TaxTMI 
TaxTMI 
2015 (12) TMI 1172
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....30 as against the income of Rs. 16,75,13,196 returned by the appellant. 2.1 That the assessing officer/ DRP erred on facts and in law in not appreciating that the free samples were neither 'freebies' not 'gifts' and were distributed by the appellant to doctors/medical practitioners on the specific written request of the latter. 2.2 That the assessing officer/DRP erred on facts and in law in not appreciating that no personal benefit has been conferred by the appellant to doctors/ medical practitioners in as much as the above free samples were to be used by the patients only. 2.3 That the assessing officer/DRP erred on facts and in law in not following the order of DRP in appellant's own case for assessment year 2009-10 whereby similar disallowance made on account of free samples distributed to doctors/ medical practitioners were deleted. 3 That the assessing officer erred on facts and in law in making an addition of Rs. 88,85,591 on account of transfer pricing adjustment in respect of the 'international transaction' of business support services. On the basis of the order passed under section 92CA(3) of the Act by the TPO. 3.1 That the DRP....
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....hich was not discharged. 3.7 That the DRP/TPO erred on facts and in law in not being consistent in denying on the claim of working capital adjustment by the appellant, when the same has been allowed in case of the other assessee. 3.8 That the DRP/TPO erred on facts and in law in not allowing risk adjustment to establish comparability on account of the appellant being a low-risk bearing captive service provider as opposed to the comparable companies. 3.9 That on the facts and in the circumstances of the case and in law, the assessing officer/TPO erred in rejecting the contention of the appellant regarding risk adjustment, allegedly holding that in absence of robust and reliable data, both for the appellant and for the comparables, risk adjustment cannot be considered for enhancing comparability 4 That the assessing officer erred on facts and in law in levying interest under Section 234B and Section 234C of the Act." 3. The assessee is a wholly owned subsidiary of Eli Lilly Netherlands B.V. and engaged in the business of trading of formulations in the domestic market which is purchased from its AE's and third parties. It is also into marketing a....
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....n favour of assessee's medicines while recommending medicine to a patient. Thus, free sample are distributed to doctors so that they prescribe more and more of the assessee's products in preference to other manufacturers products. This amounts to soliciting endorsement of the assessee's products by the doctor. As per clause (h) of Regulation 6.8 of IMC Regulations, 2002, which has been reproduced above, endorsement of any during or product of the industry is also prohibited. Thus, distribution of free samples to doctors to get endorsement from them in return is also violative of IMC regulations and consequently, violative of section 37(1) of the I.T. Act. Without prejudice to the above, the assessee' contention that distribution of free sample does not benefit doctors in any manner is also not acceptable. Free samples received by the doctor are given by the doctor to his/her patients, which helps in advancing his/her medical practice by generating goodwill. Lure of getting free medicine attracts more patents towards the doctor, thus benefiting his medical practice. Based on the observations above, expenses incurred towards free sample to doctors or medical practit....
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....medical practitioner is obliged to know that the fulfilment of the following items (i) to (vii) will be imperative for undertaking any research assignment/project funded by industry for being proper and ethical. Thus, in accepting such a position a medical practitioner shall: (i) Ensure that the particular research proposal(s) has the due permission from the competent concerned authorities. (ii) Ensure that such a research project(s) has the clearance of national/state/institutional ethics committee/bodies. (iii)Ensure that it fulfills all the legal requirements prescribed for medical research; (iv) Ensure that the source and amount of funding is publically disclosed at the beginning itself; (v) Ensure that proper care and facilities are provided to human volunteers, if they are necessary for the research project(s). (vi) Ensure that undue animal experimentations are not done and when these are necessary they are done in a scientific and humane way; (vii) Ensure that while accepting such an assignment a medical practitioner shall have the freedom to publish the results of the research in the greater interest of the soci....
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....ference was drawn to the following extract from the aforesaid code: "5. Samples 5.1 Free samples of drugs shall not be supplied to any person who is not qualified to prescribe such product. 5.2 Where samples of products are distributed by a medical representative, the sample must be handed directly to a person qualified to prescribe such product or to a person authorized to receive the sample on their behalf. 5.3 The following conditions shall be observed in the provision of samples to a person qualified to prescribe such product: (i) Such samples are provided on an exceptional basis only (see (ii) to (vii) below) and for the purpose of acquiring experience in dealing with such a product; (ii) Such sample packs shall be limited to prescribed dosages for three patients for required course of treatment; (iii) Any supply of such samples must be in response to a signed and dated request from the recipient; (iv) An adequate system of control and accountability must be maintained in respect of the supply of such samples; (v) Each sample pack shall not be larger than the smallest pack present in the market; ....
