2023 (2) TMI 760 - AT - Income Tax

Appeal Partly Allowed: AMP Expenses Not a Separate Transaction, IT Support Comparables Upheld, Seminar Costs Re-evaluated.

The appeal was partly allowed. The ITAT directed the AO/TPO to delete the addition related to AMP expenses, as it should not be treated as a separate ... TP Adjustment - adjustment on account of excessive AMP expenditure - HELD THAT:- Tribunal in assessee’s own case for the AYs 2013-14 & 2014-15 [2022 (11) TMI 1321 - ITAT BANGALORE]directed the Ld.AO/TPO to delete the addition made towards AMP expenses. Adjustment in respect of IT support services - comparable selection - HELD THAT:- The Tribunal in the case of Autodesk India Pvt. Ltd. [2018 (7) TMI 1862 - ITAT BANGALORE] took note of all the conflicting decision on the issue and rendered its decision to held as that high turnover is a ground for excluding companies as not comparable with a company that has low turnover - thus 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. Inteq Software Pvt. Ltd and Infobeans Technologies Ltd., be excluded from the list of comparables. See Finastra Software Solutions [2022 (11) TMI 1320 - ITAT BANGALORE] Disallowance of seminars, conventions and sales promotion expenses - 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. Issues Involved:1. Adjustment on account of excessive AMP expenditure.2. Adjustment in respect of IT support services.3. Disallowance of expenses.4. Consequential grounds.Detailed Analysis:1. Adjustment on account of excessive AMP expenditure:The TPO observed that the assessee incurred AMP expenses of Rs. 9658 lakhs, which were deemed to enhance the marketing intangibles of the AE. The TPO treated these expenses as a separate international transaction and computed the excess AMP expenses incurred by the assessee as Rs. 35,24,45,858. The TPO applied a margin of 12.98%, arriving at a TP adjustment of Rs. 39,81,93,330. This was later rectified to Rs. 18,46,49,177. The DRP directed the TPO to reduce 25% of the distributor's commission from the AMP expenses, verify and rectify the AMP expenses of comparable companies, and exclude Killicks Agencies from the comparable list. Consequently, the TP adjustment was revised to Rs. 25,87,94,919. The Tribunal, referencing its own previous decisions, held that the AMP expenditure should not be treated as a separate transaction and directed the AO/TPO to delete the addition made towards AMP expenses.2. Adjustment in respect of IT support services:The assessee declared a margin of 13.04% in the IT service segment, applying the Transactional Net Margin Method (TNMM). The TPO, however, selected different comparables and arrived at a TP adjustment of Rs. 1,60,92,411. The DRP's directions resulted in a final list of comparables, but the assessee argued for the exclusion of certain comparables based on the upper turnover filter. The Tribunal upheld the exclusion of companies with turnover exceeding Rs. 200 crores and directed the exclusion of Inteq Software Pvt. Ltd. and Infobeans Technologies Ltd. based on functional dissimilarity and lack of segmental details.3. Disallowance of expenses:The AO disallowed Rs. 1,58,88,337 incurred on travel and stay charges under seminar and convention expenses, citing violation of Indian Medical Council regulations and CBDT Circular No. 5 of 2012. The DRP upheld this disallowance. The Tribunal noted that prior judicial pronouncements did not consider MCI regulations applicable to pharmaceutical companies. However, in light of the Supreme Court judgment in M/s. Apex Laboratories Pvt. Ltd. v. DCIT, the Tribunal remitted the issue back to the AO for fresh verification of the nature of expenses incurred by the assessee for doctors.4. Consequential grounds:Grounds 32 and 33 were deemed consequential and did not warrant separate adjudication.Conclusion:The appeal was partly allowed, with significant directions provided for the AO/TPO to re-evaluate the AMP expenses and IT support services adjustments, and to re-examine the disallowance of seminar and convention expenses in light of the Supreme Court judgment.