TaxTMI 
TaxTMI 
2023 (3) TMI 1609
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....disallowance of expenses. (vi)Ground Nos.31 & 32 are consequential. 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 2017-18, the assessee filed the return of income on 30.11.2017 declaring a total income of Rs.55,48,44,980. 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.23,23,66,275. 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.28,14,00,547. Aggrieved, the assessee filed its objections before the DRP. ....
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....icals Ltd., Bayer Zydus Pharma Pvt. Ltd. and Kamal Distributors P. Ltd. Aggrieved by the final order of assessment passed in pursuant to the directions of the DRP the assessee is in appeal before the Tribunal. 6. 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 supervision and control of its AE. As the assessee has not benchmarked this marketing function, the TPO has benchmark....
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....o 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 kindly affirm the TPO's order." Considering the facts and circumstances of the case, and also consider....
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....hat, 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 under: Turnover 5,24,73,00,000 Distributor's Commission 36,80,00,000 Seminar....
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.... distribution expenditure Brief description 1. Distributor's commission Comprises of commission paid to the third party distributor of ophthalmic surgical and ophthalmic pharmaceutical products on the basis of sales effected by them. The amount of commission includes consideration for various services provided by consignment agents to Alcon India like warehouse charges, collection charges, charges for distribution activities in 38 locations across India. 2. Sales promotion This predominantly comprises of education grants paid to hospitals and institutions 3. Seminar and convections Comprises of cost incurred on sponsorship towards All India Ophthalmic Society Conference, All State level Conferences 9.9 On an identical situation, Coordinate Bench of this Tribunal in case of Essilor India Pvt. Ltd vs DCIT in IT(TP)A No 29/Bang/2014 and IT(TP)A No. 227/Bang/2015 observed and 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 assessme....
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....AMP expenditure was not subsumed in the operating profitability of the assessee-company. Therefore, in order to determine the ALP of international transaction with its AE, it is sine qua non that the AMP expenditure should be considered a part of the operating cost Therefore, we restore the issue of determination of ALP, on the above lines, to the file of the AO/TPO. The grounds of appeal raised by the assessee-company on this issue are partly allowed." 13. The ld. counsel for the assessee pointed out that none of the reasons given by the TPO in the order for assessment year 2013-14, for not following decision of the ITAT can be sustained. In this regard, the ld. counsel brought to our notice the facts which were highlighted by the assessee before the DRP. 16. We have given our careful consideration to the rival submissions. The Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd. (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 how....
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....lected as the business partner independently by MSIL. The co-branded trade mark "Maruti Suzuki" was used since the inception of MSIL. A licence agreement was entered into between MSIL and SMC in October 1982 for its models M-800, Omni and Gypsy. By the agreement, MSIL was permitted to use the co-branded trade mark "Maruti Suzuki" on the vehicles. In the assessment of MSIL for assessment year 2005-06, the AO invoked the provisions of section 92CA(1) of the Act and referred the case to the Transfer Pricing Officer for determination of the arm's length price in relation to the international transactions undertaken by MSIL with its associated enterprise, SMC. The Transfer Pricing Officer passed an order making an adjustment of Rs. 154.12 crores towards the advertisement, marketing and sales promotion expenses imputing a notional arm's length compensation towards the advertisement, marketing and sales promotion 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 ac....
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....the excessive advertising, marketing and sales promotion expenditure incurred by the assessee and the advertising, marketing and sales promotion expenditure of a comparable entity that an international transaction existed and then proceeding to make the adjustment of the difference in order to determine the value of such advertising, marketing and sales promotion expenditure incurred for the associated enterprise. Thus, the bright line test had been rejected as a valid method for either determining the existence of an international transaction or for the determination of the arm's length price of such transaction. Although under section 92B read with section 92F(v), an international transaction could include an arrangement, understanding or action in concert, this could not be a matter of inference. There had to be some tangible evidence on record to show that two parties had acted in concert. It was also held that 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. Me....
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....ect the AO/TPO to delete the addition made towards ALP determined for AMP expenses. TP adjustment in IT support services - Ground Nos.19 to 28 8. The assessee has declared a margin of 13.3% in the IT service segment as computed below:- Particulars IT Support Services Sales 3,32,42,044 Operating Cost 2,88,22,477 Operating Profit 44,19,567 Operating margin 13.3% 9. The assessee is applying Transactional Net Margin Method (TNMM) as the most appropriate method for the purpose of computing the arm's length margin. Operating profit/Operating Cost ratio has been taken as the Profit Level Indicator. The AO did not accept the comparables selected by the assessee. The TPO by applying fresh filters chose the final set of comparables as given below:- Sl.No. Company Name Financial Year Wise OP/OC (%) 2016-17 2015-16 2014-15 Wt. Average 1. Kals Information Systems Pvt. Ltd. 1.37 3,97 5.77 3.62 2. Rheal Software Pvt. Ltd. -12.27 3.28 3.01 -1.85 3. CG-VAK Software & Exports Ltd. 11.65 16.95 17.3 15.09 4. Larsen & Toubro Infotech Ltd. 20.78 19.21 23.98....
