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Adidas Sourcing Limited 10F, city Plaza Four,12, Taikoo Wan Road Taikoo Shing, Island East,Hong Kong. Vs. Asstt. Director of Income-tax, Circle 1(1), International Taxation, New Delhi.
September, 20th 2012
                                                                     Adidas sourcing Ltd.
                                                                   ITA No. 5300/Del/2010


               IN THE INCOME TAX APPELLATE TRIBUNAL
                     DELHI BENCH "A" NEW DELHI
            BEFORE SHRI R.P. TOLANI AND SHRI T.S. KAPOOR

                   ITA No. 5300/Del/2010
                   A.Yr. 2007-08

Adidas Sourcing Limited               Vs.   Asstt. Director of Income-tax,
10F, city Plaza Four,                       Circle 1(1), International
12, Taikoo Wan Road,                        Taxation, New Delhi.
Taikoo Shing, Island East,
Hong Kong.

PAN: AADCA7661D

( Appellant )                               ( Respondent )


            Appellant by       :      Shri Rajan Vora Adv.&
                                      Shri Vijay Iyer Adv.
            Respondent by      :      Dr. Sunil Gautam CIT ( DR)





                                   ORDER

PER R.P. TOLANI, J.M::

    This is assessee's appeal against the assessment order passed by the Asstt.
Director of Income-tax Cir. 1(1), International Taxation, New Delhi, pursuant to
order of the Dispute Resolution Panel, New Delhi, u/s 144C of the Income-tax
Act, 1961relating to asstt. Year 2007-08. Following grounds are raised:




    1.        The learned assessing officer has erred in law and in
    fact, in holding that fee received for buying agency services by
    the assessee, in relation to procurement services rendered outside

                                        1
                                                                  Adidas sourcing Ltd.
                                                                ITA No. 5300/Del/2010


India, is in the nature of Fee for Technical Services (`FTS') and
is taxable in India under the Income-tax Act, 1961 (`the Act').


2.        Without prejudice to Ground No 1, the learned
assessing officer has erred in law and in fact, in holding that the
agreement for buying agency services was entered into prior to
May 1997 and accordingly a rate of 30% would apply in the case
of the assessee.


3.        The Learned assessing officer has erred in law and in
fact, in proposing to initiate penalty proceeding under section
271AA of the Act, without appreciating the fact that the relevant
transfer pricing documents i.e. transfer pricing report of the
assessee was submitted in the course of assessment proceedings.


4.        The Learned assessing officer has erred in law and in
fact, in proposing to levy penalty under section 271BA of the
Act, without appreciating the fact that the assessee had already
furnished the report of the accountant under section 92E of the
Act, before the due date prescribed under section 139(1) of the
Act.
5.        The Learned assessing officer has erred in law and in
fact, in proposing to levy interest under sections 234B and 234D
of the Act.


6.       The Learned assessing officer has erred in law and in
fact, in proposing to withdraw interest granted under section
244A of the Act.


7.        The Learned assessing officer has erred in law and in
fact, in not allowing credit for the whole of the amount of tax
deducted at source.




                                     2
                                                                        Adidas sourcing Ltd.
                                                                      ITA No. 5300/Del/2010


       8.         The Learned assessing officer has erred in law and in
       fact, in initiating the penalty proceedings under sections 271(1)
       of the Act.

2.      Brief facts are ­ assessee, Adidas Sourcing Limited (`ASL') is a tax
resident of Hong Kong. Its Sourcing Division provides buying agency
services to various customers including Adidas India Marketing Private
Limited (`AIMPL') an AE. For such services ASL entered into a `Buying
Agency Services Agreement' with AIMPL for sourcing of merchandise in
respect to which ASL receives buying commission @ 8.25% of the value of
merchandise. The agreement was entered into on 18 June, 1999 and further
amendments to the agreement were made vide Amendment 1 to the
agreement dated 5 April, 2000 and Amendment 2 to the agreement dated 21
August, 2011. ASL provides services which include centralized media and
advertisement planning, market research, Public relations, sports marketing
and other marketing services such as catalogue production, development of
retail shop systems, etc.


