Income Tax Appellate Tribunal - Bangalore
Puma Sports India Private Limited, ... vs Deputy Commissioner Of Income Tax, ... on 26 July, 2023
IN THE INCOME TAX APPELLATE TRIBUNAL
'B' BENCH : BANGALORE
BEFORE SHRI. CHANDRA POOJARI, ACCOUNTANT MEMBER
AND
SMT. BEENA PILLAI, JUDICIAL MEMBER
IT(TP)A No. 802/Bang/2022
Assessment Year : 2018-19
M/s. PUMA Sports India
Pvt. Ltd.,
Katha No. 496, The Deputy
Mahadevapur Village, Commissioner of
KR Puram Hobli, Income Tax,
Vs.
Bengaluru (Bangalore) Circle 3(1)(1),
Urban, Bangalore.
Karnataka - 560 048.
PAN: AADCP7081J
APPELLANT RESPONDENT
Assessee by : Shri Padam Chand Kincha, CA
Shri Sunil Kumar Singh, CIT-2
Revenue by :
(DR)
Date of Hearing : 20-06-2023
Date of Pronouncement : 26-07-2023
ORDER
PER BEENA PILLAI, JUDICIAL MEMBER
Present appeal arises out of the final assessment order dated 14.07.2022 passed by the Ld.DCIT, Circle - 3(1)(1), Bangalore for A.Y. 2018-19 on following grounds of appeal:
Page 2 IT(TP)A No. 802/Bang/2022 Page 3 IT(TP)A No. 802/Bang/2022 Page 4 IT(TP)A No. 802/Bang/2022 Page 5 IT(TP)A No. 802/Bang/2022 Brief facts of the case are as under:
2. Assessee is a company incorporated in India as a wholly owned subsidiary of Puma Austria. The assessee is engaged in wholesale and retail trading of group products like footwear, apparel and accessories. The Ld.AO observed that, the assessee had filed its return of income on 30.11.2018 declaring a total income of Rs.25,67,48,230/- which was revised on 22.02.2019 declaring total income of Rs.25,67,48,230/-. The case was selected for scrutiny and statutory notices were issued to the assessee calling for various details. The Ld.AO noted that the assessee had international transactions with its associated enterprise for the year under consideration. 2.1 The case of the assessee was referred to the transfer pricing officer to compute arms length price of the international transaction. The Ld.TPO upon receipt of the reference, called upon the assessee to furnish economic details of the international transaction in form 3CEB. It was noted by the Ld.TPO that following were the international transaction undertaken by the assessee.
Received/ Particular Paid/ Payable Method Receivable Purchase of sample 260,71,253 TNMM Products Import of finished goods 27789,71,974 TNMM from AEs Page 6 IT(TP)A No. 802/Bang/2022 Import of finished goods 167,08,106 TNMM from AEs Payment towards local 2128,16,303 TNMM sourcing support Receipt of fee towards procurement support 757,87,134 TNMM services Receipt of services fees towards providing 331,85,856 TNMM product development services Reimbursement of 23,00,476 TNMM expenses Reimbursement of IT 128,71,206 TNMM related charges Recovery of expenses 32,58,607 TNMM Trade Receivables 1411,81,423 TNMM Trade Payables 9116,49,731 TNMM Total 2701,21,126 39446,80,943 42148,02,069 2.2 The Ld.TPO disputed the margin computed by the assessee under distribution segment to be at arms length. The Ld.TPO noted that TNMM was the appropriate method used by assessee for computing its margin at 3.44% by using OP/OR as the PLI. It was noted that assessee used 5 comparables with an arithmetic mean of 1.85% and thus treated its transaction to be at arms length as under:
Page 7 IT(TP)A No. 802/Bang/2022 2.3 The Ld.TPO dissatisfied with the comparables selected by the assessee shortlisted set of six comparables with a median of 13.77% as under:
2.4 The Ld.TPO rejected one of the comparables selected by assessee and set of 5 new comparables were introduced. The Ld.TPO thus proposed an adjustment of Rs.101,46,93,447/- to the shortfall in respect of distribution segment. 2.5 The Ld.TPO issued show cause notice to assessee in respect of payment made towards local sourcing and support services.
The Ld.TPO observes that, the assessee procured finished goods from foreign third party manufacturers and local third party manufacturers. It was noted that, for the product was sold by the local third party manufacturers to the assessee, sourcing fee was paid towards availing R&D for the locally procured goods. 2.6 In response to the notices, assessee submitted that assessee collects reviews, modifies and amends all orders placed by PUMA sales entities in order to consolidate and transmit them to vendors. It was submitted that, the assessee was a central sourcing agent and has entered into the procurement service agreement as per which the assessee provides procurement Page 8 IT(TP)A No. 802/Bang/2022 services to the World Cat Ltd. (WCL) as per the requirements mentioned therein. It was submitted that as per the agreement, the assessee was to provide the details regarding the local manufacturers to its AE.
2.7 It was further noted that the assessee had entered into a supply chain management service agreement with PUMA International Trading Services Ltd., HongKong and a technical R&D assistance agreement was entered by assessee with Development Services Ltd., HongKong w.e.f. 01.01.2017. 2.8 The Ld.TPO was of the opinion that assessee has not clearly established the services received by it, from the third party local manufacturers and thus, these transactions was separated from the distribution segment as against the aggregate approach adopted by the assessee. The Ld.TPO thus proposed an adjustment by disallowing the payment towards local sourcing support services at Rs.21,28,16,303/-. 2.9 Upon receipt of the transfer pricing order, the Ld.TPO passed the draft assessment order on 17.09.2021 by proposing an addition of Rs.1,22,75,09,750/-.
On receipt of the draft assessment order, the assessee filed objections before the DRP.
2.10 The DRP after considering the objections of the assessee did not appreciate the comparables that was sought for exclusion by assessee. In respect of certain liabilities that were treated as operating in nature by the Ld.TPO under the distribution segment, the DRP directed that liabilities no longer required to be returned back, miscellaneous income and interest income on vendor advances do not form part of day-to-day business Page 9 IT(TP)A No. 802/Bang/2022 activities of the assessee and therefore should be considered as non-operating in nature while computing the margin of assessee. 2.11 As regards, inclusion of the certain comparables sought by the assessee, was rejected by the DRP. Before the DRP, the assessee also prayed for the adjustment to be made proportionately restricting to the AE transactions alone. The DRP observed that as complete details with respect to bifurcation of sales and cost between AEs and non-AEs were not available and therefore the argument of the assessee could not be appreciated. 2.12 With regard to payment of local sourcing support fees, the DRP directed that no two independent enterprises would have entered into such a transaction as the assessee and its AE especially when assessee continues to show poor profits and still pays the procurement fee to the AE. The DRP was of the view that the transactions were rooted through AE in order to shift profits outside India and thus rejected the claim of assessee. 2.13 On receipt of the DRP directions, the Ld.AO passed the impugned order by making addition in the hands of the assessee amounting to Rs.122,75,09,750/-, the bifurcation of which are as under:
Page 10 IT(TP)A No. 802/Bang/2022 Aggrieved by the order of the Ld.AO, assessee is in appeal before this Tribunal.
3. At the outset, the Ld.AR has submitted that, Ground nos. 1-4, 10 are general in nature and therefore do not require any adjudication.
3.1 He also submitted that Ground nos. 5-7 are raised in respect of the distribution segment are also to be treated as general in nature.
Accordingly, the above grounds are not adjudicated. 3.2 Ground nos. 8, 11-14 are in respect of the comparables sought for inclusion / exclusion by assessee. Before we undertake the comparability analysis, it is sinequa non to understand the FAR of assessee under distribution segment. The TP study report describes the FAR to be as under:
"4.2.10 Functions performed 4.2.10.1 Strategic Management functions and corporate services Strategic management functions such as corporate strategy, treasury, etc. involve decision making on business strategy, budgeting, selecting lines of business, choosing organization structure, operating procedures, analyzing and undertaking acquisitions and disinvestments, legal and regulatory affairs, responding to competitors and to market forces. PUMA SE plays a significant role in determining the business strategy for its worldwide business (including India). The top management provides strategic direction on product development, marketing strategy and other related matters. These strategies are percolated down to various PUMA Group entities across the globe.
India specific budgets are determined by PUMA Sports India in consultation with and approval of PUMA SE and PUMA Austria. PUMA Sports India is advised of new product launches on a regular basis so that this can be incorporated into its budgeting and planning process. No strategic functions are performed by PUMA Sports India. PUMA Sports India primarily performs the Page 11 IT(TP)A No. 802/Bang/2022 tactical managerial functions regarding day to day management of its business viz. human resources, financial management, routine administration etc. Having said the above, PUMA Sports India receives regular support from PUMA Austria in areas such as strategy formulation, auditing, procurement and centralized buying, IT, budgeting, etc. 4.2.10.2 Product creation (design and development), manufacturing and procurement functions Product creation and related research and development/engineering activities are performed by PUMA SE with the assistance from other affiliated entities engaging in product creation and research and development/engineering activities.
PUMA SE supports PIT in the execution of its global sourcing function and grants the right and license to PIT to manufacture or have manufactured PUMA products and to sell these products to PUMA sales entities. Moreover, PUMA SE provides PIT with all know-how and information related to the development of the product design and related specifications which are relevant for the manufacture of the PUMA products. On the basis of their contractual arrangement, PUMA SE engages PIT to collect research and development fees from PUMA sales entities to compensate PUMA SE for its global product creation efforts.
Product Creation PUMA's product offering consists of a global product range and country or account specific product creations. The objective is to design and develop a range of footwear, apparel and accessories that can be offered across all geographical markets - promoting one clear brand image but incorporating local relevance. Product responsibility is organized within PUMA's global business units and "regional design centres", with PUMA's design language defined for all collections by PUMA SE.
