TaxTMI 
TaxTMI 
2023 (7) TMI 1629
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....R 70,44,32,165 as against the returned income of INR 44,96,42,650. 3. The learned AO/ Transfer Pricing Officer ("TPO")/ DRP have erred, in law and in facts, in making an addition of INR 15,32,27,229 to the total income of the Appellant on account of alleged excessive expenditure incurred towards Advertising, Marketing and Promotion ("AMP"), INR 10,84,876 towards Information Technology ("IT") support services, INR 61,89,154 towards Business support services("BSS") and INR 9,42,88,256 on account of disallowance of expenses incurred towards training, honorarium and travel and stay expenses included under the head seminars and conventions and sales promotion expenses. Grounds relating to adjustment on account of alleged excessive AMP expenditure 4. The learned AO/ TPO/ DRP have erred, in law and in facts, by concluding that the Appellant has incurred excessive or nonroutine AMP expenses attributable to the Development, Enhancement, Maintenance, Protection and Exploitation ("DEMPE") of marketing intangibles owned by the Associated Enterprise ("AE") and that such expenditure is a separate international transaction of provision of service, without appreciating t....
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.... 12. Without prejudice to the above grounds, the learned AO/ TPO/ DRP have erred, in law and in facts, by considering 'distributor's commission', 'sales commission', 'sales promotion expenses', 'seminar and conventions expenses' and 'travelling and conveyance', incurred in respect of the distribution segment, as part of AMP expenditure while computing the compensation for the alleged DEMPE function performed by the Appellant. 13. Without prejudice to the above grounds, the learned AO/ TPO/ DRP have erred, in law and in facts, by erroneously computing the compensation for the alleged DEMPE function performed by the Appellant for computing the transfer pricing adjustment. 14. The learned AO/ TPO/ DRP has erred, in law and in fact by applying the Bright line test ("BLT") approach to determine excessive AMP or non-routine expenditure which is not in accordance with provisions of the Income Tax Act, 1961. 15. Without prejudice to the above grounds, the learned AO/ TPO/ DRP erred in law and fact, by considering 'Other method' as the Most Appropriate Method ("MAM") and in not appreciating that TNMM has been considered as the MAM and the operating margin of....
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....n of Alcon India for IT support services segment as 10.12% instead of 15% while computing the adjustment. 22. The learned AO/ TPO/ DRP have erred, in law and in facts, by applying only the lower cap on the turnover filter of INR1 crore and not applying any upper cap for the comparability criterion. 23. The learned AO/ TPO/ DRP have erred, in law and in facts, by wrongly applying the persistent loss filter by rejecting the companies reporting losses for any two years out of the last three years. 24. Without prejudice to the above grounds, the learned AO/ TPO/ DRP have erred in law and in facts, by using employee cost greater than 25% of the total revenues as a comparability criterion. 25. Without prejudice to the above grounds, the learned AO/ TPO/ DRP have erred in law and in facts, by rejecting certain comparable companies identified by the Appellant using export earnings greater than 75% of the total revenues as a comparability criterion. 26. Without prejudice to the above grounds, the learned AO/ TPO/ DRP have erred in law and in facts, by accepting / rejecting companies based on unreasonable comparability criteria: a) The le....
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....hreesixty Logica Testing Services Private Limited 28. The learned AO/ TPO/ DRP have erred, in law and in facts, by not making suitable adjustment to account for differences in working capital position of the Appellant vis-à-vis the comparables. 29. The learned AO/ TPO/ DRP have erred, in law and facts, by not making suitable adjustments to account for differences in the risk profile of the Appellant vis-à-vis the comparables. Grounds relating to adjustment in respect of business support services 30. The learned AO/ TPO/ DRP have erred, in law and in facts, by disregarding the economic analysis undertaken by the Appellant in the TP documentation and conducting a fresh search to arrive at the ALP for the impugned international transaction of business support services. Further, the ALP was determined by using incorrect comparable companies engaged in end-to-end software development services. 31. [Modified ground] The learned AO / TPO /DRP have erred, in law and in facts, by accepting / rejecting companies based on unreasonable comparable criteria. a) Functionally comparable companies identified by the Appella....
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....e as per the amount incurred in the earlier assessment year ie. AY 2017-18 instead of the subject assessment year ie. AY 2018-19. d. The meeting, conference and event related expenses amounting to INR 51,01,377 incurred in respect of conference/events organized by the Appellant during the AY 2018-19, are allowable expenses as the Hon'ble DRP has specifically directed to allow such expenses in the DRP directions. The learned AO erred in quantifying the expenditure as per the amount incurred in the earlier assessment year ie. AY 2017-18 instead of the subject assessment year ie. AY 2018-19. e. The sponsorship expenses amounting to INR 8,96,16,573 are allowable expenses incurred during the AY 2018-19 as these sponsorship costs includes expenses pertaining to stall/booth charges for display of products, subscription of journals, information books, to conduct live surgery sessions or sessions by speaker doctors to discuss Appellant's products/ technology etc., in conferences and events organized by various societies/institutions/hospitals and not violative of IMC regulations. The learned AO erred in quantifying the expenditure as per the amount incurred in the earl....
