TaxTMI 
TaxTMI 
2019 (1) TMI 1674
X X X X Extracts X X X X
X X X X Extracts X X X X
....d in assessee's appeal for assessment year 2007-2008 is as to whether the ld.DRP was justified in upholding the Arm's Length adjustment made in respect of marketing expenses of Rs. 79,04,690 and cost allocation of Central Service Charges of Rs. 15,74,895 in the facts and circumstances of the case. 4. The brief facts of this issue are that the assessee is a downstream subsidiary of Abbott Laboratories, USA and engaged in distribution of healthcare products. 99.99% of assessee's shareholding is held by Abbott, Asia Holdings Limited, which in turn is a 100% subsidiary of Abbott, USA. The assessee imports healthcare products from its Associate Enterprises (AEs) for distribution in India. The assessee has entered into following international transactions:- Name of International Transaction Value (in Rs.) Method selected Import of healthcare products 1,07,37,92,605 Transactional Net Margin Method Central Service Charges - Cost Allocations 1,24,26,530 Transactional Net Margin method. Provision of Support Services 57,95,965 As per the note in Form No.3CEB Reimbursement of expenses (Receipts) 47,63,131 Comparable Uncontrolled Price....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y authorities is supplied by AHPL's AEs, which have undertaken the R&D to develop the products. Abbott has already registered these products in key markets. Accordingly, it possesses a great deal of data relevant to obtaining the approval in addition to product details. This information is also instrumental in assisting with the launch of and the marketing of the product in the Indian market place. b. Manufacturing 4.4.7 The supplying AEs carry out the manufacturing of the products sold in India, by AHPL, confirming international manufacturing standards. All product upgrades are also developed by these AEs. Hence, AHPL being a part of the Abbott group derives the benefit of procuring the finished products and promoting them in India. c. Marketing support 4.4.8 New product pre-marketing activities and training to the product management team is also one of the important activities that is carried out by the Abbott group. Apart from providing training in the latest techniques and practices in marketing, the focus and emphasis is on delivering quality products to customers and regular service to them in terms of medical product literature. Abbott....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Marketing 4.4.14 AHPL carries out marketing function in respect of the products imported from its AEs. AHPL carries out market study and analysis. AHPL also carries out competitor analysis, ascertaining price data of similar products, market trends, etc. Further, AHPL's large field force of marketing representatives pay field visits to doctors and participate in medical conferences. As regards imports of reagents and diagnostic equipments, AHPL leverages on the promotional, scientific and technical materials developed by Abbott Germany/Additionally Abbott Germany provides AHPL service engineers with scientific and technical product training and other necessary support to enable' AHPL's employees market tile same effectively in Indio/ Further, AHPL makes use of some direct advertising (e.g. email newsletters and medical device trade journal advertisement) to increase awareness. AHPL also participates in industry trade shows and congresses in order to exhibit its product offerings. The marketing groups,approach prospective customers on a one-to-one basis.Live demonstrations,product, training, etc. are some of the marketing tools used by the marketing groups. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....iates and agrees to reimburse Abbott GmbH & Co. KG directly for the portion of costs of the Service Center allocable to AHPL for availing services in the areas of strategic sales and marketing support; personnel support, training and product support; accounting, finance and MIS support. The participants to the agreement have realized that such services can be provided more effectively and efficiently for the group as a whole from a central location. 