With respect to products to be procured from local manufacturers, all the product designs / product creation, for the products, comes from PIT. The said products are replicated in India with help of local material available. There are also certain products, Page 12 IT(TP)A No. 802/Bang/2022 where PUMA Sports India would modify the styles according to the requirements of Indian customer, for selling them in local market, however the same would be in line with PUMA global standards.
Research and development/ engineering PUMA SE engages its subsidiary DSL to provide research and development/ engineering services to PUMA SE. Based on the Tech Packs provided by PUMA's product creation teams, DSL's research and development/ engineering team supports the manufacturers and PUMA's product creation teams during the (sample) production process. This team also supports the entire development phase to engineer PUMA goods and serves all parties concerned as communication platform.
Manufacturing PUMA products, purchased from PUMA Austria and other AEs are manufactured by third party vendors. Further locally procured goods are also manufactured by third party manufacturers in India.
Procurement a. Sourcing of products from overseas affiliates/ third party vendors Under previous sourcing structure, all the PUMA sales entities (including PUMA Sports India) placed their product requirements to the third party vendors and also negotiated the final pricing of the products. PUMA Sports India procured products from PUMA Austria and other AEs as well. Purchase orders from Asian vendors was handled by WCL. WCL carried out buying agency functions for PUMA sales entities as well as for third party licensees/distributors. As a buying agent, WCL only negotiated, but never concluded any purchase contracts with third party vendors on behalf of PUMA sales entities. Accordingly, there were weaknesses observed in the old sourcing structure as there was consistency and transparency in price resulting in PUMA sales entities exposed to foreign exchange risks. Also the sourcing structure was more complex in nature, making it difficult for PUMA group to administer the procurement functions of the PUMA sales entities.
Owing to the above difficulties, PUMA group implemented a new sourcing structure whereby sourcing of products would be the responsibility of PIT. PIT sources products Page 13 IT(TP)A No. 802/Bang/2022 from unrelated third party vendors in its own name and for its own account and for further resale to PUMA sales entities. In performing its global sourcing function, PIT is being assisted by PITS, which performs sourcing support activities for PIT, and WCL, which operates as the group's procurement agent. It is WCL's responsibility to identify appropriate vendors, monitor production process and schedule, support in price negotiations with vendors, support in determination of overall capacities of purchase volumes, and ensure vendors' compliance with PUMA's Social Accountability and Fundamental Environmental Standards. For its sourcing activities, PIT charges a mark-up on the fixed net vendor invoice price ("F-Price") when selling products to PUMA sales entities and PUMA TradeCos including PUMA Austria. Further, PIT adds a research and development fee ("R&D Fee") to the F-Price, which is charged for group development efforts. The R&D Fee represents a designated charge of PUMA SE to PUMA sales entities and PUMA TradeCos (charged via PIT) for its product creation and research and development/ engineering efforts. PIT does not add any value to the product creation and research and development/engineering activities. Thus, the R&D Fee is a pure transitory item from the perspective of PIT and no further profit mark-up is applied.
Further with respect to sourcing of goods for PUMA Sports India, PUMA Sports India procures the goods from PUMA Austria instead of overseas third party vendors, which it used to do previously.
PUMA Austria's centralized buying and TradeCo function Centralized buying functions are performed by PUMA TradeCos. PUMA TradeCos primarily serve the purpose of:
Centralized order placement guidance (according to order place dates, level loading initiatives, available productions capacities, minimum order quantities, minimum production quantities, etc.); Order fulfillment guidance (in time deliveries, quality and delivery performance checks, key marketing styles, global instore date guidance, etc.); Order bundling to achieve cost savings and to facilitate deliveries;
Structured container settings, consolidation and price negotiation with logistics service providers; Logistics coordination and document management.
Page 14 IT(TP)A No. 802/Bang/2022 In order to effectively ensure the accomplishment of its centralized buying/TradeCo function, PUMA Austria has implemented and maintains a customized SAP ERP solution which has been in use for many years. The system was designed/customized in accordance with PUMA Austria's specifications.
PUMA Sports India's local merchandisers are responsible for reporting product requirements to PUMA Austria via SAP after having received their customer orders. PUMA Austria's sourcing team consolidates all purchase orders received (including purchase orders from third party distributors) and places them with PIT.
PUMA Austria handles the communication with PIT to arrange delivery of the manufactured products according to the Incoterms stipulated in the relevant purchase orders. In the case of PUMA Sports India, products are usually shipped directly from vendors into its own warehouse. In this case, customs clearance is managed by PUMA Sports India itself.
Due to its intermediate role in the purchase process, PUMA Austria is particularly exposed to foreign exchange risks. Although PUMA Sports India is responsible for determining and reporting their purchase exposures to PUMA Austria, PUMA Austria has the overall responsibility for the reports from the EEMEA region and may adjust the reports accordingly with respect to exposures for hedging purposes. The TradeCo FX exposure is derived from the purchase exposure reports prepared by PUMA Austria's distribution entities. It is the responsibility of PUMA Austria to do a pre-consolidation for the EEMEA region, which also reflects inventory responsibility and related management and controlling tasks. The final consolidation and enrichment for hedge accounting documentation is performed by PUMA SE's Group Treasury Department ("Group Treasury") on behalf of PUMA Austria. Finally, the fully consolidated purchase exposure report is enriched by the applicable related hedges and forms a consolidated exposure planning report, which is in the responsibility of Group Treasury on behalf of PUMA Austria.
Effective procurement and supply chain management are critical success factors for global businesses. PUMA Austria has acquired comprehensive experience and Page 15 IT(TP)A No. 802/Bang/2022 expertise with respect to its centralized buying and supply chain management functions over many years. In this respect, PUMA Austria employs dedicated personnel for managing procurement and supply chain processes in the EEMEA region, which also includes the handling of customs clearance. PUMA Austria has implemented efficient processes and workflows for structured container settings and consolidation. The logistics coordination as well as the document management are critical success factors for in-time delivery and smooth operations with customs as well as local authorities. The whole business process management is centrally coordinated by PUMA Austria in its own comprehensive ERP system as well as in further affiliated systems.
b. Sourcing of products from local vendors PUMA Sports India also procures goods locally from third party vendors in India. In relation to same, PUMA Sports India involves in limited product development activities. With respect to the locally procured goods, PUMA Sports India in consultation with the overseas group entities determines the products to be sold in the India market.
4.2.10.3 Marketing of PUMA products International Marketing - Global As the owner of the PUMA trademarks, PUMA SE is responsible for the global brand building, communication and marketing activities, irrespective of whether products are distributed via wholesale or retail distribution channels. The direction of the brand is set by the PUMA SE, as well as decisions regarding the major campaigns that will be operated globally, including the ideation, creative and specific themes around which the campaigns will operate. Sales subsidiaries are required to adapt these standards and marketing themes in their market, with necessary alterations that are market specific, without diluting the theme of the communication.
Local Marketing: PUMA Sports India PUMA Sports India carries out local marketing and sponsoring activities, which comprise e.g. local advertisements (by the use of radio, television, cinemas, internet, publications, magazines, in sports arenas, etc.). The marketing and sponsoring activities include payments to athletes, clubs, and federations with Page 16 IT(TP)A No. 802/Bang/2022 national rather than international recognition as well as for products given away. In particular, the local advertising and sponsoring activities refer to national assets, i.e. the primary focus is to promote PUMA brand in the local market place, and not to generate worldwide awareness, which is the remit of PUMA SE. PUMA SE has entered into agreement with PUMA Sports India on 01st January 2017 wherein PUMA Sports India will make use of the international marketing activities and international marketing material for marketing and promotional activities in India.
The marketing activities carried out in India are generally based on the global themes, adapted to the Indian market. However, PUMA Sports India also carries out specific marketing and promotions targeted at the Indian market only. These typically are in the form of sponsorship of local sports events, team sponsorship for various sports as well as signing local athletes from various disciplines, with an intention to use their association to build the brand in the local market. In addition, the consumer events undertaken are also aimed at certain specific cities and targeted audience. All the above marketing activities are dedicated to the Indian market and therefore any benefits arising therefrom are accrued solely with PUMA Sports India in the form of increasing local sales and profit margin, and are unlikely to resonate globally.
4.2.10.4 Sale and distribution of PUMA products The sales function refers to all the activities associated with direct customer contact and negotiations to bring about purchases by the customer of the firm's products.
Local Sales: - PUMA Sports India PUMA Sports India is responsible for marketing, sales and distribution of PUMA products. This includes developing strategies for working with key retailers. The local merchandise managers are responsible for marketing, in deciding which products to take in their territory. They analyse the efficiency of the local business within their respective product category and liaise with major accounts as to their needs.
The sales department is responsible for field sales and the management of national accounts. The national accounts team comprises managers and specialist teams each covering accounts within the Sports Performance, Sport Page 17 IT(TP)A No. 802/Bang/2022 Lifestyle and Sport Fashion areas of the business. The tasks performed by a key account manager typically include:
Development and implementation of strategic customer specifications;
Internal contact person/coordinator for all customer relevant questions;
Budget planning on annual/quarterly basis; Preparation of presentations, follow-up sales meetings, preparation of offers, rolling forecast planning and strategic customer planning.
The field sales team is responsible for different geographical regions within each PUMA Sports India's sales territory. The functions performed by the field sales team inter alia include:
Presentation and sales of PUMA products (apparel, footwear, accessories);
Regular customer visits and development of customer relationships;
Responsibility for sales and implementation of sales targets;
Operational implementation of sales strategies; or Market observation and competition analysis. The sales team is supported by staff in the area of customer services, credit control, administration and visual merchandising.
For the most part, PUMA Sports India operates at the wholesale level. Further, with respect to retail sales, PUMA Sports India is responsible for the overall operations of retail stores, the general vision/direction and the related pricing of the products.
However PUMA Sports India and its franchisees also operate:
PUMA Outlet Stores;
PUMA Concept Stores; and E-commerce Stores.
PUMA Sports India provides guidelines with regard to general vision/direction relating to operations and pricing. With a view of building a consistent brand positioning, PUMA Sports India undertakes responsibility for the marketing and brand communication activities at these stores (store windows, visual merchandising etc.).
