TaxTMI 
TaxTMI 
2018 (10) TMI 1752
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....INATION OF ARM'S LENGTH PRICE (ALP) FOR ADVERTISING, MARKETING AND PROMOTION (AMP) EXPENSE Ground Nos. 1.1 to 1.7 for Asst Year 2012-13 Ground Nos. 1.1 to 1.7 for Asst Year 2013-14 The facts of Asst Year 2012-13 are taken up for adjudication and the decision rendered thereon would apply with equal force for Asst Year 2013-14 also except with variance in figures. 2.1. The brief facts of this issue are that the assessee company performs value added distribution segment akin to secondary manufacturing i.e converts the raw materials imported from Associated Enterprises (AEs) into pharmaceutical formulations. The assessee does not possess any manufacturing facilities of its own. It outsources its entire production requirements to toll manufacturers / contract manufacturers on a licence basis. The company sources the various raw materials required to manufacture the formulations and gets it converted from third party toll-manufacturers. The return of income for the Asst Year 2012-13 was filed by the assessee company on 29.11.2012 declaring total income of Rs. 32,99,14,180/-. During the cour....
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....n Biosciences N.V. (hereinafter referred to as "Organon N.V.") by Schering- Plough from Akzo Nobel on November 19,2007, Organon India became a part of the Schering-Plough Group (hereinafter referred to as "SP Group"). With effect from 4th November, 2009, Organon India became a part of Merck & Co. pursuant to the merger of Merck & Co., Inc., USA and Schering-Plough Corporation. Organon India was formerly known as Infar (India) Limited, was incorporated on August 30,1967. The holding of Organon India which was 49% at the time of formation was reduced to 40% consequent to FERA regulations and thereafter increased to 51% in 1996. The shareholding pattern as on March 31,2012 is 99.99%. 2.3. As per the TP Study Report, the assesee company operated in various therapeutic areas including Cardio Vascular, Contraception, Fertility, Neuro / Ophtha / Anesthesia and Primary Care as under:- 2.4 Functions performed by Organon India 2.4.1 Functions performed by OIPL in the course of its manufacturing operations 2.4.1.1 Import of raw materials During the financial year 2011-12 Organon India imported raw materials from its related part....
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....according to the terms of the order. b. Production Scheduling At the time of preparing the annual production plan, the amount of capacity available for export is determined. Production is scheduled according to the delivery schedule for the exports. c. Quality Control Organon India has a well-established quality control system in place. Quality specifications for the entire process are established. These standards are monitored such that they meet the specifications at all stages of production. The entire cost of quality control is borne by Organon India. The quality control system is uniform for all products and does not differentiate between export and domestic production. d. Marketing For the goods which are exported to AEs no marketing activities are required to be done as the quantum of exports to be made are predetermined at the beginning of the year through production scheduling. These are confirmed sales. However, in the case of exports made to the third parties, advertisement and sales promotion activities are undertaken by Organon India. e. Packaging Organon I....
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....rganon India's supply chain is shown in the figure below: Organon India has several C&F agents in its distribution network. These C&F agents provide products to distributors, who directly then deal with stockist. The stockist caters to the requirements of the retailers. Organon India carries out all functions related to identification of products for distribution in the Indian market, obtaining necessary local government or regulatory approvals. a. Logistics Organon India determines and arranges logistics for import and domestic sale/export of finished b. Marketing and Promotion For the goods which are sold / exported to AEs no marketing activities are required. However, in case : sale/exports made to third parties, advertisement and marketing activities are undertaken by Organon India. c. Order booking from customers For exports to AEs, programme schedule is prepared at the beginning of the year and shipments are made depending on the delivery schedule sent by the buyer. In case of exports to unrelated parties, separate orders are received and shipment made according to the terms of the order. d. Order p....
