TMI Blog2020 (12) TMI 585X X X X Extracts X X X X X X X X Extracts X X X X ..... appreciate the fact that the international transactions of importing APIs and export of FDFs are within group companies. The manufacturing agreement in an unambiguous manner has restricted the assessee to manufacture for Sandoz and its affiliates. Since the import and export transactions are within the group concerns and manufacturing is carried out in accordance with the orders received from AEs, we have no hesitation in holding that there is live link of the import and export transactions. In the instant case the distinguishable facts are: The assessee has imported APIs from its AEs for manufacturing FDFs and has exported FDFs to its AEs under manufacturing arrangement. Thus, the entire international transactions of import and export is within the closed loop of AEs. The assessee has imported 17 APIs. The TPO accepted TNMM adopted by the assessee in respect of 15 APIs and applied CUP in respect of only two APIs. The TPO failed to find appropriate comparables for closely linked transactions. Hence, in the peculiar facts of the present case CUP cannot be adopted to benchmark the international transaction of import of APIs. Although in all the years the nature of interna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance by placing reliance on MCI Regulations and CBDT Circular - contentions of the assessee is that the expenditure has been incurred for conducting seminars and not on gifts and personal travelling expenses of Doctors - HELD THAT:- We find that this issue has been considered by the Tribunal in catena of appeals and has held that MCI Regulations does not apply on pharmaceutical companies. Thus, any expenditure incurred by pharmaceutical company on medical professionals is outside the scope of MCI guidelines - AO while dealing with this issue has out-rightly disallowed the amount claimed by the assessee. We deem it appropriate to restore this issue to the Assessing Officer for the limited purpose of verification of the expenditure and allow the same in accordance with our above finding. - ITA NO.2263 /MUM/2017, ITA NO.2264/MUM/2017, ITA NO.6815/MUM/2017 - - - Dated:- 10-9-2020 - Shri Vikas Awasthy, Judicial Member And Shri G. Manjunatha, Accountant Member For the Appellant : S/Shri Rajan Vora And Hemant Chandariya For the Respondent : S/Shri Anand Mohan And A. Mohan, CIT - DRs ORDER PER VIKAS AWASTHY, JM: These three appeals have been filed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... separate and independent as they are between different entities. 2.2. The TPO also made transfer pricing adjustment in respect of recoveries of cost of: - Material (APIs) to render contract development support services; and - Bioequivalence studies. The contention of the assesse is that the cost on above services are recovered from AEs on actual basis. The TPO held that the services are akin to services provided by the assesse under Contract Development support services and assessee s margin for the same is 34.45%. The TPO applied same mark-up on recoveries and made adjustment of ₹ 24,89,43,950/-. Thus, TPO vide order dated 22/1/2016 made adjustment of ₹ 42,87,26,152/- on the international transactions with AEs by the assessee. 2.3. The Assessing Officer while passing the draft assessment order made disallowance of ₹ 1,30,04,803/- u/s. 37(1) of the Act in respect of payments purportedly made to the Doctors. Aggrieved by the order of TPO and the disallowance made in the draft assessment order, the assessee filed objections before the Dispute Resolution Panel (DRP). The objections of the assesse on aforementioned adjustments/disallowances were reje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o different entities. The TPO has failed to appreciate the terms and conditions of the Manufacturing Agreement which was furnished before him. The ld. AR pointed that at page 404 to 406 of the paper book are the extracts from the Excise Register. The same would show export/consumption details of API (Mycophenolate Mofetil) used in manufacturing process. Ample documentary evidence was furnished before the TPO and the DRP to substantiate the contentions made on behalf of the assessee. The TPO and the DRP have failed to appreciate the cogent evidences produced by the assessee. 3.2. The ld. Authorized Representative for the assessee submitted that out of 17 APIs imported by the assessee from its AEs, the TPO objected to the import cost of only two AIPs i.e. Activated Carbon and Mycophenolate Mofetil. The assessee adopted TNMM as most appropriate method to benchmark its international transaction. The TPO rejected the same in respect of import of only two APIs and applied CUP to benchmark the transaction of import of Activated Carbon and Mycophenolate Mofetil. The ld. AR contended that the Tribunal in the case of UCB India Private Ltd. vs. Asst. CIT reported as 121 ITD 131 (Mum.) has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee in AY 2013-14. The ld. Authorized Representative of the assessee submitted that the assessee has been regularly importing APIs from AEs and after manufacturing FDFs, has been exporting the same to its AEs. In all the years the assessee has been consistently applying TNMM as the most appropriate method to benchmark its transaction. The nature of international transactions, i.e. import of APIs export of FDFs to AEs is on similar lines in all the years. 