TaxTMI 
TaxTMI 
TaxTMI 
2019 (7) TMI 2063
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....lines etc. The Company predominantly sells its products to hospitals and other medical institutions. It is a subsidiary of Edwards Lifesciences World Trade Corporation, USA. Edwards Lifesciences World Trade Corporation, USA, is a wholly owned subsidiary of Edwards Lifesciences Corporation ('ELC'), USA. Hence, assessee is an indirect subsidiary of Edwards Life Science Corporation (ELC, USA) (Edwards, USA). ELC is a public limited company listed on Nasdaq Stock Exchange and is a global leader in designing, manufacturing and marketing comprehensive line of products and services to render the cardiovascular products which resulted in improved therapeutic outcome for the patients. ELC focuses on the following product areas namely heart valve therapy, cardiac surgery systems, critical care, vascular systems and perfusion products and services. 3. The facts of the A.Y.2012-13 are taken up for adjudication and the decision rendered thereof would apply with equal force for A.Y.2013-14 also except variance in figures. 3.1. The assessee company filed its return for A.Y.2012-13 on 27/11/2012 declaring total income of Rs. 2,73,54,540/ -. The assessee company reported the following int....
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....reign countries for business purposes. 3.2. The assessee also furnished the evidences with regard to the aforesaid expenses by way of a separate annexure. The assessee specifically pleaded that the above expenses incurred by the assessee are in relation to its own business and in respect of selling its products in India. As such, the AE does not garner any benefit from the same. It was specifically pointed out that "Edwards" is an established brand and that the assessee does not sell to end customer i.e., patients in India, the assessee has no reason to expend any amount to help or develop the brand of the AE. It was submitted that alternatively, the purpose of assessee incurring the above expenditure is to train, educate and make aware, the doctors of the latest development in the field of medicine, so as to help, familiarise the doctors who would need to perform the procedures on the patients. 3.3. The assessee submitted that it being the low risk distributor, had incurred advertisement expenses for distributing its products in Indian market. Accordingly, all the risk and returns in relation to the same is borne by the assessee and no benefit is passed on to the AE. Further, it....
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....------------- (d) provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service; " 3.6. Accordingly, the ld. TPO concluded that assessee had incurred the expenditure on conference expenses, marketing and promotion expenses on behalf of the AE and for the benefit of AE. The assessee, however, replied to the show-cause notice by contending that because of incurring these expenditures which were purely in respect of selling its products in India, the assessee enjoyed the benefit of increase in sales. The assessee further pleaded that in the technology hungry era if it does not create awareness amongst end users regarding technology upgradation, it will lose its customers to competitors. The ld. TPO however, considered the same as marketing intangibles and accordingly resorted to benchmark the same by treating it as an international transaction. The ld. TPO concluded that the assessee has performed the aforesaid transactions on behalf of the AE which constitutes rendering of service to the AE for which purpose, the asse....
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....hnologically upgrading at every step is to create awareness among the doctors about the availability of new technology in medical equipment. Accordingly, in order to educate about the improved medical technology products offered by the assessee, these conference and marketing promotion expenses are expended worth INR 2.65 crores and INR 1.52 crores respectively, like any other independent third party distributor. 3.3 The assessee has incurred conference and marketing promotional expense in order to create awareness of its products in the Indian market which is amongst the doctors in order to make them aware about the technology and product benefits. These expenditures have been incurred in order to educate and make aware the doctors about the latest products available in the market which is in the nature of scientific meetings, medical device awareness campaign, scientific sessions, etc. 3.4 Further, it is via marketing promotion, conference sponsorship, doctor's participation in medical conferences, etc. that the doctors are being made aware about path-breaking medicine and its technology in the Western world. The training expenses has been incurred in relation to the asse....
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....ecovered from its AE by way of subvention income which has been duly offered to tax by the assessee. It is not in dispute that the subvention income so offered in the sum of Rs.8,75,17,611/- is much higher than even the adjustment contemplated by the ld. TPO in the sum of Rs.4,83,30,978/- which includes the mark up of 15.66%. We find that the ld. AR had placed major reliance on this as an alternative argument wherein by considering the subvention income, the assessee's operating margin is higher than the arithmetic mean operating margin of 4.92% earned by independent distributors and hence any sort of conference and related expenses, if at all were to be considered, are already included / benchmarked under the net margin based analysis and accordingly there cannot be any adjustment to ALP thereon. The ld. DR relied on the findings of the ld. DRP with regard to the aspect of subvention income received by the assessee and made an elaborate arguments only on the aspect that assessee being a low risk distributor, need not have incurred the aforesaid expenditure to the tune of Rs.4.17 Crores and those expenditures were incurred only for promotion of brand building of the AE in India....
