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TMI Blog2016 (11) TMI 1453X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion the DRP was right in directing the Ld.TPO to examine the facts and ascertain the interest on receivables in accordance to the decision of Hon’ble Delhi High Court in the case of CIT vs. Cotton Naturals India private limited [2015 (3) TMI 1031 - DELHI HIGH COURT]. - Matter restored before the TPO. Disallowances u/s 37(1)- assessee could not discharge burden of proving that the advertisement, business promotion expenses, and travel expenses to doctors and other medical personnel are business expenses - Held That:- assessee has incurred expenses in the garb of marketing the cardiac machine, onus is upon the assessee to prove that the expenses incurred do not violate any law that may be applicable. we are of the considered opinion that entertaining doctors inside/abroad and luring doctors to solicit business by, which is prohibited under Regulation 6.8.1 of the MCI Regulations, and hence is clearly not allowable - Decided against assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... from the AEs beyond the credit period of the Assessee on an ad hoc basis, while completely disregarding the detailed submissions made by the Assessee to explain that such adjustments are not mandated under the facts and circumstances of the Assessee; 2.8 disregarding the actual date of the invoice and taking an arbitrary date of October 1, 2010 as the date of invoice raised for provision of marketing support services, for computation of interest on receivables outstanding on the last date of the year ; 2.9 not appreciating the fact that the said advances were nothing but mere balances recoverable from the Associated Enterprises ("AE") on account of genuine business transactions in the regular course of business and concluding that the Assessee has made interest free advances to its AEs; and 2.10 not appreciating the fact that working capital adjustment adjusts the mark-up of comparable companies on account of variation in the working capital of the Appellant. Grounds relating to corporate tax disallowances 3. The Ld. DRP has erred in law in directing the AO to enhance the income of the applicant by invoking the provisions of Section 1440(8) of the Act without a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had also declared a book profit of ₹ 36,27,614/- under the provisions of section 115 JB of the Act. The case was selected for scrutiny and notices under section 143 (2) was issued to assessee along with questionnaire and notice under section 142(1), requiring assessee to submit various information as called for. The assessing officer observed that during the year under consideration, assessee has entered into international transaction with its associated enterprises and thus the case was referred to transfer pricing officer for determination of arms length price under section 92C(1) of the Act. 4. The Ld. TPO issued notice to the assessee calling for various documents to be filed along with documentation under rule 10 D of the Income tax Rules 1962. 5. The ld.TPO observed that assessee is engaged in marketing, presale and related activities for customers (hospital and doctors) for medical products in India. It was observed that w.e.f. 25/11/2008 the associated enterprise, Ireland entered into an exclusive distributorship agreement with independent distributor, being Trivitron Healthcare Private Ltd. (Trivitron), for sale, marketing, distribution and delivery of products an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese comparables were available for the relevant financial year under consideration and they pass through the other filters applied by the TPO as these are also comparable to the assessee. After the DRP's directions the final set of comparables for consideration are as under: S. No. Company Name OP/TC margin (TP Study margins) 1 I D C (India) Ltd. 10.71% 2 Quadrant Communications Ltd. 14.58% 3 Empire Industries Ltd. (Trading & Indenting) 22.63% 4 Entertainment Network (India) Ltd. (Events (Consolidated)) 1.96% 5. Priya International Ltd. (Indenting) 4.20% 11. In respect of interest on outstanding receivables, DRP held that in case invoices is raised in foreign currency, interest will be computed using LIBOR +400 basis points and in case invoices are being raised in Indian currency the interest would be as per SBI base rate +150 basis point, if the value of the receivables is less than ₹ 50 crore and in case the value of the receivables are more than ₹ 50 crores, the interest rate would be SBI rate +300 basis point. The DRP also took October 2010 to be the midpoint of the year as the due date of invoice raised for provision of marketing support service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces for its holding company being Boston scientific International B.V(Netherlands). As per this agreement the assessee shall provide following services: * import of marketing and promotion materials for the holding company that is brochure's literature etc for carrying out marketing of Boston scientific products in Indian * providing information and creating awareness about Boston scientific products * Organizing and conducting seminars and workshops to provide information about Boston scientific products * distribution of the said brochure's, literatures etc * meeting with doctors and providing technical clarifications; and * Providing administrative support to assessee's independent distributor in India. 