4. The ld. AR submitted that in ground of appeal No. 13 to 17, the assesse has assailed the adjustment made by the TPO/ directions of the DRP is in respect of recovery of cost of APIs and cost of bio-equivalence studies under the contract development services segment. The Ld. AR pointed that the cost is incurred in respect of those patents that are likely to expire. As per the terms and conditions of Service Agreement (page 495 to 510 of the paper book) the data compiled by the development centre is sent to the AEs. The cost of the services is billed by the assessee on internal cost + mark-up. The assessee also incurs some external cost on behalf of the AEs, like cost of procurement of APIs and bio-equivalent studie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of AIPs and bio-equivalence studies as integral part of contract development service activities. However, the DRP after considering the revised margin of operating cost vis-a-vis the margin earned by the comparable companies concluded that the cost of recoveries is at arm s length. The DRP after appreciating alternate plea of the assessee deleted the adjustment proposed by the TPO. 5. The ld. Authorized Representative of the assessee submitted that in ground of appeal No.18 to 22, the assessee has assailed disallowance of ₹ 1,30,04,803/- made under section 37(1) of the Act in respect of payments allegedly made to medical practitioners (Doctors). The ld. Authorized Representative for the assessee submitted that the payments were neither made to medical practitioners, nor made for purchasing gifts or sponsoring travelling expenses of the Doctors, the expenses were incurred towards conducting of seminars. The ld. Authorized Representative for the assessee pointed that Assessing Officer has made disallowance by referring to the code of conduct laid down by Indian Medical Council (Professional Conduct Etiquette and Ethics)Regulations 2002 ( in short MCI Regulations) and CBDT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to same entities, therefore, the TPO and the DRP were justified in holding that both the transactions are distinct and unconnected. 7.1 As regards Corporate Tax issue of disallowance under section 37(1) of the Act, the ld. Departmental Representative submitted that the issue can be restored to Assessing Officer for verification of the expenditure. FINDINGS: Transfer Prising Adjustments 8. We have heard the submissions made by rival sides and have perused the orders of authorities below. We have also examined the documents referred by the ld. Authorized Representative of the assessee during the course of his submissions and the decisions on which reliance has been placed by the rival sides. The ground No. 1 to 3 of the appeal are general in nature and hence, require no adjudication. In ground No.4 and 9 of the appeal, the assessee has impugned adjustment in relation to international transactions of import of APIs by the assessee. The said grounds are reproduced here in below:- On the facts and circumstances of the case and in law, the learned AO/Hon ble DRP/Joint Commissioner of Income Tax- Transfer Pricing-4(1) (hereinafter referred to as the learned TPO ) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c order in details. Manufacturer shall only accept orders from Sandoz or its Affiliates under this Agreement if they are in writing. Oral orders (telephone) shall only be accepted in exceptional cases (emergency) forwarding the written order without delay. Sandoz or its Affiliates will specify in the purchase order: - the Agreement Products ordered (including Specification) - volume - delivery schedule - packaging and Transportation, if applicable - the reference number of the respective purchase order. - the name of the Sandoz unit/affiliate issuing the purchase order and the country of destination and place of delivery. Article 4 Commercial Terms 4.1 The price for the individual agreement Product shall in general include the cost for the respective API and/or Bulk Product. The terms agreement product and affiliates as defined in Article 1 of the agreement are as under: Agreement Product shall mean any API, Medical Product, Bulk Product, Drug Product, as the case may be, which Sandoz orders from Manufacturer during the term of Agreement; Affiliate shall mean any corporation or other business entity which dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the schedule makes it explicitly clear that the cost of FDFs shall include cost of APIs and the cost of all inputs including APIs would be reimbursed without any mark up. It is only the manufacture/processing cost on which the assessee would be remunerated with mark-up of 15%. Since, the assessee would be reimbursed entire cost of APIs used in manufacturing of FDFs, there is no element of transfer of any profits to overseas AEs. Whatever cost the asseesee is paying to its AE for import of API, the same is added to the standard cost of inputs used for manufacturing FDFs and is recovered by exporting FDFs to AEs. 10. The assessee has imported 17 APIs from its AEs and applied TMNN to determine arm s length price of the import transactions. The TPO accepted TNMM in respect of 15 APIs and applied CUP to benchmark arm s length price of only 2 APIs. It is undisputed that the assessee does not have unfettered choice to select most appropriate method to benchmark international transactions. The method to benchmark arm s length price has to be selected in accordance with the provisions of the Act and Rules framed thereunder. However, TPO having accepted the method applied by asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e comparables for closely linked transactions. Hence, in the peculiar facts of the present case CUP cannot be adopted to benchmark the international transaction of import of APIs. 12. Ostensibly, the assessee has been consistently benchmarking its international transactions of import of APIs by adopting TNMM as the most appropriate method. The ld. Authorised Representative of the assessee has pointed that TPO has accepted the assessee s method of benchmarking in AY 2009-10, 2010-11, 2011-12 and AY 2014-15. The TPO has objected to applying TNMM in AY 2008-09, 2012-13 and 2013-14. Although in all the years the nature of international transactions and the product imported from AEs were same. In AY 2013-14 the objections of the assessee against the adjustment were accepted by the DRP and the adjustment was deleted. The Revenue accepted the same as no appeal against the findings of the DRP has been filed by the Department. These facts have not been refuted by the Revenue. No material has been brought on record to distinguish the facts in the impugned assessment year. 13. Be that as it may, once the TPO has accepted the cost of inputs determined by the assessee by applying TNMM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he above, erred