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....d not by the doctor himself. It was submitted that such samples could not, in any manner, be said to be covered within the ambit of the term 'gift', much less conferring any benefit to such doctors/medical practitioners. 11. Further AR contended that similar disallowance of expenses on sample distribution was made while completing the assessment for the assessment year 2009-10 as well. It was submitted that assessee had challenged the said order before DRP and the DRP vide order dated 05.09.2013, inter alia, deleted the said disallowance. It was thus prayed that issue relating to allowance of expenses on sample distribution is squarely covered in favour of appellant by the order of DRP for the assessment year 2009-10 and therefore disallowance made may be deleted. 12. The ld. DR supported the action of the authorities below. 13. Having considered the rival submissions we find that in the immediately preceding assessment year DRP by an order dated 5.9.2013 had deleted the identical disallowance by observing as under: "6.11.3 The Panel has carefully considered the submissions made by the assessee and also gone through the relevant Act/Rules/ Guidelines. For under....
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....ties....... 7.2 Hospitality....... 7.3 Cash or monetary grants...... Where there is any item missing, the code of MCI as per "Indian Medical Council (professional conduct, etiquette and ethics) Regulation, 2002 as amended time to time will prevail" 6.11.4 Thus it is evident from the above that a clear distinction has been made between the free samples, gifts, travel facilities, hospitality and cash or monetary grants. It would accordingly be incorrect to put samples in the definition of gifts being separately categorized in Para 5 & 6 of the UCPMP respectively. It is noticed from the CBDT Circular No. 5/2012 that it refers the IMC Regulations 2002 which imposed a provision on the medical practitioner for taking any gift, travel facility, hospitality, cash and medical grant from the pharma sector. The Government of India has clearly demarcated the operation nature of each term in the UCPMP, which has been discussed above and therefore, it cannot be said that the term 'Gift' covers free samples also. 6.11.5 Moreover a medical practitioner is bound by the IMC Regulations 2002. Para 7.8 of the said regulations read as under: 7.8 A r....
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....dingly, such expenditure cannot be said to be disallowable u/s 37(1) of the Income-tax Act in the hands of the Pharma companies distributing such free samples to doctors. 6.11.8 In the light of the details discussion made above, the Panel holds that the free samples are not covered by the IMC regulations of 2002 (as amended in 2009) read with CBDT circular no. 5/2012, UCPMP and the Drugs and Cosmetic Act and regulations made there under. Accordingly the O is directed to delete the proposed addition on this account. Accordingly the AO is directed to delete the proposed addition on this account."(Emphasis supplied)" 14. The above order has acquired finality and no appeal there from has been preferred by the revenue. In light of the above and in accordance with principle of consistency the disallowance is held to be legally untenable. In support of the above conclusion reliance is placed on the judgment of Apex Court in the case of CIT vs. Excel Industries 358 ITR 295 wherein it has been held as under: "29. In Radhasoami Satsang Saomi Bagh v. Commissioner of Income Tax, [1992] 193 ITR 321 (SC) this Court did not think it appropriate to allow the reconsideration....
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....tted a Transfer Pricing Report adopting operating profits to the total cost as its profit level indicator (hereafter 'PLI') for the transfer pricing study. The assessee applied the transactional net margin method (hereafter 'TNMM'), which was considered to be the most appropriate method for the purposes of benchmarking the international transactions. The assessee's operating profit margin (i.e. operating profit/total cost) was computed at 9.26% and the assessee claimed that the same was comparable with other companies rendering business support services. For the purposes of the transfer pricing study, the assessee used multiple year data and chose 11 companies as comparable on the basis of the search conducted in the public data bases Prowess and Capital line plus and computed the weighted average mean as the result of the benchmarking analysis as under: Sr. No. Name of the Company Weighted average OP/TC (%) 1 Access India Advisor Limited 34.77% 2 Asian Business Exhibition and Conferences Ltd. 18.10% 3 Educational Consultant Ind Limited (Segment) (Technical assistance & HRD) 4.37% 4 ICRA Management Consulting Services Limited ....
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.... different from the taxpayer are excluded. 23. During the course of proceedings, the assessee submitted updated margin of comparable companies identified in the transfer pricing document with current year profits available for 9 companies. The TPO, applied the aforesaid criteria of acceptance/ rejection and accordingly, rejected/accepted following companies from the set of companies submitted by the assessee: Sr. No. Name of the Company Remarks of the TPO 1 Cyber Media India Online Limited formerly IDC (India) Limited This is a suitable comparable 2 Indus Technical & Financial Consultants Ltd. Fails turnover filter applied by the TPO 3 Educational Consultant Ind Limited (Segment) (Technical assistance & HRD) Functionally not comparable 4 HT Music & Entertainment Co. Ltd. Functionally not comparable 5 Ma Foi Global Search Services Ltd. Different year ending and it also fails positive networth filter 6 ICRA Management Consulting Services Limited Functionally not comparable 7 ITDC Limited (Segment) Functionally not comparable 8 In House Production Limited (Segment) (Healthcare division) Functionally no....