4.4.20 These services are in the nature of shared services and are therefore customized for the Abbott Group. The said services are mainly related to healthcare products. The transaction entered into by AHPL is identified as cost allocation. Further, based on the information available from AHPL, the basis of allocation to other Abbott affiliates is the same and there is no markup/profit element in the said charge. SUPPORT SERVICES 4.4.21 During the financial year 2006-2007, AHPL has rendered' incidental support services to Abbott Vascular Devices Holland BV, Netherlands and Abbott Laboratories Intl. Co, USA. The said associated enterprises have reimbursed the personnel costs in this regard to the assessee ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sk relates to the potential impart on profits that may arise because of changes in foreign exchange rates. AHPL and its associated enterprises faces currency risk. The respective Finance departments continuously monitors the foreign exchange risk, and tries to hedge it adequately, as and when required. Credit Risk : This is the risk arising from non-payment of dues by customers. Credit risk arises as a result of sales to Indian customers is borne by AHPL. As regards the prime transaction discussed, the AEs are exposed to the credit risk. 8. The assessee, based on the Transfer Pricing Study Report, characterized itself as distributor exposed to normal risks while carrying out such business, which was accepted by the ld.TPO. 9. The ld.TPO observed that during the course of proceedings, the assessee was asked to submit details of Central Services Charges - cost allocation, which was submitted vide reply letter dated 17.09.2010. The ld.TPO observed that the assessee was not able to show as to how the gross allocation base was computed by the AE at Germany. The assessee has claimed to have allocated following expenses out of gross base computed by its AE at Germany:- (....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... support services. The said agreement also provided that an independent Accountant shall be appointed by mutual agreement by the parties so that the final cost allocation established by Abbott GmbH and in order to capture the total cost incurred by Abbott GmbH and the corresponding cost allocation made to respective participating countries including the assessee. Such audit certificate shall be circulated to each of the participant countries upon request made by them. (ii) Copy of certificate issued by Deloitte & Touche GmbH certifying the total cost incurred by Abbott Germany and cost allocation to respective participating countries including the assessee. As per the said certificate, the total cost incurred by the AE was 33135000 Euros and the cost allocated to Indian company, i.e., the assessee was 239000 Euros working out to 0.72% being the share of Indian company based on turnover. The said total cost of 239000 Euros allocated to assessee-company comprises of the following:- (i) Sales and Marketing Expenses 1,33,000 Euros (ii) Personnel Expenses 8,000 Euros (iii) Training Expenses 48,000 Euros (iv) Account and Miscellane....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... manufacturer at arm's length. (ii) TPO has clearly observed that the average amount spent on marketing of comparable companies is only 3.85% and assessee is spending 4.37%. Thus the assessee already incurring itself on advertisement and marketing what an independent distributor in India is expected to spend or spending advertisement and marketing. (iii) The assessee has not shown/demonstrated as to how an arm's length distributor has borne such expenses. 6.11 Considering the totality of the facts and circumstances of the case, the TP adjustment of Rs. 94,79,585/- is approved, for the reasons given above by the DRP." 13. Aggrieved, the assessee is in appeal before us. 14. We have heard the rival submissions. At the outset, we find that the assessee pursuant to the Service Centre Agreement had shared the cost towards Central Services Charges in respect of sales and marketing expenses; accounting; finance and MIS support services; training and product support services; and personnel support services. The assessee being participant to the Service Centre Agreement entered into by Abbott GmbH with various Abbott affiliates had to absorb certain c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s launched in India. 3.2.3 Accounting Finance and MIS support services: ITS (Instrument tracking system), SEAS (Service Equipment Accounting System), DFAIFLEX are few package installed in AHPL. which are being maintained by Abbott GmbH, Germany. ITS system is used to track Instrument location in India whereas SEAS is used to calculate service equipment amortization and DFAIFLEX is used to generate reports by PGN for analysis, control and If necessary take corrective action. It is also a planning tool used to forecast and is also used for MIS. India also uses ADOC (order entry) and FMS (margin tracking) systems. 