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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 ..... hen the AMP expenditure also is required to be accepted at Arm s length as it is already factored in the pricing. We also find that the ld TPO and ld DRP had sought to include the selling expenses incurred in SLE REPS PROMO PRINT and EDUINFOSPEAKER HO/ as part of AMP expenditure and the same has been included to bench mark the ALP of AMP expenditure. In this regard, we find that these expenditures are purely related to products of the assessee and not for any brand. We also find that the assessee while incurring the total expenditure towards AMP and Selling Expenses, had duly bifurcated the same by identifying at the time of incurrence itself whether the said expenditure constitutes AMP expenditure or Selling Expenses. This bifurcation of expenditure had been ignored by the revenue in the instant case. We find that if these two items are excluded, then the AMP expenditure incurred by the assessee is at Arm s length even after the mark up of 5%. Hence no separate discussion is required herein with regard to the validity of mark up of 5%. Hence in any case, there cannot be any adjustment to ALP of AMP expenditure in the instant case. Addition on account of Scientific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kata [ in short the ld AO] under section (u/s in short) 143(3) read with section 144C(13) of the Income Tax Act, 1961 (hereinafter referred to as the Act ) dated 31.1.2017 and 25.10.2017, pursuant to the directions issued by the Hon ble Dispute Resolution Panel [ in short the ld DRP] dated 8.12.2016 and 25.8.2017 for the Asst Years 2012-13 and 2013-14 respectively. As identical issues are involved in these appeals, they are taken up together and disposed off by this common order for the sake of convenience. 2. DETERMINATION OF ARM S LENGTH PRICE (ALP) FOR ADVERTISING, 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. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liers ) for subsequent resale to third parties in India. The assessee sells finished goods to N.V.Organon. The assessee recovers expenses incurred on behalf of P.T.Scering Plough Indonesia TBK and MSD International GmbH, Singapore (collectively referred to as MSD Reimbursing Entities ). It was mentioned in the TP Study Report that the assessee was primarily engaged in the business of manufacturing and distribution of pharmaceutical formulations. Organo India was a part of the Akzo Nobel group headquartered in Netherlands (hereinafter referred to as Akzo Group ). The Akzo Group based in the Netherlands, serves customers throughout the world with healthcare products, coatings and chemicals. Headquartered in Oss, Netherlands, the group plays a vital role in everyday life, manufacturing and supplying quality products that are crucial to modern society, products that millions of people use as part of their daily routine. Pursuant to the acquisition of Organon Biosciences N.V. (hereinafter referred to as Organon N.V. ) by Schering- Plough from Akzo Nobel on November 19,2007, Organon India became a part of the Schering-Plough Group (hereinafter referred to as SP Group ). With eff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anon India does some amount of quality testing, in case of active ingredients, Organon India relies on MSD Raw Material Suppliers. The functions performed in the course of purchase of raw materials are the general ones like receiving an indent, obtaining quotations, placing of purchase orders and payment to the suppliers. 2.4.1.3 Export of manufactured finished goods Organon India exports its products to AEs as well as unrelated companies. The exports to AEs comprise majority of bulk drugs and some quantity of formulation whereas those to unrelated companies comprise of only formulations. The various activities performed in the course of export are: a. Receipt of order For exports to AEs, programme schedule is prepared at the beginning of the year and shipments are made depending on the delivery schedule as requested by the buyer. In case of exports to unrelated parties, separate orders are received and shipment made according to the terms of the order. b. Production Scheduling At the time of preparing the annual production plan, the amount of capacity available for export is determined. Production is scheduled acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent pharmaceutical entities invest significant time and resources to generate new product lines, making it a risky exercise. However, being a part of a multi-product group like MSD provides operating companies like Organon India with the advantage of continuously introducing new products without assuming additional risk of spending on product development in order to accentuate its product portfolio. Organon India is engaged in sales and distribution of the pharmaceutical products developed