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....ition of Rs.25,19,46,815/- towards disallowance of Seminars, Conventions and Sales Promotion Expenses. Accordingly, the assessed income was determined at Rs. 86,63,71,244/-. 4. The assessee filed objections before the DRP and the ld. DRP passed the order on 27.06.2022 giving marginal relief to the assessee. As per the directions of the DRP, the TPO passed OGE dated 26.07.2022 revising the TP adjustment to Rs.16,05,01,259/- which was incorporated by the AO in the final assessment order. Also, as directed by the DRP, the AO after considering the submissions of the assessee regarding the disallowance of Seminars, Conventions and Sales Promotion Expenses made a disallowance of Rs.9,42,88,256/-. Aggrieved, the assessee has filed the appeal before the Tribunal. 5. The assessee has raised the grounds on the following issues:- (i) AMP Expenses (Grounds 4 to 19) (ii) IT Support Services/SWD segment (Grounds 20 to 29) (iii) BSS segment (Grounds 30 to 32) (iv) Corporate issue regarding disallowance of Seminar, Conventions & Sales Promotion expenses (Grounds 33 to 37). (v) Ground No. 01 to 03 is general in nature, hence, not required for adjud....
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....arked this marketing function, the TPO has benchmarked this transaction separately to determine the ALP of this international transaction. Therefore, the TPO has rightly concluded that the assessee has incurred excessive or non-routine AMP expenditure attributable to DEMPE of marketing intangibles owned by the AE and that such expenditure is a separate international transaction of provision of service. 2.2 Further, the TPO has discussed in para 9.4 of his order that the assessee has not been compensated for the sales and distribution expenditure incurred. It is seen that the TPO has proved that the assessee has incurred far more expenses when it was compared to the companies involved in similar activity. He has mentioned that the assessee has spent substantial portion of money on brand awareness activities. He concluded that this has enhanced the brand image in India. The fact remains that the brand is owned by its AE and hence, the AE has certainly benefitted by the expenses incurred by the assessee. However, the assessee has not been compensated for this. Ld. DRP was in agreement with the arguments of the TPO and found no reason to interfere with the order of the TPO on ....
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....ircumstances of the case, and also considering the submissions of the assessee, we are of the view that the TPO for the detailed reasoning given therein is justified in his approach to make an adjustment on AMP. However, in respect of ground No 2, relating to distributors' commission, we are of the view that the cost relating to provision of warehousing, particularly the cold storage being provided by the distributors, needs to be excluded from the AMP. As per the Consignment Agency Agreement (CAG) entered by the assessee with M/s Parekh Integrated Services Pvt Ltd, Consignment Agent (CA), responsibility is cast on the CA by Clause 11 (a) to provide: (a) The CA shall provide work space equivalent to 500 square feet at the zonal offices and 300 square feet at other locations including two cabins for the zonal mangers of Alcon at the Zonal offices. It is agreed between the Parties that the area of the above work space(s) may be increased or decreased by Alcon as ....The work space provided at the zonal offices and other locations shall include telephone facilities and other accessories of an office premises including but not limited to chairs, tables. CA shall also provi....
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....#39;s Commission 36,80,00,000 Seminars & Conventions 14,87,00,000 Sales Promotion 7,97,00,000 Total AMP 59,64,00,000 Alcon India's AMP to Sales 11.37% 9.3 The Ld.AR submitted that, the revenue made adverse observation that assessee incurred excessive sales and distribution expenses and compared to the comparable companies by using CUP as the most appropriate method. He submitted that the revenue has attributed excessive sales and distribution expenditure to the additional function of promoting and developing the marketing intangibles of the AE by assessee in India by using bright line test. It is the submission of the Ld.AR that, this is not a recognised method under the trans-uprising regulation. 9.4 The Ld.AR submitted that, there is no agreement between the assessee and the AE to make such expenditure in order to promote the intangibles of the AE in India. And in the absence of any specific requirement to make such expenditure on behalf of AE, the expenditures incurred by assessee cannot be treated to be an international transaction. In support, he placed reliance on the decision of Hon'ble Delhi High Court in ....
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....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 foreign AE. We also hold that that in the absence of machinery provisions to ascertain the price incurred by the assessee-company to promote the brand values of the products of the foreign entity, no TP adjustment can be made by invo....