2.1.    A different ASL Division, i.e. the Regional Head Office Asia/Pacific,
provides certain regional marketing and administrative support services to
the Group's Asia-Pacific distribution entities (including AIMPL).


2.2.    For the year under consideration, the original return of income was
filed on 4 March 2008 wherein the total income was declared at Rs 3.9
crores. Subsequently, a revised return of income was filed by ASL on 5
March 2008 wherein a mistake in relation to claim of credit for tax deducted
at source was rectified by the assessee. Thereafter, a second revised return


                                           3
                                                                      Adidas sourcing Ltd.
                                                                    ITA No. 5300/Del/2010


was filed by ASL on 18 March 2009 increasing the income to Rs 4.9 crores
which was on account of rectification of an inadvertent mistake at the time
of grossing up of tax paid on behalf of the appellant.


2.3.   For the year under consideration, ASL received buying commission
from AIMPL for the services provided by ASL to AIMPL. Such buying
commission was not offered to tax by ASL in the return of income. During
the course of the assessment proceedings, Assessing Officer (AO) held that
the buying commission income received by the assessee is in the nature of
fees for technical services (`FTS') and the same should be taxable in India in
the hands of ASL. Accordingly, the same was considered to be taxable on
gross basis @ 30% in the assessment order on the ground that the agreement
for providing such services was entered on 18 June 1999. DRP confirmed
with the view of the AO. Aggrieved assessee is before us.

3.    Ld counsel for the assessee apropos respective grounds contends as
under:


3.1.   The assessee has entered into a buying agency services agreement
(`BAS Agreement'), dated 18 June 1999, with AIMPL (formally known as
`Adidas India Trading Private Limited') for providing `Buying Agency
Services'. The scope of work was subsequently extended and the fee was
enhanced vide Amendments dated 5 April 2000 and 21 August 2001. All
these agreements are placed on the paper book.



3.2.   As per the BAS agreement, during the relevant AY, ASL was required
to provide services to AIMPL in relation to purchase of goods from outside


                                          4
                                                                      Adidas sourcing Ltd.
                                                                    ITA No. 5300/Del/2010





India, for and on behalf of AIMPL in accordance with the terms of the
agreement. For the year under consideration, ASL received remuneration in
the form of buying commission @ 8.25% of the invoice amount of the
merchandise. The total commission earned by ASL during the year under
consideration is Rs 1.13 crores.



3.3.   As per the agreement, the assessee was broadly required to provide
the following services to AIMPL in relation to the sourcing of goods from
outside India:


   -       Maintain relationship with the manufacturers outside India and
       search for new potential manufacturers.
   -       Supply AIMPL with credit reports and other marketing
       information concerning manufacturers.
   -      Co-ordinate between AIMPL and manufacturers for the purpose of
       buying the merchandise and the same includes placing the purchase
       order, assisting in negotiations, etc.
   -      Assist in procurement of samples and sending the same to AIMPL
       with other terms and conditions for approval.
   -      Provide translation services as required for communication
       between AIMPL and the manufacturers.


3.4.   Though assessee was acting on behalf of AIMPL it did not had any
authority to enter into any binding commitment on behalf of AIMPL. The
invoice would be raised by the manufacturers on ASL for the sake of
administrative convenience as services included assessee act as AIMPL's
paying agent. The agreement specifically provided that AIMPL shall retain
for itself the final decision on selection of manufacturers, pricing, delivery
and other such related matters.
                                         5
                                                                         Adidas sourcing Ltd.
                                                                       ITA No. 5300/Del/2010