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....en transactions. All market risks with respect to the product including customer acceptance are borne by OIPL both in case of exports and domestic sales for its import of raw materials. On the other hand, the AEs does not have any significant exposure to this risk in respect of sales made by Organon India. 2.4.9. Product liability risk Product liability risk is associated with product failures including non-performance to generally accepted or regulatory standards. This could result in product recalls and possible injuries to end- users. Product liability risks are borne by Organon India both in case of exports and domestic sales. However, any risk pertaining to the quality of API is not borne by Organon India with respect to the import of raw materials. On the other hand, the AEs does not have significant exposure to this risk in respect of sales made by Organon India. However, it bears the risk pertaining to the quality of API. 2.4.10. Technology Risk Technology risk arises if the market in which the company operates in is sensitive to introduction of products and technologies. Hence, in that case, business units may face lo....
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....activities are provided in table below: 2.5. The four international transactions reported hereinabove had been accepted at Arm's Length by the ld TPO and no adjustment to ALP was made in the order u/s 92CA(3) of the Act dated 28.1.2016 for the Asst Year 2012-13. 2.6. The ld TPO directed the assessee to submit complete details of advertisement and sales promotion expenditure including details of advertisement and matter dealt therein. The assessee was also asked to provide details of products which were advertised. The assessee submitted the details of expenditure incurred under the head AMP and selling expenses as under:- 2.7. The ld TPO issued show cause notice to the assessee on the ground that assessee had been developing the brands and the products owned by Merck Group and accordingly created marketing intangibles for the Merck Group, without being compensated for such activity. The list of AMP / Net Sales of the comparables selected by the assessee are as under along with AMP / Net Sales of Organon India :- The ld TPO show caused that if the average AMP / Net Sales of the comparables are applied, then the....
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....thin the arm's lendth range as per Indian TP regulations, the international transaction under review can be considered to be at arm's length. Further the assessee is into paying any royalty for use of trademark or making any other payment to its AE which could be considered as another form of concession or subsidy given by the AE. d) Without prejudice to the preliminary argument, that AMP expenses does not constitute an international transaction, it was pleaded that application of Bright Line Test (BLT) is not in consonance with Indian TP regulations. The assessee submitted that the methodology adopted by the ld TPO to benchmark the AMP expenses using BLT does not fall under any of the five prescribed methods in the Indian TP Regulations for computing the ALP of the international transactions. The sixth method in clause (f) of section 92C of the Act i.e 'such other method as may be prescribed by the Board' was not prescribed by the CBDT. Hence the five methods prescribed in the statute does not cover 'bright line test' (BLT) or the methodology followed by the ld TPO in the show cause notice. e) Without prejudice to the prelimina....
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....ointed out that the ld TPO had taken comparable companies from TP documentation maintied by the assessee company and determined average AMP spend of the comparable companies in relation to sales at 2.21%. For the case of the assessee, the ld TPO had determined the AMP spends to sales at 6.22%. However, as pointed out above, any expense which has been incurred by the assessee exclusively for the purpose of its own distribution channel requirement such as dealer / staff incentive, gifts, festival giveaways, market study expenses etc are required to be excluded from the AMP expenses for computation of such ratios. Once the selling and distribution expenses are excluded, then the ratio of AMP to sales for the assessee will come down to 2%. Hence the assessee had not incurred any excess AMP when compared to comparable companies and the adjustment as proposed in the show cause notice should not be valid. 3.3. The assessee also submitted that the ld TPO had proposed an adhoc mark up of 12% over and above the alleged excess AMP expenditure incurred by the assessee, which is erroneous. 4. The ld TPO observed that the assessee had provided ce....
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....the order of the ld TPO u/s 92CA(3) of the Act passed a draft assessment order is 143(3) / 144C of the Act and made an addition of Rs. 7,07,55,565/- to the total income. The assessee filed objections before the ld DRP against the adjustment made by the ld AO in the draft assessemnt order. The assessee submitted sample marketing material in respect of following products which are dealt by it before the ld DRP :- a) Deca Durabolin b) Novelon c) Recagon The assessee submitted the details of advertisement and sales promotion expenses of Rs. 35,98,000/- containing scientific session charges and journals as under:- The assessee also requested the ld DRP to admit and consider these evidences as additional evidences as the same could not be filed before the ld TPO / ld AO due to paucity of time or in absence of specific query by the ld TPO. 5.1. The ld DRP sought for a remand report from the ld TPO admitting the aforesaid evidences together with calling for further details to be filed by the assessee vide its remand proceedings in F.No.DRP-2/2016-17/669 dated 20.10.2016. The assessee duly submitted the requisite details before t....
