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TMI Blog2018 (10) TMI 1752X X X X Extracts X X X X X X X X Extracts X X X X ..... VERTISING, MARKETING AND PROMOTION (AMP) EXPENSE Ground Nos. 1.1 to 1.7 for Asst Year 2012-13 Ground Nos. 1.1 to 1.7 for Asst Year 2013-14 The facts of Asst Year 2012-13 are taken up for adjudication and the decision rendered thereon would apply with equal force for Asst Year 2013-14 also except with variance in figures. 2.1. The brief facts of this issue are that the assessee company performs value added distribution segment akin to secondary manufacturing i.e converts the raw materials imported from Associated Enterprises (AEs) into pharmaceutical formulations. The assessee does not possess any manufacturing facilities of its own. It outsources its entire production requirements to toll manufacturers / contract manufacturers on a licence basis. The company sources the various raw materials required to manufacture the formulations and gets it converted from third party toll-manufacturers. The return of income for the Asst Year 2012-13 was filed by the assessee company on 29.11.2012 declaring total income of Rs. 32,99,14,180/-. During the course of scrutiny proceedings, the assessee's case w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h from Akzo Nobel on November 19,2007, Organon India became a part of the Schering-Plough Group (hereinafter referred to as "SP Group"). With effect from 4th November, 2009, Organon India became a part of Merck & Co. pursuant to the merger of Merck & Co., Inc., USA and Schering-Plough Corporation. Organon India was formerly known as Infar (India) Limited, was incorporated on August 30,1967. The holding of Organon India which was 49% at the time of formation was reduced to 40% consequent to FERA regulations and thereafter increased to 51% in 1996. The shareholding pattern as on March 31,2012 is 99.99%. 2.3. As per the TP Study Report, the assesee company operated in various therapeutic areas including Cardio Vascular, Contraception, Fertility, Neuro / Ophtha / Anesthesia and Primary Care as under:- 2.4 Functions performed by Organon India 2.4.1 Functions performed by OIPL in the course of its manufacturing operations 2.4.1.1 Import of raw materials During the financial year 2011-12 Organon India imported raw materials from its related parties as well as unrelated parties. The raw materials were processed further for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he annual production plan, the amount of capacity available for export is determined. Production is scheduled according to the delivery schedule for the exports. c. Quality Control Organon India has a well-established quality control system in place. Quality specifications for the entire process are established. These standards are monitored such that they meet the specifications at all stages of production. The entire cost of quality control is borne by Organon India. The quality control system is uniform for all products and does not differentiate between export and domestic production. d. Marketing For the goods which are exported to AEs no marketing activities are required to be done as the quantum of exports to be made are predetermined at the beginning of the year through production scheduling. These are confirmed sales. However, in the case of exports made to the third parties, advertisement and sales promotion activities are undertaken by Organon India. e. Packaging Organon India has subcontracted its manufacturing operations to contract manufacturers who work under the strict supervision and control of Organon India. Sub-cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with stockist. The stockist caters to the requirements of the retailers. Organon India carries out all functions related to identification of products for distribution in the Indian market, obtaining necessary local government or regulatory approvals. a. Logistics Organon India determines and arranges logistics for import and domestic sale/export of finished b. Marketing and Promotion For the goods which are sold / exported to AEs no marketing activities are required. However, in case : sale/exports made to third parties, advertisement and marketing activities are undertaken by Organon India. c. Order booking from customers For exports to AEs, programme schedule is prepared at the beginning of the year and shipments are made depending on the delivery schedule sent by the buyer. In case of exports to unrelated parties, separate orders are received and shipment made according to the terms of the order. d. Order placement on suppliers Organon India performs the order placement function depending on the quantum of order received from related and unrelated parties. e. Inventory OIPL also performs the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ificant exposure to this risk in respect of sales made by Organon India. 2.4.9. Product liability risk Product liability risk is associated with product failures including non-performance to generally accepted or regulatory standards. This could result in product recalls and possible injuries to end- users. Product liability risks are borne by Organon India both in case of exports and domestic sales. However, any risk pertaining to the quality of API is not borne by Organon India with respect to the import of raw materials. On the other hand, the AEs does not have significant exposure to this risk in respect of sales made by Organon India. However, it bears the risk pertaining to the quality of API. 2.4.10. Technology Risk Technology risk arises if the market in which the company operates in is sensitive to introduction of products and technologies. Hence, in that case, business units may face loss of potential revenues to inefficiencies arising from obsolete infrastructure and tools as well as obsolescence of manufacturing processes. Technology risk is borne by Organon India with respect to the Indian market. On the other hand, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Year 2012-13. 