3.2.4 Personnel Support Services: HR functioning in Germany comes up with Incentive scheme for sales manager and then they also approve the same." 15. The ld.TPO determined the arm's length price of sales and marketing support services to the tune of 133000 Euros equivalent to Rs. 79,04,690 at Rs.Nil and made adjustment to the same in transfer pricing order u/s 92CA(2) of the Act. We find that the assessee had justified the same in the following manner:- (a) The assessee gets characterized as a normal risk distributor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ientific promotion of the products through participation in medical meetings, both in India and abroad. Obviously, the AEs at global level had to incur expenses for rendering these services, which are meant for all participating countries across the globe. Hence, those costs ought to be shared by all the participating companies. It is not disputed that the total cost incurred by the group and the cost allocation made to assessee-company under each head was duly certified by an independent Accountant, who was appointed for this specific purpose in accordance with the conditions laid out in the Service Centre Agreement. When such costs that had been allocated to the assessee-company had been absorbed by making the payment to AEs for the services rendered by AEs (which is not disputed by the Revenue before us), then the action of the lower authorities in determining the arm's length price of such services at Rs.Nil is unwarranted. 17. We also find from one of the functions performed by the assessee-company is towards "Market Research and Strategic Marketing". Under this category, the assessee carries out marketing functions in respect of the product imported from its AEs. Apart....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... "21. We have considered rival submissions and perused materials on record in the light of decisions relied upon. Though, the Transfer Pricing Officer has alleged that the assessee failed to furnish any evidence to substantiate its claim that the payment made to the AE for availing Information System Services, however, the material on record reveal that the assessee has not only undertaken a bench marking process for determining the arm's length price of the transaction in the transfer pricing study report which was filed before the Transfer Pricing Officer, but, other relevant and necessary documents like copy of the agreement, invoices raised, certificate from independent Chartered Accountant Firm, KPMG, details of users were also furnished before the Transfer Pricing Officer. Therefore, the allegation of the Transfer Pricing Officer that the assessee has not furnished the necessary details is not totally correct. In any case of the matter, non-furnishing of certain documentary evidences, as alleged by the Transfer Pricing Officer, does not empower him to embark on determining the arm's length price of the international transaction on estimation basis. Further, a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....over, when the Transfer Pricing Officer himself agrees that the AE has provided software and certain services, there is no reason for not accepting the payment made to the AE to be at arm's length in the absence of any contrary evidence brought on record and by simply applying the benefit test. If the Transfer Pricing Officer did not agree to the arm's length price shown by the assessee it was open for him to determine the arm's length price by applying one of the most appropriate methods being backed by supporting material. Without complying to the statutory provisions, the Transfer Pricing Officer certainly cannot determine the arm's length price on ad-hoc/estimation basis. Our reasoning in paragraph 11 to 15 will equally apply to this issue also. Accordingly, we delete the adjustment made to the arm's length price of payment made towards availing information system services from AE. This ground is allowed." 20. We also find that the co-ordinate Bench of this Tribunal in the case of Dresser Rand India (P.) Ltd. v. Addl. CIT [2011] 13 taxmann.com 82/[2012] 53 SOT 173 under similar circumstances had held as under:- '8. We find that the basic reas....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ve paid for the same. Similarly, whether the AE gave the same services to the assessee in the preceding years without any consideration or not is also irrelevant. The AE may have given the same service on gratuitous basis in the earlier period, but that does not mean that arm's length price of these services is 'nil'. The authorities below have been swayed by the considerations which are not at all relevant in the context of determining the arm's length price of the costs incurred by the assessee in cost contribution arrangement. We have also noted that the stand of the revenue authorities in this case is that no services were rendered by the AE at all, and that since there is no evidence of services having been rendered at all, the arm's length price of these services is 'nil '. The Dispute Resolution Panel has also confirmed these findings of the Transfer Pricing Officer and the Assessing Officer. However, we have noted that vide letter dated 25th January, 2010 (acknowledged to have been received in DRP office on 28th January, 2010), the assessee has filed a huge compilation of papers, running into almost three hundred pages, including copies of report....