by MSD Finished Good Suppliers. Organon India imports formulations from MSD Finished Good Suppliers and distributes or markets the same in the Indian market. Organon India has an elaborate distribution framework to supply formulations to the target clients. The network consists of clearing and forwarding ( C F ) agents, distributors, stockiest and retailers performing diverse functions across the supply chain. Organon India s supply chain is shown in the figure below: Organon India has several C F agents in its distribution network. These C F agents provide products to distributors, who directly then deal with stockist. The stockist caters to the requirements of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t intangibles and does not undertake any significant research and development on its account that leads to the development of non-routine intangibles. Organon uses the trademarks, process, know-how, technical data software, operating/quality standards etc. developed/owned by the MSD Group companies. Accordingly, Organon India does not own any significant non-routine intangibles. 2.4.7. Risks Analysis The risk profile of Organon India vis-a-vis its AEs are provided in below with respect to the import of raw materials and manufacture oJ processed products through contract manufacturers, akin to value added distribution activities. 2.4.8. Market Risk Market risk is the risk that is incurred due to uncertainties in the market. Uncertainties can include fluctuations in costs, demand, and pricing. Market risk represents a standard risk borne by any firm involved in market driven transactions. All market risks with respect to the product including customer acceptance are borne by OIPL both in case of exports and domestic sales for its import of raw materials. On the other hand, the AEs does not have any significant exposure to this risk in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the risk that the inventory held by a company will become obsolete (unsellable) or depreciated before it can be sold. Organon India is responsible for managing the flow of inventory of raw materials and formulations to ensure that production is not disrupted and sales are not lost on account of stock-outs respectively. Organon India is responsible for ensuring sufficient inventory of traded goods is maintained so that sales are not lost due to stock-outs. 2.4.15 Foreign Exchange Risk Foreign exchange risk arises when there is a mismatch between the currencies in which an entity earn its revenues and incurs its expenses. Organon India faces currency risk while importing raw materials and formulations from AEs. The AEs does not have any exposure in this respect. The risk profile of Organon India vis- -vis its AEs with respect to the trading activities are provided in table below: 2.5. The four international transactions reported hereinabove had been accepted at Arm s Length by the ld TPO and no adjustment to ALP was made in the order u/s 92CA(3) of the Act dated 28.1.2016 for the Asst Year 2012-13. 2.6. The ld TPO direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has sufficient / substantial gross operating margin so as to be compensated for any alleged AMP expenses and the adjustment for AMP expenses had led to double taxation in the hands of the assessee since the assessee s margins are already at Arm s Length. The assessee has been adequately compensated by premium return for the excess AMP spend, if any, through the sale of products in the Indian market and its pricing policy for various international transactions with its AEs. The same is evident from the higher margins of the assessee compared to the comparables. It was also pleaded that the assessee has earned a gross margin , adjusted for AMP expenses, of 60.37% which is much higher when compared to comparable companies margins. Since the gross margins, adjusted for AMP expenses, earned by assessee from its trading activities are within the arm s lendth range as per Indian TP regulations, the international transaction under review can be considered to be at arm s length. Further the assessee is into paying any royalty for use of trademark or making any other payment to its AE which could be considered as another form of concession or subsidy given by the AE. d) With ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,38,850 Total AMP expenses excluding selling expenses (D) = (A) 3,71,42,349 Operating Revenue of the Company (E) 185,70,15,451 AMP and Sales promotion expenses as a Percentage of sales (C ) / (E) 6.22% AMP net of selling expenses as a percentage of sales (D) / (E) 2.00% The assessee submitted the details of AMP expenditure incurred in a separate annexure along with its submission dated 18.12.2015. The invoices for the same on sample basis were also enclosed along with this submission. 