TaxTMI 
TaxTMI 
2023 (2) TMI 760
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....3. The assessee is a company providing market support and maintenance services to its group companies in relation to the products during and after warranty period. The assessee has entered into an agreement with Alcon Laboratories Inc. dated 1.1.2002 in this regard. The assessee also distributes pharmaceutical products in addition to distribution of Ophthalmic Surgical products. For the AY 2016-17, the assessee filed the return of income on 30.11.2016 declaring a total income of Rs.36,07,89,840. The case was selected for scrutiny under CASS and a notice u/s. 143(2) was duly served on the assessee. Since the assessee had international transactions, the AO made a reference to the TPO for determination of arm's length price (ALP). Accordingly, the TPO completed the proceedings u/s. 92CA by making an adjustment of Rs.20,07,41,588. The AO passed the draft assessment order incorporating the transfer pricing (TP) adjustment. Besides, the AO also made disallowance of seminars, conventions and sales promotion expenses for an amount of Rs.1,58,88,337. Aggrieved, the assessee filed its objections before the DRP. As per the directions of the DRP the TP adjustment was enhanced to Rs.27,48,87,33....
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....excess AMP expenses incurred treated as incurred for the benefit of AE was revised to Rs.22,61,60,028. Accordingly the TP adjustments towards AMP expenses was computed as Rs.25,87,94,919. Aggrieved by the final order of assessment passed in pursuant to the directions of the DRP the assessee is in appeal before the Tribunal. 7. The ld. AR submitted that the issue has been already considered by the coordinate bench of the Tribunal in assessee's own case for the AYs 2013-14 & 2014-15 in IT(TP)A No.2889/Bang/2017 & 3376/Bang/2018 dated 16.11.2022 as under:- "2.1 Facts of the issue are that the TPO has discussed in detail in para 9 of his order that AMP is an international transaction. He has also discussed that when the Indian subsidiary is discharging both the distribution and marketing functions, then both the functions need to be benchmarked separately. He has discussed in detail the various clauses of the "Distribution and Marketing Services" agreement with its AE w.e.f. 01/04/2006 to conclude that it is obligatory for the assessee (distributor) to undertake marketing activities on behalf of supplier (its AE). He has also referred that it is operating under the direct s....
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.... direct selling of products to end customers (or) some companies may use retails chains to distribute end products to consumers. In the taxpayer's case, it has adopted the consignment model to distribute its products. Further, as per the website of M/s Parekh Integrated Solutions Ltd, it offers consignment services to various companies. This being the case, the taxpayer may have to provide required incentives to M/s Parekh Integrated Solutions Ltd to distribute its products, then that of its competitor's products. 6. Further, the warehousing & logistics function provided by M/s Parekh Integrated Solutions Ltd, does not result in any value addition of the taxpayer's products. On the other hand, facilities such cold storage/warehousing etc. are essentially required to maintain the composition of taxpayer's products, which are to be distributed. Therefore, such functions/Services are only incidental to the distribution function undertaken by M/s Parekh Integrated Solutions Ltd, for/on behalf of the taxpayer. Hence, the TPO has rightly considered the distribution commission paid as part of AMP expenses and therefore, it is requested that the Hon'ble DRP may....
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....9.4.2022 and decided the issue in favour of the assessee by observing as under:- "9.1 The Ld.AR submitted that, the assessee purchases ophthalmic pharmaceuticals and ophthalmic surgical products from its AE is for distribution in India. It was submitted that assessee also renders services in relation to the products during and after warranty period. The Ld.AR submitted that, on one hand the revenue accepts the distribution activities and marketing activities carried on by assessee to be at arm's length whereas on the other hand while making the AMP expenditure the Ld. TPO holds that the selling and distribution expenses incurred by assessee promotes the intangibles of AE in India and the distribution expenses incurred being towards the products amounts to advertisement. 9.2 The Ld.AR submitted that, the Ld. TPO did not consider that the sales promotion expenses and the seminars and conventions carried on ease to educate the Indian market in respect of the products distributor by the assessee within the Indian territory he submitted that by these expenditures the assessee is promoting its own business in India as a distributor. The details of the expenditure are as....
