Income Tax Appellate Tribunal - Delhi
Marks And Spencer (India) Private ... vs Acit, Circle-2(1), Gurgoan on 10 March, 2023
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., Vs ACIT,
Plot No. 64, 2nd Floor, Holly Hocks, Circle-2(1),
Sector-44, Gurgaon, Gurgaon-122001
Haryana-122002
(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. That in the facts and circumstances of the case and in law, the order passed by the Learned Assessing Officer ('AO') / Transfer Pricing Officer ('TPO') and to the extent upheld by the Hon'ble Dispute Resolution Panel ("DRP") is bad in law and erroneous.
2. That in the facts and circumstances of the case and in law, the Ld. AO pursuant to the directions of the Hon'ble DRP erred in making an addition of Rs.11,06,15,455/- to the income of the appellant on account of international transaction pertaining to payment of royalty expense for business services and 2 ITA No. 9331/Del/2019 Marks & Spencer (India) Pvt. Ltd.
license of proprietary trademarks ('bundled rights and services') received by the Assessee by erroneously alleging arm's length rate to be 1 percent. In doing so, the Ld. TPO/Ld. AO and the Hon'ble DRP have grossly erred in:
2.1. disregarding the arm's length price ("ALP"), as determined by the Appellant in the TP documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income Tax Rules,1962 ("the Rules");
2.2. adopting an erroneous and arbitrary approach by simply applying rate of 1 percent as per earlier year agreement and ignoring the submissions made, documentary evidences furnished and benchmarking analysis conducted by the Appellant;
2.3. disregarding the corroborative benchmarking analysis submitted by the Appellant using Comparable Uncontrolled Price ("CUP") methodology without providing any cogent reasons;
2.4. holding that no incremental/additional support has been demonstrated for the increase in royalty payout from 1% to 6%, thereby disallowing the differential 5 percent payment.
3. That in the facts and circumstances of the case and in law, the Ld. AO erred in proposing to levy interest under section 234A and 234B of the act.
4. Without prejudice to the above, that in the facts and circumstances of the case and in law the Ld. AO has inadvertently computed the outstanding demand without giving due credit to the taxes paid by the Appellant."
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 3 ITA No. 9331/Del/2019 Marks & Spencer (India) Pvt. Ltd.
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.
4 ITA No. 9331/Del/2019Marks & Spencer (India) Pvt. Ltd.
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 Tested Party's Comparable's indicator operating margin 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;
5 ITA No. 9331/Del/2019Marks & Spencer (India) Pvt. Ltd.
- 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 6 ITA No. 9331/Del/2019 Marks & Spencer (India) Pvt. Ltd.
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 pertinent to mention here that the assessee itself also renders the support services for its AE and provides various services including identification of local suppliers. If the assessee is providing the supplier information to its AE as per transfer pricing study, it becomes un understandable why it had to receive the same service from its AE. As per TP study report, it is the assessee who is in regular touch with & communicates on day to day basis with the suppliers, it is the assessee only 7 ITA No. 9331/Del/2019 Marks & Spencer (India) Pvt. Ltd.
who communicates the specification and changes to be made in the items/apparels being prepared and as such would be in a better position to negotiate with the suppliers. Most of the suppliers are local suppliers having their base in India. In such a scenario it is most likely that the assessee is the one who must be helping the AE in selection, negotiation and also communicating the requirements of the AE to various suppliers which is also clear from the function of procurement activities, activity of identification of suppliers performed by the assessee. There exists no doubt that the list of the suppliers for the assessee and the AE would be more or less similar as no one would like to invest so much time, money and effort in performing same task of identifying suppliers when there already exists a list of suppliers with whom they have been in regular touch with and who also understand the requirements of the M&S India and overall group. The moot point is that being a local entity which understands the conditions, market and other factors better and which is also involved in identifying the suppliers it is the Indian entity which would be in a better position to bargain with suppliers and obtain their services. There exists a definite possibility of duplication in the list of suppliers in the sense that the list of supplier which have been identified by the assessee for the AE would be the ones from whom the assessee is claiming to have received from its AE and obtained preferential rates. Further, the assessee had not provided the list of suppliers provided by the AE to the assessee even after asking specifically for the same. In absence of concrete documentation/information, these services are held to be duplicative in nature. Further, the assessee has not submitted any documentary evidence in support of its claim that 8 ITA No. 9331/Del/2019 Marks & Spencer (India) Pvt. Ltd.
the supplier information includes assistance in obtaining preferential/discounted rates for entering into contracts with such suppliers."
"Further, in respect of quality of products and designs, the assessee has merely submitted some screenshots, which in no way confirms the receipt of services. There is no description or any other information in these screenshots that the designing and related work has been done by the AB of the assessee."