3.2. The assessee also submitted that without prejudice to the aforesaid arguments, the AMP expenses incurred by it was not excess when compared with the comparable companies. In this regard, it was pointed out that the ld TPO had taken comparable companies from TP documentation maintied by the assessee company and determined average AMP spend of the comparable companies in relation to sales at 2.21%. For the case of the assessee, the ld TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n expired, no royalty can be chargeable. Accordingly, the ld TPO rejected the claim of the assessee that it was compensated by the AE through exemption of royalty payment. 4.2. The ld TPO accordingly determined the ALP of marketing intangibles created by the assessee for the Merck Group by way of incurring AMP expenditure and made a mark up of 5% of the quantum of AMP expenditure determined in the sum of ₹ 6,73,86,252/- above and computed the ALP as under:- Quantum of AMP as determined above 6,73,86,252/- Add: Mark up of 5% 33,69,313/- ALP of Marketing Intangibles 7,07,55,565/- Accordingly, the ld TPO made an upward adjustment of ₹ 7,07,55,565/- for the Asst Year 2012-13 on account of ALP of Marketing Intangibles created by the assessee for the AEs. 5. The ld AO pursuant to the order of the ld TPO u/s 92CA(3) of the Act passed a draft assessment order is 143(3) / 144C of the Act and made an addition of ₹ 7,07,55,565/- to the total income. The assessee fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te budgeting process, particularly in regard to advertising and market promotion, right from the stage of planning to final approval ; information on the marketing budger, advertising plans/ designs, core advertising message, implementation of strategy and the actual involvement of the parent and subsidiary in this area of work ; correspondence and communications dealing with marketing budget, marketing spend and marketing strategy between the employees of the taxpayer and the employees of the AE and channel of submission and level of approval of the taxpayer both internally in the taxpayer company. g) All agreements between the taxpayer and the AEs (including the owner of marketing intangibles) in connection with licensing and use of brand name, trademark etc and technology - In this regard, the assessee clarified that it has only distribution agreement between its AEs for its operation in India, which was submitted before the ld TPO at the time of assessment proceedings. It was specifically clarified that there is no specific and separate licensing / trademark and technology agreement with its AE for assessee s operation. h) Information on brand royalty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AEs for the same and there would be no interference of the AE in the same. m) Details of various employees of the tax payer involved with marketing of goods sold, advertising, sales promotion schemes, all issues relating to brnad, and their reporting structure. n) Details of employes (name, role, emoluments) of the assessee who have functional or administrative reporting to the employees of the AEs - In this regard, it was clarifid that no employee of the assessee functionally report to any employee of AE for its day to day operations. It is pertinent to mention that assessee has independent functional employee structure and employee of assessee interact with employees of AE on a need basis only. Further, the managing director of the assessee administratively report to the Chairman of the Company appointed by the Parent company of Organon India (assessee). The approach of the AE towards assessee s business is that of stewardship, consultative and facilitative , with assessee taking all its decisions on a bottom s up basis. o) Details fo list of personnel of the AE in regard to the marketing and advertising (DEMPE) functions along with the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Information on any business restructuring that has taken place in the MNE group in the last 5 years and till date, including sale of any part or whole of the business and contribution of marketing intangibles in the valuation of any part or whole of the business In this regard, it was submitted that in 2009, there was a merger between Merck Co. Inc. and Schering Plough Corporation. The relevant details were submitted in the TP Study Report. 