3.5.    At the time of filing the return of income, the appellant did not offer
the income received from AIMPL for providing sourcing services to tax
since the appellant does not have a place of business in India from where
such sourcing services are provided to AIMPL. Further, no employee of the
appellant visited India during the year for providing such services to AIMPL
i.e the services were provided by the appellant from outside India. In these
circumstances and a catena of judicial pronouncements, assessee was under
bonafide belief that the payment received by it for rendering sourcing
services is not in the nature of FTS as it is not - managerial, technical or
consulting in nature, on following considerations. The services provided by
ASL to AIMPL are not in the nature of managerial, technical and
consultancy on following submissions:


       i)    Managerial services -       In case of managerial services, the
             service provider provides the services independently (without
             any supervision or instruction), however, in case of the assessee,
             AIMPL has complete control on the work performed by the
             assessee. Reference can be made to clauses 2.3, 2.4, 2.9 and 9.1
             of the BAS agreement which make it clear that the appellant was
             working under the control and supervision of AIMPL and the
             appellant did not have any authority to conclude contracts on
             behalf of AIMPL. Hence, the services rendered by ASL are not
             managerial services in nature. The buying agency services
             provided by the assessee are not managerial in nature as the said
             services are provided under the instruction and overall control
             and supervision of AIMPL. In this regard, various clauses of the
                                            6
                                                                Adidas sourcing Ltd.
                                                              ITA No. 5300/Del/2010


      BAS agreement        are referred which make it clear that the
      assessee was working under the control and supervision of
      AIMPL and had neither decision making authority nor capacity
      to bind the assessee. It's role was only in the context of routine
      buying support services and have no inkling to be termed as
      Managerial services.


ii)   Technical services - The services are not technical in nature as
      no technical knowledge belonging to art, science or profession
      was required. The assessee was merely facilitating AIMPL in
      procuring the merchandise from outside India and ensuring
      smooth transmission of the merchandise to AIMPL. The said
      activity was only liaisoning, coordination, facilitator or
      supervision service to ensure that the merchandise which AIMPL
      wants to purchase meet their specifications. Hence, the same
      cannot be equated with technical service.


In the case of Skycell Communications Ltd. vs. DCIT (251 ITR 53)
(Madras) the Hon'ble High Court has held that the popular meaning
associated with the word `technical' is `involving or concerning applied
and industrial science'.


Consultancy services - Assessee, ASL was merely facilitating the
procurement of the merchandise and acting in a liaison function. It was not
providing any expert service or opinion regarding any matter to AIMPL and
hence cannot qualify as consulting services under the definition of FTS under
the Act. Thus any kind of administration work or co-ordination services
cannot be included within the scope of consultancy services.

                                    7
                                                                Adidas sourcing Ltd.
                                                              ITA No. 5300/Del/2010




Following Judicial pronouncements are relied in this regard


    (i) Spahi Projects Pvt. Ltd. (2009-214 Taxation 56) (AAR) ­
            The AAR held that the services of procuring orders,
            negotiating prices and other terms and conditions, following
            up for purchase orders, attending queries of shipment did
            not qualify as managerial, technical or consultancy and
            hence were not FTS and also did not form any business
            connection of non-resident receiving commission for the
            services provided.

    (ii)    Linde AG vs ITO (62 ITD 330) (Mumbai ITAT) ­ The
            Hon'ble ITAT held that procurement services did not
            involve imparting of any information concerning industrial,
            commercial or scientific experience and hence were not
            FTS or royalty.

    (iii)   DDIT vs Samsung Engineering Co Ltd (2010 TII ITAT
            Mum INTL) - The Hon'ble ITAT held that the services of
            identification, procurement of critical imported material,
            arranging co-ordination between foreign vendors and
            SECL, monitoring all other activities for the project do not
            mean imparting of any information concerning industrial,
            commercial, or scientific experience and hence would not
            qualify as a payment towards FTS.




                                    8
                                                                   Adidas sourcing Ltd.
                                                                 ITA No. 5300/Del/2010


iii)    Intention of the parties and the overall nature of the agreement is
        to be considered for ascertaining the nature of contractual
        obligations.