Page 18 IT(TP)A No. 802/Bang/2022 However, PUMA Sports India receives guidance and support regarding the strategic and operational direction of its retail activities from PUMA SE's Global Retail team. PUMA SE owns the know-how related to these functions as well as any centrally concepts developed and bears the related costs.
4.2.10.5 Quality control The reputation risk is significantly dependent on the quality of the products. Inferior products that do not meet the requirements of the customers can affect the brand name, market share and reputation of the PUMA Group. The sales entities within PUMA Group do not assume any product liability risk. The third party manufacturing entities are responsible for undertaking repairs and provide the sales entities with new products where product defects are attributed to the manufacturing process. PUMA sales entities will be fully compensated by PIT. PIT in turn negotiates and enforces the claim against the vendors. On the other hand, PUMA SE as the owner of the product design and related IPs shall be responsible for any product defects attributed to the product design and development process of PUMA's merchandise.
WCL negotiates quality standards with third party vendors on behalf of PIT26 production and quality inspection staff are employed by DSL and its overseas representative offices and affiliates. They perform quality checks on the products produced by the manufacturers.
To control and manage this risk, PUMA SE lays down the guidelines/protocols to be followed by the manufacturing entities. The manufacturing units follow the protocols and undertake the quality control/testing of the products to ensure that the goods conform to the prescribed quality standards. Therefore for imported goods, PUMA Sports India does not perform the said function.
For goods procured from local manufacturers, PUMA Sports India's sourcing team inspects the quality of products at the time of production as well as at the time when goods are received in warehouse from the manufacturer's factory. The sourcing team regularly visits the factory for detailed inspection of each and every type of product being manufactured and further ensures that the sample product meets the requirements and expectations as per the required quality. Also, if Page 19 IT(TP)A No. 802/Bang/2022 there are any issues arising at the time of production process, the sourcing team tries to resolve the same and ensures that the order is delivered within agreed time.
4.2.10.6 Sales price to customers Pricing of the product is an important function. Determination of a suitable price for the product includes various aspects which needs to be considered like fluctuation in the market, prices of the competitor products etc. PUMA Sports India is involved in the determination of the MRP of the PUMA branded products in India. PUMA Sports India fixes the maximum recommended price for the sale of PUMA products in India.
4.2.10.7 Warehousing the products PUMA Sports India is responsible for arranging for an adequate storage space for warehousing PUMA products. With respect to stocking of products for retail stores, PUMA Sports India would be responsible for maintenance of the finished goods to ensure that they are not damaged or spoilt until they are sold. Given the nature of products being traded, the risk on account of damages to the products is limited and the same is covered by an insurance.
The table below shows the functions performed by the transacting entities in relation to the trading activity of PUMA Sports India.
PUMA Sports PUMA
Type of function
India Group
Strategic management function and
No Yes
corporate services
Product creation (design and
Limited* Yes
development)
Manufacturing No** No**
Procurement Yes Yes
Marketing of PUMA products Yes*** Yes
Sale of PUMA products Yes*** No
Quality control Limited Yes
Sales price to customers Yes No
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Warehousing the products Yes No
* Product creation activities performed by PUMA Sports India are insignificant. The product designs / product creation, for the products, which are to be procured from local manufacturers, comes from PIT and are replicated in India. There are certain products where PUMA Sports India would modify the style according to requirements of customer, however the same would in line with the PUMA global standards.
** The products are being manufactured by third party vendors *** Restricted to Indian market.
4.2.11 Risks assumed Briefly summarized below are some of the key business risks, which are applicable to PUMA Sports India and its Group Companies in relation to the trading activity of PUMA Sports India:
4.2.11.1 Market risk PUMA Austria shares the market risk with its distributors (including PUMA Sports India), which may result from increased competition, declines in market demand or changes in market perceptions regarding PUMA products.
In the event that the ranges launched, reflects a misreading of the market or the market sentiment undergoes sudden unexpected shifts, PUMA Sports India's sales could decline. This in turn would also result in a decline in PUMA Austria's sales to its Distributors. Both, PUMA Austria and PUMA Sports India needs to ensure that they are adequately staffed to operate their businesses. An unexpected failure of sales to materialize could not only lead to a decline in sales/profits in any year but also to a failure of sales revenue to cover committed expenditure for both, PUMA Austria and PUMA Sports India.
PUMA Sports India incurs advance spending commitments in relation to advertising and promotion. PUMA Sports India could suffer lower than expected sales due to untimely arrival of the product, or arrival of sub-standard product that the customer refuses to accept, and this could adversely affect its longer-term relationship with retailers as well as shorter term profitability.
Page 21 IT(TP)A No. 802/Bang/2022 Generally, both PUMA Austria and PUMA Sports India rely on PUMA SE to maintain the desirability of the brand, and to launch product ranges that meet market needs.
Further, PUMA Sports India is responsible for marketing the finished goods to ensure that the targeted sales volume results in recovery of purchase price, related expenses and a reasonable margin.
Hence, market risk is borne by PUMA Sports India with regard to Indian market.
4.2.11.2 Product liability risk Product liability risk arises when a corporate provides a particular product, which fails to perform at accepted standards due to which the corporate is held liable for such risk (patent infringement, defective quality, etc.).
PUMA Sports India does not assume product liability risk. However, the third party manufacturing entities are responsible for undertaking repairs and provide new products to the sales entities.
Further, the manufacturing entities provide sales entities with reduction in the sale price by offering a certain percentage of the price as a defect allowance and hence the sales entities are protected by any small re-work/repair job which they may undertake on their own. For quality issues which cannot be covered by the said defect allowance, manufacturing entities are obliged to compensate the sales entities for the related damages and/or costs incurred. In case of major claims, PUMA sales entities will be fully compensated by PIT. PIT in turn negotiates and enforces the claim against the vendors. On the other hand, PUMA SE as the owner of the product design and related IPs shall be responsible for any product defects attributed to the product design and development process of PUMA's merchandise.
From an Indian customer standpoint, it is primarily the responsibility of PUMA Sports India to ensure that the products sold in the market meet the prescribed quality standards. However, PUMA Sports India passes on any liability incurred by it on account of a defective product to PIT and in turn to the respective manufacturing entity. Thus PUMA Sports India does not assume warranty and/or product liability risk.
Page 22 IT(TP)A No. 802/Bang/2022 4.2.11.3 Inventory risk PUMA Sports India determines its inventory levels and re-order levels based on the estimated demand for the products during the year although, PUMA SE provides management insights in relation to trading conditions and budget objectives.
With respect to the wholesale business, PUMA Sports India aims to get its customers to place their orders as long as possible in advance before the required delivery date in order to be able to place back orders for stock. In practice this only happens to a limited extent and it is necessary to make speculative purchases in order to fulfill market potential and not to lose sales. Also, in the event of a particularly poor consumer response to a product or range, the customers of PUMA Sports India, who are retailers may seek not to call off all the orders placed. With respect to retail business also, PUMA Sports India would be responsible to determine its inventory levels and re-order levels based on the estimated demand in the market.
Also with relation to excess/ unsold stock, PUMA Sports India may sell the stock at discounted price to its customers. Accordingly, PUMA Sports India would bear the risk of loss on account of unsold/ excess stock.
4.2.11.4 Credit and collection risks The credit and collection risks arise when a firm supplies products or services to a customer in advance of the payment. In such a scenario the firm runs the risk that the customer will fail to make payment.
With respect of wholesale sales, PUMA Sports India negotiates the price and the other terms of the contract with its customers (i.e. wholesalers/distributors etc.), such as payment terms, delivery scheduling and pricing. PUMA Sports India filtimAtPly concludes the contract with the wholesalers/distributors etc. As PUMA Sports India directly transacts with its customers, it bears the risks arising from the contracts with the customers i.e. credit and collection risks in relation to late or non- receipt of payments from customers.
Page 23 IT(TP)A No. 802/Bang/2022 With respect to goods sold through retail stores and online sales channels, as the goods are directly sold to customers, on cash basis, PUMA Sports India is not exposed to credit risks.
4.2.11.5 Foreign exchange risk Exchange rate risk relates to the potential variability of profits that can arise because of changes in foreign exchange rates.
At PUMA, FX management is centralized to the greatest possible extent, i.e. FX hedging is centrally performed by Group Treasury with the exposed entities in their name and on their behalf. Due to PIT's and PUMA Austria's intermediate roles in the purchasing process, PIT and PUMA Austria bear the majority of FX exposures. PUMA Austria's purchases from PIT are denominated in Euro, while products are sold to PUMA Sports India in Indian Rupees. Hence, the risk arising due to the foreign exchange fluctuations is borne by PIT and PUMA Austria.
The risks faced by PUMA Sports India and PUMA Group entities, in respect of PUMA Sports India's trading activity have been summarised below:
PUMA Sports Type of risk PUMA Group India Market risk Yes Yes Product liability risk No Limited Inventory risk Yes No Credit and collection Yes** No risk Foreign Exchange No Yes risk * PUMA Sports India bears limited product liability risk with regard to Indian customers ** PUMA Sports India will face the said risk with respect to goods sold to wholesalers/ distributors only 4.3 Assets employed 4.3.1 Tangible Assets PUMA Sports India owns routine tangible assets associated with sales and distribution such as leased property including warehouses, offices, showrooms Page 24 IT(TP)A No. 802/Bang/2022 etc. In addition, PUMA Sports India also owns inventory and customer accounts receivable.
