2019 (9) TMI 1506 - HC - Income Tax

Court upholds Comparable Uncontrolled Price method for Arms Length Price, allows quality adjustment

The Court dismissed the appeal challenging the Tribunal's order. The Court upheld the application of the Comparable Uncontrolled Price method for ... TP Adjustment - adjustment of 10% on account of quality difference and deleting the addition made by TPO / AO by applying CUP to arrive at ALP in respect of Bisoprolol Fumerate without giving adjustment for quality as claimed by the assessee - HELD THAT:- The application of CUP method was what was canvassed by the Revenue and accepted by the Tribunal. Thus, there could be no grievance with regard to the application of CUP method. Similarly, the adjustment on account of quality as claimed by the assessee was allowed. This adjustment was in terms of Rule 10B(1) (a)(ii) of the Income Tax Rules. It is a fact of which judicial note can be taken that wherever even two products are identical, yet on account of perception there could be difference of the price in the open market. This has to be factored in while determining the ALP as has been recognized in the aforementioned rule 10B(1)(a)(ii) of the Income Tax Rules. TPO himself has accepted this price adjustment on account of perception of quality by allowing the adjustment at 10% in the Assessment Year 2010-11.In the above view, the question (a) as proposed does not give rise to any substantial question of law. Thus, not entertained. Adjustments in respect of technical consultancy fees - HELD THAT:- It is an agreed position between the parties that in the respondent’s own case for Assessment Year 2003-04, a similar issue had arisen viz. package of services being available under the agreement on as and when required basis. This Court by an order in Merck Ltd. [2016 (8) TMI 561 - BOMBAY HIGH COURT] held the fees paid for on bouquet of services as and when required, would be similar to retainer agreement. It is agreed by the Revenue that the above order dated 8th August, 2016 of this Court in the respondent’s own case will equally apply to the present facts. Disallowance on share buyback expenditure without appreciating that it is a capital expenditure and not allowable u/s. 37 - HELD THAT:- Following the decision of Delhi High court in CIT Vs. Selan Exploration Technology Ltd. [2009 (9) TMI 989 - DELHI HIGH COURT] as held that share buyback expenditure incurred by the respondent did not result in a benefit of an enduring nature as after the buyback the capital employed had gone down. Thus, the expenditure incurred has not resulted in bringing into existence any new asset, thus was not in the nature of the capital expenditure. On the aforesaid basis, the Delhi High Court held that once it is held that the expenditure is not capital in nature, then, the expenditure is allowable under Section 37 of the Act as a revenue expenditure as it was incurred for the benefit of existing shareholders in the ordinary course of business. Disallowance in respect of sales promotion and conference expenses incurred without appreciating that these expenses does not render any benefit to the assessee company and are against ethics - CIT-A deleted the addition - HELD THAT:- It is for the assessee to decide whether the expenditure should be incurred in the course of his business and once it is found that it is incurred wholly and exclusively for the purposes of business, then it is deductible under Section 37 of the Act. It further records that it is relevant to note that an attempt was made to introduce the word “necessity” in Section 37 of the Income Tax Bill of 1961. However, this had led to public protest and resulted in dropping the word “necessity” when the Income Tax bill of 1961 was passed into the Income Tax Act, 1961. Thus, the view of the Tribunal on this issue cannot be faulted Disallowance in respect of sales promotion and conference expenses incurred prior to date of amendment in the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 i.e. 10-12-2009 without adjudicating the issue - HELD THAT:- We did not think it fit to adjudicate the issue. In fact, the impugned order of the Tribunal records that the Revenue has not contested the issue before it. As the Revenue has not urged this issue of disallowance of expenses before the Tribunal, it cannot now be urged by the Revenue before us. This Court in Commissioner of Income Tax Vs. Mahalaxmi Glass Works Co. [2009 (4) TMI 182 - BOMBAY HIGH COURT] held that if a concession is made before the Tribunal, then on that issue no substantial question of law arises. Issues:1. Adjustment on account of quality difference for imported pharmaceutical ingredient.2. Deletion of adjustments in respect of technical consultancy fees.3. Disallowance on share buyback expenditure.4. Disallowance in respect of sales promotion and conference expenses.5. Disallowance in respect of sales promotion and conference expenses incurred before a specific date.Adjustment on account of quality difference for imported pharmaceutical ingredient:The respondent imported Bisoprolol Fumarate from an Associate Enterprise in Switzerland and sought to determine the Arms Length Price (ALP) based on Transactional Net Margin Method (TNMM). However, the Transfer Pricing Officer (TPO) applied the Comparable Uncontrolled Price (CUP) method and made adjustments. The Tribunal upheld the application of CUP method and allowed a quality adjustment of 10% based on Rule 10B(1)(a)(ii) of the Income Tax Rules. The Court found no substantial question of law in this regard and dismissed the appeal.Deletion of adjustments in respect of technical consultancy fees:The respondent had a consultancy agreement with an Associate Enterprise for technical consultancy services but did not avail the services. The TPO determined the ALP at Nil, but the Tribunal held that the respondent had the right to receive the services as per the agreement. Relying on previous decisions, the Court found no substantial question of law and dismissed the issue.Disallowance on share buyback expenditure:The Tribunal deleted the disallowance of expenses incurred in share buyback, following a Delhi High Court decision. The expenditure was considered revenue expenditure under Section 37 of the Act. The Court noted that similar issues had been decided in favor of the respondent in previous cases, leading to the dismissal of this issue.Disallowance in respect of sales promotion and conference expenses:The Assessing Officer disallowed sales promotion and conference expenses citing lack of evidence of benefit to the assessee. However, the Tribunal allowed the expenses as they were incurred for the purpose of business. The Court supported the Tribunal's decision based on Supreme Court precedents, emphasizing that expenses incurred for commercial expediency are deductible under Section 37 of the Act. No substantial question of law was found, leading to the dismissal of this issue.Disallowance in respect of sales promotion and conference expenses incurred before a specific date:The Tribunal chose not to adjudicate on this issue due to the small amount involved and the lack of contestation by the Revenue. The Court held that since the Revenue did not raise this issue before the Tribunal, it cannot be entertained later. Citing precedent, the Court dismissed this issue as it did not give rise to any substantial question of law.In conclusion, the appeal challenging the Tribunal's order was dismissed by the Court based on the detailed analysis and findings on each issue raised by the Revenue.