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... can opinions or decisions recorded be shown to be manifestly just and reasonable." 9. ** ** ** 10. Once we come to the conclusion that the assessee has indeed received the services from the AE the next question which we have to decide is as to what is the arm's length price of these services received under cost contribution agreement. It hardly needs to be emphasized that even cost contribution arrangement should be consistent with arm's length principle, which, in plain words, requires that assessee's share of overall contribution to the costs is consistent with benefits expected to be received, as an independent enterprise would have assigned to the contribution in hypothetically similar situation. In the case before us, as evident from the cost contribution agreement, the costs have been shared at average of percentage of (i) head count to the total count and (ii) sales revenue to total revenue. The assessee's share of head count is 3.90 per cent and of total revenue is 3.30 per cent and, accordingly, 3.50 per cent being average of these two parameters, is taken as the cost con....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... cost allocation sheet duly certified by an independent Accountant was very much placed before him for his examination. In any case, the ld.TPO cannot make any adhoc disallowance while determining the ALP of international transaction. His duty is to determine the ALP by following any of the five methods prescribed in section 92C of the Act r.w.s. 10B of the I.T.Rules. In this regard, we find that the Hon'ble jurisdictional High Court in the case of CIT v. Johnson & Johnson Ltd. [2017] 80 taxmann.com 337 (Bom.) had held as under:- "(d) We find that the impugned order of the Tribunal upholding the order of the CIT(A) in the present facts cannot be found fault with. The TPO is mandated by law to determine the ALP by following one of the methods prescribed in Section 92C of the Act read with Rule 10B of the Income Tax Rules. However, the aforesaid exercise of determining the ALP in respect of the royalty payable for technical knowhow has not been carried out as required under the Act. Further, as held by the CIT(A) and upheld by the impugned order of the Tribunal, the TPO has given no reasons justifying the technical knowhow royalty paid by the Assessing Officer to its Ass....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ily are as under:- Sl. No. Name of the person whom devotes time in investment activity Proportionate time spent per month (in hrs.) (A) Time spent per year (B) No. of days spent per year (c) (figure as per B/S) (being 8 hrs. per day) Salary cost (CTC) (D) 14A Disallowance (in INR) (E=D/365* C) 1. Mr. Shrihari Shidhay e 2 24 3 2675403 21990 2. Mr.Upen Maru 2 24 3 1086142 8927 3. Mr. Anil Deshpande 16 192 24 926579 60926 4. Mr. Firoze Rehman 2 24 3 3414562 28065 Administrative Expenses (Printing stationary, telephone, fax etc.) 10000 Grand Total 129907 28. The ld. AO however disregarded this method without giving any finding or satisfaction as to why the disallowance made by the assessee is incorrect having regard to the amounts of the assessee and proceeded to make disallowance under Rule 8D(2) of the I.T. Rules by applying second and third limb thereon. Accordingly, the disallowance was finally determined at Rs. 10,34,897/- by the ld. AO after reducing the amount al....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t from the ITS details (AIR information) reflected in the website of the Department that there was a transaction at Sr.No.11 of ITS taken on 02.12.2011 to the tune of Rs. 12,250/- against the name of the assessee. The assessee was asked to reconcile the same. The assessee stated that this transaction does not pertain to it and corresponding TDS reflected thereon also was not claimed by it in the return of income. The ld. AO, however, did not heed to this contention of the assessee and proceeded to make addition of Rs. 12,250/-as non-reconciled entry in the data while completing the assessment. This action of the ld. AO was upheld by the ld. DRP. 34. Aggrieved, the assessee is in appeal before us. 35. We have heard the rival submissions. The assessee had categorically denied that the transaction in the sum of Rs. 12,250/- does not pertain to it. The assessee had also stated that the corresponding TDS amount relatable to such transaction, was also not claimed by it in the return of income. The assessee is a large size company and is part of a multinational group and had maintained its accounts meticulously. In such scenario, asking the assessee to reconcile some data, which is ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....en