in not considering that even if the recovery cost of APIs and cost of bio-equivalence studies are considered as an integral part of contract development support activity of the Appellant (i.e the aforesaid cost is included in the segment revenue and segment cost), the revised margin of 18.03% on operating cost would still meet the arm's length test as compared to comparable companies (i.e. 13.08% on operating cost); 17. without prejudice to the above, erred in making adjustment on total recovery of expenses from AEs amounting to ₹ 72,26,23,949 as against ₹ 70,32,77,988 being recovery from AEs in relation to cost of APIs and cost of bio-equivalence studies as per Form 3CEB; 16. The ld. Authorized Representative of the assessee has referred to service agreement at page 495 of the Paper Book. A perusal of the said agreement reveals that as per Article-3 of the agreement, the assessee (service provider) shall invoice on monthly basis the service charges for services rendered and the assessee shall be entitled to mark-up of 10% on internal services cost only. The ld.Authorized Representative of the assessee has fairly admitted that in assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts and dissemination of knowledge etc and not with a view to giving something free of charge to the doctors. The act of giving something free of charge is incidental to the main objective of product awareness. Accordingly, it does not amount to provision of freebies. Consequently, there is no question of contravention of the MCI Regulations and applicability of Circular no. 5 of 2012 for disallowance of the expenditure. 22. The department has not brought anything on record to show that the aforesaid regulation issued by Medical Council of India is meant for pharmaceutical companies in any manner. On the contrary, the assessee has brought to the notice of the bench the judgment of the Delhi High Court in the case of Max Hospital v. MCI in [WPC 1334 of 2013, dated 10- 1- 2014], wherein the Medical Council of India admitted that the Indian Medical Council Regulation of 2002 has jurisdiction to take action only against the medical practitioners and not to health sector industry. From the aforesaid decision, it is ostensibly clear that the Medical Council of India has no jurisdiction to pass any order or regulation against any hospital or any health care sector under its 2002 regu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity of 'Indian Medical Council Regulation 2002' by making it applicable to the pharmaceutical companies or allied health care sector industries. Such an enlargement of scope of MCI regulation to the pharmaceutical companies by the CBDT is without any enabling provisions either under the provisions of Income Tax Law or by any provisions under the Indian Medical Council Regulations. The CBDT cannot provide casus omissus to a statute or notification or any regulation which has not been expressly provided therein. The CBDT can tone down the rigours of law and ensure a fair enforcement of the provisions by issuing circulars and by clarifying the statutory provisions. CBDT circulars act like 'contemporanea expositio' in interpreting the statutory provisions and to ascertain the true meaning enunciated at the time when statute was enacted. However the CBDT in its power cannot create a new impairment adverse to an assessee or to a class of assessee without any sanction of law. The circular issued by the CBDT must confirm to tax laws and for purpose of giving administrative relief or for clarifying the provisions of law and cannot impose a burden on the assessee, leave alon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has stated at the Bar that he is not pressing grounds No.23 to 27 of the appeal. These grounds of appeal are dismissed, accordingly. 19. In ground No.28 of the appeal the assessee has assailed initiation of penalty proceedings under section 271(1)(c) of the Act. The challenging to penalty proceedings is premature at this stage. This ground of the appeal is dismissed, as such. 20. In the result, appeal of the assessee for assessment year 2012-13 is partly allowed in the terms aforesaid. ITA NO.2264/MUM/2017, A.Y. 2008-09: 21. This appeal by the assessee is against transfer pricing adjustment on import of APIs and recoveries of cost of APIs cost of Bio-equivalence studies under Contract Development Services agreement. Both the sides unanimously stated that the facts in assessment year 2008-09 are similar to TP adjustment made in assessment year 2012-13. The ld.Authorized Representative of the assessee stated that the submissions made in respect of appeal for 2012-13 would equally hold good for the appeal for assessment year 2008-09. 20. Both sides heard. We find that the TPO in assessment year 2008-09 has made transfer pricing adjustment only in respect of 2 AP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issed, as such. 24. The ground of appeal No.1 and 2 are general in nature, hence, require no adjudication. 25. In ground 3 and 4 of the appeal, the assessee has raised legal ground challenging the jurisdiction of TPO. The ld. Authorized Representative of the assessee stated at the Bar that grounds No.3 4 are not pressed. Both these grounds are dismissed, as such. 26. In the result, appeal of the assessee for assessment year 2008-09 is partly allowed. ITA NO.6815/MUM/2017, A.Y. 2013-14: 27. The assessee in appeal has raised two issues. The first issue is against adjustment of ₹ 75,19,986/- on account of MODVAT credit and closing stock under section 145A of the Act. The ld.Authorized Representative of the assessee stated at the Bar that this issue is not pressed. Accordingly, the issue raised in the grounds of appeal is dismissed as not pressed. 28. The second issue in appeal is with regard to disallowance of ₹ 78,84,160/- under section 37(1) of the Act on account of payment made to health care professionals(Doctors). This issue is identical to the one adjudicated by us in the appeal of assessee for assessment year 2012-13 above. Since the facts and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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