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TMI Blog2019 (1) TMI 1674X X X X Extracts X X X X X X X X Extracts X X X X ..... year 2007-2008 is as to whether the ld.DRP was justified in upholding the Arm's Length adjustment made in respect of marketing expenses of Rs. 79,04,690 and cost allocation of Central Service Charges of Rs. 15,74,895 in the facts and circumstances of the case. 4. The brief facts of this issue are that the assessee is a downstream subsidiary of Abbott Laboratories, USA and engaged in distribution of healthcare products. 99.99% of assessee's shareholding is held by Abbott, Asia Holdings Limited, which in turn is a 100% subsidiary of Abbott, USA. The assessee imports healthcare products from its Associate Enterprises (AEs) for distribution in India. The assessee has entered into following international transactions:- Name of International Transaction Value (in Rs.) Method selected Import of healthcare products 1,07,37,92,605 Transactional Net Margin Method Central Service Charges - Cost Allocations 1,24,26,530 Transactional Net Margin method. Provision of Support Services 57,95,965 As per the note in Form No.3CEB Reimbursement of expenses (Receipts) 47,63,131 Comparable Uncontrolled Price Method Reimbursement of expenses (Payments) 36,33,919 Compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eady registered these products in key markets. Accordingly, it possesses a great deal of data relevant to obtaining the approval in addition to product details. This information is also instrumental in assisting with the launch of and the marketing of the product in the Indian market place. b. Manufacturing 4.4.7 The supplying AEs carry out the manufacturing of the products sold in India, by AHPL, confirming international manufacturing standards. All product upgrades are also developed by these AEs. Hence, AHPL being a part of the Abbott group derives the benefit of procuring the finished products and promoting them in India. c. Marketing support 4.4.8 New product pre-marketing activities and training to the product management team is also one of the important activities that is carried out by the Abbott group. Apart from providing training in the latest techniques and practices in marketing, the focus and emphasis is on delivering quality products to customers and regular service to them in terms of medical product literature. Abbott believes in the scientific promotion of the products through participation in medical meetings - both within India and abroad. 4.4.9 Having ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a of similar products, market trends, etc. Further, AHPL's large field force of marketing representatives pay field visits to doctors and participate in medical conferences. As regards imports of reagents and diagnostic equipments, AHPL leverages on the promotional, scientific and technical materials developed by Abbott Germany/Additionally Abbott Germany provides AHPL service engineers with scientific and technical product training and other necessary support to enable' AHPL's employees market tile same effectively in Indio/ Further, AHPL makes use of some direct advertising (e.g. email newsletters and medical device trade journal advertisement) to increase awareness. AHPL also participates in industry trade shows and congresses in order to exhibit its product offerings. The marketing groups,approach prospective customers on a one-to-one basis.Live demonstrations,product, training, etc. are some of the marketing tools used by the marketing groups. d. Warehousing and Inventory Management 4.4.15 Warehousing forms an important part of AHPL's functions. In order to ensure quality maintenance of its products, AHPL has invested in having its own warehouses various pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts to the agreement have realized that such services can be provided more effectively and efficiently for the group as a whole from a central location. 4.4.20 These services are in the nature of shared services and are therefore customized for the Abbott Group. The said services are mainly related to healthcare products. The transaction entered into by AHPL is identified as cost allocation. Further, based on the information available from AHPL, the basis of allocation to other Abbott affiliates is the same and there is no markup/profit element in the said charge. SUPPORT SERVICES 4.4.21 During the financial year 2006-2007, AHPL has rendered' incidental support services to Abbott Vascular Devices Holland BV, Netherlands and Abbott Laboratories Intl. Co, USA. The said associated enterprises have reimbursed the personnel costs in this regard to the assessee with a mark-up. REIMBURSEMENT OF EXPENSES (RECEIPTS AND PAYMENTS) 4.4.22 These pertain to actual expenses incurred in relation to travel, conveyance, accommodation, promotion expenses, etc. These expenses are received/paid from/to Abbott affiliates on actual cost basis and do not involve any mark-up." 7. The risks as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dues by customers. Credit risk arises as a result of sales to Indian customers is borne by AHPL. As regards the prime transaction discussed, the AEs are exposed to the credit risk. 8. The assessee, based on the Transfer Pricing Study Report, characterized itself