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....he learned counsel for the assessee during the course of hearing that once M/s Educational Consultant India Ltd., M/s ITDC Ltd. and M/s In House Production Ltd. are included in the set of comparables and furthermore M/s TSR Darashaw Ltd. is excluded from set of comparables, then the margin of the appellant is within the range. 29. Having regard to the above submission, we take up the comparable Educational Consultant India Limited (EDCIL) (Technical assistance & HRD) (Segment). The TPO/DRP has excluded the above comparable on the ground that the company is involved in educational consultancy business and is not providing any services, hence it is functionally different and cannot be accepted. 30. Having considered the rival submissions we find that the aforesaid company was held to be valid comparable in our own order for Assessment year 2009-10 by holding as under: "19 We have heard the rival submissions and, perused the material on record. In the present case, the assessee wants inclusion of EDCIL, a government company, in the final set of comparables adopted by TPO/DRP. The assessee inter-alia submitted that in the appellants own case for the assessment year 2008-....
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.... the facts for the instant assessment year, the AO/DRP is directed to include EDCIL in the final set of comparable companies. Reliance in this regard is placed on the following observation of the Mumbai Bench of the Tribunal in the case of ACIT vs. NGC Network India (P) Ltd. 10 taxmann.com 140 wherein it has been held as under: "These comparables and the method of computation of arm's length price has been accepted by the department in the subsequent assessment year i.e. 2004-05. Therefore in our view comparables selected by the assessee have to be adopted for the purpose of computation of transfer pricing adjustments this year also." 22 Thus, after including EDCIL in the final set of comparable companies considered by the TPO, the average operating profit to cost margin of the comparable companies works out to 14.98%, as under: Sr. No. Name of the Company OP/TC (%) 1 Best Mulyankan Consultants Ltd. 9.91% 2 IDC (India) Ltd. 10.46% 3 Basiz Fund Services Pvt. Ltd. 46.75% 4 Indus Technical & Financial Consultants Ltd. 6.45% 5 Immacs Management Services Ltd. 14.54% 6 Shristi Urban Infrastructure Development L....
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....to the nature of services rendered by the assessee to its AEs. The services rendered by the company under the ARMS segment, as noted from the website of the company are reproduced as under: "Management Consultancy and Advisory Services: These envisage assistance in project management, recruitment of personnel, imparting in-house on-the-job-training of hotel staff. ITDC can also offer group-marketing services through its network of Ashok Reservation and Marketing Services (ARMS) all over India. * Preparation of cost-benefit analysis and budgetary support * Operation of hotels, business centres, convention halls, banqueting, etc. * Preparation of Master Plans for development of tourism." 37. In view of the above ITDC is directed to be included in the final set of comparables. 38. So far as M/s In House Production Ltd., it is noted that TPO/DR excluded the said comparable on the ground that such company is an ITES company engaged in medical transcription. He has held that during financial year 2009-10 as per prowess database 69.33% of its income was from medical BPO and 15.05% from programme rights and hence it is functionally different and was r....
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.... This is similar to information/knowledge being provided by the assessee to its AEs. Hence, this division is comparable to the assessee. DRP has examined the above contentions and submission of the assessee. We find that functionally it is comparable for computing ALP. 40. Having regard to the above we find force in the submission of assessee and as such direct the inclusion of M/s In House Production Ltd. 41. Further so far as M/s TSR Darashaw Ltd. is concerned, the TPO/DRP have held that the said company is engaged in BPO services, payroll processing services, registrar and transfer agents services etc. which are in the nature of business support services and therefore was retained as a comparable in the final set of comparables. 42. The learned AR submitted that the TPO has included TSR Darashaw Ltd. in the final set of companies with an operating profit margin of 41.15%. In this regard, it was submitted that the company is a BPO Company providing payroll process outsourcing services to its customers. It was further submitted that during the year under consideration, the company has selected a new global payroll ERP application called RAMCO for its fast growin....
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....gainst correctness. If the assessee inadvertently includes a company in its final set of comparables, which is, in fact, not comparable, he has a right to agitate before the authorities that this company may be excluded. This right of the assessee does not, in any manner, prejudice the powers of the authorities to examine the comparability of the company which is sought to be excluded. If, on making such an analysis, the authorities find that the company so agitated as functionally incomparable, is comparable, then there can be no reason to exclude the same. If, however, the company turns out to be functionally dissimilar from the assessee, then, there can be no rationale in continuing to treat it as comparable despite the functional variation. The crux is that what really matters is the actual comparability and not the wrong view canvassed by the assessee in the original reporting. What is true for the assessee is equally true for the Revenue as well. The authorities are fully competent to consider the comparability of the companies treated by the assessee as comparable. If the analysis undertaken by the TPO shows that some of the companies so construed by the assessee as comparab....