3.6.     It is emphasized that under the BAS Agreement, only `buying
agency services' were provided by ASL to AIMPL. The entire services
were provided by ASL under the complete control and supervision of
AIMPL.


3.7.     Each function in the agreement cannot be characterized and
categorized on the basis of its individual nature. The overall functions
need to be cumulatively ascertained as the consideration is paid for all
the functions collectively. It will not be appropriate to pick and choose
each of the function and characterize some of them as managerial,
technical or consultancy in nature. Reliance in this regard is placed on
the recent decision of CIT vs. NIIT Ltd. 2009 (226 CTR 521) (Delhi
HC) and Horizontal Drilling International S.A. v CIT (237 ITR 142)
(AAR).

3.8.     Further reliance is placed on the following judgments for the
meaning of the words `managerial', `technical' and `consultancy':


(iv) UPS SCS (Asia) Limited vs ADIT (50 SOT 268 2012) (Mumbai
       ITAT) - The assessee a Hong Kong based company had entered
       into a Regional Transportation Services Agreement with Menlo
       Worldwide Forwarding (India) Private Limited for providing
       freight and forwarding and logistic services to each other. The

                                      9
                                                             Adidas sourcing Ltd.
                                                           ITA No. 5300/Del/2010


Mumbai ITAT in connection with the export consignment services
(i.e. services in relation to custom clearance and transportation of
goods to the ultimate customer outside India) held that such
services did not qualify as managerial, technical and consultancy
and hence were outside the purview of FTS as defined under the
Act.


The ITAT held that services can qualify as managerial services if
it involves both execution and planning of the activities to be
performed. Further since the term has not been defined in the Act
it would be required to interpreted in a commercial sense. The
ITAT held that the term cannot be interpreted in a narrow sense to
mean simply executing the directions of the others for doing a
specific task. The ITAT held that the word managing is wider in
scope than the word executing. Accordingly restricted services
cannot qualify as managerial services. Further the ITAT as given
an instance that in case a worker is instructed to place goods on a
carrier in a particular manner, then the activities carried on by the
worker cannot be held as managerial in nature since the worker is
only executing the directions in the prescribed way. Further these
activities cannot be construed as managerial in nature only if the
worker is applying his mind for carrying out the activities and is
expected to be vigilant in carrying on such activities.


Further the ITAT held that consultancy services means giving
some sort of consultation de hors the performance or execution of


                               10
                                                                       Adidas sourcing Ltd.
                                                                     ITA No. 5300/Del/2010


          any work. It is only when some consideration is given for
          rendering some advice or opinion etc that the same falls within the
          scope of consultancy services. The word consultation excludes
          actual execution. Hence the ITAT held that freight and logistics
          services cannot qualify as consultancy services.


          In relation to the interpretation of the word technical services, the
          ITAT held that the word technical has been sandwiched between
          the words `managerial' and `consultancy' and hence the meaning
          needs to be ascertained by applying the principle of nosticur a
          sociis. The ITAT held that since managerial and consultancy pre
          supposes some sort of direct human involvement and hence
          technical services even though rendered with or without
          equipment cannot be conceived without the direct involvement of
          human element. Thus the consideration for payment is rendering
          services and not for use of computer.


          (v)    DCIT vs Eon Technology (P) Ltd (203 Taxman 266) (Delhi
                 HC)
          (vi)   Armayesh Global vs ACIT (ITA No. 8822/2010) (Mumbai
                 ITAT)

          (vii) ACIT vs Leaap International Pvt Ltd (ITA No.
                 356/2009)(Madras ITAT).



3.9.   The Hon'ble Supreme Court in the case of CIT vs Toshoku Ltd (125
ITR 525) held that commission earned by the non-resident for acting as the

                                         11
                                                                        Adidas sourcing Ltd.
                                                                      ITA No. 5300/Del/2010


selling agent for the Indian exporter, wherein such non-resident was
rendering services from outside India does not accrue in India.