17. Besides these function assessee also performs general management functions which include: * Finance and accounting function: both assessee as well as its holding company are responsible for managing the day-to-day finances and accounting functions. They're also responsible for all local statutory compliances. Further in certain cases when necessary assessee is guided/supported by its holding company. * Human resource management function: assessee responsible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee as the assessee is also providing technical clarifications to the doctors. 21.2. We have perused the records placed before as and the arguments advanced by both the parties. As per the annual report of this comparable this company is promoted by export import bank of India in association with leading Indian public sector and private sector consultancy Organisation on the basis of public-Private partnership model that offers particular focus on procurement. It's services has been outlined in the annual report as conducting independent procurement review of multilaterally funded projects spread across the globe. The company has also undertook Valuation Assignments as listed at page 237 of the paper book. It is basically into providing advise on procurement and carrying out procurement audit. These services provided by this company are very much different from those rendered by assessee. We therefore direct the ld.TPO to exclude this company from the final list of comparables. Info Edge India Ltd. 22. The assessee has objected to the inclusion of this company as it is functionally different from that of the assessee. It has been contended that this company is engaged in recru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laced before us. In our view allocation of un-allocable expenses must be made on the basis of gross margin of distribution function and commission income receipts and not on the basis of sales as adopted by the TPO. Thus we direct the ld.TPO to recomputed margin of this company by allocating unallocable expenses to the gross profit as the basis. Interest on receivables 24. At the outset the Ld.AR in the synopsis has submitted that the interest on receivables cannot be treated as an international transaction as the interest proposed to be charged if any, is already built in the price charged. It has been further submitted in the synopsis that once the ALP in respect of any service is determined, it is deemed to cover all the aspects of the transactions. Reliance has been placed on the decisions of this Tribunal in the case of M/s.Avnet India Pvt. Ltd. Vs. DCIT in ITA No. 757/BANG/2011 for assessment year 2007-08 and Micro Inks Ltd versus ACIT reported in (2013) 36 Taxmann.com 50. 25. The Ld.AR has put forth alternative argument in the synopsis that as the invoice for the payment has been raised only at the year-end that is on 31/03/2011, the receivables were outstanding only for o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urse of carrying on the business. Once any debt arising during the ITA Nos. 2010 & 2575/Del/2014 course of business has been ordained by the legislature as an international transaction, it is, but, natural that if there is any delay in the realization of such debt arising during the course of business, it is liable to be visited with the TP adjustment on account of interest income short charged or uncharged. Under such circumstances, the contention taken by the assessee before the TPO that it is not an international transaction, turns out to be bereft of any force. 23. The Hon'ble Bombay High Court in the case of CIT vs. Patni Computer Systems Ltd., (2013) 215 Taxmann 108 (Bom.) dealt, inter alia, with the following question of law:- "(c) Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 926(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, losses or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra). On perusal of this decision it is very clear that Explanation has sought to include, 'any other debt arising during the course of business' as international transaction with a retrospective effect thereby covering the assessment year under consideration That being so, the payment/nonpayment of interest or receipt/non-receipt of interest on the loans accepted or allowed in the circumstances as mentioned in this clause of the Explanation, also become international transactions, requiring the determination of their ALP. 29. The decisions relied upon by the assessee are prior to the insertion of the explanation to section 92B and therefore the ratio laid down cannot be applied to the assessee before us. Respectfully following the decision in Ameriprise India private limited (supra), we reject the argument of the Ld. AR that interest charged by the assessee is in included in the prize charged and would not amount to international transaction. 30. Adhering further, to understand whether the interest proposed to be charged by the assessee is built in the prize charged, it would be necessary to deal with the relevant clauses of the Marketing Support Services Agreement d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments are received by the assessee which happens to be falling in the next financial year. Under such method of crediting the receivables, even during this financial year relevant to the assessment year under consideration, assessee would have received receivables pertaining to the previous financial year being 2008-09. At this juncture we have observed the manner in which assessee have been shifting the payment of receivables to the succeeding financial year. This cannot be allowed as the ALP of an international transaction has to be calculated in the year in which services have been rendered. 