2021 (10) TMI 439 - AT - Income Tax

TP adjustment in trading segment - adoption of Most Appropriate Method - assessee has adopted RPM method as most appropriate method while benchmarking the transactions - TPO has rejected the method and adopted TNMM as the most suitable method and proposed TP adjustment - HELD THAT - As relying on assessee's own case 2019 (8) TMI 1766 - ITAT MUMBAI we direct Ld. AO / TPO to consider the benchmarking using RPM method and re-determine the issue of ALP of these transactions. This ground of assessee s appeal stand allowed for statistical purposes. TP adjustment on account of AMP expenditure - International transaction u/s 93B - HELD THAT - We find that there is no express agreement between the assessee and its AE wherein the assessee is required to incur the AMP expenditure for brand building on behalf of its AE. All these payments are third party payments. There is no concrete material in support of conclusion of Ld.CIT that there was a prima facie arrangement between the AE and the assessee to incur such expenditure. The said observation is not supported by any express agreement on record. Unless it was shown that there was such an arrangement which resulted into any direct or indirect benefit to the brand of assessee s AE, these transactions could not be regarded as international transaction u/s 92B as held by Hon ble Delhi High Court in the case of Maruti Suzuki India Ltd. V/s CIT 2015 (12) TMI 634 - DELHI HIGH COURT . Disallowance u/s 37(1) on account of Medical Freebies - expenditure has been disallowed in terms of Indian Medical Council (Professional Conduct, Etiquette and Ethics) regulations, 2002 as applicable from 14/12/2009 - HELD THAT - As in catena of judicial decision, it has been held that the aforesaid regulations apply to Medical Practitioners only and not to pharmaceutical companies incurring such expenditure. The amount so expanded would be an allowable deduction u/s 37(1) - the regulations as referred to by lower authorities to make the disallowance are not applicable to the assessee and thus, the disallowance is not sustainable in law. By deleting this addition, we allow assessee s ground of appeal. Thus we would hold that the given transactions could not be regarded as international transaction as defined under section 92B of the Act and therefore, no transfer pricing adjustment could have been made by the Transfer Pricing Officer in this regard. The grounds raised by the assessee stands allowed which makes revenue s grounds infructuous.

Issues Involved:
1. Upward adjustment in determining the Arm's Length Price (ALP) of international transactions.
2. Non-issuance of notice to the appellant regarding proposed adjustment.
3. Transfer pricing adjustment in respect of purchase of formulations.
4. Transfer Pricing adjustment in respect of significant Advertisement, Marketing, and Sales Promotion (AMP) expenses.
5. Commercial expediency of the appellant's business.
6. Legal expenses related to patent violation cases.
7. Segregation of purchase of formulations and AMP expenses.
8. Consideration of judicial precedents.
9. Disallowance of expenses on conferences, seminars, and sales promotion under section 37(1) of the Act.

Issue-wise Analysis:

1. Upward Adjustment in Determining ALP:
The appellant challenged the upward adjustment of ?164,115,028 made by the AO/CIT(A) in determining the ALP of international transactions related to the purchase of formulations and AMP expenses. The Tribunal noted that the assessee had benchmarked the transactions using the Resale Price Method (RPM), which showed the assessee's margins were higher than the mean margins of comparable entities. However, the TPO applied the Transactional Net Margin Method (TNMM), which resulted in a TP adjustment of ?1703.99 Lacs. The Tribunal upheld the use of RPM as the most appropriate method for benchmarking the transactions, directing the AO/TPO to reconsider the benchmarking using RPM.

2. Non-Issuance of Notice to Appellant:
The appellant contended that the AO/CIT(A) erred by not giving notice about the grounds on which the adjustment was proposed, violating the principle of natural justice. The Tribunal did not specifically address this issue but focused on the appropriateness of the RPM method.

3. Transfer Pricing Adjustment in Respect of Purchase of Formulations:
The appellant argued that the AO/CIT(A) did not correctly consider the functions performed by the appellant while rejecting RPM and applying TNMM. The Tribunal found that the appellant had rightly selected RPM for benchmarking its transactions of importing formulations from its AE, as the goods were resold without any value addition. The Tribunal directed the AO/TPO to re-determine the ALP using RPM.

4. Transfer Pricing Adjustment in Respect of AMP Expenses:
The appellant contended that the AMP expenses incurred were not international transactions as per section 92B of the Act. The Tribunal observed that there was no express agreement between the appellant and its AE to incur AMP expenses for brand building on behalf of the AE. The Tribunal held that the transactions could not be regarded as international transactions under section 92B, relying on the decision in Maruti Suzuki India Ltd. v/s CIT. Consequently, the TP adjustment on AMP expenses was deleted.

5. Commercial Expediency of Appellant's Business:
The appellant argued that the AO/CIT(A) erred in questioning the commercial expediency of its business of distributing pharmaceuticals in India. The Tribunal did not specifically address this issue but focused on the appropriateness of the RPM method and the non-applicability of AMP expenses as international transactions.

6. Legal Expenses Related to Patent Violation Cases:
The appellant contended that the AO/CIT(A) erred in stating that the appellant incurred legal expenses related to patent violation cases in India. The Tribunal did not specifically address this issue but focused on the broader TP adjustments and disallowances.

7. Segregation of Purchase of Formulations and AMP Expenses:
The appellant argued that the AO/CIT(A) erred in segregating the purchase of formulations and AMP expenses and undertaking separate TP adjustments for both transactions. The Tribunal upheld the use of RPM for benchmarking the purchase of formulations and deleted the TP adjustment on AMP expenses, effectively addressing the segregation issue.

8. Consideration of Judicial Precedents:
The appellant contended that the AO/CIT(A) considered only judicial precedents in favor of the Revenue and failed to distinguish those in favor of the appellant. The Tribunal relied on various judicial precedents to uphold the use of RPM and delete the TP adjustment on AMP expenses, thereby addressing the appellant's concerns.

9. Disallowance of Expenses on Conferences, Seminars, and Sales Promotion Under Section 37(1):
The appellant challenged the disallowance of expenses on conferences, seminars, and sales promotion under section 37(1) of the Act. The Tribunal noted that the disallowance was made based on Indian Medical Council regulations applicable to medical practitioners, not pharmaceutical companies. The Tribunal cited several judicial decisions to conclude that the regulations did not apply to the appellant, and the disallowance was not sustainable in law. The disallowance was deleted.

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the appellant's appeal. The Tribunal upheld the use of RPM for benchmarking the purchase of formulations and deleted the TP adjustment on AMP expenses. Additionally, the Tribunal deleted the disallowance of expenses on conferences, seminars, and sales promotion under section 37(1) of the Act.

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