3.10. Circular 23 of 1969 and 786 of 2000 were issued in the context of
sales commission payable by a resident exporter to the agents outside India
and reiterated that the income paid to an agent is not taxable if the operations
are carried out by the agent outside India.


3.11. Further, it may be noted that the nature of operation undertaken by a
sales agent are similar to a buying agent and, therefore, if the income of a
sales agent cannot be taxed in India then the income of buying agent also
cannot be taxed in India.


3.12. For sake of completeness, it is submitted that the said circulars have been
withdrawn by the recent Circular 7 of 2009. Nonetheless the said withdrawal is
prospective from 22 October 2009 and would not alter the situation for the relevant
AY. The said Circular 7 at para 3 clearly states that Circular 23 is withdrawn with
`immediate effect' i.e. 22 October 2009.


3.13. Reliance in this regard is placed on the following decisions:


   -      Satellite Television Asia Region Advertising Sales BV (`STAR')
       [2010-TII-58-ITAT-Mumbai-Intl
   -      DDIT vs Siemens Aktiengesellschaft by Mumbai ITAT (ITA No.
       6133/Mum/2002)
   -       Sanjiv Gupta v. DCIT (135 TTJ 641) (Lucknow ITAT) (please
       refer page 103 of the case laws paper book)


                                           12
                                                                         Adidas sourcing Ltd.
                                                                       ITA No. 5300/Del/2010


     -       DIT vs Ericsson AB (343 ITR 470) (Delhi HC) (please refer page
          112 of the case laws paper book)
     -        UTI vs P.K. Unny (249 ITR 612) (Bombay HC)


3.14. It is submitted that in view of the above decision of the Supreme
Court and in view of Circular in the relevant period, commission paid to
ASL for rendering services outside India is not taxable in India.


3.15.         Apropos AOs observations while categorizing assesses income as
FTS, ld. counsel contends that they are based on assumptions which are
contrary to plethora of case laws.


A.        Information collected from website is not sufficient to determine
         taxability of Income:



         AO has relied on the information available on the website of the Adidas
         Group, (www.adidas-group.com) which belongs to umbrella services
         and not purely of the assessee unit. Extracts from some other alleged
         website whose source is not specified. It has been assumed that the
         function of the assessee might not be restricted to mere commission
         agency. The website is for the entire Adidas group and is not
         specifically in the context of Indian operations.


B.       Advertisement for appointment of manager for Vietnamese
         operations:




                                             13
                                                                    Adidas sourcing Ltd.
                                                                  ITA No. 5300/Del/2010


     The AO has reproduced an advertisement from the internet in relation
     the hiring of a manager. This is an advertisement for Vietnam business
     operations and not for Indian operations which are primarily in the
     nature of sourcing operations. Thus the observations have been made
     without application of mind. Even if it is assumed the assessee has
     employed personnel who are technically qualified, still, it cannot be
     concluded that the assessee has been providing such technical services
     to AIMPL.


C.   Relationship between ASL and AIMPL held to be in the nature of
     principal agent relationship:



     AO has held that ASL had a major role in identifying, selecting and
     developing the suppliers for AIMPL and that ASL is involved in the
     role of consulting / guiding AIMPL on the products. However the AO
     has failed to provide any evidence to substantiate this assumption and
     merely placed reliance on the website of the whole Group and held that
     the assessee is providing consulting and managerial services to AIMPL.
     The AO has ignored the principal agent relationship between ASL and
     AIMPL and has held that ASL in its own capacity rendered managerial
     services to AIMPL. AO failed to appreciate that each manufacturer
     invoice quotes AIMPL as the buyer with assessee acting `as buying
     agent' of AIMPL. Thus not only the clauses of agreement but also the
     supporting documentations, actual conduct of the parties demonstrates
     that assessee worked as      a buying agent . It was accordingly
     remunerated for buying services commission and not FTS.