38. There is a categorical finding recorded by DRP that assessee has not submitted complete details regarding the currency in which receivables are to be paid to the assessee and the details of computation of interest on the receivables before ld.TPO. As the facts have not brought on record by the assessee, in our opinion the DRP was right in directing the Ld.TPO to examine the facts and ascertain the interest on receivables in accordance to the decision of Hon'ble Delhi High Court in the case of CIT vs. Cotton Naturals India private limited reported in 2015-TII-09-HTC-DEL-TP. 39. We there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h complete details to the AO within a week." 42. Subsequently the assessing officer called upon the assessee to provide all the details as per the directions of DRP. After perusal of the details and the submissions the Ld.AO disallowed the payments made to directly and indirectly to the doctors amounting to ₹ 13,14,548/-, expenses incurred by the assessee under the head meetings/seminars/Convention expenses amounting to ₹ 19,06,000/-and the sponsorship paid amounting to ₹ 8 Lacs. Aggrieved by the disallowance made the assessee is in appeal before us now. 43. The Ld. AR submitted that assessee being a leader in medical equipment industry, is quite often approached by event organising committees for co-sponsoring prestigious events conferences along with other corporate in the pharmaceutical industry. The ld.AR submitted that the expenditure incurred by the assessee in relation to Honorarium fee, registration charges for conferences/seminars and travelling expenses in relation to doctors or medical practitioners does not amount to provision of freebies and accordingly will not be covered by the CBDT circular read with MCI regulations. It has been submitted that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade in respect of such expenditure." 47. The explanation has been included in order to curb those benefits that would be expended which are unwarranted for, under any applicable law. The purpose of incorporation of this explanation has been explained by the CBDT vide Circular No. 772 dated 23/12/1998. Thus it emerges that an assessee would not be entitled to deduction of any payments that has been made in contravention of law. 48. MCI Regulations fall within the definition of 'law', and hence, covered under Explanation to section 37 of the Act. Now we shall proceed to examine the nature of expenses incurred by the assessee in respect of doctors/medical petitioners in the light of exercise of powers conferred under the Indian Medical Councils Act 1956,that has been amended as the Indian Medical Council (professional conduct, etiquette and ethics) 2002, which has been amended vide notification dated 10/12/2009. Regulation 6.8 has been added which prohibits a medical practitioner from taking any gifts, travel facilities, cash or monetary grants hospitality from any pharmaceutical or allied healthcare sector which reads as under: "6.8 Code of conduct for doctors and profession ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an volunteers, if they are necessary for the research project(s). (vi) Ensure that undue animal experimentations are not done and when these are necessary they are done in a scientific and a humane way. (vii) Ensure that while accepting such an assignment a medical practitioner shall have the freedom to publish the results of the research in the greater interest of the society by inserting such a clause in the MoU or any other document / agreement for any such assignment. f) Maintaining Professional Autonomy: In dealing with pharmaceutical and allied healthcare industry a medical practitioner shall always ensure that there shall never be any compromise either with his / her own professional autonomy 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 any way. (iii) E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is difficult to make out whether these doctors have entered into agreements with assessee in their individual capacity or on behalf of respective hospitals with whom they are associated, as its representative. 52. As the assessee has incurred expenses in the garb of marketing the cardiac machine, onus is upon the assessee to prove that the expenses incurred do not violate any law that may be applicable. The burden lies upon the assessee which has not been discharged with cogent evidences/materials. Merely by placing the bills of payments, the travel details, the hotel details where the doctors were stationed and the seminars/conferences were conducted does not prove that in reality the conferences were actually attended by such doctors. Assessee has also not demonstrated that the doctors by participating in such conferences/accepting the hospitality extended by the assessee has not contravened any MCI regulations. 53. In the light of the above discussion we are of the considered opinion that entertaining doctors inside/abroad and luring doctors to solicit business by, which is prohibited under Regulation 6.8.1 of the MCI Regulations, and hence is clearly not allowable in view ..... X X X X Extracts X X X X X X X X Extracts X X X X
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