TaxTMI 
TaxTMI 
2021 (10) TMI 439
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....une 13, 2016) passed by the Commissioner of Income tax (Appeals)-55 ['CIT(A)']. 1. Under the facts and circumstances of the case and in law, the learned AO/CIT(A) erred in making an upward adjustment of Rs. 164,115,028 in determining the Arm's Length Price ("ALP") of the international transactions entered into by the Appellant pertaining to purchase of formulations and incurring of significant Advertisement, Marketing and Sales Promotion Expenses ("AMP"). 2. Under the facts and circumstances of the case and in law, the learned AO/CIT(A) erred in not giving a notice to the Appellant conveying grounds on which adjustment is proposed to be made to the income of the Appellant which is against the principle of natural justice. 3. Transfer pricing adjustment in respect of purchase of formulations: Rs. 139,929,027 3.1 Under the facts and circumstances of the case and in law, the learned AO/ CIT(A) erred in not considering the functions performed by the Appellant in a correct perspective while rejecting Resale Price Method ("RPM") selected by the Appellant and applying Transactional Net Margin Method ("TNMM") as the Most Appropriate Method ("....
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....ties. 4.5. Under the facts and circumstances of the case and in law, the learned AO/ CIT(A) erred in not providing any direct or indirect evidence of incurring AMP expenses by the Appellant or rendering any services under the head AMP for the benefit of the AE or on behalf of the AE. 4.6. Without prejudice to the above grounds, that on the facts and circumstances of the case and in law the learned AO/ CIT(A) erred in concluding that any perceived/notional indirect benefit to the AE due to incurrence to AMP expenses as an international transaction. 4.7 Under the facts and circumstances of the case and in law, the learned AO/ CIT(A) erred in linking incurrence of alleged AMP expenses to the development of brands owned by the AE. 4.8. Under the facts and circumstances of the case and in law, the learned AO/ CIT(A) erred in concluding that there was an arrangement between the Appellant and its AE to carry out activities which resulted in creating brand awareness. 5. Under the facts and circumstances of the case and in law, the learned AO/ CIT(A) erred in questioning the commercial expediency of the Appellant in doing business of distribution....
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....w, the learned CIT(A) erred in upholding the disallowance made by the learned AO disregarding that the MCI Regulations provides for Code of Conduct for the doctors and the professional associations of doctors in their relationship with the industry and hence, the said Regulations apply only to medical practitioners and not to pharmaceutical and allied healthcare industry. 9.5 Without prejudice to above, on the facts and in the circumstances of the case and in law, the learned CIT(A) erred in upholding the disallowance made by the learned AO not considering the fact that the Medical Council of India has not questioned the current practice followed or expenses incurred by the Appellant and hence, the current practice cannot be treated as constituting violation of the MCI Regulations. 9.6 The Appellant prays that the said disallowance under section 37(1) of the Act for expenses incurred on conferences & seminar amounting to INR 70,19,788 and sales promotion expenses amounting to INR 24,93,086 may please be deleted. As evident, the assessee is aggrieved by confirmation of certain Transfer Pricing Adjustment as well as by confirmation of addition on account of sales....
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....uld be as given in succeeding paragraphs. Assessment Proceedings 4.1 Since the assessee carried out certain international transactions with its Associated Enterprises (AE), the same were referred to Ld. TPO u/s 92CA (1) for determination of Arm's Length Price (ALP). The subject matter of dispute before us is with respect to purchase of formulations by the assessee from its AE namely Bristol US. The quantum of purchases aggregated to Rs. 3466.79 Lacs. The products were purchased for distribution in India. The assessee benchmarked the transactions using Resale Price Method (RPM). As per functional analysis, it was submitted that the assessee act as a distributor buying goods for resale in the domestic market without adding significant value to the products. The assessee reflected Gross Profit (GP) margin of 65% as against mean margin of 36.40% reflected by the comparable entities. The adjusted GP margins after excluding advertisement, marketing and distribution costs were also stated to be higher than adjusted mean margin of comparable entities. Thus, no adjustment was proposed by the assessee in its TP study report. 4.2 However, Ld. TPO proposed to apply Transactional Net m....
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....roduced four drugs namely Onglyza, Perfalgan, Orencia and Ixempra, The expenses so incurred were not in the nature of international transactions since no payment was made to AE. The expenditure include advertisement, sponsorship of conferences in relation to products sold by the assessee, honorarium paid to doctors for medical educational events, travel, banquet and accommodation expenses for attending conferences, purchase of stationery bearing the trademark of products being sold by the assessee etc. Pertinently, the expenses were paid to third parties. The assessee was not the owner of brand but it was only responsible to sell the products in individual capacity. No royalty was being paid to AE for use of brand. The expenses incurred were for the benefit of assessee and assessee only and no benefit was derived by AE. It was in the business interest of the assessee to incur these expenses. The contention that expenses would lead to marketing intangibles had no basis. However, Ld. TPO formed an opinion that the assessee incurred excessive AMP expenses. It was providing advertising services to AE and therefore, the transactions were to be suitably benchmarked. The assessee shoul....
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.... Rs. 33.85 Lacs 4. Conference and Seminar Expenses incurred for Doctors Rs. 10.69 Lacs Total Rs. 306.88 Lacs Appellate Proceedings 5.1 Aggrieved by above adjustments / disallowances, the assessee preferred further appeal before Ld. CIT(A) which culminated into impugned order dated 28/04/2016. 5.2 The Ld. CIT(A) concluded that though the assessee earned high GP margins but it was incurring losses year after year. The same would be explained by the fact that the assessee was incurring AMP expenditure and also rendering after sales services. The imports were made at prices which resulted into commercial losses for the assessee. Therefore, RPM method was not a suitable method for benchmarking the transaction. This method would not reflect true state of commercial affairs vis-à-vis the business of distribution of pharmaceuticals in India especially in view of the fact that the assessee introduced new drugs in India which require intensive marketing which has absorbed high GP margins of the assessee, Therefore, TNMM as adopted by Ld. TPO was appropriate method for benchmarking. Having said so, Ld.TPO was directed to exclude one comparable entit....