                                       14
                                                                      Adidas sourcing Ltd.
                                                                    ITA No. 5300/Del/2010




D.   Development of suppliers data base is out of assesses own business
     requirements and not a technical service to AIMPL



     The assessee being in the business of sourcing services, maintains a
     database in ordinary course of business to update the potential suppliers
     and give options to buyers for sourcing of the products. AO without
     appreciating the correct facts has assumed that ASL was providing
     services to AIMPL by building a database of suppliers. The AO has
     failed to appreciate the fact that AIMPL was only interested in the final
     products and the not the technical resources required for performing the
     services. Various Courts have held that while deciding such issues, the
     actual nature of services needs to be verified and services will not
     qualify as technical services merely because some sort of technical
     equipments or technology is used by the service provider.



E.   Commission received by the assessee does not include payment for
     any technology



     The AO in his order has concluded that the commission paid by
     AIMPL is for the inbuilt technology in the shoes manufactured by the
     suppliers and where this technology is supplied by ASL.




                                         15
                                                                        Adidas sourcing Ltd.
                                                                      ITA No. 5300/Del/2010


     However, it is submitted that the products, as a whole, are being sold to
     AIMPL by the manufacturers and not the technology used in
     manufacturing the product and AIMPL is only buying the product and
     is not paying for the use of the technology. Further reference is made
     on the case laws cited in para D above wherein the Courts have
     distinguished between technical services and technological driven
     services.



F.   Invoices generated from the same computer



     The AO has alleged that the invoices from the manufacturer seem to be
     generated from the same computer. Please refer page 19 of the
     assessment order. In this regard it is submitted that it is a common
     practice in the industry to standardize the processes and documents.
     Thus, as a part of the standard process the format of the invoices has
     been standardized by the assessee and all the manufacturers have been
     required to raise the invoice in the standard format. This
     standardization of the invoice format was desirable as it helps speed up
     the preparation and submission of the invoices (in digital format) ­ a
     process that is absolutely critical in the phase of export clearance in the
     origin country and import clearance in the recipient country.




                                          16
                                                                      Adidas sourcing Ltd.
                                                                    ITA No. 5300/Del/2010


G. The AO has further mentioned that the `management service
     agreement' and the BAS agreement are connected with each other and
     ASL has artificially split the functions performed by it.

     In this regard we would like to submit that both the agreements are
     different. Having said this, the differences between the two agreements
     can be explained as:



     (i)     two different and distinct Divisions of ASL which provide the
             buying agency services on the one hand and the management
             services on the other hand;

     (ii)    two different sets of agreements are in place; and

     (iii)   two distinct and differing methods for the remuneration have
             been agreed upon, there is ample evidence that the two
             arrangements are not connected with each other. This is also
             obvious from the fact that most of the Group entities (approx 80)
             utilize the `buying agency services' of ASL while only a small
             number of entities (approx 15 Asia Pacific Region distribution
             entities) receive the management services from ASL.


3.16.Further, it may be noted that both OECD TP Guidelines as well as
Indian regulations adhere to the principle that Revenue should analyse
transactions and the underlying contracts based on the transaction actually
undertaken by the associated enterprises as it has been structured by them
and should not re-characterize such transactions / contracts.



                                           17
                                                                      Adidas sourcing Ltd.
                                                                    ITA No. 5300/Del/2010


3.17. It is argued that rendering procurement services outside India does not
constitute a business connection of ASL in India as section 9(1)(i) of the Act
provides that, an income of a non-resident can be taxable in India if it is
attributable to a business connection in India. It is not in dispute that the
sourcing services provided to AIMPL by the assessee were render in India
nor does it constitute business connection in India. Therefore, commission
received by the appellant for services are not taxable in India under Section
9(1)(i) of the Act for following reasons:.

    -   All the activities performed by ASL for AIMPL are rendered outside India.
    - There is no nexus of the services performed by ASL with the sale of
        goods by AIMPL, which purchases the goods on its own account.
        Final authority in relation to the purchase of the goods is with AIMPL
        and not with the assessee in any manner.