5.2. The ld DRP upheld the action of the ld TPO in determining the ALP of AMP expenditure treating the same as an international transaction vide its directions u/s 144C(5) of the Act dated 8.12.2016. The assessee later filed a rectification application under Rule 13 of IT (Dispute Resolution Panel) Rules, 2009 which was dismissed by the ld DRP vide its proceedings on 17.1.2017. The ld AO in the final assessment order dated 31.1.2017 made an adjustment of ₹ 7,07,55,565/- towards AMP expenditure. Aggrieved, the assessee is in appeal before us. 6. We have heard the rival submissions. At the outset, there is no dispute on the selection of comparables for determination of ALP of AMP expenditure. We find that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee is a manufacturer cum distributor as accepted by the lower authorities, the decision rendered in Maruti Suzuki supra would be applicable to the assessee s case, since the contention of the ld DR that assessee is only distributor, is not emanating from the records of the lower authorities. We find that the issue under dispute before us is squarely addressed by this tribunal in assessee s own case for the Asst Year 2011-12 supra wherein it was held :- 43. We have heard the rival submissions and perused the materials available on record. The preliminary issue here arises whether the AMP expenses constitute the international transactions so as to attract the provisions of transfer pricing of the Income Tax Act, 1961. The claim of the Ld. AR is that the AMP transaction does not represent the international transaction between the AE s therefore no question of determining the ALP of AMP transactions. We find force in the argument of the ld. AR in the given facts and circumstances. Therefore, in our considered view the AMP cannot be regarded as international transaction. In holding so we find the support guidance from the judgment of Hon ble Delhi High Court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Johnson Johnson and now manufactured by ITC Ltd. It is to be understood that the product is sold because of the name Savlon and not because it is manufactured by Johnson Johnson or by ITC Ltd. Hence the usage of the foreign word Organon in the name of the assessee company does not enable its products to be sold in the open market. We find that the assessee had given the details of products manufactured by it before the ld DRP which was also subject to remand proceedings and from the said products list that are enclosed in 412 to 448 of the paper book, we find that the products are sold only by its relevant name in the open market and not by the manufacturers of it. Hence the incurrence of AMP expenditure in the instant case cannot be attributed as towards incurred for brand promotion of the AE, thereby requiring any compensation. 6.2. We find that the entire AMP expenditure has been incurred and paid only to third parties and not to AEs. The assessee pleaded that the same had been incurred for the purpose of its business and for its products and hence the same are not eligible to be compensated by the AEs. It was submitted that there was no transfer of mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear 2012-13 is general in nature and does not require any specific adjudication. 8. DISALLOWANCE OF SCIENTIFIC SESSION CHARGES ₹ 12,50,000/- Ground Nos. 2.2. and 2.3 for Asst Year 2012-13 The brief facts of this issue are that the ld AO on perusal of the profit and loss account under the head other expenses noticed that the assessee had debited an amount of ₹ 11,56,38,850/- on account of Advertisement and Sales Promotion during the financial year 2011-12. The assessee was requested to furnish the detailed break-up of the same . In response to the same, the assessee furnished the details and on verification of the same, the ld AO noticed that the assessee had debited an amount of ₹ 32,50,000/- on account of Scientific Session Charges and ₹ 3,48,000/- as journals. The assessee furnished party wise details of journals and scientific session charges along with TDS certificates issued by the assessee company to those parties. From the same, the ld AO observed that a sum of ₹ 12,50,000/- does not pertain to the year under consideration and break up of the same are as under:- Name of the Party ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hence it could be seen that there is a shift in stand by the ld AO and the assessee was not given any opportunity to make its submissions in this regard. In these facts and circumstances, we deem it fit and appropriate, to remand this issue to the file of ld AO for verification of the same as to whether the said expenditure was claimed as deduction in Asst Year 2011-12 by the assessee. If it is found to have been claimed, then the assessee should not be given deduction in Asst Year 2012-13. If not, then the assessee should be granted deduction for the same as there is no change in tax rates in both the years and incurrence of the said expenditure for the purpose of business is not in dispute. Accordingly, the Ground Nos. 2.2. and 2.3. raised by the assessee for Asst Year 2012-13 are allowed for statistical purposes. 9. DISALLOWANCE OF INTEREST ON SERVICE TAX ₹ 1,257/- Ground No. 2.4 for Asst Year 2012-13 The brief facts of this issue are that the ld AO observed that the assessee company had debited an amount of ₹ 1,257/- under the head Finance cost towards Interest on Service Tax during the financial year 2011-12. The assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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