Key tangible assets employed by PUMA Sports India are as follows:
Tangible Assets Amount (in INR)
Leasehold improvements 113,169,127
Computers and networking
23,897,573
equipment
Office equipment 40,059,368
Furniture and fixtures 152,260,550
Total 329,386,624
4.3.2 Intangible Property
Key tangible assets employed by PUMA Sports India are as follows:
Intangible Assets Amount (in INR) Computer Software 48,142,655 Total 48,142,655 Product and Marketing Intangibles PUMA SE is the legal and economic owner of the outcome of all product creation efforts and related technical research & development and engineering services, i.e. all rights, titles and interests in and to all current and future intellectual property ("IP") rights (e.g. copyrights, marks, patents, utility models, designs, concepts, ideas and/or methods) are exclusively owned by PUMA SE. PUMA SE ultimately bears all expenses related to the creation of new PUMA branded products (including third party expenses and expenses incurred by PUMA's "regional design centers"). In addition, PUMA SE is the legal and economic owner of the PUMA brand, logo and associated trademarks. PUMA SE has granted to PUMA sales entities the license and right to use its brand and trademarks, as well as international marketing concepts and campaigns.
In view of the above, PUMA Sports India does not own any non-routine product or marketing intangibles.
Page 25 IT(TP)A No. 802/Bang/2022 Sourcing related intangibles Procurement/ sourcing intangible assets may arise from informational advantages pr ovided by the location and personnel. Procurement companies in a particular geographic location may have specialized knowledge of the capabilities of the vendors in that region that is not discernible to prospective purchasers outside the region.
WCL has been a central sourcing agent for PUMA Group for several years and has developed a master list of vendors across the globe. This has enabled PUMA Group to transact with some of the best manufacturers who can supply PUMA products at desirable quality and standards. While, WCL has been assisted by local PUMA sales affiliate in order to provide its sourcing services, the support received has been routine and has not enabled developing any significant local sourcing intangibles. Further, with the modification in sourcing structure and concentration of some of the core activities at PIT, PUMA group would be able to achieve higher synergies and administer sourcing function appropriately. Any procurement related intangible created such as vendor lists, supplier inf ormation etc. are owned by PUMA group. Also, these intangibles cannot be termed unique as this information would also be developed by similarly placed procurement companies.
PUMA Sports India assists PIT/WCL in sourcing goods from India for supply to other PUMA sales affiliate. However, the functions performed by PUMA Sports India does not enable to create a unique intangible as PUMA Sports India largely uses the existing information available within the group and hence PUMA Sports India does not own any such intangible.
Human capital related intangibles PUMA Sports India's workforce whom it uses for undertaking trading activities generally constitutes of graduates or appropriately qualified for performing the aforementioned functions. Further, PUMA Sports India believes that as the employees that constitute the workforce may relinquish their employment with PUMA Sports India in accordance with the terms of their employment and hence cannot be regarded as a unique intangible.
Customer Relations Page 26 IT(TP)A No. 802/Bang/2022 PUMA Sports India has its own customer base and is responsible for retaining and developing customer relations within its territory. Over the years, PUMA Sports India has developed a list of customers to whom it has supplied PUMA products.
While one may consider Customer relationships (particularly in the wholesale business) as a potential intangible asset but the same is vulnerable to market competition given the fact that the customers do not incur any costs for switching to other suppliers. Also, PUMA Sports India does not have control on its customer's nor there are any binding agreements for purchase of PUMA products. Similar lists are also developed by various business units operating in the industry.
From an individual customer's perspective, it is the brand image and product design which enhance product loyalty amongst the customers. Since the brand image and product design are developed and maintained by PUMA SE, customer list developed does not put PUMA Sports India in a commanding position or provide any unique intangible to earn more profits. The customer relation enables PUMA Sports India to earn routine returns for its distribution activity and survive in the market.
4.4 Characterization of entity Based on the facts as presented in the above analysis of functions performed, assets employed and risks assumed by PUMA and its AEs, PUMA Sports India as a licensed distributor/ sales entity bearing risks similar to other distributors operating in this industry." 3.3 Based on the above FAR analysis, we shall undertake the comparability of the comparables sought for inclusion / exclusion by the assessee.
3.4 In the transfer pricing study, regarding payment of local sourcing support fees paid by assessee to the AE, it is mentioned that a sum of Rs.21,28,16,303/- has been paid towards availing R&D and sourcing support services for the locally procured goods from third parties. It has been submitted in the transfer pricing Page 27 IT(TP)A No. 802/Bang/2022 study that the assessee is responsible for global sourcing activities and in performing such services, the assessee is assisted by the group AEs.
3.5 The AE has entered into a local sourcing support agreement with assessee on 01.04.2015 to grant assessee a non-exclusive and non-transferable sub-license to manufacture or have manufactured and to use, offer for sale and sale the licensed products bearing the licensed trade markets within the licensed territory. Further assessee has also received R&D services and support services from its AE for the goods locally procured, manufactured by third party manufacturers in India. 3.6 The nature of services as described in the transfer pricing study are as under:
"4.2.2.1 Nature of services R & D Services PUMA Sports India receives research and development/support services from PIT for the goods locally procured, manufactured by third party manufacturers in India. Research and development /Engineering services are rendered by Development Services Limited, but the costs incurred in providing research and development/engineering services are taken over by PUMA SE.
PUMA SE has granted to PIT a non-exclusive and worldwide right and license to manufacture or have manufactured PUMA products.
As per the agreement PIT has granted non-exclusive and non-transferable sub license to manufacture or have manufactured licensed products bearing licensed trademarks within a specific territory, i.e. the entire India territory of India, which will be locally sourced by PUMA Sports India.
PIT undertakes to provide PUMA Sports India with all know-how and information related to the development of the product design and related specifications which are relevant for the manufacture of the Licensed Products (the "Technical Know-how") and further R & D activities (together the "R & D Services").
Page 28 IT(TP)A No. 802/Bang/2022 PIT shall exercise its usual diligence in making available the technical know-how to PUMA Sports India. PIT shall, however, not be responsible or liable for (i) any oversights or errors in the technical Know-how and its transmission,
(ii) claims, actions or demands of third parties with respect to the Licensed Products manufactured by or for PUMA Sports India under the Technical Know-how or (iii) any infringement of the Licensed Trademarks by third parties and damages resulting therefrom. In case an oversight or error in any part of the technical know-how should occur, PIT shall correct such oversight or error after detection of the same.
PIT is authorized to use support services by PUMA or any of its Affiliates PUMA Sports India undertakes to strictly abide the quality standards and other standards as PIT may stipulate from time to time with respect to the Licensed Products to be manufactured under the Agreement Support Services PITS performs the support activities in Hong Kong under the oversight of PIT. Support service will cover order management and supply chain management.
PIT provides following assistance to PUMA Sports India:
Determining of the overall capacities of purchase volumes of the Licensed Products;
Seeking the commitment of manufacturers on capacity production volume and schedules requested by PUMA Sports India;
Placement of purchase orders to manufacturers thorough PIT's sourcing system;
Monitoring and following up among different suppliers on production schedules and buffering capacities in order to minimize production delays, etc.; Following up with PUMA Sports India on claims by PUMA Sports India against suppliers and from suppliers against PUMA Sports India;
Monitoring and following up with PUMA Sports India and suppliers on application of special labels on products, changing packing requirements, delay in shipment, size run, and/or increase or decrease in the order quantity; Monitoring and following up with the logistic departments of suppliers to arrange on time delivery of the manufactured products; and Performing any miscellaneous activities incidental to the above as may be required by PUMA Sports India from time to time.
Page 29 IT(TP)A No. 802/Bang/2022 Along with the above and as way of support to PUMA Sports India with relation to procurement of goods from local manufacturers, PIT has also provided a set of policy/ principle documents directing PUMA Sports India and the local manufacturers being engaged by PUMA Sports India, to adhere to the said principles and standards ("referred as Declaration of Principles") which are also being followed by PUMA Group at global level. The list of said "Declaration of Principles" are as follows:
A. Anti-corruption statement. B. Building safety policy. C. Policy against use of exotic skins, feathers and mulesed wool. D. Pay for Play policy - to encourage manufacturers
to improve their social, health, safety and environmental standards and to penalize manufacturers who do not reach the required standards over several audits (each of them a "PUMA SAFE Audit") E. Standard operating procedure regarding the Restricted Substances List - serving as guidance for manufacturers to ensure that the testing protocol, the certification and the reporting requirements regarding restricted substances are followed and that all Licensed Products pass relevant consumer product safety laws.
In addition to the above, template of "IP Right Protection Undertaking" which is required to be executed between the vendor or component supplier and PUMA Sports India, supplying goods to PUMA Sports India have been also provided in order to ensure and protect the validity, integrity and image of the Principal IP.
Further PIT has also provided PUMA Sports India certain insurance conditions whereby PUMA Sports India shall oblige its unrelated vendors to obtain sufficient insurance coverage in case of claims in connection with product liability or any recall of Licensed Products in accordance of Kering Group insurance policy or own insurance coverage meeting.
Payment to PIT in lieu of above local sourcing support services received For the period between 01 April 2016 to 31 December 2016, PUMA Sports India has paid a service fee at the rate of 2 percent of the FOB price i.e. the price of licensed products invoiced from unrelated vendors to PUMA Sports India. With effect from 01st January 2017, to realign with Page 30 IT(TP)A No. 802/Bang/2022 PUMA's transfer pricing policy for sourcing activities at a global level, the service fee payable by PUMA Sports India to PIT for the local sourcing support services has been increased from 2 percent of the FOB price to 7 percent of the FOB price.
It is to be noted that PIT being PUMA Group Company has charged lower rate of 2 percent in the initial period, to support PUMA Sports India on account of weak Indian market conditions and its thin profitability situation during the said period."