1

    - There is no income attributable to India as no activities are performed
      in India.


    - Reliance is placed on the following case laws wherein it was held by
      the various Courts that since the business operations were carried out
      outside India, such income earned by the non-residents is not taxable
      in India:


    -       UPS SCS (Asia) Limited vs ADIT (50 SOT) (Mumbai ITAT)
        (please refer page 1 of the case laws paper book)

    -      CIT vs Toshoku Ltd (125 ITR 525) (Supreme Court) (please refer
        page 25 of the case laws paper book)

    -       CIT vs. EON Technology P. Limited (343 ITR 366) (Delhi HC)
        (please refer page 15 of the case laws paper book)
                                             18
                                                                      Adidas sourcing Ltd.
                                                                    ITA No. 5300/Del/2010




     -      A.B. Hotel Ltd. (Radison Hotel) vs DCIT (2008 25 SOT 368)
         (Delhi ITAT)


3.18. Applying the same principle to the facts there is no dispute that
assessee rendered services from outside India, i.e. Hong Kong and hence
ASL does not form a business connection in India.

3.19. Explanation 1(a) to section 9(1)(i) of the Act which provides that even
in case a non-resident has a business connection in India, then only such
income as is reasonably attributable to the operations carried out in India
shall be taxable in India. This has been upheld by AAR in the case Spahi
Projects Pvt. Ltd. (supra).

4.       Ld DR relied on the orders of AO and DRP and contends that the
Explanation 1(a) to section 9(1)(i) of the Act provides and inclusive
definition of the meaning of the term `fees for technical services' and
applying this inclusive test the payments received by the assessee are fees
for technical services. The Ld DR further argues that the compensation of
the assessee from AIMPL is more towards the efforts of the assessee in
relation to the manufacture rather than buying. The cost of manufacturing
technology is also built in the cost of products and the commission paid to
assessee thereby inferring that the payment of commission also includes
payment for technology giving it color of FTS. The Ld DR also relied on
the general extracts of Adidas website as pointed out by the AO in the
assessment order.


5.       We have heard the rival contentions and pursued the submissions
made by the parties in detail. The main issue for consideration is whether the
                                         19
                                                                          Adidas sourcing Ltd.
                                                                        ITA No. 5300/Del/2010


consideration received by the assessee from AIMPL under the Buying
Agency Services Agreement (`BAS') could be characterized as `fees for
technical services' under section 9(1)(vii) of the Act and accordingly by
taxed under the provisions of section 115A of the Act. Explanation 2 to
section 9(1)(vii) defines `fees for technical services' as under:


       Explanation 2.--For the purposes of this clause, "fees for
       technical services" means any consideration (including any lump
       sum consideration) for the rendering of any managerial,
       technical or consultancy services (including the provision of
       services of technical or other personnel) but does not include
       consideration for any construction, assembly, mining or like
       project undertaken by the recipient or consideration which
       would be income of the recipient chargeable under the head
       "Salaries".
5.1.    It is evident that for a particular stream of income to be characterized
as `fees for technical services', it is necessary that some sort of `managerial',
`technical' or `consultancy' services should have been rendered in
consideration. The terms `managerial', `technical' or `consultancy' do not
find a definition in the Income-tax Act, 1961 and it is a settled law that they
need to be interpreted based on their understanding in common parlance. Let
us examine the meaning of each of these words:

       Managerial : the Delhi High Court in the case of J.K. (Bombay) Ltd.
       vs. CBDT & Anr. (1979) 118 ITR 312 (Del) referred to an article on
       `Management Sciences' in Encyclopaedia 747, wherein it is stated that
       the management in organisations include at least the following: (a)
       discovering, developing, defining and evaluating the goals of the
       organisation and the alternative policies that will lead towards the
       goals; (b) getting the organisation to adopt the policies; (c) scrutinising

                                            20
                                                                          Adidas sourcing Ltd.
                                                                        ITA No. 5300/Del/2010


       the effectiveness of the policies that are adopted and (d) initiating steps
       to change policies when they are judged to be less effective than they
       ought to be. Management thus pervades all organizations.