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....ding of AE pursuant to incurrence of such expenditure and that it does not fall within the ambit of an international transaction u/s.92B of the Act, need not be gone into. The Grounds raised by the assessee in this regard are disposed off accordingly. 5.4. The above decision rendered for A.Y.2012-13 would apply with equal force in A.Y.2013-14 also on the said issue. However, we find that the ld. TPO while adjudicating the issue on similar grounds had additionally applied Bright Line Test (BLT) to justify his adjustment to ALP which is reflected in para 17.3 of his order as under :- Particulars Amount in INR Total sales 835,287,811 Arm's length level of AMP exp. (% of sale) 3.29% Arm's length AMP 27,480,969 Amount actually spent on AMP exp. 38,147,558 Amount spent in excess of 'bright-line' and on creation of marketing intangible 10,666,589 Mark-up(r) 7. 09% 756.261 The amount by which the assessee company should have been reimbursed by A.E, and for which the adjustment is proposed to be made 11,422,850 5.5. We find that the application of Bright Line Test has been negatived by the Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd.....
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....s 4,79,990 disallowed on pro rata basis for the period 10 December 2010 to 13 (b) Entertainment expenses of Rs, 1,08,885 incurred from 14 December 2009 to 31 March 2010. 5. Against the above order of AO, assessee approached to CIT(A). 6. By the impugned order CIT(A) partly confirmed the addition on account of disallowance of expenditure of Rs.33,30,321/- incurred towards appointment of faculty doctor or assessee's consultant doctor in a medical conference out of conference expenses of Rs.1,65,51,331/ -. CIT(A) given relief of Rs.31,98,259/- and Rs.8,06,705/ -. The CIT(A) has also allowed to relief in respect of expenditure incurred on lunch and snacks of own staff amounting to Rs.61,242/ -. Finally CIT(A) confirmed the disallowance of Rs.1,21,14,020/- incurred on doctors or their professional association by observing that same was prohibited by MCI regulations. 7. Assessee is in further appeal before us. It was argued by learned AR Mr. Madhur Agarwal that assessee had filed a breakup of the advertising and sales promotion expenditure and also filed detailed submission on allowability of advertisement and sales promotion expenditure vide letter dated 20 February 2014. Pu....
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....er consideration is 2010-2011 and 2011-2012. Accordingly, we do not find any merit in the disallowance so made by the AO in both the assessment years under consideration." 11. Reliance was also placed by learned AR on the order passed by the Co-ordinate Bench on similar facts in the case of Solvay Pharma India Ltd., 169 ITD 13. As per learned AR, MCI guidelines cannot be applied to the pharma company and it is only applicable to the practicing doctors. 12. Learned AR also invited our attention to the expenditure so incurred so as to bring to our notice that new expenditure is incurred on freebies to the doctors. Learned AR also invited our attention to the detailed documentary proof with regard to the nature of expenditure incurred which was filed before the lower authorities to substantiate the claim of expenditure so incurred was fully and exclusively for the purpose of business to promote its product. 13. On the other hand, learned DR invited our attention to the findings recorded by lower authorities to the fact that expenditure were incurred in contravention of guidelines laid down by MCI and the judicial pronouncements relied on by the lower authorities in their respect....
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.... for purchase/hiring of materials during conferences - Rs.8,06,705 (iv Expenses incurred for participation/sponsorship of conferences - Rs. 87,36,056 (v)Pro rata disallowance of conference incurred from 10 December 2009 to 13 December 2009- Rs. 4,79,990/- 18. We observe that the nature of the expenses .itself demonstrates that the expenses incurred are outside the purview of the MCI guidelines. In respect of expenditure incurred on the sales staff during conference amounting to Rs.31,98,259/-, we found that these expenses represent travel expenses, visa charges etc of the employees of the assessee incurred for attending various conferences, group meetings etc. These expenses are not incurred on the doctors/medical practitioners but are incurred wholly and exclusively for the purpose of business. 19. With regard to the expenditure alleged to be incurred on purchase / hiring materials during conference amounting to Rs.8,06,705/- we found that these expenses represent printing, stationery, Xerox charges, and stall designing charges incurred by the assessee in relation to the sponsoring of conferences like Atlas, CTCOMCON, IACTA etc. These expenses are also not incurred on the ....
