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TMI Blog2015 (12) TMI 1172X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant. 2.1 That the assessing officer/ DRP erred on facts and in law in not appreciating that the free samples were neither 'freebies' not 'gifts' and were distributed by the appellant to doctors/medical practitioners on the specific written request of the latter. 2.2 That the assessing officer/DRP erred on facts and in law in not appreciating that no personal benefit has been conferred by the appellant to doctors/ medical practitioners in as much as the above free samples were to be used by the patients only. 2.3 That the assessing officer/DRP erred on facts and in law in not following the order of DRP in appellant's own case for assessment year 2009-10 whereby similar disallowance made on account of free samples distributed to doctors/ medical practitioners were deleted. 3 That the assessing officer erred on facts and in law in making an addition of Rs. 88,85,591 on account of transfer pricing adjustment in respect of the 'international transaction' of business support services. On the basis of the order passed under section 92CA(3) of the Act by the TPO. 3.1 That the DRP/TPO erred on facts and in law in excluding the following companies from the set of comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 3.8 That the DRP/TPO erred on facts and in law in not allowing risk adjustment to establish comparability on account of the appellant being a low-risk bearing captive service provider as opposed to the comparable companies. 3.9 That on the facts and in the circumstances of the case and in law, the assessing officer/TPO erred in rejecting the contention of the appellant regarding risk adjustment, allegedly holding that in absence of robust and reliable data, both for the appellant and for the comparables, risk adjustment cannot be considered for enhancing comparability 4 That the assessing officer erred on facts and in law in levying interest under Section 234B and Section 234C of the Act." 3. The assessee is a wholly owned subsidiary of Eli Lilly Netherlands B.V. and engaged in the business of trading of formulations in the domestic market which is purchased from its AE's and third parties. It is also into marketing and selling of life saving drugs formulations that find usage in the treatment of several disease segments ranging from Oncology, CNS, Cardiovascular, Cancer, Infectious diseases, Endocrine, etc. The assessee filed its return of income on 13.10.2010 declaring a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... products by the doctor. As per clause (h) of Regulation 6.8 of IMC Regulations, 2002, which has been reproduced above, endorsement of any during or product of the industry is also prohibited. Thus, distribution of free samples to doctors to get endorsement from them in return is also violative of IMC regulations and consequently, violative of section 37(1) of the I.T. Act. Without prejudice to the above, the assessee' contention that distribution of free sample does not benefit doctors in any manner is also not acceptable. Free samples received by the doctor are given by the doctor to his/her patients, which helps in advancing his/her medical practice by generating goodwill. Lure of getting free medicine attracts more patents towards the doctor, thus benefiting his medical practice. Based on the observations above, expenses incurred towards free sample to doctors or medical practitioners are treated as disallowable. Disallowance of Rs. 5,42,19,943/- being expenses towards free sample to doctors is hereby made." 7. Being aggrieved, the assessee has come up in appeal before us and brought to our notice the Standard Operating Procedure ('SOP') adopted by the assessee to distribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmission from the competent concerned authorities. (ii) Ensure that such a research project(s) has the clearance of national/state/institutional ethics committee/bodies. (iii)Ensure that it fulfills all the legal requirements prescribed for medical research; (iv) Ensure that the source and amount of funding is publically disclosed at the beginning itself; (v) Ensure that proper care and facilities are provided to human volunteers, if they are necessary for the research project(s). (vi) Ensure that undue animal experimentations are not done and when these are necessary they are done in a scientific and humane way; (vii) Ensure that while accepting such an assignment a medical practitioner shall have the freedom to publish the results of the research in the greater interest of the society be inserting such a clause in the MOU or any other document/agreement for any such assignment. f) Maintaining Professional Autonomy: In dealing with pharmaceutical and allied healthcare industry a medical practitioner shall always ensure that there shall never by any compromise either with his/her own professional autonomy and/or with the autonomy and freedom of the medical institution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons shall be observed in the provision of samples to a person qualified to prescribe such product: (i) Such samples are provided on an exceptional basis only (see (ii) to (vii) below) and for the purpose of acquiring experience in dealing with such a product; (ii) Such sample packs shall be limited to prescribed dosages for three patients for required course of treatment; (iii) Any supply of such samples must be in response to a signed and dated request from the recipient; (iv) An adequate system of control and accountability must be maintained in respect of the supply of such samples; (v) Each sample pack shall not be larger than the smallest pack present in the market; (vi) Each sample shall be marked "free medical sample- not for sale" or bear another legend of analogous meaning; (vii) Each sample shall be accompanied by a copy of the most up-todate version of the Product information (As required in Drug and Cosmetic Act. 1940) relating to that product. 5.4 A pharmaceutical company shall not supply a sample of a drug which is an antidepressant, hypnotic, sedative or tranquillizer. 