4. Ground no. 11 raised by assessee is challenging the application of persistent loss filter to reject the comparable Arvind Lifestyle Brands Limited which was the comparable suggested by assessee during the transfer pricing proceedings. 4.1 The Ld.AR submitted that, this Tribunal has held in a large number of cases that, in order for a comparable to be held to satisfy this filter, the comparable must have incurred losses consequently, for three years and that if it has incurred profit in event one of the three years, it cannot be held that this comparable has to be rejected by applying persistent loss filter. 4.2 It is submitted by the Ld.AR that the annual reports of this comparable which is filed in the paper book Part - 2 for all the three preceding assessment years reveals that, it has never incurred loss referring to page 3479 (FY 2015-16), 3554 (FY 2016-17), 3608, 3676 (2017-18). He submitted that the observations of the Ld.TPO are incorrect for rejecting this comparable. The Ld.AR has also submitted that this company is functionally similar with that of assessee as it is engaged in the wholesale and retail sale of textiles, clothing, footwear and leather goods. He also submitted that the Ld.TPO however has not objected for the functional dissimilarity of the assessee with Page 31 IT(TP)A No. 802/Bang/2022 this comparable, but has rejected it by holding that this comparable fails the persistent loss filter. 4.3 On the contrary, the Ld.DR placed reliance on orders passed by authorities below.
We have perused the submissions advanced by both sides in the light of records placed before us.
4.4 The assessee in the written submission provided the computation of the profits earned by this comparable in the immediately preceding financial years as under:
Particulars FY 2015-16 FY 2016-17 FY 2017-18 Operating Revenue (A) 24,31,53,24,178 25,55,22,14,572 25,89,98,91,121 Operating Cost (B) 23,29,75,52,520 24,57,83,91,886 25,30,87,14,714 Operating Profit (C) 1,01,77,71,658 97,38,22,686 59,11,76,407 Operating profit/Operating 4.19% 3.81% 2.28% Revenue (D) = (C)/(A) It is noted that the Ld.TPO has not verified the above facts before rejecting this comparable to be failing the persistent loss making filter.
4.5 We therefore remand this comparable back to the Ld.AO/TPO to carry out necessary verification having regard to the annual reports of this comparable that has already there placed on record. Assessee may assist the Ld.TPO/AO in determining the eligibility of this comparable by providing relevant information as called for. Needless to say that proper opportunity of being heard must be granted to assessee.
Accordingly, ground no. 11 raised by assessee stands allowed for statistical purposes.
Page 32 IT(TP)A No. 802/Bang/2022
5. Ground no. 14 is raised by assessee for rejecting the following comparables.
a) KD Trend Wear Ltd.
b) Sohum Shoppe Ltd.
c) Major Brands Pvt. Ltd.
It is submitted that, the above comparables were rejected by the Ld.TPO as these were not appearing in the search matrix of the TPO. The Ld.AR emphasized that the three comparables passes through all the filters applied by the Ld.TPO and is functionally similar to the assessee.
5.1 On the contrary, the Ld.DR has submitted as under:
"1. The appelant seeks inclusion of following three comparables :
i. M/s K D Trend Wear Ltd ii. M/s Sohum Shoppe Ltd iii. M/s Major Brands Private Limited
2. The Hon'ble DRP in it's Order has rejected the request of appellant stating that these three companies don't figure in the search matrix of TPO. When the TPO is in the process of passing of Transfer Pricing Order u/s 92CA(3) after rejecting the TP study report prepared by the assessee, for various reasons mentioned in his order, he is bound to do a fresh search of the comparables. For this purpose, certain filters are adopted. These filters have almost been standardised and are being used all over India. This fresh search gives us a list of comparable companies which have passed the filter test. This constitutes the search matrix of the assessee company. For example, in this case, it is related to AY 2018-19 for which the order by TPO has been passed on 19.03.2021. Therefore a search would have been made around September 2020 in Prowess and Capitalline database which is extensively used by TPOs.
Therefore, for FY 2017-18 when a search is made in September 2020, it is fairly assumed that the financials of all the companies for the current year i.e.. 2017-18 will be available in the public domain and hence, will be captured. It may humbly be noted that when the appellant prepares and submits the Transfer Pricing Study Report, the current year data is not available in most of the cases. Therefore, Page 33 IT(TP)A No. 802/Bang/2022 the TPO is left with no other option but to do a fresh search as per the Act and Rules.
3. The appellant is free to point out any comparable which TPO has missed out. The only condition is that it should be part of the search matrix. In the specific case of three comparables cited above, the non inclusion of these companies is possible for only 2 reasons:
i) The comparables were part of the database but were rejected because it could not pass the filter test. In this case, the filters can be questioned. It has to be seen that these comparables were rejected because of which filter and whether that filter is inappropriate. Needless to argue, the filters are largely standardised which is used in all the cases in unbiased and fair manner. The use of these filters has been contstantly upheld by the honourable Tribunals in a number of cases. It is not the case of the appellant that TPO has used some filter which has not been used in other cases. In view of this, this argument should be rejected
ii) The comparables are part of the search matrix but was rejected because some reasons of the TPO with which the appellant doesn't agree. If this is the case, the appellant must place those arguments before DRP as well as before the honourable bench. The comparables need to be included or not will be decided as per the merits of the argument which is being done in all the cases related to Transfer Pricing.
4. If these comparables are not covered in the above categories, then from where these comparables have come? Whether these comparables were not in these two databases on the date of search by TPO but were included later in the database of Prowess and Capitalline. If this is the case, then the only way to include these comparables will be by the way of a fresh search. Then, the case must be sent back to the TPO for doing a fresh search. But whether this exercise will serve any purpose? The fresh search will throw up few more comparables which may include these 3 comparables cited in the submission of the appellant, but may give some more comparables which has not been discussed so far. It will tantamount to a fresh assessment order denovo which will give rise to many more comparables and a fresh round of litigation will start. The same appellant will again argue against many more comparables which are now part of the search matrix. This fresh search may help in the inclusion of these comparables considered favourable to the assessee but Page 34 IT(TP)A No. 802/Bang/2022 will also give some comparables which will not be favourable to the appellant.
5. The assesse can participate in the proceeding before the TPO and he can point out if any such company has not been captured. The TPO can consider only those comparables which are available in Province or Capitalline database. If the assessee asked for inclusion of any comparable then TPO will have to do a fresh search in these two databases to include these comparables if available in the database and passes all the filters as a corollary it may throw up some new comparables which were not available on the date of previous search. Therefore, entire exercise will be repeated once more and we may arrive with a new set of comparables some of which may be favourable to the assessee and some of which may not be favourable to the assessee. Therefore, in all fairness, a cut off line has to be drawn and we will have to restrict ourselves to all the companies available in the search matrix of the TPO.
6. To sum it up, if these comparables are considered for inclusion then the TPO will have to be directed to carry out a fresh search and as a consequence he also will have the freedom to select few more comparables which are thrown up in the fresh search."
We have perused the submissions advanced by both sides in the light of records placed before us.
5.2 We are of the opinion that merely because these comparables do not appear in the search process by the Ld.TPO, it cannot be excluded if assessee is able to file the annual reports which are verifiable. We rely on the decision of Coordinate Bench of this Tribunal in case of Prism Networks vs. ACIT reported in (2022) 141 taxmann.com 163. We rely on the following observation in case of Prism Networks vs. ACIT (supra) in support of this contention.
"18. We heard the rival submissions. It is clear from the order of the DRP that the DRP has not considered the plea of the Assessee in proper perspective. The fact that the TPO rejected the TP study of the Assessee cannot be the basis not to consider the claim of the Assessee for Page 35 IT(TP)A No. 802/Bang/2022 inclusion of comparable companies. The TPO excluded these companies only on the ground that information related to these companies was not available in the public domain and this fact was shown to be an incorrect assumption by the Assessee in the submissions before the DRP. In such circumstances, it was incumbent on the part of the DRP to have adjudicated the question of inclusion of these companies as comparable companies. The fact that these companies do not figure in the search matrix of the TPO is not and cannot be a ground not to consider inclusion of these companies as comparable companies. Since the DRP has failed to do so, we are of the view that the issue regarding inclusion of the aforesaid companies as comparable companies should be set aside to AO/TPO for fresh consideration in the light of the information available in public domain. Thus ground No. 7 is treated as allowed for statistical purposes."
Respectfully following the above, we remand these comparables to the Ld.AO/TPO to reconsider them in the light of the annual reports that will be filed by assessee. In the event they are found to be functionally similar with that of assessee, the same may be included in the final list.
Accordingly, this ground raised by the assessee stands allowed for statistical purposes.
5.3 The Ld.AR also submitted that the following comparables were rejected by the Ld.TPO due to functional dissimilarities as alleged in the 92CA order.
a) SSIPL Lifestyle Pvt. Ltd.
b) Aditya Birla Fashion and Retail Ltd.
SSIPL Lifestyle Pvt. Ltd.
5.4 The Ld.AR submitted that these companies was rejected by the Ld.TPO, primarily for the reason that it is mainly into manufacturing and fails the core function filter. Before the DRP, the assessee had sought for their inclusion but DRP upheld the observation of the Ld.TPO.
Page 36 IT(TP)A No. 802/Bang/2022 5.5 The Ld.AR emphasized that though this comparable is engaged in manufacturing, it also has a trading segment and is engaged in trading lifestyle products like footwears, apparels and accessories etc. The Ld.AR referring to page 527 of paper book Vol 2 submitted that this company is primarily engaged in the business of trading of footwear and accessories through its retail and wholesale network.
5.6 Referring to page 542 of paper book, the Ld.AR submitted that the expenses incurred by this company is in respect of purchase of stock in trade and no expenses are incurred on purchase of raw materials that reveals that it is engaged in trading activity. It is the submission of the Ld.AR that the observations of the revenue that this comparable is in manufacturing activity is wrong having regards to the annual report and the Director report of this company. He thus prayed for inclusion of this comparable.
5.7 The Ld.DR on the contrary submitted as under:
"SSIPL Lifestyle Pvt Ltd.: It is noted from Para no.6.2 of the order of DRP that this company has been rejected for two reasons:
a. It fails the core filter b. It is functionally different.
A company will come in search matrix provided it possess the filters adopted by the TPO. Whether segmented data is available or not or whether a subsidiary is having similar line of business doesnot come into the picture when filters are applied. These details can be considered only if the company passes the filtered criteria. If we start considering the some companies which have failed the filter test, it will also empower the TPO to consider some of the companies which has failed the filter test and hence were not part of the search matrix."