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....l report in respect of certain comparables and accordingly the TPO passed on OGE whereby the TP adjustment was reduced to 27,05,349. 12. The ld. AR submitted that out of the list of comparables, except for item No.20, the rest of the comparables have to be excluded based on the application of upper turnover filter. The ld. AR submitted that the turnover of the assessee is Rs.3.32 crores. The TPO while applying the turnover filter applied only the lower turnover filter of Rs.1 crore but did not apply the higher turnover filter of Rs.200. Accordingly, the ld. AR prayed for the exclusion of these comparables. 13. We heard the rival submissions. The Tribunal in the case of Autodesk India Pvt.Ltd. Vs. DCIT (2018) 96 Taxmann.com 263 (Bangalore-Tribunal), took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7. of the decision held as that high turnover is a ground for excluding companies as not comparable with a company that has low turnover. The following were the relevant observations: 17.7. We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delh....
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....ervices (supra) and Capegemini India Pvt. Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon'ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the....
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....e Bench in the case of Finastra Software Solutions (supra) has considered the exclusion of Infobean Technologies and held that - "21. We have heard the rival contentions and perused the material on record. We notice that the coordinate bench in the case of NTT Data FA Insurance Systems (India) Pvt. Ltd (supra) has considered the issue of exclusion of Inteq Software Pvt. Ltd. and Infobeans Technologies Ltd. and held as under: - "18. We have heard the rival submissions and perused the materials available on record. In our opinion, this comparable was considered by the Hyderabad Tribunal in the case of ADP Pvt. Ltd. in ITA No.227 & 228/Hyd/2021 dated 3.2.2022 at para 7 page 3678 to 3680 wherein held as under:- 7. "Infobeans Technologies 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. ....
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....comparables in this case also. 7.4 On perusal of the order of the coordinate bench of this Tribunal and on perusal of the financial statements of Infobeans Technologies Ltd., we observe that the company is functionally not comparable and no segmental details are available. Therefore, the coordinate bench did not consider this company as comparable in assessee's own case for AYs 2014-15 & 2015-16. Respectfully following the decision of the coordinate bench, we direct the AO/TPO to exclude this company from the final list of comparables." IT(TP)A No.261/Bang/2021 NTT Data FA Insurance Systems (India) Pvt. Ltd., Bangalore Page 21 of 37 18.1 Same view was taken by the Tribunal in the case of Global Logic India Pvt. Ltd. Vs. DCIT reported in (2022) 134 Taxmann.com 35 for the assessment year 2016-17. Respectfully following above judgement, we are inclined to direct the AO/TPO to exclude this company from the list of comparables." 19. Respectfully following the decision of the coordinate bench we hold that Infobeans Technologies Ltd., be excluded from the list of comparables. 20. In view of the above decision with respect to comparables, ground No.24(b) with regard....
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....eturn for the referring, recommending or procuring of any patients for medical, surgical or other treatment. The expenditure has been admittedly incurred by the assessee with an objective to encourage doctors to recommend their optical -items and pharmaceutical products dealt within by the assessee to the patients. so that sales and profitability of the assessee company increases which clearly reflect that these are legal 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 ....
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.... of 1956), the Medical Council of India, with the previous approval of the Central Government, made the regulations relating to the Professional Conduct, Etiquette and Ethics for registered medical practitioners, namely the Indian Medical Council (Professional conduct, Etiquette and Ethics) Regulations, 2002 and hence these regulations shall be covered under the definition of law' and hence is covered under explanation 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 Mumbai 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.28,14,00,547/- respect....
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...., who use these products in surgeries. The ld. AR further submitted that all the relevant details and supporting with regard to these expenses are already submitted before the AO which would substantiate the claim of the assessee. 26. The ld DR relied on the order of the lower authorities. 27. We have heard rival submissions and perused the material on record. It is pertinent to note that prior to the judgment of the Hon'ble Apex Court in the case of M/s. Apex Laboratories Pvt. Ltd. v. DCIT [2022] 135 taxmann.com 286 (SC) many of the judicial pronouncements had held that MCI Regulations are not applicable on pharmaceutical companies and expenses incurred by such companies are not violative of CBDT Circular. During this phase of assessment, there were only adhoc summary basis evaluation of expenditure. In the present case also there is no critical evaluation of the expenses and post the Hon'ble Supreme Court judgment, the dictum laid down, same needs to be followed and each of the expenditure needs to be evaluated to see if the disallowance is justified. It was claimed that even if the criteria as laid down in CBDT Circular and also the MCI Regulation (as now affirmed by the H....