5.5 The companies will maintain details, such as product name, doctor name, Quant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that issue relating to allowance of expenses on sample distribution is squarely covered in favour of appellant by the order of DRP for the assessment year 2009-10 and therefore disallowance made may be deleted. 12. The ld. DR supported the action of the authorities below. 13. Having considered the rival submissions we find that in the immediately preceding assessment year DRP by an order dated 5.9.2013 had deleted the identical disallowance by observing as under: "6.11.3 The Panel has carefully considered the submissions made by the assessee and also gone through the relevant Act/Rules/ Guidelines. For understanding the intent of the government on this issue, it would be relevant to refer to the UCPMP and reproduce the relevant provisions. This is a voluntary code of marketing practices for Indian Pharmaceutical Industry for the present and its implementation will be reviewed after a period of implemented effectively by the Pharma Association/companies, the Government would consider making it a statutory code. 1...... 2...... 3...... 4....... 5 Samples 5.1 Free sample of drugs shall not be supplied to any person who is not qualified to prescribe such product. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for taking any gift, travel facility, hospitality, cash and medical grant from the pharma sector. The Government of India has clearly demarcated the operation nature of each term in the UCPMP, which has been discussed above and therefore, it cannot be said that the term 'Gift' covers free samples also. 6.11.5 Moreover a medical practitioner is bound by the IMC Regulations 2002. Para 7.8 of the said regulations read as under: 7.8 A registered medical practitioner shall not contravene the provisions of the Drugs and Cosmetics Act and regulations made there under. Accordingly 1 Prescribing steroids/psychotropic drugs when there is no absolute medical indications; 2 Selling schedule "H" and "L" drugs and poisions to the public except to his patient" In contravention of the above provisions shall constitute gross professional misconduct on the part of the physician." 6.11.6 It is noticed from the above that the medical practitioner is to adhere to the provisions of the Drugs and Cosmetics Act and regulations made there under. The relevant regulations 65(18) applicable to the license/distributor and regulation 95 regards as under: "65(18) No drug intended for distribution t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s held to be legally untenable. In support of the above conclusion reliance is placed on the judgment of Apex Court in the case of CIT vs. Excel Industries 358 ITR 295 wherein it has been held as under: "29. In Radhasoami Satsang Saomi Bagh v. Commissioner of Income Tax, [1992] 193 ITR 321 (SC) this Court did not think it appropriate to allow the reconsideration of an issue for a subsequent assessment year if the same "fundamental aspect" permeates in different assessment years. In arriving at this conclusion, this Court referred to an interesting passage from Hoystead v. Commissioner of Taxation, 1926 AC 155 (PC) wherein it was said: "Parties are not permitted to begin fresh litigation because of new views they may entertain of the law of the case, or new versions which they present as to what should be a proper apprehension by the court of the legal result either of the construction of the documents or the weight of certain circumstances. If this were permitted, litigation would have no end, except when legal ingenuity is exhausted. It is a principle of law that this cannot be permitted and there is abundant authority reiterating that principle. Thirdly, the same principle, n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Weighted average OP/TC (%) 1 Access India Advisor Limited 34.77% 2 Asian Business Exhibition and Conferences Ltd. 18.10% 3 Educational Consultant Ind Limited (Segment) (Technical assistance & HRD) 4.37% 4 ICRA Management Consulting Services Limited 0.06% 5 IDC (India) Limited 12.30% 6 In House Production Limited (Segment) (Healthcare division) 1.51% 7 ITDC Limited 5.31% 8 Ma Foi Global Services -0.54% 9 Ma Foi Management Consultants Limited 3.61% 10 Overseas Manpower Corpn. Limited 3.23% 11 Times Innovative Media Limited -2.21% Average 7.23% 20. It was submitted that since arithmetic average of the operating profit margin of the said comparables was computed at 7.23% and the price charged in its international transactions is more than the said arithmetical mean price, the price charged in the international transactions has been treated as at arm's length. 21. The Assessing Officer referred the matter to the TPO. The TPO, by an order dated 23rd January, 2014, under section 92CA(3) of the Act, computed the TP adjustment at Rs. 88,85,591/- (Rupees Eighty Eight Lacs Eighty Five Thousand Five Hundred and Ninety One). The TPO accept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not comparable 8 In House Production Limited (Segment) (Healthcare division) Functionally not comparable 9 Overseas Manpower Corpn. Limited Functionally not comparable 24. Also, the TPO brought following companies in the final set of comparable companies which were rejected by the assessee in its transfer pricing study on account of functional dissimilarity: Sr. No. Name of the Company OP/TC (%) 1 Aptico Limited 9.91% 2 Global Procurement Consultants Limited 37.19% 3 HCCA Business Services Pvt. Ltd. 20.05% 4 Quadrant communications Limited 13.11% 5 TSR Darashaw Limited 41.15% 6 Cameo Corporate Services Limited 8.26% 25. In pursuance thereof, the final set of 8 comparable companies considered by the TPO in the impugned order, having an average operating profits of 22.08% is as under: Sr. No. Name of the Company OP/TC (%) (without Forex) 1 Cyber Media India Online Limited formerly IDC (India) Limited 14.85% 2 Aptico Limited 40.09% 3 Global Procurement Consultants Limited 37.19% 4 HCCA Business Services Pvt. Ltd. 20.05% 5 Quadrant communications Limited 13.11% 6 TSR Darashaw Limited 41.15% 7 Cameo Corporate Services L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment, namely, 'Technical Assistance' and 