2019 (7) TMI 2063 - AT - Income Tax

ITAT Mumbai allows TP relief on AMP expenses, rejects Bright Line Test application

M/s. Edwards Lifesciences (India) Private Limited Versus Assistant Commissioner of Income Tax - Circle 9 (2) (2), Mumbai

The ITAT Mumbai ruled in favor of the assessee regarding TP adjustments on AMP expenses. The TPO had made ALP adjustments claiming the assessee incurred ... TP Adjustment - arm's length price (ALP) adjustment made towards advertising, marketing and promotion expenses (AMP) - TPO concluded that assessee had incurred the expenditure on conference expenses, marketing and promotion expenses on behalf of the AE and for the benefit of AE - HELD THAT:- It is a general statement about the group's business activity and its profile. It was argued that the lower authorities have picked up some lines from the annual report which was not apparently submitted by the assessee but rather obtained by the ld. TPO independently. It was specifically brought to the notice of the Bench that the Annual report relied upon by the lower authorities was not that of the AE which had given subvention income to the assessee herein. Therefore, it was submitted that the remarks made in one of the group entities annual report which had not even entered into any international transaction with the assessee cannot constitute any agreement or arrangement with the assessee and hence, cannot be relied upon. This was not controverted by the ld DR before us. We find lot of force in this specific argument of the ld. AR. We are inclined to grant relief to the assessee on the ground that subvention income received by the assessee is much more than even the entire ALP adjustment made by the ld. TPO and upheld by the ld. DRP towards advertising, marketing, sales promotion, conference expenses etc., and in view of this decision, the other arguments made by the ld. AR that the incurrence of said expenditure was only for its benefit in the form of increase in turn over and there was no brand building of AE pursuant to incurrence of such expenditure and that it does not fall within the ambit of an international transaction u/s.92B of the Act, need not be gone into. The Grounds raised by the assessee in this regard are disposed off accordingly. TPO had additionally applied Bright Line Test (BLT) to justify his adjustment to ALP - We find that the application of Bright Line Test has been negatived in the case of Maruti Suzuki India Ltd. [2015 (12) TMI 634 - DELHI HIGH COURT] Hence, the action of the lower authorities would not be justified even on that count. Disallowance of expenses incurred on surgeons / consultants forming part of marketing promotion expenses by applying CBDT circular No.5/2012 dated 01/08/2012 and provisions of explanation to Section 37(1) - We find that this issue is already decided in favour of the assessee in its own case by the order of this Tribunal in A.Y.2010-11 in [2018 (11) TMI 1124 - ITAT MUMBAI] as held nature of expenditure so incurred with reference to the judicial pronouncements referred above, we do not find any merit in the action of CIT(A) for upholding the expenditure incurred by assessee fully and exclusively for the purpose of business. ISSUES: Whether advertising, marketing and promotion (AMP) expenses incurred by a low risk distributor constitute an international transaction with the associated enterprise (AE) under Section 92B of the Income Tax Act. Whether the AMP expenses incurred by the assessee benefit the AE and require arm's length price (ALP) adjustment. Whether subvention income received from AE compensates the assessee for AMP expenses and precludes further ALP adjustment. Whether the application of the Bright Line Test (BLT) to AMP expenses for ALP adjustment is valid. Whether expenses incurred on surgeons/consultants as part of marketing promotion expenses are allowable deductions under the Income Tax Act, considering CBDT Circular No.5/2012 and the Explanation to Section 37(1) of the Act. RULINGS / HOLDINGS: The court held that the AMP expenses were incurred wholly and exclusively for the assessee's own business to create awareness and educate doctors about its products, and thus did not constitute an international transaction with the AE under Section 92B. The court found that even if the AMP expenses were considered as services rendered to the AE constituting an international transaction, the subvention income received by the assessee from the AE fully compensated these expenses, negating the need for any ALP adjustment. The court rejected the application of the Bright Line Test for ALP adjustment, noting that it was negatived by a higher court and thus not applicable. Regarding expenses on surgeons/consultants, the court allowed the expenditure, holding that such expenses are incurred for business purposes and are not prohibited by law or the Medical Council of India (MCI) regulations, and thus are deductible under the Income Tax Act. RATIONALE: The court applied the provisions of Section 92B of the Income Tax Act and its Explanation, which define 'international transaction' to include provision of services to AEs, but emphasized the factual context that the AMP expenses were for the assessee's own distribution business and did not confer benefit on the AE. The court relied on the subvention income arrangement under supplementary distribution agreements, whereby the AE compensates the assessee to maintain arm's length margins, concluding that this income effectively covers the AMP expenses, precluding double adjustment. The court referred to judicial precedent negating the Bright Line Test in transfer pricing matters, thereby disallowing its use for ALP adjustment in this case. For the disallowance of expenses on doctors/surgeons, the court examined the scope of MCI regulations and CBDT Circular No.5/2012, concluding that these apply only to medical practitioners and not to pharmaceutical or medical device companies, and that the expenses were incurred for legitimate business purposes such as training and product awareness. The court noted that the Explanation to Section 37(1) prohibits allowance of expenditure incurred for an offence or prohibited by law, which was not established in this case.