We have perused the submissions advanced by both sides in the light of records placed before us.
Page 37 IT(TP)A No. 802/Bang/2022 5.8 On perusal of the annual report of this company the business profile is revealed to be primarily engaged in business of trading of footwear and apparels etc. Further, it is the submission of the assessee that the parent company of this comparable is into manufacturing activity whereas this company perse engaged in trading activity. In our considered opinion, this needs to be verified and in the event it is found that this comparable is carrying out trading activity, the same may be included. Accordingly, we remand this comparable back to the Ld.AO/TPO for verification as directed above.
Aditya Birla Fashion and Retail Ltd.
5.9 The Ld.AR submitted that the comparable Aditya Birla Fashion and Retail Ltd. is engaged in manufacturing and distribution of branded fashion apparel and accessories as well as retailing of apparel and accessories. 5.10 It is submitted that Aditya Birla Fashion and Retail Ltd. is maintaining segmental information for trading and manufacturing activities and that it is comparable with that of assessee in respect of the trading activity. The DRP rejected this comparable as the panel erroneously noted that this company is engaged in manufacturing of branded apparels and therefore held that it is functionally not similar with assessee which is mainly engaged in distribution sector.
5.11 The Ld.TPO also has held that this company is into manufacturing activity without verifying the annual reports. The Ld.AR submitted that the annual reports placed at page 157 of paper book clearly reveals the segmental details of the trading Page 38 IT(TP)A No. 802/Bang/2022 and manufacturing activity carried on by this company. He thus prayed for its inclusion.
5.12 The Ld.DR on the contrary relied on the orders passed by authorities below.
5.13 We have perused the submissions advanced by both sides in the light of records placed before us.
We note that the annual reports has not been looked upon by the revenue authorities before rejecting this comparable. In the interest of justice, we remand this comparable to the Ld.AO/TPO for reconsidering the plea of assessee in the light of the annual reports.
Accordingly we remand this comparable back to the Ld.AO/TPO for necessary verification in accordance with law. Accordingly, ground no. 14 raised by assessee stands allowed for statistical purposes.
6. Ground no. 15 - The Ld.AR is seeking exclusion of following comparables by submitting that they are functionally not similar with that of assessee.
a) Metro Brands Ltd. (Also known as Metro Shoes Ltd.)
b) Adidas India Mktg. Pvt. Ltd.
c) Pokarna Marketing Pvt. Ltd.
d) Sreeleathers Ltd.
Metro Brands Ltd.
6.1 The Ld.AR submitted that this company has paid excise duty under the Central Excise Act, 1944 and accordingly, it can be inferred that the Company is engaged in manufacturing activity, which is functionally incomparable to the distribution business of the Assessee. (Page 79, 235 of AR, PB reference no 1855 of PB-2 Page 39 IT(TP)A No. 802/Bang/2022 and 1870 of PB II). The Ld.AR submitted that this company has major litigation pending in respect of Central excise and hence it can be inferred that the company is predominantly engaged in manufacturing activity, which is functionally incomparable to the distribution business of the Assessee. (Page 78 and 93 of AR of FY 2017-18, PB reference no 1854 of PB-2 and 1869 of PB II). 6.2 He further submitted that in Assessee's own case for AY 2015-16, Metro Shoes Limited was excluded from the list of comparable companies, on the ground that the company is engaged predominantly into manufacturing activities. 6.3 It is submitted that this company is functionally not similar with that of assessee. The Ld.AR relied on assessee's own case for Assessment Year 2015-16 in IT(TP)A No. 306/Bang/2022 vide order dated 26.09.2022 wherein this Tribunal observed and held as under:
"11. We heard the DR. During the course of hearing the ld AR drew our attention to the details tabulated from the financials of Metro Shoes Ltd., wherein trading income as a percentage of the total revenue is more than 25%. The details of the same is extracted below: -
Particulars Metro Shoes Ltd
Page no. Page no. ref Page no.
Mar-13 Mar-14 Mar-15
ref - PB II - PB II ref - PB II
Trading Income 24,741 974 29,345 974 32,612 1276
Manufacturing
41,863 974 47,254 974 51,544 1276
Income
Total Income 66,605 76,599 84,155
Trading
Income/Total 37.15% 38.31% 38.75%
Income
Result Fails trading income filter of >75%
Page 40
IT(TP)A No. 802/Bang/2022
"12. We also notice that the TPO has applied trade filter of 75% while selecting fresh comparable companies and according to the above working the company fails the trade filter of more than 75%. We further notice from the financials of Metro Shoes Ltd., that the company has paid customs duty. We do not see any merit in the contention of the DRP that Metro Shoes is also primarily engaged in trading of footwear similar to the business of the assessee while rejecting the plea of the assessee on the application of trade filters. In view of this discussion we hold that Metro Shoes fails the trade filter of more than 75% and therefore should be excluded from the comparable companies."
6.4 The Ld.DR relied on the orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us.
6.5 As this comparable has been held to be functionally not similar with that of assessee in assessee's own case by the Coordinate Bench of this Tribunal, in the preceding assessment year, we direct the exclusion of this comparable for the relevant year under consideration.
Adidas India Mktg. Pvt. Ltd.
6.6 The Ld.AR submitted that this company is engaged in wholesale business as per the annual report and over 95% of its revenue is derived from such wholesale activities. It is submitted that the revenue from retail business is very minimal whereas in the case of the assessee it is engaged in both wholesale as well as retail business.
6.7 It is also submitted by the Ld.AR that this comparable has very low rental cost which forms around 1% of the turnover whereas the assessee operated on a different business model. It is submitted that the operating profit of the assessee is lower on account of operational cost incurred by which due to the rent Page 41 IT(TP)A No. 802/Bang/2022 cost of the various stores / outlets operated by the assessee in India as against this comparable. It is thus submitted that this comparable may be excluded from the final list. 6.8 The Ld.DR on the contrary relied on the orders passed by the authorities below.
We have perused the submissions advanced by both sides in the light of records placed before us.
6.9 We note that assessee is challenging the functional similarity of this comparable only because the rental expenditure of this comparable is much lower than the rental expenditure incurred by the assessee. It is the submission of the Ld.AR that the high rental expenditure in the hands of the assessee affects the operating profits and therefore the business model is different as compared to Adidas.
6.10 In our view, working capital adjustment would take care of these itself by not considering such item which can be identified for computing the operating profit of the assessee in order to iron out the differences. We direct the Ld.AO/TPO to consider this comparable by excluding the rental expenditure for the purpose of computing the margins to determine the comparability. Accordingly, this comparable is directed for inclusion. Sreeleathers Ltd.
6.11 This comparable is sought for exclusion by assessee as it is submitted to be functionally different. The Ld.AR submitted that this comparable operates on a different business model as compared to assessee. It is submitted that this comparable has been excluded by Coordinate Bench of this Tribunal in assessee's own case for A.Y. 2015-16 in IT(TP)A No. 306/Bang/2022.
Page 42 IT(TP)A No. 802/Bang/2022 6.12 The Ld.DR relied on the orders passed by the authorities below.
We have perused the submissions advanced by both sides in the light of records placed before us.
6.13 We note that Coordinate Bench of this Tribunal has rejected this comparable by observing as under:
"13. With regard to the exclusion of Sreeleather Ltd: the learned A.R. contended that Sreeleather Ltd. is engaged in both wholesale and retail trading of footwear and leather articles. The learned A.R. drew our attention to the financials of the company for FY 2014-15 (page 1973 of the paper book III) wherein out of the total turnover of the company 66.76% is derived from retail trading activity and only 12.78% is derived from wholesale trading activity. The learned A.R. therefore contended that the assessee who is into wholesale trading business cannot be compared with Sreeleather Ltd. whose major income is from retail trading.
14. We heard the rival contentions and perused the material on record. We notice that Rule 10B(2)(d) of the Act, the relevant extract is reproduced below provide that the company is in the wholesale trading and retail trading have to be considered separately for the purpose of comparison: -
(2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:--
(a)*** (b)***
(d)***
(d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail.
(emphasis supplied)
15. From the reading of the above rule it is clear that for the purpose of comparability with an uncontrolled transaction, whether the market in which the companies are operating is wholesale or retail needs to be considered. In the given case the financials of Sreeleather Ltd., which Page 43 IT(TP)A No. 802/Bang/2022 is extracted below shows that the company is deriving major part of its revenue from ritual business: -
Name & Description Sl. NIC Code of the % of total turnover of main products/ No. Product/Service of the company services
1. Footwear expenses 51312 12.78%
2. Footwear Retail 52323 66.76% Leather Goods for
3. 52324 20.46% Accessories
16. We also notice that the assessee has raised this contention before the DRP which is not been considered by the DRP by stating that it is not valid since the TPO and the assessee were in consensus in not applying the wholesale retail filter. In view of the above and considering the provisions contained in Rule 10B (2)(d) we are of the considered view that Sreeleather Ltd. should be excluded as comparable."
Respectfully following the above view, we direct exclusion of this comparable from the final list.
Pokarna Marketing Pvt. Ltd.
6.14 The Ld.AR submitted that sufficient information is not available in respect of this company, however the Ld.TPO has adopted this comparable only observing the principle business activity to be wholesale distribution of textiles. 6.15 The Ld.DR on the contrary relied on the orders passed by authorities below.
We have perused the submissions advanced by both sides in the light of records placed before us.
6.16 The Ld.TPO has considered this comparable in the final list by observing as under:
"On Page No. 6 of the annual report for FY 2017- 18, it is clearly mentioned that the principal business activity of the company is wholesale distribution of textiles.
So, the contention of the taxpayer is rejected."
6.17 It has been argued by the assessee that there is insufficient description regarding the business activity carried on by this Page 44 IT(TP)A No. 802/Bang/2022 comparable. It was also submitted before the DRP that there is no information of this comparable even available on the public domain. The DRP however affirmed the observations of the TPO by observing as under:
"6.7 Having considered the submissions of the assessee, it is noted that page 06 of the annual report for FY 2017-18 the principal business activity of the company is distribution of the textiles. Thus, the contention of the assessee doesn't hold any ground and hence is rejected."
