TMI Blog2023 (2) TMI 760X X X X Extracts X X X X X X X X Extracts X X X X ..... ses - MCI Regulations applicable on pharmaceutical companies or not? - HELD THAT:- AO had primarily made disallowance by referring the CBDT Circular No.5/2012 dated 01.08.2012. In the larger interest of justice, in view of the latest judgment of M/s. Apex Laboratories Pvt. Ltd. [ 2022 (2) TMI 1114 - SUPREME COURT] which has examined the very same issue, it becomes necessary to examine the exact nature of expenses incurred by the assessee for Doctors from all angles. Therefore, for substantial question and cause, necessarily, the matter needs fresh verification by the A.O., especially in the light of the recent judgment of M/s. Apex Laboratories Pvt. Ltd. v. DCIT (supra) - the issues is remitted back to the AO to examine the details submitted in the light of the decision of the Apex Court after giving an opportunity of being heard to the assessee. It is ordered accordingly. Appeal by the assessee is partly allowed. - IT(TP)A No.224/Bang/2021 - - - Dated:- 19-12-2022 - SHRI N.V. VASUDEVAN, VICE PRESIDENT AND Ms. PADMAVATHY S, ACCOUNTANT MEMBER For the Appellant : Shri Percy Pardiwala, Sr. Counsel For the Respondent : Shri K. Sankar Ganesh, Jt.CIT(DR)(ITAT), Benga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd marketing services with effect from 01.04.2006. The TPO was of the view that incurring of AMP expenses by the assessee is enhancing the value of marketing intangibles of the AE and hence the assessee has to be compensated for the same. The TPO therefore treated the said expenses as a separate international transaction. The assessee submitted before the TPO that the sales and distribution expenses incurred by the assessee is not an international transaction and the incidental benefit accruing to the AE cannot be considered as provision of service. The assessee also submitted that when TNMM is applied analysing individual items of cost may not be appropriate and the bundled approach is relevant. The TPO computed the estimated percentage of AMP expenses incurred by the comparable companies @ 5.94% and accordingly worked out the excess AMP expenses incurred by the assessee as Rs.35,24,45,858 holding the same towards DEMPE function in favour of the AE. The TPO also arrived at the margin to be applied on AMP expenses based on the list of comparables median margin of 12.98% and accordingly arrived at the TP adjustment as below:- Particulars Amount ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e attributable to DEMPE of marketing intangibles owned by the AE and that such expenditure is a separate international transaction of provision of service. 2.2 Further, the TPO has discussed in para 9.4 of his order that the assessee has not been compensated for the sales and distribution expenditure incurred. It is seen that the TPO has proved that the assessee has incurred far more expenses when it was compared to the companies involved in similar activity. He has mentioned that the assessee has spent substantial portion of money on brand awareness activities. He concluded that this has enhanced the brand image in India. The fact remains that the brand is owned by its AE and hence, the AE has certainly benefitted by the expenses incurred by the assessee. However, the assessee has not been compensated for this. Ld. DRP was in agreement with the arguments of the TPO and found no reason to interfere with the order of the TPO on this ground. 2.3 Finally, the Ld. DRP followed the earlier order of Ld. DRP in assessment year 2012-13 and observed as under:- Having considered the submissions, (For above 4 grounds), it is observed from the perusal of the TP order (in par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distributors' commission, we are of the view that the cost relating to provision of warehousing, particularly the cold storage being provided by the distributors, needs to be excluded from the AMP. As per the Consignment Agency Agreement (CAG) entered by the assessee with M/s Parekh Integrated Services Pvt Ltd, Consignment Agent (CA), responsibility is cast on the CA by Clause 11 (a) to provide: (a) The CA shall provide work space equivalent to 500 square feet at the zonal offices and 300 square feet at other locations including two cabins for the zonal mangers of Alcon at the Zonal offices. It is agreed between the Parties that the area of the above work space(s) may be increased or decreased by Alcon as ....The work space provided at the zonal offices and other locations shall include telephone facilities and other accessories of an office premises including but not limited to chairs, tables. CA shall also provide table space with telephone facility for each of Alcon's Area Managers when visiting the CA's warehouses. The assessee is having distribution activities in 38 locations across India as per the submissions made by the assessee vide letter dated 25 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction of promoting and developing the marketing intangibles of the AE by assessee in India by using bright line test. It is the submission of the Ld.AR that, this is not a recognised method under the trans-uprising regulation. 9.4 The Ld.AR submitted that, there is no agreement between the assessee and the AE to make such expenditure in order to promote the intangibles of the AE in India. And in the absence of any specific requirement to make such expenditure on behalf of AE, the expenditures incurred by assessee cannot be treated to be an international transaction. In support, he placed reliance on the decision of Hon ble Delhi High Court in case of Maruti Suzuki India Ltd. vs. CIT, reported in 381 ITR 117 and M/s. Sony Ericsson Mobile Communications Pvt. Ltd. vs CIT reported in 374 ITR 118. 