2022 (11) TMI 1321 - AT - Income Tax

Adjustment on account of alleged excessive AMP expenditure - HELD THAT - As relying in assessee s own case in assessment year 2022 (12) TMI 238 - ITAT BANGALORE we redirect the Ld.AO/TPO to delete the addition made towards AMP expenses. Disallowance of Seminars Conventions and sales promotion expenses - expenses incurred related to doctors in the form of seminars and conventions and sales promotion - HELD THAT - Similar issue came for consideration before this Tribunal in the case of Astra Zeneca Pharma India Ltd 2023 (1) TMI 1114 - ITAT BANGALORE A.O. had primarily made disallowance by referring the CBDT Circular No.5/2012 dated 01.08.2012. The A.O. has not critically examined the nature of expenditure incurred by the assessee. In the larger interest of justice in view of the latest judgment of the Hon ble Apex Court which has examined the very same issue it becomes necessary to examine the exact nature of expenses incurred by the assessee for Doctors from all angles. Therefore for substantial question and cause the additional evidence are taken on record. Since the additional evidence is taken on record necessarily the matter needs fresh verification by the A.O. especially in the light of the recent judgment of the Hon ble Supreme Court in the case of M/s. Apex Laboratories Pvt. Ltd. 2022 (2) TMI 1114 - SUPREME COURT For the aforesaid purpose the issues raised are allowed for statistical purposes. Adjustment in respect of IT support services - Companies functinally dissimilar with that of assessee need to be deselected - we direct the AO/TPO to exclude M/s. Infosys Ltd. M/s. L T Infotech Ltd. M/s. Persistent Systems Ltd. and M/s. Thirdware Solutions Ltd. from the lists of comparables and to recompute the ALP of international transactions with A.E. Ordered accordingly.

Summary

Issues Involved:
1. Adjustment on account of alleged excessive AMP expenditure.
2. Disallowance of seminars, conventions, and sales promotion expenses.
3. Adjustment in respect of IT support services.

Detailed Analysis:

1. Adjustment on Account of Alleged Excessive AMP Expenditure:
The primary issue revolves around the adjustment for excessive Advertisement, Marketing, and Promotion (AMP) expenditure. The assessee contended that the AMP expenses incurred were not excessive or extraordinary and should not be treated as a separate international transaction. The Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) concluded that the AMP expenses were attributable to the Development, Enhancement, Maintenance, Protection, and Exploitation (DEMPE) of marketing intangibles owned by the Associated Enterprise (AE), and thus, a separate international transaction. The TPO benchmarked this transaction separately to determine the Arm's Length Price (ALP). The Tribunal, referencing its decision in the assessee's case for the assessment year 2012-13, held that the AMP expenditure should not be treated as a separate transaction and should be considered part of the operating cost for determining the ALP. Consequently, the Tribunal ruled in favor of the assessee, directing the deletion of the AMP expenditure adjustment.

2. Disallowance of Seminars, Conventions, and Sales Promotion Expenses:
The second issue pertains to the disallowance of expenses incurred on seminars, conventions, and sales promotions. The Assessing Officer (AO) disallowed a portion of these expenses, citing the CBDT Circular No. 5/2012 and the Indian Medical Council (Professional Conduct, Etiquette, and Ethics) Regulations, 2002. The assessee argued that these regulations apply only to medical practitioners and not to pharmaceutical companies. The Tribunal, referencing the Supreme Court's judgment in the case of M/s. Apex Laboratories Pvt. Ltd. v. DCIT, remitted the issue back to the AO for fresh consideration. The AO was directed to critically evaluate the nature of the expenses and determine if they were in violation of the MCI Regulations and the CBDT Circular.

3. Adjustment in Respect of IT Support Services:
The third issue involves the adjustment for IT support services. The assessee contested the inclusion of certain comparables used by the TPO to determine the ALP. The Tribunal examined the functional comparability of the following companies: Infosys Ltd., L&T Infotech Ltd., Persistent Systems Ltd., and Thirdware Solutions Ltd. The Tribunal found that these companies were not functionally comparable to the assessee due to their diversified operations, significant intangibles, and high brand value. Consequently, the Tribunal directed the exclusion of these companies from the list of comparables and ordered the AO/TPO to recompute the ALP of the international transactions with the AE.

Conclusion:
The Tribunal ruled in favor of the assessee on the issues of excessive AMP expenditure and the comparability of certain companies for IT support services. The issue of disallowance of seminars, conventions, and sales promotion expenses was remitted back to the AO for fresh evaluation in light of the Supreme Court's judgment. The appeals were partly allowed for statistical purposes.