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TMI Blog2015 (12) TMI 1172X X X X Extracts X X X X X X X X Extracts X X X X ..... ght of the details discussion made above, the Panel holds that the free samples are not covered by the IMC regulations of 2002 (as amended in 2009) read with CBDT circular no. 5/2012, UCPMP and the Drugs and Cosmetic Act and regulations made there under. Accordingly the AO is directed to delete the proposed addition on this account.- Decided against REVENUE Transfer Pricing Adjustment on account of provision of business support services - Held that:- Since the operating profit to cost margin of the appellant at 9.26% is higher than the operating profit to cost ratio of the comparable companies at 6.30%, the adjustment made by the AO/TPO/DRP, in relation to international transaction of provision of business support services, is deleted. In view of the above conclusion, we do not find, it necessary to adjudicate as to the comparability of inclusion of ‘Aptico Limited’, ‘Global Procurement Consultants Limited.’ and HCCA Business Services (P) Ltd., and the objection of the assessee in respect of these two companies are kept open. The grounds are allowed to the extent discussed above. - ITA No.788/Del./2015 - - - Dated:- 24-11-2015 - SHRI S.V.MEHROTRA, ACCOUNTANT MEMBER and SHRI A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction Limited ( IHPL ) (iv) Indus Technical Financial Consultants Limited ( ITFCL ) 3.2 That the assessing officer/DRP erred facts and in law in rejecting the following companies without appreciating that the relevant business segments of these companies were functionally comparables to the international transactions of business support services undertaken by the appellant: Sr. No. Name of the company Comparable segment 1. Educational Consultant India Limited Technical assistance and human resource development 2. ITDC Limited Event management segment 3. In House Production Limited Healthcare division 3.3 That the assessing officer/DRP erred on facts and in law in rejecting the above companies from the set of comparable companies not appreciating that the relevant business segments of these companies were considered by the DRP for undertaking the benchmarking analysis in the preceding year. 3.4 The DRP/TPO erred on facts and in law in conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2010 declaring an income of ₹ 16,75,13,196/- which came to be assessed at an income of ₹ 23,06,18,730/- in an order dated 12.1.2015 u/s 144C/143(3) of the Act and hence this appeal by appellant company 4. Ground No. 1 is general and is therefore rejected. 5. Ground 2 to 2.3 relates to disallowance under section 37(1) of the Act of ₹ 5,42,19,943/- being expenditure incurred towards distribution of free samples to doctors/medical practitioners, holding the same to be incurred in contravention of the guidelines issued by Indian Medical Council read with circular 05/2012 issued by the CBDT. 6. The relevant facts, as succinctly stated are that assessee had incurred an amount of ₹ 5,42,19,943/- towards distribution of free samples to doctors/medical practitioners. The Assessing Officer/DRP disallowed the whole of the above expenditure in view of the Circular No. 5/2012 [F. No. 225/142/2012-ITA-II] dated 01.08.2013 issued by the Central Board of Direct Taxes ( CBDT ) read with Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 observing that above free samples of medicines distributed by the appellant to doctors/ medical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edure ( SOP ) adopted by the assessee to distribute samples to doctors/medical practitioners. It was submitted that the sample so distributed to the doctors/medical practitioners by the appellant are in pursuance of the specific request being made by the latter and such samples are not distributed voluntarily/ suo-moto to any doctor/ medical practitioner in order to influence the latter s discretion of prescribing its medicines to the patients. A reference was made to Regulation 6.8 of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, (as amended in 2009), which reads as under: 6.8.1 in dealing with pharmaceutical and allied health sector industry a medical practitioner shall follow and adhere to the stipulations given below: a) Gifts: A medical practitioner shall not receive any gift from any pharmaceutical or allied health care industry and their sales people or representatives. b) Travel Facilities: A medical practitioner shall not accept any travel facility inside the country or outside including rail, air, ship, cruise tickets, paid vacations, etc. from any pharmaceutical or allied health care industry or their representatives ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and/or with the autonomy and freedom of the medical institution. g) Affiliation: A medical practitioner may work for pharmaceutical and allied healthcare industries in advisory capacities, as consultants, as researchers, as treating doctors or in any other professional capacity. In doing so, a medical practitioner shall always: (i) Ensure that his professional integrity and freedom are maintained; (ii) Ensure that patients interest are not compromised in anyway; (iii) Ensure that such affiliations are within the law; (iv) Ensure that such affiliations/employments are fully transparent and disclosed. h) Endorsement: A medical practitioner shall not endorse any drug or product of the industry publically. Any study conducted on the efficacy or otherwise of such products shall be presented to and/or through appropriate scientific bodies or published in appropriate scientific journals in a proper way. 8. On the basis of the aforesaid regulations, it was contended that doctors/medical practitioners are prohibited from receiving, inter-alia, any gift or cash or monetary grants or travel facility from any pharmaceutical or any allied healthcare industry. It was submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.5 The companies will maintain details, such as product name, doctor name, Quantity of samples given, Date of supply of free samples distributed to Healthcare practitioners etc. 6. Gifts 6.1 No gifts, pecuniary advantages or benefits in kind may be supplied, offered or promised to persons qualified to prescribe or supply drugs, by a pharmaceutical company or any of its agents i.e. distributors, wholesalers, retailers etc. 6.2 Gifts for the personal benefit of healthcare professionals and family members (both immediate and extended) (such as tickets to entertainment events) also are not be offered or provided. 