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....f this adjudication. For the same, appropriate directions were issued to lower authorities. In other words, the ground was partly allowed. 5.5 Regarding disallowance u/s 37(1) relating to Medical Freebies, it was observed that the expenditure fall within the purview of Medical Council Regulations applicable to Medical Practitioners prohibiting them from accepting gifts / benefits from pharma companies. What was illegal for recipient would also be illegal for the giver of such benefits. Honorarium paid to doctors for giving lectures etc. would not be covered by such rules and would thus be excluded while making disallowance. However, other expenses would fall under the Medical Council Rules and therefore, any such expenses incurred after 14/12/2009 was required to be disallowed u/s 37(1). In other words, the ground was partly allowed. 5.6 Aggrieved, the assessee as well as revenue is in further appeal before us. Our findings and Adjudication 6. First we take up the issue of Transfer Pricing (TP) adjustment in trading segment. It could be seen that the assessee has adopted RPM method as most appropriate method while benchmarking the transactions. Using this method, the as....
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....rice margin would be influenced by the level of activities performed by the reseller, therefore, the functions performed, which affects the resale price margin should either be similar or it should be possible to make adjustments for such differences. Also, the TPO after rejecting the RPM method had declined to accept 4 comparables (out of 6 comparables) selected by the assessee, for the reason, that they had a different year ending. It was observed by the TPO that as per Rule 10B(4) the companies whose accounts are prepared for the same period are most suitable for comparison than the companies whose accounts cover a different period. On the basis of his aforesaid deliberations, the TPO computed the ALP as per the TNMM after adopting operating profit/operating revenue as the PLI by confining himself to two comparables (out of 6 comparables) selected by the assessee, namely (i) M/s Om Chemical Industries ltd.; and (ii) M/s Priya International ltd. We find that the DRP while disposing off the objections of the assessee as regards the rejection of the comparables did not find any infirmity in the view taken by the TPO, and concurred with his view that as per Rule 10B(4) companies hav....
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....services obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise, is identified,' (ii) such resale price is reduced by the amount of a normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions; (iii) the price so arrived at is further reduced by the expenses incurred by the enterprise in connection with the purchase of property or obtaining of services; (iv) the price so arrived at is adjusted to take into account the functional and other differences, including differences in accounting practices, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of gross profit margin in the open market; (v) the adjusted price arrived at under sub-clause (iv) is taken to be an arm's length price in res....
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....uipment India Pvt. ltd., ITA No. 6401/Del/2012 (Delhi). On the basis of our aforesaid observations, we are of a strong conviction that in the case of a pure distributor RPM is the most appropriate method for benchmarking its international transactions. On the other hand, under the TNMM, the ALP is determined bycomparing the operating profit related to an appropriate base i.e. cost or sale or assets of the "tested party" with the operating profit of an uncontrolled party engaged in comparable transactions. As such, under the TNMM, the net margin or operating profit achieved in related party transactions is compared with those entered into between the independent entities. Accordingly, under the TNMM the major thrust is to derive the operating profit at the transactional level and to identify the operating expenses of both the tested party as well as the independent parties, which, thus, requires a lot of adjustments to arrive at the actual operating profit. Thus, if the ALP of a transaction can be determined by applying any of the direct methods like CUP, RPM, CPM then they should be given a preference, and it is only where the said traditional methods have been rendered inapplicabl....
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.... AE are resold in the domestic market in the same form, then the gross profit margin earned on such transactions becomes the determinative factor for benchmarking the international transactions of the assessee with its AE by taking RPM as the most appropriate method. Our aforesaid view is supported by the order of the ITAT Pune, Bench in the case of Fresenious Kabi India (P) Ltd. Vs. DCIT (ITA No. 235/Mum/2013), wherein it was held that in caseof distribution activity the selling and marketing expenses which are borne by the assessee would not lead to any value addition to the product in question. In the backdrop of our aforesaid deliberations, we find substantial force in the contention advanced by the ld. A.R that as per Rule 10B(1)(b) in the Income Tax Rules, 1962, the RPM can safely be taken as the best suited method for determining the ALP of the international transactions in the case of the assessee before us, which as observed by us hereinabove had imported formulations from its AE and resold the same without making any value addition to unrelated parties in the domestic market. Our aforesaid view is further fortified by the orders of the various coordinate benches of the Tr....
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.... material in support of conclusion of Ld.CIT that there was a prima facie arrangement between the AE and the assessee to incur such expenditure. The said observation is not supported by any express agreement on record. Unless it was shown that there was such an arrangement which resulted into any direct or indirect benefit to the brand of assessee's AE, these transactions could not be regarded as international transaction u/s 92B as held by Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd. V/s CIT (2015; 64 Taxmann.com 150). In this case, it was further held that no adjustment for determination of arm's length price with regard to AMP expenditure can be made by resorting to bright line test or any other similar method which is not provided in the statute. It could be noted that this decision was delivered by the Hon'ble Delhi High Court at a later point of time and after taking note of its own decision in Sony Ericson Mobile Communications (374 ITR 118). Therefore, the ratio laid down in Maruti Suzuki India Ltd. (supra) would prevail and the ratio of the same would be applicable to the present appeal since facts are more or less similar. Similar is the view i....