2023 (2) TMI 189 - AT - Income Tax

Appeals partly granted on raw material purchases, free samples, and sales promotion expenses. Interest and penalty issues dismissed.

M/s. Merk Limited Versus DCIT 7 (2) (1) Range 7 (2) (1) Mumbai And ACIT CIR 7 (2) (1), Mumbai Versus M/s. Merk Limited

M/s. Merk Limited Versus DCIT 7 (2) (1) Range 7 (2) (1) Mumbai And ACIT CIR 7 (2) (1), Mumbai Versus M/s. Merk Limited - TMI Issues Involved:1. Transfer Pricing Issues2. Disallowance under Section 14A3. Distribution of Free Samples4. Sales Promotion - Conference Expenses5. Interest under Section 234D6. Initiation of Penalty Proceedings under Section 271(1)(c)7. Deletion of Adjustment on Account of Technical Service8. Disallowance under Section 2(24)(x) read with Section 36(1)Detailed Analysis:1. Transfer Pricing Issues:The assessee challenged the rejection of the Transactional Net Margin Method (TNMM) and the adoption of the Comparable Uncontrolled Price (CUP) method for determining the arm's length price of raw materials purchased from associated enterprises (AE). The TPO had used data from Unichem Laboratories to determine the CUP, resulting in an adjustment of Rs. 93,28,708/-. The Tribunal upheld the use of the CUP method, following its previous decisions for earlier assessment years (A.Y. 2009-10 and 2010-11), but directed the AO/TPO to restrict the adjustment based on a simple average price method, reducing the adjustment substantially.2. Disallowance under Section 14A:The assessee contested the disallowance of Rs. 9,35,446/- under Section 14A read with Rule 8D, arguing that only Rs. 3 lakhs should be disallowed as proportionate salary cost. However, this ground was not pressed during the hearing and was dismissed.3. Distribution of Free Samples:The assessee argued against the disallowance of 50% of the expenditure on free samples distributed to doctors, amounting to Rs. 3,00,62,583/-. The Tribunal found that the distribution of free samples is directly related to business promotion and is not prohibited under any medical council guidelines. The Tribunal directed the lower authorities to delete the disallowance, following the precedent set in earlier years.4. Sales Promotion - Conference Expenses:The disallowance of Rs. 62,59,227/- incurred on sales promotion conferences was contested by the assessee. The Tribunal upheld the disallowance, citing the Supreme Court's decision in Apex Laboratories Pvt. Ltd. v. DCIT, which ruled against such expenses.5. Interest under Section 234D:The assessee contested the charging of interest under Section 234D amounting to Rs. 12,34,499/-. The Tribunal found the issue premature and dismissed this ground.6. Initiation of Penalty Proceedings under Section 271(1)(c):The assessee challenged the initiation of penalty proceedings under Section 271(1)(c). The Tribunal found the issue premature and dismissed this ground.7. Deletion of Adjustment on Account of Technical Service:The AO's appeal against the deletion of an adjustment for technical consultancy fees of Rs. 3,03,90,000/- was dismissed. The Tribunal followed the decision of the co-ordinate bench and the Bombay High Court, which had upheld the aggregation of technical fees with other international transactions and the application of the TNMM method.8. Disallowance under Section 2(24)(x) read with Section 36(1):The AO's appeal against the deletion of a disallowance for late payment of employees' contribution to ESIC amounting to Rs. 92,158/- was allowed. The Tribunal cited the Supreme Court's decision in Checkmate Services Pvt. Ltd. v. CIT, which ruled against the assessee on this issue.Conclusion:The Tribunal partly allowed the appeals of both the assessee and the AO. The adjustments for raw material purchases were directed to be recalculated, the disallowance of free samples was deleted, and the disallowance of sales promotion expenses was upheld. The interest and penalty issues were dismissed as premature. The adjustment for technical service fees was deleted, while the disallowance for late payment of employees' contributions was upheld.