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....oceedings. It was specifically clarified that there is no specific and separate licensing / trademark and technology agreement with its AE for assessee's operation. h) Information on brand royalty and the basis of setting the royalty rate. Group policy in this regard. Policy with regard to whether the AE undertakes to promote the market for the goods in India or any other country. And whether while fixing the royalty rate such factors are taken in to account and agreements governing royalty - In this regard, it was clarfied that the assessee does not pay any royalty to its AE, hence the same is not applicable. i) Information on the registration and patenting of trade and marketing intangibles like brand name, mark, trade name etc by the AE in India - In this regard, it was submitted that Merck Group owns the brand name and trademarks and Organon India (assessee herein) has only been granted an exclusive right to use the brand to sell the products in the designated territory. AE is the owner of all trademark / brand intangibles that it licenses. Accordingly, the ownership provides prerogatives of control - legal right....
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....he approach of the AE towards assessee's business is that of stewardship, consultative and facilitative , with assessee taking all its decisions on a bottom's up basis. o) Details fo list of personnel of the AE in regard to the marketing and advertising (DEMPE) functions along with the purpose as also the correspondence with regard to the objective of the visit - In this regard, it was submitted that no personnel from AEs had any involvement in the marketing and advertising functions of the assessee. Furhter, no employees of AE have visited assessee in this regard. p) Agreements with market research agencies, advertisement agencies, brand ambassadors, sponsorship agreement etc and the involvement of the AE in the selection of the same supported by bills / invoices - In this regard, the assaessee submitted on sample basis an agreement with market research agency and clarified that it does not have any brand ambassadors / sponsorship agreement with any third parties. Furtehr it was reiterated that the AEs of the assessee have no involvement in these activities altogether. q) Information along with evidence on all the risks assumed by taxpa....
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....gs on 17.1.2017. The ld AO in the final assessment order dated 31.1.2017 made an adjustment of Rs. 7,07,55,565/- towards AMP expenditure. Aggrieved, the assessee is in appeal before us. 6. We have heard the rival submissions. At the outset, there is no dispute on the selection of comparables for determination of ALP of AMP expenditure. We find that the assessee made preliminary objection that AMP expense should not be considered as an international transaction at all and hence the same need not be benchmarked for the purpose of determination of ALP. We find that the ld DR argued that the assessee is only a distribution company and not a manufacturing company and hence the decision of the Hon'ble Delhi High Court relied upon by the ld AR in the case of Maruti Suzuki India Ltd vs CIT reported in 381 ITR 117 (Del) does not support the case of the assessee. In this regard, we find that the assessee is engaged in both manufacturing and distribution of pharmaceutical formulations. We find that the assessee company outsources its entire production requirements to toll manufacturers / contract manufacturers on a licence basis. The assessee comp....
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....61. The claim of the Ld. AR is that the AMP transaction does not represent the international transaction between the AE's therefore no question of determining the ALP of AMP transactions. We find force in the argument of the ld. AR in the given facts and circumstances. Therefore, in our considered view the AMP cannot be regarded as international transaction. In holding so we find the support & guidance from the judgment of Hon'ble Delhi High Court in the case of Maruti Suzuki India Limited vs. CIT reported in 381 ITR 117 wherein it was held as under: "51. The result of the above discussion is that in the considered view of the court the Revenue has failed to demonstrate the existence of an international transaction only on account of the quantum of AMP expenditure by MSIL. Secondly, the Court is of the view that the decision in Sony Ericsson Mobile Communications India (P) Ltd. case (supra) holding that there is an international transaction as a result of the AMP expenses cannot be held to have answered the issue as far as the present Assessee MSIL is concerned since finding in Sony Ericsson to the above effect is in the context of those Assessees whose cases ....