as distributor exposed to normal risks while carrying out such business, which was accepted by the ld.TPO. 9. The ld.TPO observed that during the course of proceedings, the assessee was asked to submit details of Central Services Charges - cost allocation, which was submitted vide reply letter dated 17.09.2010. The ld.TPO observed that the assessee was not able to show as to how the gross allocation base was computed by the AE at Germany. The assessee has claimed to have allocated following expenses out of gross base computed by its AE at Germany:- (i) Sales and Marketing Expenses 1,33,000 Euros (ii) Personnel Expenses 8,000 Euros (iii) Training Expenses 48,000 Euros (iv) Account and Miscellaneous 51,000 Euros 10. The ld.TPO observed that the assessee is selling its product in India only. It has already spent substantial amount of Rs. 6.41 crore on sales and marketing in India. The total marketing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... participant countries upon request made by them. (ii) Copy of certificate issued by Deloitte & Touche GmbH certifying the total cost incurred by Abbott Germany and cost allocation to respective participating countries including the assessee. As per the said certificate, the total cost incurred by the AE was 33135000 Euros and the cost allocated to Indian company, i.e., the assessee was 239000 Euros working out to 0.72% being the share of Indian company based on turnover. The said total cost of 239000 Euros allocated to assessee-company comprises of the following:- (i) Sales and Marketing Expenses 1,33,000 Euros (ii) Personnel Expenses 8,000 Euros (iii) Training Expenses 48,000 Euros (iv) Account and Miscellaneous 51,000 Euros (iii) The details of Central Services Charges of Abbott GmbH allocated to the assessee-company in the nature of shared services and sample copies of inter-company debit notes and cost allocation sheet workings. FINDINGS OF THE LD.TPO 11. The ld.TPO observed in his order as under:- "7C I have considered the assessee's submission and my observations are already detailed in Para 6A (supra). I conclude that assessee shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the totality of the facts and circumstances of the case, the TP adjustment of Rs. 94,79,585/- is approved, for the reasons given above by the DRP." 13. Aggrieved, the assessee is in appeal before us. 14. We have heard the rival submissions. At the outset, we find that the assessee pursuant to the Service Centre Agreement had shared the cost towards Central Services Charges in respect of sales and marketing expenses; accounting; finance and MIS support services; training and product support services; and personnel support services. The assessee being participant to the Service Centre Agreement entered into by Abbott GmbH with various Abbott affiliates had to absorb certain costs that were allocated by the group to various participants including the assessee-company. In other words, certain services as detailed in the Service Centre Agreement, which are already reproduced hereinabove, were to be rendered at Abbott GmbH Germany and the cost incurred thereon would have to be shared by all the participant countries including the assessee-company in the ratio of turnover. These services are in the nature of shared services and are therefore customized for the Abbott group. We find tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for MIS. India also uses ADOC (order entry) and FMS (margin tracking) systems. 3.2.4 Personnel Support Services: HR functioning in Germany comes up with Incentive scheme for sales manager and then they also approve the same." 15. The ld.TPO determined the arm's length price of sales and marketing support services to the tune of 133000 Euros equivalent to Rs. 79,04,690 at Rs.Nil and made adjustment to the same in transfer pricing order u/s 92CA(2) of the Act. We find that the assessee had justified the same in the following manner:- (a) The assessee gets characterized as a normal risk distributor, which has been accepted by the ld.TPO in his order. (b) From the risk profile of the assessee, which is not disputed, inventory risk lies with the assessee. (c) Since the assessee is bound to sell the imported products from AE in the local market in India, the entire distribution risks also vests with the assessee. (d) The expenditure that has been absorbed by the assessee by way of reimbursement to AE, based on gross cost allocation on shared services, were incurred in order to maintain the common methodology, manner of presentation of financial s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vice Centre Agreement. When such costs that had been allocated to the assessee-company had been absorbed by making the payment to AEs for the services rendered by AEs (which is not disputed by the Revenue before us), then the action of the lower authorities in determining the arm's length price of such services at Rs.Nil is unwarranted. 