9.5 On the contrary the Ld. CIT.DR placed reliance on orders passed by authorities below. 9.6 We have perused submissions advanced by both sides in light of records placed before us. 9.7 We know that the DRP refused to follow the above decisions of Hon ble Delhi High Court by observing that these decisions have not been accepted by the Department and SLP has been filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a case of revenue that there existed an arrangement and agreement between the assessee-company and its foreign AE to incur AMP expenditure to promote brand value of its products on behalf of the foreign AE, merely because the assessee-company incurred more expenditure on AMP compared to the expenditure incurred by comparable companies, it cannot be inferred that there existed international transaction between assessee-company and its foreign AE. Therefore, the question of determination of ALP on such transaction does not arise. However, the transaction of expenditure on AMP should 'co treated as a part of aggregate of bundle of transactions on which TNMM should be applied in order to determine the ALP of its transactions with its AE. In other words, the transaction of expenditure on AMP cannot be treated as a separate transaction. In the present case, we find from the TP study that the operating profit cost to the total operating cost was adopted as Profit Level Indicator which means that the AMP expenditure was not considered as a part of the operating cost. This goes to show that the AMP expenditure was not subsumed in the operating profitability of the assessee-company. Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordingly, disposed of with no order as to costs. 17. The Hon'ble Delhi High Court in an other case of Maruti Suzuki India Ltd. Vs. CIT 381 ITR 117 (Delhi) held that the fact that the benefit of such AMP expenses would also ensure to the AE is itself insufficient to infer the existence of an international transaction. Similar decision was also rendered by the Hon'ble Delhi High Court in the case of CIT (LTU) v. Whirlpool of India Ltd., 381 ITR 154. The bright line test which was applied by the AO in the present case was also applied by the AO in the aforesaid cases. The bright line test which was accepted by the Special Bench of ITAT in the case of L.G. Electronics India Pvt. Ltd. v. ACIT (2013) 22 ITR (Trib.) 1 (Del)(SB) was held by the Hon'ble Delhi High Court to be not correct. In the case of Maruti Suzuki (supra), the facts were Maruti Suzuki India Ltd. (MSIL) was engaged in the manufacture of passenger cars in India. It was a subsidiary of SMC, a Japanese company. MSIL started its business in 1982 as a Government of India owned company. SMC was selected as the business partner independently by MSIL. The co-branded trade mark Maruti- Suzuki was used since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t deny that as far as the brand Suzuki was concerned its legal ownership vested with the foreign associated enterprise, i.e., SMC. Moreover as MSIL was concerned, its operating profit margin was 11.19 per cent. which was higher than that of the comparable companies whose profit margin was 4.04 per cent. Therefore, applying the transactional net margin method it must be stated that there was no question of a transfer pricing adjustment on account of advertisement, marketing and sales promotion expenditure. The advertisement, marketing and sales promotion expenses incurred by MSIL could not be treated and categorised as an international transaction under section 92B of the Act. 18. In the case of Whirlpool of India Ltd. (supra), it was held that there had to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the arm's length price. The transfer pricing adjustment was not expected to be made by deducing from the difference between the excessive advertising, marketing and sales promotion expenditure incurred by the assessee and the advertising, market ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MP expenses by comparing the expenses incurred by the Assessee with comparable companies. In view of the above conclusions, the other aspects whether the comparable companies chosen by the TPO are in fact comparable in terms of Functions performed, Assets employed and Risks assumed (FAR) analysis and other aspects of determination of ALP does not require any consideration. Therefore the addition made on account of determination of ALP of AMP expenses in AY 2011-12 to 2014- 15 is directed to be deleted. 10. In our view the above view by the coordinate bench requires to be followed, and there are no reasons whatsoever to take a different view. Respectfully following the above view, we redirect the Ld.AO/TPO to delete the addition made towards AMP expenses. 3.1 In view of the above order of the Tribunal, taking a consistent view, we allow these grounds taken by the assessee in both the appeals for the assessment years 2013-14 2014-15. 8. The facts being identical in the year consideration respectfully following the above decision, we direct the AO/TPO to delete the addition made towards ALP determined for AMP expenses. TP adjustment in IT support services - G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 92 42.6 32.71 10. Aspire Systems (India) Pvt. Ltd. 33.63 30.45 37.21 33.55 11. Infosys Ltd. 38.62 41.38 36.16 38.74 12 Thirdware Solutions Ltd. 30.18 42.46 48.17 39.86 13 Cybage Software Pvt. Ltd. 62.06 68.3 68.97 66.03 35th percentile 2 0.87 Median 25.64 65th Percentile 32.71 11. Accordingly the TPO arrived at the TP adjustment as given below:- Particulars Formula Amount (in Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt.Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a nonjurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra). 