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....d held as under: "12. We have heard the submissions of the learned counsel for the assessee as well as the ld. DR. The first aspect which was brought tour notice by the ld. counsel for the assessee is the decision of the ITAT in assessee's own case for assessment year 2009-10 and 2010- 11 on the same issue of AMP expenses. The Tribunal took the following view after extracting the decision of the Hon'ble Delhi High Court in the case of M/s Maruti Suzuki India Ltd. (supra). "21. Respectfully following the ratio of the decision of the Hon'ble Delhi High Court in the above cases, we hold that no TP adjustment can be made by deducing from the difference between AMP expenditure incurred by assessee-company and AMP expenditure of comparable entity, if there is no explicit arrangement between the assessee - company and its foreign AE for incurring such expenditure. The fact that the benefit of such AMP expenditure would also ensure to its foreign AE is not sufficient to infer existence of international trans action. The onus lies on the revenue to prove the existence of international transaction involving AMP expenditure between the assessee-company and its fo....
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.... (MSIL) v. Addl. CIT, TPO [2010] 328 ITR 210 (Delhi), in the case of a licensed manufacturer incurring AMP expenses it was held that it incurring of AMP expenses would be an international transaction and the issue of determination of ALP was remanded. This decision was however overruled in Maruti Suzuki India Ltd. v. Addl. CIT [2011] 335 ITR 121 (SC) wherein the Hon'ble Supreme Court left the question whether AMP expenses gives raise to international transaction or not open with the following observations: "In this case, the High Court has remitted the matter to the Transfer Pricing Officer ("the TPO" for short) with liberty to issue fresh show-cause notice. The High Court has further directed the Transfer Pricing Officer to decide the matter in accordance with law. Further, on going through the impugned judgment of the High Court dated July 1, 2010, we find that the High Court has not merely set aside the original show cause notice but it has made certain observations on the merits of the case and has given directions to the Transfer Pricing Officer, which virtually conclude the matter. In the circumstances, on that limited issue, we hereby direct the Transfer Pricing....
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....on expenses incurred by MSIL for SMC. On the above facts, the Hon'ble Delhi High Court held as follows: ".... when the licence agreements were originally entered into in 1982, MSIL was known as MUL and SMC did not hold a single share in MUL. In 2003 SMC acquired the controlling interest in MSIL. There were various models of Suzuki motor cars manufactured by MSIL and each model was covered by a separate licence agreement. Under these agreements, granted licence to MSIL to manufacture that particular car model and provided technical know-how and information and right to use Suzuki's patents and technical information. It also gave MSIL the right to use Suzuki's trade mark and logo on the product. Pursuant to this agreement, MSIL was using the co-brand, i.e., Maruti Suzuki trade mark and logo for more than 30 years. This cobrand could not be used by SMC and was not owned by it. The clauses in the agreement between MSIL and SMC indicated that permission was granted by SMC to MSIL to use the co- brand "Maruti Suzuki" name and logo. The mere fact that the cars manufactured by MSIL bore the symbol "S" was not decisive as the advertisements were of a particular model of....
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....t the provisions under Chapter X envisaged a separate entity concept. In other words, there could not be a presumption that the assessee was a subsidiary of the foreign company and that all the activities of the assessee were in fact dictated by the foreign company. Merely because the foreign company had a financial interest, it could not be presumed that advertising, marketing and sales promotion expenses incurred by the assessee were at the instance or on behalf of the foreign company. The initial onus was on the Revenue to demonstrate through some tangible material that the two parties acted in concert and further that there was an agreement to enter into an international transaction concerning advertising, marketing and sales promotion expenses." 19. In the light of the law as it exists today, we shall examine the arguments of the rival parties. There has been no agreement between Essilor International which owns the various brands set out by the TPO in his order and the Assessee to incur any Advertisement and Marketing or Sales promotion expenses. None of the other reasons given by the TPO which have been explained by the Assessee and set out in the earlier paragraph ....
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.... Kals Information Systems Pvt. Ltd. 4.33 5.77 16.94 8.73 2. Rheal Software Pvt. Ltd. 3.29 3.02 36.38 14.54 3. CG-VAK Software & Exports Ltd. 20.16 19.87 13.91 18.05 4. Inteq Software Pvt, Ltd. 7.64 32.95 45.36 20.47 5. R S Software (India) Ltd. -1.98 32.66 24.14 20.87 6. Larsen & Toubro Infotech Ltd. 21.12 24.24 23.07 22.69 7. Nihilent Ltd. 15.94 29.19 33.12 25.64 8. Persistent Systems Ltd. 23.95 30.4 35.1 29.25 9. Infobeans Technologies Ltd. 35.19 20.92 42.6 32.71 10. Aspire Systems (India) Pvt. Ltd. 33.63 30.45 37.21 33.55 11. Infosys Ltd. 38.62 41.38 36.16 38.74 12 Thirdware Solutions Ltd. 30.18 42.46 48.17 39.86 13 Cybage Software Pvt. Ltd. 62.06 68.3 68.97 66.03 35th percentile 2 0.87 Median 25.64 65th Percentile 32.71 11. Accordingly the TPO a....