9. Further, reference was also made to the provisions of Drugs and Cosmetics Act, 1945 wherein the distribution of free samples had been held to be permissible, i.e. not against the public policy, subject to certain conditions. The relevant extracts of such regulations has relied upon as below: 65 (18): No drug intended for distribution to the medical profession as free sample which bears a label on the container as specified in clause (viii) of sub-rule (1) of rule 96, and no drug meant for consumption by the Employees State Insurance Corporation, the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f drugs shall not be supplied to any person who is not qualified to prescribe such product. 5.2 Where sample of products re distributed by a medical representative, the sample must be handed directly to a person qualified to prescribe such product or to a person authorized to receive the sample on their behalf 5.3 The following conditions shall be observed in the provisions of samples to a person qualified to prescribe such product. i) Such samples are provided on an exceptional basis only (see (ii) to (vii) below) and for the purpose of acquiring experience in dealing with such a product ii) Such sample packs shall be limited to prescribed dosages for three patients for required course of treatment iii) Any supply of such sample must be in response to a signed and dated request for the recipient iv) An adequate system of control and accountability must be maintained in respect of the supply of such samples v) Each sample pack shall not be larger than the smallest pack present in the market vi) Each sample shall be marked free medical sample-not for sale or bear another legend of analogous meaning vii) Each sample shall be accompanied by a copy of the most ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he license/distributor and regulation 95 regards as under: 65(18) No drug intended for distribution to the medical profession as free sample which bears a label on the container as specified in clause (viii) of sub-rule () of rule 96 and no drug meant for consumption by the Employees State Insurance Corporation. The Central Government Health Scheme, the Government Medical Stores Depots, the Armed Forces Medical Stores or other Government institutions, which bears a distinguishing mark or any inscription on the drug or on the label affixed to the container thereof indicating this purpose shall be sold or stocked by the licensee on his premises 95 Prohibition of sale or distribution unless labeled-subject to the other provisions of these Rules, no person shall sell or distribute any drug (including a patent or proprietary) unless it is labeled in accordance with these Rules. Thus, it becomes evident that even the Drugs and Cosmetics Act and regulations made there under do not prohibit the licensee or a medical practitioner to distribute the free samples, albeit following prescribed conditions. On this account also, the Panel observes that the free samples cannot be said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this cannot be permitted and there is abundant authority reiterating that principle. Thirdly, the same principle, namely, that of setting to rest rights of litigants, applies to the case where a point, fundamental to the decision, taken or assumed by the plaintiff and traversable by the defendant, has not been traversed. In that case also a defendant is bound by the judgment, although it may be true enough that subsequent light or ingenuity might suggest some traverse which had not been taken. 16. For the aforesaid reasons stated above the disallowance made are deleted and grounds raised are allowed. 17. Ground No. 3 to 3.9 relates to Transfer Pricing Adjustment of ₹ 88,85,591/- on account of provision of business support services. 18. That during the relevant assessment year, the assessee had undertaken the following international transactions: Sr. No. Types of International Transaction Method selected Total Value of Transaction 1 Purchase of Formulations TNMM 150,21,21,570 2 Co-ordination of Clin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 In House Production Limited (Segment) (Healthcare division) 1.51% 7 ITDC Limited 5.31% 8 Ma Foi Global Services -0.54% 9 Ma Foi Management Consultants Limited 3.61% 10 Overseas Manpower Corpn. Limited 3.23% 11 Times Innovative Media Limited -2.21% Average 7.23% 20. It was submitted that since arithmetic average of the operating profit margin of the said comparables was computed at 7.23% and the price charged in its international transactions is more than the said arithmetical mean price, the price charged in the international transactions has been treated as at arm s length. 21. The Assessing Officer referred the matter to the TPO. The TPO, by an order dated 23rd January, 2014, under section 92CA(3) of the Act, computed the TP adjustment at ₹ 88,85,591/- (Rupees Eighty Eight Lacs Eighty Five Thous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HT Music Entertainment Co. Ltd. Functionally not comparable 5 Ma Foi Global Search Services Ltd. Different year ending and it also fails positive networth filter 6 ICRA Management Consulting Services Limited Functionally not comparable 7 ITDC Limited (Segment) Functionally not comparable 8 In House Production Limited (Segment) (Healthcare division) Functionally not comparable 9 Overseas Manpower Corpn. Limited Functionally not comparable 24. Also, the TPO brought following companies in the final set of comparable companies which were rejected by the assessee in its transfer pricing study on account of functional dissimilarity: Sr. No. Name of the Company OP/TC (%) 1 Aptico Limited 9.91% 2 Global Procurement Consultants Limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after DRP ) against the adjustment proposed by the Assessing Officer in its draft order. The DRP vide its order dated 16.12.2014, rejected the objections raised by the assessee in its order and confirmed the above adjustment and, following which addition of ₹ 88,85,591 was made in the final order dated 12.1.2015 u/s 143(3)/144C of the Act 28. The learned counsel for the assessee during the course of hearing that once M/s Educational Consultant India Ltd., M/s ITDC Ltd. and M/s In House Production Ltd. are included in the set of comparables and furthermore M/s TSR Darashaw Ltd. is excluded from set of comparables, then the margin of the appellant is within the range. 