2.6. The ld TPO directed the assessee to submit complete details of advertisement and sales promotion expenditure including details of advertisement and matter dealt therein. The assessee was also asked to provide details of products which were advertised. The assessee submitted the details of expenditure incurred under the head AMP and selling expenses as under:- 2.7. The ld TPO issued show cause notice to the assessee on the ground that assessee had been developing the brands and the products owned by Merck Group and accordingly created marketing intangibles for the Merck Group, without being compensated for such activity. The list of AMP / Net Sales of the comparables selected by the assessee are as under along with AMP / Net Sales of Organon India :- The ld TPO show caused that if the average AMP / Net Sales of the comparables are applied, then the quantum of expenditure under the head advertisement and sales promotion of assessee company would be 2.21% of Rs. 185,70,15,451/- i.e Rs. 4,10,40,041/- and that the excess AMP of assessee company attributable to creation of marketing intangibles for AE b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther form of concession or subsidy given by the AE. d) Without prejudice to the preliminary argument, that AMP expenses does not constitute an international transaction, it was pleaded that application of Bright Line Test (BLT) is not in consonance with Indian TP regulations. The assessee submitted that the methodology adopted by the ld TPO to benchmark the AMP expenses using BLT does not fall under any of the five prescribed methods in the Indian TP Regulations for computing the ALP of the international transactions. The sixth method in clause (f) of section 92C of the Act i.e 'such other method as may be prescribed by the Board' was not prescribed by the CBDT. Hence the five methods prescribed in the statute does not cover 'bright line test' (BLT) or the methodology followed by the ld TPO in the show cause notice. e) Without prejudice to the preliminary argument, that AMP expenses does not constitute an international transaction, it was pleaded that for bright line test, as per the OECD guidelines in para 1.42 thereon, the comparable companies should be similar in respect of the economically significant activities performed and responsibi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out above, any expense which has been incurred by the assessee exclusively for the purpose of its own distribution channel requirement such as dealer / staff incentive, gifts, festival giveaways, market study expenses etc are required to be excluded from the AMP expenses for computation of such ratios. Once the selling and distribution expenses are excluded, then the ratio of AMP to sales for the assessee will come down to 2%. Hence the assessee had not incurred any excess AMP when compared to comparable companies and the adjustment as proposed in the show cause notice should not be valid. 3.3. The assessee also submitted that the ld TPO had proposed an adhoc mark up of 12% over and above the alleged excess AMP expenditure incurred by the assessee, which is erroneous. 4. The ld TPO observed that the assessee had provided certain documents , which are in the nature of invoices in support of expenditure. However, the invoices failed to provide descriptive details regarding nature of printing materials, advertisement materials etc . Hence he observed that the assesee's claim cannot be accepted on face value in absence of abovementioned document ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of following products which are dealt by it before the ld DRP :- a) Deca Durabolin b) Novelon c) Recagon The assessee submitted the details of advertisement and sales promotion expenses of Rs. 35,98,000/- containing scientific session charges and journals as under:- The assessee also requested the ld DRP to admit and consider these evidences as additional evidences as the same could not be filed before the ld TPO / ld AO due to paucity of time or in absence of specific query by the ld TPO. 5.1. The ld DRP sought for a remand report from the ld TPO admitting the aforesaid evidences together with calling for further details to be filed by the assessee vide its remand proceedings in F.No.DRP-2/2016-17/669 dated 20.10.2016. The assessee duly submitted the requisite details before the ld TPO as directed by ld DRP with a copy marked to ld DRP as under:- a) Information for atleast 5 years in regard to turnover, gross profit, net profit, selling and distribution expenses, AMP expenses, royalty payment, intra-group service charge payment, purchase of key components from the AE. b) Confirmation by the assessee that none of its AEs make an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ixing the royalty rate such factors are taken in to account and agreements governing royalty - In this regard, it was clarfied that the assessee does not pay any royalty to its AE, hence the same is not applicable. i) Information on the registration and patenting of trade and marketing intangibles like brand name, mark, trade name etc by the AE in India - In this regard, it was submitted that Merck Group owns the brand name and trademarks and Organon India (assessee herein) has only been granted an exclusive right to use the brand to sell the products in the designated territory. AE is the owner of all trademark / brand intangibles that it licenses. Accordingly, the ownership provides prerogatives of control - legal rights to license the trademarks / brands, assert or grant exclusivity, deter competition, and an obligation to protect the trademark and brand against infringement in all the markets where the trademarks / brands have been registered. Therefore, any expenses in these areas are borne by the AE. However, the assessee being separate legal entity, is not privy to such information. j) Information on any infringement of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the marketing and advertising functions of the assessee. Furhter, no employees of AE have visited assessee in this regard. p) Agreements with market research agencies, advertisement agencies, brand ambassadors, sponsorship agreement etc and the involvement of the AE in the selection of the same supported by bills / invoices - In this regard, the assaessee submitted on sample basis an agreement with market research agency and clarified that it does not have any brand ambassadors / sponsorship agreement with any third parties. Furtehr it was reiterated that the AEs of the assessee have no involvement in these activities altogether. q) Information along with evidence on all the risks assumed by taxpayer, risk mitigation undertaken and risks in practice materialized in India and who