15. In view of the aforesaid decision, we hold that companies listed whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies. Exclusion of Inteq Software 16. The TPO held that the company is engaged in software development and therefore should be added as comparable. The DRP upheld the inclusion on the ground that the principle activity of the company is software development services and that the company satisfies various filters adopted by the TPO. 17. The ld. AR submitted that the company offers solutions which are in the nature of application development which involves providing full life cycle support that starts from requirement gathering phase and lasts till maintenance, trading of software products, software validation and a wide range of healthcare BPO services. The ld. AR submitted that in the annual report of the company, no s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssions and perused the materials available on record. In our opinion, this comparable was considered by the Hyderabad Tribunal in the case of ADP Pvt. Ltd. in ITA No.227 228/Hyd/2021 dated 3.2.2022 at para 7 page 3678 to 3680 wherein held as under:- 7. Infobeans Technologies Ltd.: The ld. AR of the assessee submitted that this company is functionally different for the following reasons: 1. It is engaged in diversified activities in the nature of custom application development, content management systems, enterprise mobility, big data analytics, 2. No change in the business as compared to last year 3. Leading provider of consulting technology next generation service. 4. There is abnormal increase in percentage of revenue from 35.35 crore to 62.06 crore. 5. It is also into IT enabled services i.e. business process management, HR and Payroll, commerce 6. No segmental details are available. 7.1 He relied on various decisions of ITAT including the decision in ITA No. 2233/Hyd/2018 for AY 2014-15 wherein this company is excluded as comparable. 7.2 The Ld. DR, on the other hand, submitted that this company is engaged in rendering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inal list of comparables. 18.1 Same view was taken by the Tribunal in the case of Global Logic India Pvt. Ltd. Vs. DCIT reported in (2022) 134 Taxmann.com 35 for the assessment year 2016-17. Respectfully following above judgement, we are inclined to direct the AO/TPO to exclude this company from the list of comparables. 19.**** 20.**** 21. We have heard the rival submissions and perused the materials available on record. This comparable has considered in the case of Global Logic India Pvt. Ltd. Vs. DCIT (2022) 134 Taxmann.com 35 for the assessment year 2016-17, wherein held as under:- 46. The taxpayer sought exclusion of Inteq again on account of functional dissimilarity being into providing outsourced product development services and Healthcare BPO services to its customers as per website extracted at pages 83 to 85 of the appeal memo set. It being a private limited company its financials are not available in the public domain. Its annual report made available at pages 848 to 909 of the annual reports paper book does not provide segmental profitability earned from software development services, outsourced product development services and Healthcare ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctors to recommend their optical -items and pharmaceutical products dealt within by the assessee to the patients. so that sales and profitability of the assessee company increases which clearly reflect that these are legal gratification which are prohibited by law. The CBDT brought a Circular No. 5 of 2012 dated 1-8-2012 which is clarificatory and clarifies that any expenses incurred in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations. 2002 shall be inadmissible under section 37(1) being an expense prohibited by the law. The law as stood during relevant previous year as per provisions of section 37(1) read with explanation inserted by Finance Act, 1998 with effect from 1-4- 1962 clearly stipulates that if an expenditure is incurred for any purpose which is an offence or which is prohibited under law shall not be allowed as deduction due to restriction contained under section 37(1) read with explanation. The said circular dated 1-8-2012 issued by the CBDT was subject to challenge in writ petition filed in Himachal Pradesh High Court in the case of Confederation of Pharmaceutical Industry v. CBDT writ petition No. 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amely the Indian Medical Council (Professional conduct, Etiquette and Ethics) Regulations, 2002 and hence these regulations shall be covered under the definition of law' and hence is covered under explanation to section 37. For claiming the expenses under section 37 which is a residuary sector', it is essential that the expenses are not covered under clauses of Sections 30 to 36 and are incurred wholly and exclusive for the purposes of business and it is not sufficient that it has some connection with the business of the assessee. Reliance is placed on the decision of Hon'ble ITAT !shortie in the case of ACIT vs. M/s. Live Healthcare Ltd dated September 12, 2016, [2016) 181 TTJ 433 (Mumbai Trib.) which squarely covers the facts of the case. 3.3 Out of expenses towards Seminar and Convention expenses and Sales promotion expenses, the expenditure incurred by the assessee company towards travel and stay charges amounts to Rs.1,58,88,337/- respectively. These expenses are construed as freebies given to doctors, Therefore in ins with the discussions made. these expenses are disallowed under section 37 of the IT Act. 24. The DRP upheld the disallowance by st ..... 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