'Human Resource' as comparable to the assessee and since the business of EDCIL and assessee has remained unchanged from preceding years, EDCIL continues to be comparable to the assessee and there exists no legitimate reason to reject the company in the year under consideration. The assessee placed his reliance on the judgment of Hon'ble Supreme Court in the case of CIT vs. Excel Industries Limited 358 ITR 295, wherein their Lordships reiterated the law laid down in Radhasoami Satsang vs. CIT 193 ITR 321 to hold that, where a fundamental aspect permeating through the different assessment years have been found as a fact one way or the other, and the parties have allowed the position to be sustained by not challenging the order, it is not allowed to change the position in any subsequent year. Having gone through the order dated 30.8.2012 for Assessment year 2008-09 in the case of appellant, it is stated that DRP has held in regard to the above comparable as under: "1 Educational Consultants India Ltd. (EDCIL) According to the assessee EDCIL offer support services in the following areas: Student placement Secondment of experts Technica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.80% Average 14.98% 23 Since, the operating profit to cost of the appellant at 9.82% is within the +/-5% range of the average operating profit to cost ratio of the aforesaid 10 comparable companies at 14.98%, the international transaction of provision of business support services of assessee during the relevant year is considered to be at arm's length and the adjustment made by the TPO in the impugned order is liable to be deleted, for this reason alone. The grounds are allowed to the extent discussed above." 31. Following the same EDCIL is held to be functionally comparable to the appellant and therefore included in the final set of comparable companies. 32. Now taking up M/s ITDC Ltd., the TPO/DRP has rejected the said comparable by holding that the event management segment as considered by the assessee as comparable does not match to the profile of the assessee. It was held that ITDC owns hotels, motels, inns, resorts providing short term lodging faculties including accommodation in house boats and hence this is not a suitable comparable. 33. The counsel for the assessee that ITDC operates in the following segments: * Hotel/Restaurants operations, * ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hcare delivery institutions and health professionals in India, which is similar to the information/knowledge being provided by the appellant to its associated enterprises on the market conditions in India and accordingly for the purposes of comparability analysis, the "Healthcare" segment of the company has been considered comparable to the appellant. Having considered the rival submission, we notice that the said company has also been considered comparable by the DRP in AY 2008-09 and AY 2009- 10. The relevant extract from the order of DRP for AY 2008-09 is as follows: "According to the assessee "the IHPL, the company has two main business segments, namely - Media Division and - Healthcare In the media division, the company is engaged in sale of programming software and right. Under the Healthcare division IHPL, provides access to information, relating healthcare technology including management, practices and knowledge database to healthcare delivery institutions and health professional in India. This is similar to information/knowledge being provided by the assessee to its AEs on industrial products related to automotive electronics and factory automation in India. Hen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... registrar and transfer agent activity, records management activity and payroll and trust activity in the annual report. In view of the above, it was submitted that the services provided by TSRDL are far more complex than the business support services provided by assessee to its AEs. The company is engaged in providing altogether different set of services and therefore it is functionally different from the appellant company. The assessee, in this regard, has also placed reliance on the of the Hon'ble Delhi Bench of Tribunal in the case of Microsoft Corporation India Pvt. Ltd. vs. DCIT in ITA No. 5766/Del/2011 wherein it was held that TSR Darashaw is not functionally comparable to the company providing marketing support services and was directed to be excluded from the final set of comparable companies. The learned DR supported the inclusion of said comparable. 43. Having considered the rival submissions it is seen that Delhi Bench of Tribunal in the case of M/s Microsoft Corporation Ltd. vs. DCIT ITA No. 5766/D/2011 has held that TSR Darashaw is not functionally comparable to the company providing marketing support services and has observed as under: "16. This company was chosen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion, we are of the considered opinion that the objection taken by the ld. DR in outrightly rejecting the assessee's contention, is untenable. 18. Coming to the merits of comparability, we find that this company has three segments, which inter alia include: 'Pay Roll and Trust Fund activity (Pay Roll).' It is this segment which has been considered by the assessee as comparable. This company on an overview is a broking and investment banking house. Its other segments are : 'Registrar and Transfer Agent activity (R&D)' and 'Records management activity (Records).' The segment of 'Pay Roll' was considered by the assessee as comparable in its TP study report and the same is now assailed. Under the 'Pay Roll' segment, this company undertakes pay roll and employee trust fund administration and management. When we compare the nature of pay roll activity undertaken by this company with the marketing support services rendered by the assessee to its AEs, we find that both are way apart from each other. There can be no logical comparison between a specific pay roll services rendered by a company to its clients with the marketing support services rendered by the assessee to its AEs. This comp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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