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....facturers of it. Hence the incurrence of AMP expenditure in the instant case cannot be attributed as towards incurred for brand promotion of the AE, thereby requiring any compensation. 6.2. We find that the entire AMP expenditure has been incurred and paid only to third parties and not to AEs. The assessee pleaded that the same had been incurred for the purpose of its business and for its products and hence the same are not eligible to be compensated by the AEs. It was submitted that there was no transfer of marketing intangibles. The assessee also pleaded that it was not promoting any of the brands of the AEs in India in order to be eligible to be compensated. We find that the revenue had only assumed that the assessee had promoted the brand of the AE by incurring AMP expenditure in India thereby warranting any compensation. In this regard, we find lot of force in the arguments of the ld AR that the assessee had not paid any royalty or trademark fee to its AEs and had been benefitted by the excess premium return in the sale price of goods. The AMP expenditure is duly factored into the said pricing fixed by the AEs. In....
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....nbsp; In response to the same, the assessee furnished the details and on verification of the same, the ld AO noticed that the assessee had debited an amount of Rs. 32,50,000/- on account of 'Scientific Session Charges' and Rs. 3,48,000/- as journals. The assessee furnished party wise details of journals and scientific session charges along with TDS certificates issued by the assessee company to those parties. From the same, the ld AO observed that a sum of Rs. 12,50,000/- does not pertain to the year under consideration and break up of the same are as under:- Name of the Party Amount Asst Year as per TDS certificate Credence Hospital Pvt Ltd 4,00,000 2011-12 GET 2011 (Joseph Kurian) 4,00,000 2011-12 A H IVF and Infertility Research Centre Pvt Ltd 2,50,000 2011-12 Association of tamil Nadu Members of RCOG 2,00,000 2011-12 Since the aforesaid expenses related to prior period which is not allowable as deduction in the year under consideration, the ld AO disallowed the same in the final assessment order. Aggrieved, the assessee is in appeal befo....
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....atistical purposes. 9. DISALLOWANCE OF INTEREST ON SERVICE TAX - Rs. 1,257/- Ground No. 2.4 for Asst Year 2012-13 The brief facts of this issue are that the ld AO observed that the assessee company had debited an amount of Rs. 1,257/- under the head 'Finance cost' towards 'Interest on Service Tax' during the financial year 2011-12. The assessee had collected service tax but failed to deposit the same within due time. The service tax rule amended with effect from 1.4.2011 i.e. Asst Year 2012-13 and onwards, states that all service tax should be paid / deposited within the due time once invoice for the service provided or agreed to be provided is issued or when payment of service charges is received as to the extent of such payment (in case where invoices were not issued), whichever is earlier. The assessee in the instant case made delayed remittance of service tax which the ld AO considered as violation of service tax rule for which interest was paid by the assessee company. This was considered as penal in nature by the ld AO and was accordingly disallowed u/s 37 of the Act in the final assessment order. Aggrieved, the assess....
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....isk Organon India MSD API Suppliers High Low Low High Low High R&D risk Low High Credit Risk High Low Manpower Risk High Low Price Risk High Low Foreign Exchange Risk High Low Document 5 Particulars AMP SLE REPS PROMO-PRINT SALES PROM-MISC 25,291,215 Sales Promo-Dgm- ot Sales Promo-Home-Con EDUINFO--SPEAKERHO ADV-AGENCY FEES 6,665,047 CLINGRANTS/TRAILS Selling Expenses 26,210,736 20,021,512 19,222,444 6,953,430 4,134,005 Types of expenses Expenses for printed materials/Art work for promotional activity, detailing aids, Part of sales promotion expense and should not be part of AMP Brand communication fee, part of AMP expense. The expenses are mainly in nature of accommodation, airport pick up, food etc. Hence should not be part of AMP. The expenses are mainly in nature of accommodation, airport pick up, food etc. Hence should not be part of AMP Payment made to speaker of the conference as honorarium. Should not be part of AMP expense. Advertising Agencies fees for publishing advertisement/ Retai....