       Technical : In the case of Skycell Communications Ltd. vs. DCIT (251
       ITR 53) (Madras), the Hon'ble High Court has held that the popular
       meaning associated with the word `technical' is `involving or
       concerning applied and industrial science'.

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

5.2.    Our attention was also brought to the decision of the Mumbai bench
of the ITAT in the case of Linde AG vs ITO (62 ITD 330) wherein it is
observed that:

       "In the definition for `fees for technical services' the
       consideration has to be for rendering technical, managerial or
       consultancy services. By making purchase for the Indian concern
       no consultancy services is provided as no advise is given to them.
       It is a simple procurement of equipments by the assessee for
       them. It is also not a technical service in the sense of technical
       education is concerned with teaching applied sciences and
       special training in applied sciences, technical procedures and
       skills required for practice of trade or profession, especially

                                            21
                                                                         Adidas sourcing Ltd.
                                                                       ITA No. 5300/Del/2010


       those involving the use of machinery or scientific equipment. If
       the information is given for the use of the machinery or scientific
       equipment it would partake the character of fees for technical
       services but when it is only for the procurement of the scientific
       equipments it would be a simple service of commercial and
       industrial nature. It, therefore, cannot be termed as a technical
       service for which the procurement fees charged by the assessee
       cannot be a consideration for technical services. The third
       category is managerial service. The managerial service, as
       aforesaid, is towards the adoption and carrying out the policies
       of a organisation. It is of permanent nature for the organisation
       as a whole. In making the stray purchases, it cannot be said that
       the assessee has been managing the affairs of the Indian concern
       or was rendering managerial services to the assessee."

5.3.    The copies of the Buying Agency Services agreement are placed on
record, the nature of services have not been disputed. Department has only
interpreted them to be amounting to ` Fees for Technical Services', in our
considered opinion these are not technical services but routine services
offered in the procurement assistance . The agreements demonstrate that the
assessee was to receive commission for procuring the products of AIMPL
and rendering incidental services for purchases. The primary services
provided by the assessee to AIMPL in terms of the Buying Agency Services
agreement are as under:

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

       (ii) assisting in negotiations,

                                           22
                                                                       Adidas sourcing Ltd.
                                                                     ITA No. 5300/Del/2010


       (iii) assist in procurement of samples and sending them to AIMPL,
       23(iv) maintain relationship with the manufacturers and search for new
       manufacturers,
       (v) supply credit reports and other marketing information concerning
       manufacturers and
       (vi) provide translation services as required for communication between
       AIMPL and the manufacturers.
5.4.    Applying the principles and case laws discussed above to the facts of
the present case, we are of the view that the services rendered by the
assessee in this case were purely in the nature of procurement services and
cannot be characterized as `managerial' `technical' or `consultancy'
services. Accordingly, the consideration received by the assessee was
appropriately classified as `commission' as against `fees for technical
services'.

5.5.    Ground Number 3 and 4 are inconsequential as no separate penalty
proceedings have been initiated so far and the Grounds about levy of interest
u/s 234 B, 234 D and 244 A are consequential in nature. Ground regarding
TDS credit will be verified by the AO in accordance with law.

6.     In view of the foregoings, assessee's appeal is allowed on above
terms.
Order pronounced in open court on 18-09-2012.
Sd/-                                                       Sd/-
( T.S. KAPOOR )                                     ( R.P. TOLANI )
ACCOUNTANT MEMBER                                   JUDICIAL MEMBER
Dated: 18-09-2012.
MP
Copy to :
   1. Assessee
   2. AO
   3. CIT
   4. CIT(A)
   5. DR
                                          23
       Adidas sourcing Ltd.
     ITA No. 5300/Del/2010




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