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.... 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 Officer, who, in the meantime, has already issued a show cause notice on September 16, 2010, to proceed with the matter in accordance with law uninfluenced by the observations/directions given by the High Court in the impugned ju....
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.... 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 the car with the logo "Maruti- Suzuki". The Revenue had been unable to contradict the submission of MSIL that the co-brand mark "Maruti-Suzuki" in fact did not belong to SMC and could not be used by SMC either in India or anywhere....
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....ct 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 can be the basis to hold that there was in fact an international transaction in the matter of incurring of AMP expenses by the Assessee. The order of the Tribunal in Assessee's own case for A.Y.2009-10 and 2010-11 in our view r....
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....d the taxpayer's PLI at 10.12% which is at page 42 of Appeal set, which is wrong. The assessee's PLI at 15% has not been disputed by the TPO/DRP, which is more than the 35th percentile at 13.37%. In view of the this, no adjustment can be made in the SWD segment. It is held accordingly. The grounds are allowed. BSS Segment (Grounds 30 to 32) 14. Consequent to the directions of the DRP, the TPO in OGE retained 9 comparables as follows:- (i) Goldmine Advertising Ltd. (ii) Confluence Integrated Services Pvt. Ltd. (iii) Scare Crow Communications Ltd. (iv) Axience Consulting Pvt. Ltd. (v) Dun & Bradstreet Information Services India Pvt. Ltd. (vi) Pressman Advertising Ltd. (vii) Lintas India Pvt. Ltd. (viii) Majestic Research Services & Solutions Ltd. (ix) Chell India Pvt. Ltd. 15. The TPO calculated the ALP as under:- Business Support Services Particulars Amount (in Rs.) Taxpayer's operating revenue 16,12,73,531 Taxpayer's operating cost 14,02,18,274 Taxpayer's operating profit 2,10,55,257 Taxpayers PLI 15.02% 35th Percentile Margin of comparable set 17.11% ....
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....ny is not a pure service provider as it also offers technology products, unlike the Assessee. It is also submitted that the Company earns revenue from subscription or retainership arrangements as well as royalty income which is in contrast to the Assessee's business model under MSS segment. It is submitted that no segmental details are available as regards to various suites of services provided by the Company. 10.1 Reliance in this regard is placed by the ld. A.R. on the Order dated 30.03.2023 passed by this Tribunal in the case of TiVo Tech Pvt. Ltd. v. ACIT in IT(TP)A No. 862/Bang/2022, wherein in the case of a similarly placed assessee for the assessment year 2018-19, this company came to be excluded. 10.2 The ld. D.R. relied on the orders of the lower authorities. 11. We have heard the rival submissions and perused the materials available on record. This issue came for consideration before this Tribunal in the case of Tivo Tech Pvt. Ltd. cited (supra) wherein the Tribunal held as under: "9(ii) It is submitted that Dun & Bradstreet is engaged in providing services in the nature of credit reporting, risk management, learning and economic insigh....
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....ew of the above order of the Tribunal on the basis of functionality, we direct the AO/TPO to exclude this company M/s. Dun & Bradstreet Information Services India Pvt. Ltd. from the list of comparables." 20. Respectfully following the above decision, we direct the TPO/AO for exclusion of Dun & Bradstreet Information Services India Pvt. Ltd. on the basis of functional dissimilarity. Accordingly, as per the submission of the ld. AR, the other companies are not considered as not pressed. This issue is partly allowed. Disallowance of Seminar, Conventions & Sales Promotion expenses (Grounds 33 to 37). 21. The assessee incurred expenses towards Seminar, Conventions & Sales Promotion. The AO issued notices u/s. 142(1) and the assessee submitted reply on 22.09.2021. The AO relied on CBDT Circular No.5/2012 dated 01.08.2012 and observed that any expenses incurred in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible u/s. 37(1) of the Act. He also relied on the judgement of Hon'ble High Court of Punjab & Haryana in the case of CIT vs. Kap Scan and Diagnostic Centre (P.) Ltd. reported in [2012] 25....
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....ssessee. Hence the same is not allowed in view of directions of Hon'ble DRP. Total disallowance 9,42,88,256 22. The AO accordingly disallowed Rs.9,42,88,256 u/s. 37 of the Act. 23. The ld. AR of the assessee reiterated the submissions made before the lower authorities and strongly submitted that these are not in the nature of freebies. It was incurred for the business expediency of the assessee and referred to sample copy at page 2697 and submitted that it was paid to All India Ophthalmological Society and not to the Doctors. 24. The ld. DR relied on the orders of the lower authorities. 25. After hearing the rival contentions, we note that similar issue has been decided by the coordinate Bench of the Tribunal in the assessee's own case for AY 2017-18 (supra) and it was held as under:- "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 an....