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 view of the remand report and the rejoinder, during the hearing on 21.08.2019, the Assessee was specifically asked as to what additional services/rights were provided by the AE for this substantial increase in the rate of royalty from 1% to 6%. The Assessee repeated its responses about the nature of valuable services and intangibles being provided by the AE due to which the year on year sales kept on increasing. However the AR could not point out any particular change in the services being provided by the AE. It was also reiterated by the assessee that the earlier agreement (1% of sales) was at concessional rate and an appropriate arm's length rate using comparable agreements was determined by the Assessee at the time of 9 ITA No. 9331/Del/2019 Marks & Spencer (India) Pvt. Ltd.
entering into a revised agreement (6% of sales) for receiving the bundled rights and services"
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.
10 ITA No. 9331/Del/2019Marks & Spencer (India) Pvt. Ltd.
18. The Assessee submitted that the TPO has disregarded the benchmarking analysis conducted by the Assessee which is as under:
S. Li ce n so r Li ce n se e De sc r i pt io n of Ro y al ty Ro y al ty No . a gr e em e nt b as e r at e 1 Do n n a Br o ad w a y E xcl u si v e l i cen s e t o N et 7 .0 0 % K ar an J e an s w ea r u s e t h e "DK N Y J EA NS " S al e s Studio H ol d i n g s, t ra d em a r k an d l og o t o In c . , m an u fa ct u r e, Br o ad w a y d i st ri b u t e an d s el l J e an s w ea r b asi c an d t r ad i t i on al Co m p a n y , c o r e i t e m s o f a d en i m -
In c . an d b as e d j e an s w ea r
Br o ad w a y c ol l ect i on , an d fa sh i on
J e an s w ea r art i cl es f o r i n cl u s i on
S ou r ci n g , in a p art i cu l ar
In c . s ea s on al c ol l ect i on .
2 Ma r ke r , Lt d . S ki & E xcl u si v e l i cen s e t o N et 5 .0 0 %
an d M a rk e r S p o r t s use the " Ma rk e r" S al e s
In t e rn at i on R e c r eat i on t ra d em a r k to
al , In c . Co m p a n y , m an u fa ct u r e, m a r k et
LL C an d s el l m e n ' s,
l ad i es ', an d ch i l d re n ' s
ou t e r w ea r, ski w e ar ,
su i t s , sh el l s, v es t s ,
p an t s, bib p an t s ,
fl e e c e j a ck et s an d
v es t s , v el ou r j a ck e t s ,
v es t s an d p an t s ,
sw e at e rs , p i l e j ac k et s
an d v es t s , T-n e c ks ,
sh i rt s , h at s, ca p s an d
h ea d g e a r, g l o v e s,
b ag s an d p ac k s , ot h e r
ac c e ss o ri e s .
11 ITA No. 9331/Del/2019
Marks & Spencer (India) Pvt. Ltd.
3 A ri s G ru p o E xt ra E xcl u si v e l i cen s e t o N et 8.oo%
In d u st ri e s, o f N ew u s e t h e " XO X O" an d S al e s
In c . , X OX O Y or k , In c. the "F r ag i l e"
Cl ot h i n g t ra d em a r k to
Co m p a n y , m an u fa ct u r e, m ar k et ,
In c o rp o r at e ad v e rt i s e , p r om o t e ,
d, s el l an d d i st ri b u t e
BP Cl o t h i n g wo m en 's cl o t h i n g ,
Co m p a n y , j ean s wear an d
In c . , Eu r op e sp o rt sw e a r.
Cr af t
Im p o rt s,
In c . an d
Ma r cad e
R e al t y
Co r p .
4 L ot t o S . p . A . A a ri ca E xcl u si v e l i cen s e t o N et 5 .0 0 %
H ol d i n g u s e t h e " L ot t o " an d S el l i n g
In c . "D ou b l e Di am o n d " Pri c e
t ra d em a r k s to
m an u fa ct u r e, p ro m ot e
an d s el l m en ' s , l ad ie s'
an d ch i l d r en ' s sh o e s,
ap p a r el an d
ac c e ss o ri e s .
5 E v e rl ast J ac q u es E xcl u si v e t ra d em ar k N et 5 .0 0 %
W o rl d wi d e Mo r e t , In c . li cen s e t o S al e s
In c . m an u fa ct u r e, i m p o rt ,
ad v e rt i s e , d i st ri b u t e
an d s el l m en ' s
ap p a r el , i n cl u d i n g
act i v e w e ar ,
sp o rt sw e a r, j ea n s,
swi m w e a r, an d
ou t e r w ea r, but
sp e ci fi cal l y e x cl u d i n g
b o y s, i n fan t , an d
t od d l e r ap p a r el , an d
p r o f es si on al an d
am at eu r b ox i n g
ap p a r el .
Co u nt 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.12 ITA No. 9331/Del/2019
Marks & Spencer (India) Pvt. Ltd.
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