before the ld. DRP. Accordingly, the disallowance was sustained at Rs. 20,04,446/- pursuant to the directions of the ld. DRP. 38. Aggrieved, the assessee is in appeal before us. 39. We have heard the rival submissions. We find that the assessee had furnished the details before the ld. AO within the available short span of time. Even though the assessee could not furnish the details of entire expenses even before the ld. DRP, that alone cannot fasten the liability on the assessee when no defects in any manner whatsoever or infirmities were found by the ld. AO or by the ld. DRP with regard to the details filed by the assessee. In the instant case we find that the disallowance had been made at the rate of 20% on unreconciled portion of expenses based on AIR information on an adhoc basis. We find that the books of account filed by the assessee were not rejected by the ld. AO by pointing out some defect thereon. Hence, no disallowance of expenditure could be made on an adhoc basis. Accordingly, the disallowance of Rs. 20,04,446/- made by the assessee is hereby directed to be deleted. Accordingly, Ground Nos.3.1 to 3.3 are allowed. 40. Ground No.5 raised by the assessee is ge....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssessee. Moreover, we find that the assessee was able to furnish details to the tune of Rs. 2.91 crores as against the total sum of Rs. 3.01 crores. Hence, there cannot be any disallowance in the facts of the instant case. We also hold that the reasons given by us for assessment year 2008-2009 for Ground No.3 would apply with equal force for this assessment year also. 45. The Ground No.4 raised by the assessee for assessment year 2009- 2010 is questioning the transfer pricing adjustment of Rs. 2,38,29,880/- in respect of payment of Central Services Charges to its AEs. We find that the ld. TPO had also stated that the assessee had not proved the benefit received by it pursuant to incurrence of said expenditure by way of reimbursement to AEs. This observation was made in addition to regular observations made in respect of the very same issue in assessment years 2007-2008 and 2008-2009. We have decided the impugned issue in favour of the assessee for assessment years 2007-2008 and 2008-2009. We also find with regard to the assessee's passing the benefit test out of incurrence of the impugned expenditure, the case law relied upon by the ld. AR on the decision of this Tribunal da....
X X X X Extracts X X X X
X X X X Extracts X X X X
....off of security deposit outstanding amounting to Rs. 41.65 lakhs along with copies of email correspondences explaining the reasons for refusing refund inspite of peaceful vacation of the premises by the assessee. These were admitted as additional evidence by the ld. DRP and the remand report from the ld. AO was called for. In the remand report, the ld. AO did not make any comment on the evidences submitted by the assessee. Instead the ld. AO tried to raise certain fresh issues, which are as follows:- (a) The provision for doubtful debt was made by the assessee within months of shifting in the rented premises. (b) Contrary to the claim made by the ARs during the remand proceedings, the website of the Ministry of Corporate Affairs (hereinafter referred to as 'MCA') shows the company to be 'active'. (c) The assessee has not taken any legal action for return of the deposits. (d) The deposits were not written off in the books. 49. The assessee filed rejoinder to the remand report submitted by the ld. AO by making the following observations :- (a) The data of making of the provision is not impor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the ground raised by the Revenue itself is patently wrong inasmuch as the Revenue is expecting the assessee to comply with the conditions of section 36(2) of the Act by offering the income in the hands of the assessee in earlier years. The ground also suggests that the assessee had made claim u/s 36(1)(vii) of the Act, which in the instant case is not claimed by the assessee. The assessee has claimed deduction only u/s 28 of the Act after duly satisfying the conditions laid down for such claim. Hence, the Ground No.1 raised by the Revenue deserves to be dismissed on this count itself. Hence, in our considered opinion, the same is allowable as deduction u/s 28 of the Act, which have been rightly deleted by the ld. DRP, which does not require any interference. Accordingly, Ground No.1 raised by the Revenue is dismissed. 53. Ground No.2 raised by the Revenue is with regard to the action of the ld. DRP in deleting the addition of bogus purchases of Rs. 21,78,563/-. The brief facts of the case are that the assessee was asked to produce the details of purchases made by it from two parties, i.e., (i) M/s.Tulsiani Trading Pvt. Ltd. for Rs. 6,31,688/- and (ii) M/s.Vaastu Trading Co. for ....