6.18 We have verified the annual report of this comparable that is placed at page 2937 / 2982 of the paper book. We note that this company has earned revenue from sale of products being traded goods - fabric at Rs.12,12,59,996/-. Schedule 2.14 of the profit and loss account at page 2962 provides the details. The revenue recognition has been stated to be from sale of goods under the significant accounting policies at page 2975. 6.19 We note that this company is into the trading of textiles (fabrics) for which all the relevant details are available in the annual report. On functionality, in our view this comparable is similar with the assessee. However the filters applied by the Ld.TPO needs to be verified which was not done by the authorities below.
6.20 We note that while the assessee was arguing certain comparables for inclusion, more particularly KD Trend Wear Ltd., the assessee argued that this comparable is functionally similar with that of assessee as it is engaged in trading of clothing and footwear and it passes all the filters applied by the Ld.TPO. Going by the same principle, we remand this comparable to the Ld.TPO for necessary verification on the functional similarities to be considered in accordance with law. We apply the same Page 45 IT(TP)A No. 802/Bang/2022 principle to the present comparable and direct the Ld.TPO to verify the filters that has been applied and in the event it is found to satisfy all the necessary filters, the same be considered. Accordingly we remand this comparable back to the Ld.AO/TPO. Accordingly this ground raised by the assessee stands allowed as indicated hereinabove.
7. Ground no. 16 is regards to wrong computation of operating margin of the following comparables.
a) Tommy Hilfiger Arvind Fashion Pvt. Ltd.
b) V F Brands India Pvt. Ltd.
c) Sreeleathers Ltd.
As we have already excluded Sreeleathers Ltd. in the preceding paragraphs, the same is excluded from the list. 7.1 With regards to V F Brands India Pvt. Ltd. and Tommy Hilfiger Arvind Fashion Pvt. Ltd., the Ld.AR submitted that the operating margin considered by the Ld.TPO of these companies are incorrect.
7.2 We accordingly direct the Ld.TPO to recomputed the ALP having regards to the financials of the two companies and determine the margins afresh in accordance with law. Accordingly, this ground raised by assessee stands allowed for statistical purposes.
8. Ground no. 17 is regarding the working capital adjustment not granted to assessee.
8.1 After hearing the contentions of both the sides, we are of the opinion that this issue is no longer resintegra as this issue is covered by the decision of Coordinate Bench of this Tribunal in case of Huawei Technologies India (P.) Ltd. v. Jt. CIT reported in Page 46 IT(TP)A No. 802/Bang/2022 (2019) 101 taxmann.com 313 wherein this Tribunal has held as under:
"17. In the light of the above discussion we are of the view that the CIT(A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT(A) has not found any error in the TPO's working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the assessee and a copy of the same is at page 173 & 192 of the assessee's paper book. No defect whatsoever has been pointed out in these working by the CIT(A). We may also further add that in terms of Rule 10B(1) (e)(iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is not the case of the CIT(A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT(A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Rules, which provides as follows:-
"(3) an uncontrolled transaction shall be comparable to an international transaction if -
(i) None of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged to paid in, or the profit arising from, such transactions in the open market; or
(ii) Reasonably accurate adjustments can be made to eliminate the material effects of such differences."
18. In such a scenario there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore, in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment Page 47 IT(TP)A No. 802/Bang/2022 as claimed by the assessee should be allowed. We hold and direct accordingly.
19. In the result, the appeal of the assessee is allowed." 6.3 In view of the above order of the Tribunal, we inclined to remit the issue to the file of AO/TPO to determine the correct working capital adjustment."
Accordingly, this ground raised by assessee stands allowed for statistical purposes.
9. Ground no. 18 is in respect of refusing the risk adjustment by the Ld.TPO. The same has been rejected as relevant data in respect of the comparables were not provided by the assessee. in the event the assessee is able to establish the risks undertaken by the outstanding comparables, the same may be considered in accordance with Rule 10B by the Ld.TPO. Necessary verification may be carried out in respect of the same by the Ld.TPO. Accordingly this ground raised by assessee stands partly allowed for statistical purposes.
10. Ground nos. 19-20 is in respect of restricting the transfer pricing adjustment only to the gross income earned by assessee on sales made to AE.
The Ld. TPO, in the TP order determined the TP adjustment on the entire business operation of the assessee, which also includes revenue from third party customers and expenses incurred/payment made to third party vendors. It is submitted that the Ld.TPO did not restrict the transfer pricing adjustment to the quantum of the disputed international transactions undertaken by the assessee. The detailed computation of TP adjustment undertaken by the Ld. TPO is provided in Section 19 of the TP order.
Page 48 IT(TP)A No. 802/Bang/2022 10.1 The Ld.AR provided the computation of the ratio of disputed international transactions to the total operating cost and the subsequent computation of the TP adjustment which is as under:
Value of international International transaction under transaction for FY 2017- dispute 18 (INR) Purchase of materials and 2,778,971,972 consumables Cost of samples 26,071,254 Payment of local sourcing 212,816,303 support fees Total disputed expenses (A) 3,017,859,529 Total operating cost as per TP 9,362,086,132 order (B) Ratio of cost of disputed international transaction / 32.23% Total operating cost (C)=(A)/(B) 10.2 The Ld.AR has relied on the following decisions in support of its contention that the transfer pricing adjustment must be restricted to the international transactions alone.
Hon'ble Supreme Court in the case of Hindustan Unilever Limited (S.L.P. (C) No. 28540/2018 (IX)) Hon'ble Delhi High Court in the case of Keihin Panalfa Limited [ITA No. 11/2015 and 12/2015] Hon'ble Bombay High Court in the case of Phoenix Mecano (India) Private Limited (I.T.A. No. 1182 of 2014] Honble Bombay High Court in the case of Bhansali & Co. [ITA No. 1066 of 2014] Hontle Bombay High Court in the case of Alstom Projects India Limited [ITA No.362 of 2014] Bangalore Tribunal in the case of Kirloskar Toyota Textile Machinery Pvt Ltd Vs.ACIT (IT(TP)A No. 1401/ Bang/ 2010) Bangalore Tribunal decision in the case of M/s Syssaris Software (India) Private Limited [IT(TP)A No. 639/Bang/2012] Chennai Tribunal ruling in the case of M/s. Valeo Lighting Systems India Pvt. Ltd. [ITA No. 1042/ Chny/2017] Hyderabad Tribunal in the case of Polartech India Pvt Ltd Vs Asstt. CIT (2013) 156 TTJ 0659 Delhi Tribunal, in the case of Hi-Lex India Private Limited [ITA No. 2036/DeI/2014 and ITA No. 1849/De1/2014] Page 49 IT(TP)A No. 802/Bang/2022 Ahmedabad Tribunal in case of Liquid Controls India (P) Ltd (ITA No.79/Ahd/2010) (AY 2002-03) Mumbai Tribunal in case of Emersons Process Management India P td (ITA NO 8118/M/2010) (AY-2006-07) Mumbai Tribunal in case of DCIT vs Starlite (133 TTJ 425) (Mum) (AY 2002-03) On the contrary, the Ld.DR placed reliance on orders passed by authorities below.
We have perused the submissions advanced by both sides in the light of records placed before us.
10.3 Based on the above submissions, we direct the Ld.AO to verify the computation of the international transaction to the total operating cost as provided by the assessee hereinabove. In any event, the transfer pricing adjustment has to be restricted to the value of international transaction alone. The Ld.AO is directed to consider the claim of assessee in accordance with law. Having regard to the observations of various Tribunals and Hon'ble High Courts, Hon'ble Supreme Court on this issue in the referred cases.
Accordingly, these grounds raised by assessee stands allowed for statistical purposes.
11. Ground nos. 21-28 11.1 The Ld.AR submitted that under the sourcing structure, assessee is responsible for sourcing PUMA products which is located in Germany. It is submitted that, the assessee purchases PUMA products from unrelated third party vendors in its own name and for its own account for resale to PUMA entities. For this activity of global sourcing function, the assessee is assisted by PUMA International Trading Services Ltd. (PITS) in Hongkong that performs sourcing support activities for assessee, and World Page 50 IT(TP)A No. 802/Bang/2022 Cat Ltd. (WCL) in Hongkong that operates as groups procurement agent.
11.2 The Ld.AR submitted that it is WCL's responsibility to identify appropriate vendors, support in quality standards, and ensure vendors' compliance with PUMA's Social Accountability & Fundamental Environmental Standards ("SAFE"). 11.3 In addition, the Ld.AR submitted that PITS, Hongkong and WCL, Hongkong are further supported by the AEs located in various countries (e.g. Guangzhou World Cat Information Consulting Services Company Limited in China, and World Cat Vietnam Sourcing & Development Services Company Limited in Vietnam etc.) in the course of providing sourcing and procurement agency services respectively to the PIT (PUMA International Trading GmbH).