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.... they are faculty. Also, clause 6.8.i(g) of the MCI Guidelines allows a doctor to work for a pharmaceutical and allied health sector companies in advisory capacity, as consultant, as researcher, as treating doctors or in any other professional capacity. Accordingly, the assessee has appointed certain doctors as consultant to the company. 23. From the record we also found that the assessee does not provide any personal gifts or free holiday packages to doctors and hence no expense is incurred for such unethical practice. Furthermore, the products dealt in by the assessee are very different than those dealt in by pharmaceutical companies. The assessee deals in cardiovascular products. While the products manufactured by pharmaceutical companies are low priced products with a longer life cycle, the products of assessee are high end technology products either implanted inside human body or used for monitoring patients which have short life cycle due to quick technologically upgradation. 24. From the record we also observe that while the products of pharmaceutical companies are sold at the counter through prescription, assessee's products are not sold at counter through prescript....
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....l Council of India (MCI). The code of conduct laid down in the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 ('MCI Regulations') issued with effect from 10th December 2009 applies only to doctors and not to Pharmaceutical and Medical device companies. Accordingly, MCI Regulations are not applicable to assessee, the question of assessee incurring expenditure in alleged violation of the regulations does not arise. 18. On the plain and simple reading of the provision of the Indian Medical Council Act, 1956, it is apparent that the ambit of statutory provisions relating to professional conduct of registered medical practitioners under the Indian Medical Council Act, 1956 is restricted only to persons registered as medical practitioners with the State Medical Council and whose names are entered into the Indian Medical Register maintained u/s 21 of the Act. 'Under the scheme of the Act. 19. Furthermore, there is no ambiguity of any kind in the scheme of the Indian Medical Council Act, 1956 that it neither deals with nor provides for any conduct of any association / society and deals only with the conduct of individual registered med....
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.... has jurisdiction to take action only against the medical practitioners and not to health sector industry. From the aforesaid decision, it is ostensibly clear that the Medical Council of India has no jurisdiction to pass any order or regulation against any hospital or any health care sector under its 2002 regulation. So once the Indian Medical Council Regulation does not have any jurisdiction nor has any authority under law upon the pharmaceutical company or any allied health sector industry, then such a regulation cannot have any prohibitory effect on the pharmaceutical company like the assessee. If Medical Council regulation does not have any jurisdiction upon pharmaceutical companies and it is inapplicable upon Pharma companies like assessee then, where is the violation of any of law/regulation? Under which provision there is any offence or violation in incurring of such kind of expenditure. 23. Now coming to the Explanation to Section 37(1) invoked by the CIT, the Explanation provides an embargo upon allowing any expenditure incurred by the assessee for any purpose which is an offence or which is prohibited by law. This means that there should be an offence by an assessee who....
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....not create a new impairment adverse to an assessee or to a class of assessee without any sanction of law. The circular issued by the CBDT must confirm to tax laws and for purpose of giving administrative relief or for clarifying the provisions of law and cannot impose a burden on the assessee, leave alone creating a new burden by enlarging the scope of a different regulation issued under a different act so as to impose any kind of hardship or liability to the assessee. In any case, it is trite law that the CBDT circular which creates a burden or liability or imposes a new kind of imparity, same cannot be reckoned retrospectively. The beneficial circular may apply retrospectively but a circular imposing a burden has to be applied prospectively only. Here in this case the CBDT has enlarged the scope of 'Indian Medical Council Regulation, 2002' and made it applicable for the pharmaceutical companies. Therefore, such a CBDT circular cannot be reckoned to have retrospective effect. The free sample of medicine is only to prove the efficacy and to establish the trust of the doctors on the quality of the drugs. This again cannot be reckoned as freebies given to the doctors but for ....