the Transfer Pricing Officer.

Corporate Tax Grounds

14. That on the facts in the circumstances of the case and in law, the Hon’ble Dispute Panel-1 (‘Hon’ble Disputes Resolution Panel’) erred in upholding the adjustments made by the Learned Deputy Commission of Income tax, Circle 1(2), New Delhi (‘learned assessing officer’) which is bad in law, contrary to the facts and must be quashed.
15. On the facts in the circumstances of the case and in law, the learned Assessing officer/Hon’ble Disputes Resolution Panel erred in directing to disallow fee for “buying agency services” under section 40(a)(i) of the Income Tax Act, 1961 (‘the Act’) paid by the Appellant to Adidas International Trading B. V. (‘aIBV’) by holding the same to fall within the definition of “Fees for technical services” under section 9(1)(vii) of the Act and Article 12(5) of the India-Netherlands Double Taxation Avoidance Agreement (“the DTAA”).
16. Without prejudice, on the facts in the circumstances of the case and in law, the learned Assessing officer/Hon’ble Disputes Resolution Panel erred in law by reading into the meaning of “Fees for technical services” contained in section 9(1)(vii) of the Act for the purpose of interpreting the definition of “Fees for technical services” provided under Article 12(5) of the India-Netherlands DTAA.
17. Without prejudice, On the facts in the circumstances of the case and in law, the learned Assessing officer/Hon’ble Disputes Resolution Panel grossly erred in categorizing the services rendered by aIBV into the scope of “make available” as provided in Article 12(5) of the India-Netherlands DTAA.
18. Without prejudice to the above grounds, on the facts in the circumstances of the case and in law, the learned assessing officer while computing the assessed income, erred in not allowing set of brought forward losses available with the Appellant as per section 72 of the Act.
19. On the facts in the circumstances of the case and in law, the learned assessing officer erred in incorrectly charging interest under section 234B and 234A of the Act.
20. On the facts in the circumstances of the case and in law, the learned assessing officer erred in initiating penalty proceedings under section 271(l)(c) of the Act against the Appellant on account of the above adjustments made in the impugned final assessment order.
21. Both parties agreed before us that issue involved in grounds raised in the year under consideration are identical to issue involved in assessment year 2011-12 and may be decided accordingly.
22. We have heard the submission of the parties. In view of the submission of the parties and verification by us, grounds raised in the present appeal are decidedmutasis mutandis to the issues decided in ITA No. 953/Del/2016 for assessment year 2011-12.
23. The appeal for assessment year 2012-13 is accordingly allowed partly for statistical purposes.
24. In the result, both the appeals of the assessee are allowed partly for statistical purposes.