has borne the loss due to the same. What were the reimbursements / compensation / subvention by the AE in this regard to the taxpayer - In this regard, it was submitted that the assessee operates as an independent company in India and bears all risks in relation to its functions and activity. Till date, there is no major loss incurred by the assessee in India, which c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion at all and hence the same need not be benchmarked for the purpose of determination of ALP. We find that the ld DR argued that the assessee is only a distribution company and not a manufacturing company and hence the decision of the Hon'ble Delhi High Court relied upon by the ld AR in the case of Maruti Suzuki India Ltd vs CIT reported in 381 ITR 117 (Del) does not support the case of the assessee. In this regard, we find that the assessee is engaged in both manufacturing and distribution of pharmaceutical formulations. We find that the assessee company outsources its entire production requirements to toll manufacturers / contract manufacturers on a licence basis. The assessee company sources the various raw materials required to manufacture the formulations and gets it converted from third party toll-manufacturers. We find from the financial statements of the assessee company that it had shown manufacturing details in terms of consumption of raw materials, sale of finished goods, inventories of finished goods etc . We also find from the said financials, that the products manufactured by the assessee either on its own or through the contract manufa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vs. CIT reported in 381 ITR 117 wherein it was held as under: "51. The result of the above discussion is that in the considered view of the court the Revenue has failed to demonstrate the existence of an international transaction only on account of the quantum of AMP expenditure by MSIL. Secondly, the Court is of the view that the decision in Sony Ericsson Mobile Communications India (P) Ltd. case (supra) holding that there is an international transaction as a result of the AMP expenses cannot be held to have answered the issue as far as the present Assessee MSIL is concerned since finding in Sony Ericsson to the above effect is in the context of those Assessees whose cases have been disposed of by that judgment and who did not dispute the existence of an international transaction regarding AMP expenses." In view of we note that the facts of the above cases are identical to the present issue, thus, the principle laid down by the Hon'ble Delhi High Court in the case of Maruti Suzuki India Limited (supra) are applicable to the instant case. Respectfully following the same we dismiss the ground of appeal filed by the Revenue." Respectfully following th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was no transfer of marketing intangibles. The assessee also pleaded that it was not promoting any of the brands of the AEs in India in order to be eligible to be compensated. We find that the revenue had only assumed that the assessee had promoted the brand of the AE by incurring AMP expenditure in India thereby warranting any compensation. In this regard, we find lot of force in the arguments of the ld AR that the assessee had not paid any royalty or trademark fee to its AEs and had been benefitted by the excess premium return in the sale price of goods. The AMP expenditure is duly factored into the said pricing fixed by the AEs. In the instant case, we find that the international transactions with AEs of purchase of raw materials, purchase of finished goods, sale of finished goods and recovery of expenses have been duly accepted to be at Arm's Length. Then the AMP expenditure also is required to be accepted at Arm's length as it is already factored in the pricing. 6.3. We also find that the ld TPO and ld DRP had sought to include the selling expenses incurred in SLE REPS PROMO - PRINT of Rs. 2,62,10,736/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reak up of the same are as under:- Name of the Party Amount Asst Year as per TDS certificate Credence Hospital Pvt Ltd 4,00,000 2011-12 GET 2011 (Joseph Kurian) 4,00,000 2011-12 A H IVF and Infertility Research Centre Pvt Ltd 2,50,000 2011-12 Association of tamil Nadu Members of RCOG 2,00,000 2011-12 Since the aforesaid expenses related to prior period which is not allowable as deduction in the year under consideration, the ld AO disallowed the same in the final assessment order. Aggrieved, the assessee is in appeal before us. 8.1. We have heard the rival submissions. We find that the incurrence of expenses towards scientific session charges and journals to the tune of Rs. 12,50,000/- as stated supra for the purpose of business of the assessee is not in dispute in the final assessment order of the ld AO. The said payments were also duly subjected to deduction of tax at source by the assessee. The only dispute is that it relates to earlier year as per the TDS certificate issued by the assessee to those parties. The ld AR stated that no deduction was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all service tax should be paid / deposited within the due time once invoice for the service provided or agreed to be provided is issued or when payment of service charges is received as to the extent of such payment (in case where invoices were not issued), whichever is earlier. The assessee in the instant case made delayed remittance of service tax which the ld AO considered as violation of service tax rule for which interest was paid by the assessee company. This was considered as penal in nature by the ld AO and was accordingly disallowed u/s 37 of the Act in the final assessment order. Aggrieved, the assessee is in appeal before us. 9.1. We have heard the rival submissions. We find that the Service Tax Provisions as amended by Finance Act 2012 contains Section 75 and Section 76 thereon. The interest is charged on the assessee for delayed payment of service tax as per section 75 thereon. The penalty is charged on the assessee under section 76 thereon for failure to pay service tax, interest under section 75 thereon. We find that the amount under dispute in the sum of Rs. 1,257/- represents interest paid under section 75 of the Act whic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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