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....ng analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a nonjurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was muc....
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..... In view of the aforesaid decision, we hold that companies listed whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies. Exclusion of Inteq Software 16. The TPO held that the company is engaged in software development and therefore should be added as comparable. The DRP upheld the inclusion on the ground that the principle activity of the company is software development services and that the company satisfies various filters adopted by the TPO. 17. The ld. AR submitted that the company offers solutions which are in the nature of application development which involves providing full life cycle support that starts from requirement gathering phase and lasts till maintenance, trading of software products, software validation and a wide range of healthcare BPO services. The ld. AR submitted that in the annual report of the company, no segmental break-up is available nor does the revenue break-up towards various activities undertaken by the company is available. It is therefore contended that the company is to be excluded. Infobean Technologies Ltd. 18. The company is included by the TPO on the ground that i....
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....nologies Ltd.: The ld. AR of the assessee submitted that this company is functionally different for the following reasons: 1. It is engaged in diversified activities in the nature of custom application development, content management systems, enterprise mobility, big data analytics, 2. No change in the business as compared to last year 3. Leading provider of consulting technology & next generation service. 4. There is abnormal increase in percentage of revenue from 35.35 crore to 62.06 crore. 5. It is also into IT enabled services i.e. business process management, HR and Payroll, commerce 6. No segmental details are available. 7.1 He relied on various decisions of ITAT including the decision in ITA No. 2233/Hyd/2018 for AY 2014-15 wherein this company is excluded as comparable. 7.2 The Ld. DR, on the other hand, submitted that this company is engaged in rendering of software services and, hence, functionally comparable to assessee company. 7.3 We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. The coordinate bench of th....
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....nt, we are inclined to direct the AO/TPO to exclude this company from the list of comparables." 19.**** 20.**** 21. We have heard the rival submissions and perused the materials available on record. This comparable has considered in the case of Global Logic India Pvt. Ltd. Vs. DCIT (2022) 134 Taxmann.com 35 for the assessment year 2016-17, wherein held as under:- 46. "The taxpayer sought exclusion of Inteq again on account of functional dissimilarity being into providing outsourced product development services and Healthcare BPO services to its customers as per website extracted at pages 83 to 85 of the appeal memo set. It being a private limited company its financials are not available in the public domain. Its annual report made available at pages 848 to 909 of the annual reports paper book does not provide segmental profitability earned from software development services, outsourced product development services and Healthcare BPO services. 47. When we examine profit & loss account at page 873 of the annual report paper book, software development and service charges are shown in composite manner with no segmental profitability. In thes....
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....egal gratification which are prohibited by law. The CBDT brought a Circular No. 5 of 2012 dated 1-8-2012 which is clarificatory and clarifies that any expenses incurred in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations. 2002 shall be inadmissible under section 37(1) being an expense prohibited by the law. The law as stood during relevant previous year as per provisions of section 37(1) read with explanation inserted by Finance Act, 1998 with effect from 1-4- 1962 clearly stipulates that if an expenditure is incurred for any purpose which is an offence or which is prohibited under law shall not be allowed as deduction due to restriction contained under section 37(1) read with explanation. The said circular dated 1-8-2012 issued by the CBDT was subject to challenge in writ petition filed in Himachal Pradesh High Court in the case of Confederation of Pharmaceutical Industry v. CBDT writ petition No. 10793 of 2012-J wherein validity of the said CBDT circular was challenged, the Himachal Pradesh High Court held that the said circular is valid and the Indian Medical Council (Professional Conduct. Etiquette and Ethic....
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....ion to section 37. For claiming the expenses under section 37 which is a residuary sector', it is essential that the expenses are not covered under clauses of Sections 30 to 36 and are incurred wholly and exclusive for the purposes of business and it is not sufficient that it has some connection with the business of the assessee. Reliance is placed on the decision of Hon'ble ITAT !shortie in the case of ACIT vs. M/s. Live Healthcare Ltd dated September 12, 2016, [2016) 181 TTJ 433 (Mumbai Trib.) which squarely covers the facts of the case. 3.3 Out of expenses towards Seminar and Convention expenses and Sales promotion expenses, the expenditure incurred by the assessee company towards travel and stay charges amounts to Rs.1,58,88,337/- respectively. These expenses are construed as freebies given to doctors, Therefore in ins with the discussions made. these expenses are disallowed under section 37 of the IT Act." 24. The DRP upheld the disallowance by stating that - "As the MCI regulations are towards promoting a public interest, a narrow and pedantic view contrary to public interest and objectives of the regulation cannot be taken. The validity ....