11.4 The Ld.AR submitted that PIT engages WCL as its procurement agent to identify new vendors, communicate with the current vendors, and conduct on-site audits to ensure that vendors adhere to PUMA Group's SAFE standards. The detailed functions performed by PIT, PITS, Hongkong and WCL, Hongkong are part of the global sourcing support services and that these details has been submitted before the DRP. 11.5 The Ld.AR submitted that the assessee determined the ALP of local sourcing support fees under the TNMM by considering the same to be an integral part of the overall distribution activity carried on by it. Referring to Rule 10A, the Ld.AR submitted that the transfer pricing regulations also refer to application of the most appropriate method to a transaction or class of Page 51 IT(TP)A No. 802/Bang/2022 transactions, and that, for the purposes of Rules 10AB-10E "transaction" includes a number of closely linked transaction. He also referred to following decisions in support of his submission, that closely linked transactions are to be aggregated. Autoliv India Pvt. Ltd. [TS-1033-ITAT-2017 (Bang)-TP] Demag Cranes & Components vs. DCIT [ITA No. 1683/PN/2011] SRF Limited [ITA No. 2064/Del/2014] Toyota Kirloskar Motor (P) Ltd. [TS-217-ITAT-2014 (Bang)-TP] Knorr-Bremse India Private Limited vs. ACIT [TS-558-HC-2015 (P&H)- TP] Fosroc Chemicals India Pvt. Ltd. [TS-572-ITAT-2017 (Bang)-TP] Kaypee Electronics & Associates Pvt. Ltd. [TS-310-ITAT-2017 (Bang)-TP] Sony Ericsson Mobile Communications India Pvt. Ltd. and others [ITA No. 16/2014] GBT India Pvt. Ltd Vs. The A.C.I.T [TS-90-ITAT-2020(DEL)-TP] Demag Cranes & Components (ITA No. 1683/PN/2011) Ericsson Mobile Communications India Pvt. Ltd. and others [ITA No. 16/2014] Avery Dennison (India) P Ltd [TS-619-ITAT-2015(Del)- TP] 11.6 He submitted that, a similar issue has been considered by Coordinate Bench of this Tribunal in assessee's own case, wherein the buying commission fee paid by the assessee was treated as an integral part of the distribution activity performed by assessee. He relied on assessee's own case in IT(TP)A No. 1611/Bang/2017 for Assessment Year 2013-14. 11.7 On the contrary, the Ld.DR vide written submission dated 20.06.2023 submitted as under:
"iii. Grounds related to local sourcing support services: TPO has discussed this issue in detail in Para no.20 to 21.5 (Page no. 44 to 55) of the paperbook submitted by the Page 52 IT(TP)A No. 802/Bang/2022 assessee and DRP has discussed this in para no.12 of its order as under:
"12.0 Ground of Objection 12: Payment of Local Sourcing Support Fees:
12.1 The learned TPO/A0 have erred, in law and in facts, by determining the ALP of the local sourcing support fees paid by PUMA Sports India of INR 21,28,16,303/- as 'NIL' by stating that payment of local sourcing support fees made to the AE is in the nature of shifting of profits of the taxpayer outside India[Kindly refer Annexure 12] 12.2 The Learned TPO/A0 have erred, in law and in facts, by separately testing the arm's length nature of the transaction of payment of local sourcing support fees to the AE, without appreciating the fact that the said transaction is to be considered as closely linked to the international transaction of purchase of materials and consumables, being integral and germane to the distribution business of the Assessee 12.1 Panel: Having considered the submissions of the assessee, it is observed that finished goods are procured by the assessee from third party sources outside India and from local third-party sources. 12.2 For products procured from outside India PIT, PITS, WCL, and PUMA Austria are compensated for their roles in souring from third party manufacturers. In local sourcing the third-party manufacturers directly sell products to the assessee and a sourcing fee is paid to the PIT.
12.3 During the relevant assessment year, the assessee has paid INR 21,28,16,303/- to PIT towards availing R&D and sourcing support services for the locally procured goods from the third parties. 12.4 In addition, the assessee itself acts as a procurement/sourcing agent for PUMA Group affiliates outside India, providing procurement support services to WCL, providing product technical and research and development assistance to DSL for export of goods from third party Indian vendors and providing supply chain management services to PITS for export of goods from third party Indian vendors.
12.5 From the above para it is abundantly clear that the assessee has the capability, resources and the knowledge about the local manufacturers directly, without help of PIT. Moreover, it is practically impossible for PIT, a company headquartered in Germany to coordinate the procurement made locally as per the needs of the local market.
Page 53 IT(TP)A No. 802/Bang/2022 12.6 In this regard it is pertinent to note the bed rock of the Transfer Pricing audit that is whether two independent parties would have entered into such transaction and if so, what would be the price it would have charged for such service? Based on the above it is crystal clear that no two independent enterprises would have entered into such a transaction as the assessee and the PIT have, especially in view of the fact that the assessee continues to show poor profits and still pays a procurement fee to the PIT. Thus, the transactions are routed through the PIT in order to shift profits outside India.
12.7 Hence, we are inclined to uphold the TPOs decision of holding the ALP of the payments towards local sourcing support as NIL. Thus, the objection of the assessee is rejected.
7. Each transaction of the assessee which can be separately benchmarked needs to be segregated. This is a transaction which can be separately benchmarked and has noted by the TPO and DRP that the assessee has capability, knowledge and resources about the local manufacturers directly, without help of PIT. Moreover, it is practically impossible for PIT, a company headquartered in Germany to coordinate the procurement made locally as per the needs of the local market. Therefore, this transaction is similar to loyalty, management fee where separate benchmarking has been applied by various orders of the Tribunal and it has also been held that the assessee needs to show that services has indeed been rendered."
We have perused the submissions advanced by both sides in the light of records placed before us.
11.8 The assessee procures finished goods from third party sources outside India and also from local third party manufacturers. The products that are procured by assessee from outside India being PIT, PITS, Hongkong, WCL, Hongkong and PUMA, Austria are compensated for their roles in the sourcing from the third party manufacturers.
11.8.1 In the circumstances where the local sourcing third party manufacturers are involved, the sale of products directly happens with assessee and the sourcing fees is paid to PIT by the Page 54 IT(TP)A No. 802/Bang/2022 assessee. For the year under consideration, the assessee has paid Rs.21,28,16,303/- to PIT towards availing R&D and sourcing support services for the locally procured goods from third parties in India. Such services are rendered by PIT to the assessee with the help of PITS, Hongkong and WCL, Hongkong. 11.8.2 To sum it up, PIT provides assessee with all knowhow and information related to the development of the product design and related specification that are relevant for the manufacture of licensed products that are manufactured by assessee through the local third party manufacturers in India. 11.8.3 PIT also provides support services to assessee by determining the overall capacity of the purchase volumes of the licensed products and other support services that have been reproduced at page 28 of this order hereinabove. 11.9 Thus the sourcing support provided by PIT to assessee in India for sourcing of goods from local market can be represented pictographically as under:
PIT Grant of manufacturing rights Providing sourcing Providing research and to PUMA Sports India in support related development services relation to manufacturing of services goods in India 11.10 For the above services, assessee has to pay a service fee at the rate of 7% of the FOB price as per agreement dated 01.04.2015 which has been revised w.e.f. 01.01.2017. Thus the Page 55 IT(TP)A No. 802/Bang/2022 assessee has aggregated following transactions to be interlinked with the trading activity.
Cost of samples Payment of local sourcing support fees to PIT Payment made to PUMA SE towards IT related expenses Receipt of service fee from WCL for rendering procurement support services Receipt of service fee from DSL for rendering product development services Receipt of service fee from PITS for rendering supply chain services Receipt of store layout design charges from PUMA Austria Reimbursement of expenses paid to AEs Reimbursement of expenses recovered from AEs Sale of products 11.11 The Hon'ble Punjab & Haryana High Court in Knorr Bremse India (P) Ltd. vs. ACIT reported in (2016) 380 ITR 307 considered the question of aggregation of international transactions. Their Lordships laid down the principles of aggregation of international transactions by holding that, several transactions between two or more AEs can form a single composite transaction, if they are closely linked transactions and the onus is always on the assessee to establish that such transactions are part of an international transaction pursuant to an understanding between various members of a group.
11.12 The Hon'ble High Court observed that, in case of a package deal where each item is not separately valued but all are given a composite price, these are one international transaction. And that, where a number of transactions are priced differently but on the understanding that the pricing was dependent upon the assessee accepting all of them together (i.e. either take all or Page 56 IT(TP)A No. 802/Bang/2022 leave all), then also they have been held to be taken as one international transaction.
11.13 The onus is cast on the assessee to prove that although each is priced separately, they were provided under one composite agreement. It is further held by the Hon'ble Court that, each component may be priced differently also, but it will have to be shown that they are inextricably linked that one cannot survive without other.
11.14 In the present facts as has been observed in the preceding paragraphs, the assessee is into wholesale and retail sales of PUMA products. The common sourcing entity globally is the PIT to all PUMA sales entities, who is assisted by PITS and WCL. PIT assists the assessee with the sourcing services, to get the products manufactured from the local third party manufacturers. The products so manufactured by the third party local manufacturers, are restricted to Indian market only. 11.15 On a detailed analysis of the transfer pricing study, we note that the assessee is one of the PUMA sales entity to sell PUMA products. PIT is a medium who sources by either to manufacture or have manufactured PUMA products, which is sold to PUMA sales entities like assessee before us. There is a contractual agreement between PIT and PUMA SE(an AE who owns and provides necessary rights to use trade mark and brand name to PUMA sales entities), as per which PIT is allowed to collect R&D fees from PUMA sales entities to compensate PUMA SE for its global product creation efforts. 11.16 This in our considered opinion cannot be aggregated with the trading activity of the assessee. It has been rightly segregated Page 57 IT(TP)A No. 802/Bang/2022 by the revenue authorities. However we not that the Ld.TPO/AO has not bench marked the transaction in accordance with the transfer pricing procedures. We therefore remand this issue back to the Ld.TPO to carry out necessary verification and to determine the arms length price by adopting internal CUP. Needless to say that proper opportunity of being heard must be granted to the assessee.
We therefore remand this issue back to the Ld.TPO for de novo consideration in accordance with law.
Accordingly this ground No.28 raised by the assessee stands allowed and Grounds 21-27 stands dismissed. In the result, the appeal filed by assessee stands partly allowed.
Order pronounced in the open court on 26th July, 2023.
Sd/- Sd/-
(CHANDRA POOJARI) (BEENA PILLAI)
Accountant Member Judicial Member
Bangalore,
Dated, the 26th July, 2023.
/MS /
Copy to:
1. Appellant 4. CIT(A)
2. Respondent 5. DR, ITAT, Bangalore
3. CIT 6. Guard file
By order
Assistant Registrar,
ITAT, Bangalore