29. Having regard to the above submission, we take up the comparable Educational Consultant India Limited (EDCIL) (Technical assistance HRD) (Segment). The TPO/DRP has excluded the above comparable on the ground that the company is involved in educational consultancy business and is not providing any services, hence it is functionally different and cannot be accepted. 30. Having considered the rival submissions we find that the aforesaid company was held to be valid comparable in our own order for Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reason to reject the company this year. After considering the above facts, we find that functionally it is comparable and TPO is directed to include it in the list of comparables for computation of ALP 21 For the foregoing reason and there being no change in the facts for the instant assessment year, the AO/DRP is directed to include EDCIL in the final set of comparable companies. Reliance in this regard is placed on the following observation of the Mumbai Bench of the Tribunal in the case of ACIT vs. NGC Network India (P) Ltd. 10 taxmann.com 140 wherein it has been held as under: These comparables and the method of computation of arm s length price has been accepted by the department in the subsequent assessment year i.e. 2004-05. Therefore in our view comparables selected by the assessee have to be adopted for the purpose of computation of transfer pricing adjustments this year also. 22 Thus, after including EDCIL in the final set of comparable companies considered by the TPO, the average operating profit to cost margin of the comparable companies works out to 14.98%, as under: Sr. No. Name of the Company OP/TC (%) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Reservation and Marketing Service Division ( ARMS ) and Ashok Consultancy Engineering Division 34. He further submitted that for the purpose of the comparability analysis, the ARMS segment has been considered comparable to the appellant s business. 35. The DR argued for the exclusion of the said comparable. 36. Having considered the rival submission we find that ITDC operates in the various segments, and for the purpose of the comparability analysis, the SEL ARMS Misc Operations segment has been considered comparable to assessee s business. The relevant segment provides event management services, which identifies and coordinates with various service agencies for its clients and the same is comparable to the nature of services rendered by the assessee to its AEs. The services rendered by the company under the ARMS segment, as noted from the website of the company are reproduced as under: Management Consultancy and Advisory Services: These envisage assistance in project management, recruitment of personnel, imparting in-house on-the-job-training of hotel staff. ITDC can also offer group-marketing services through its network of Ashok Reservation and M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nctionally it is comparable and TPO is directed to include it as a comparable for computing ALP. Relevant extract from DRP order of AY 2009-10 is as follows: 2 In House Production Limited Functionally different Functionally similar According to the assessee the IHPL the company has two main business segments, namely-media Division and Healthcare. In the media division, the company is engaged in sale of programming software and related rights. Under the Healthcare division IHPL provides access to information relating healthcare technology including management practices and knowledge database to healthcare delivery institution and health professional in India. This is similar to information/knowledge being provided by the assessee to its AEs. Hence, this division is comparable to the assessee. DRP has examined the above contentions and submission of the assessee. We find that functionally it is comparable for computing ALP. 40. Having regard to the above we find force in the submission of assessee and as such direct the inclusion of M/s In House Production Ltd. 41. Further so far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er pricing study report. The TPO accepted the functional comparability of this segment of the company with the assessee s marketing support services agreement. The ld. AR contended that this company was wrongly included in the list of comparables and the same should be excluded. The ld. DR objected to the exclusion of this company on the ground that since the assessee voluntarily included it in the final set of comparables, now it cannot turn around to contend its incomparability. 17. We are not inclined to uphold the objection taken by the ld. DR on the inclusion of this company as comparable merely on the fact that the assessee treated it as comparable in its TP study report. It goes without saying that there can be no estoppel against correctness. If the assessee inadvertently includes a company in its final set of comparables, which is, in fact, not comparable, he has a right to agitate before the authorities that this company may be excluded. This right of the assessee does not, in any manner, prejudice the powers of the authorities to examine the comparability of the company which is sought to be excluded. If, on making such an analysis, the authorities find that the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d from the final set of comparables. 44. Following the above decision M/s TSR Darashaw is held to be not functionally comparable to the appellant and is directed to be excluded from the set of comparable companies. 45. Having regard to the above conclusion we find that as a result of the above inclusion of M/s Educational Consultant India Ltd., M/s ITDC Ltd. and M/s In House Production Ltd. and exclusion of TSR Darashaw Ltd. in the final set of comparable, the average operating profit to cost ratio works out to 6.30% as under: Sr. No. Name of the Company OP/TC (%) (without Forex) 1 Cyber Media India Online Limited formerly IDC (India) Limited 14.85% 2 Quadrant communications Limited 13.11% 3 Cameo Corporate Services Limited 8.26% 4 ICRA Management Consulting Services Limited 1.94% 5 Educational Consultant Ind Limited (Segment) (Technical assistance HRD) 7.37% ..... X X X X Extracts X X X X X X X X Extracts X X X X
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