17. We also find from one of the functions performed by the assessee-company is towards "Market Research and Strategic Marketing". Under this category, the assessee carries out marketing functions in respect of the product imported from its AEs. Apart from carrying out market study and analysis, the assessee carries out competitor analysis, ascertains price data of similar products, market trends etc. In addition, the assessee's field force of marketing representatives pay field visits to Doctors and participate in medical conferences. As regards imports of reagents and diagnostic equipments, the assessee leverages on the promotional, scientific and technical material developed by Abbott Germany. Additionally, Abbott Germany provides the assessee, service engineers with scientific and technical product training and other necessary support t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments like copy of the agreement, invoices raised, certificate from independent Chartered Accountant Firm, KPMG, details of users were also furnished before the Transfer Pricing Officer. Therefore, the allegation of the Transfer Pricing Officer that the assessee has not furnished the necessary details is not totally correct. In any case of the matter, non-furnishing of certain documentary evidences, as alleged by the Transfer Pricing Officer, does not empower him to embark on determining the arm's length price of the international transaction on estimation basis. Further, a reading of the Transfer Pricing Officer's order makes it clear that his finding on the issue is contradictory. On the one hand, he has observed that the assessee has failed all the three tests, including, whether the services have actually been provided, on the other hand, he has accepted that the AE has provided the software. Thus, he has accepted that the AE has provided the software. Thus, ultimately, what the Transfer Pricing Officer disbelieves is the quantum of payment. Accordingly, he has proceeded to estimate the price of the services rendered by the AE at Rs. 1,62,05,000. Though, the Transfer Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er certainly cannot determine the arm's length price on ad-hoc/estimation basis. Our reasoning in paragraph 11 to 15 will equally apply to this issue also. Accordingly, we delete the adjustment made to the arm's length price of payment made towards availing information system services from AE. This ground is allowed." 20. We also find that the co-ordinate Bench of this Tribunal in the case of Dresser Rand India (P.) Ltd. v. Addl. CIT [2011] 13 taxmann.com 82/[2012] 53 SOT 173 under similar circumstances had held as under:- '8. We find that the basic reason of the Transfer Pricing Officer's determination of ALP of the services received under cost contribution arrangement as 'NIL' is his perception that the assessee did not need these services at all, as the assessee had sufficient experts of his own who were competent enough to do this work. For example, the Transfer Pricing Officer had pointed out that the assessee has qualified accounting staff which could have handled the audit work and in any case the assessee has paid audit fees to external firm. Similarly, the Transfer Pricing Officer was of the view that the assessee had management experts on its ro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is that no services were rendered by the AE at all, and that since there is no evidence of services having been rendered at all, the arm's length price of these services is 'nil '. The Dispute Resolution Panel has also confirmed these findings of the Transfer Pricing Officer and the Assessing Officer. However, we have noted that vide letter dated 25th January, 2010 (acknowledged to have been received in DRP office on 28th January, 2010), the assessee has filed a huge compilation of papers, running into almost three hundred pages, including copies of reports, e-mails and other documents evidencing the rendering of services. Yet, the DRP simply brushed aside these documents by simply observing that "The DRP has perused the submissions of the assessee and the documents. In view of the DRP, such documents do not prove the receipt of services by the assessee ascertained (asserted ?) to be provided by its AE, and, accordingly, the action of the Assessing Officer in treating the cost of such services at zero is confirmed". When we perused these documents, which were filed before us as "Paper-book Vol. II", we found that the assessee has given sufficient evidence of the servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sts is consistent with benefits expected to be received, as an independent enterprise would have assigned to the contribution in hypothetically similar situation. In the case before us, as evident from the cost contribution agreement, the costs have been shared at average of percentage of (i) head count to the total count and (ii) sales revenue to total revenue. The assessee's share of head count is 3.90 per cent and of total revenue is 3.30 per cent and, accordingly, 3.50 per cent being average of these two parameters, is taken as the cost contribution ratio. We see no infirmity in this contribution being taken as an arm's length contribution to the costs. The TPO's objection to this arrangement was two fold first, that the cost should be shared in the ratio of actual use of services; and second, that the costs should be charged to the assessee as per Indian employee costs. None of these objections has any legally sustainable merits. There is no objective way in which use of services can be measured and as is the commercial practice even in market factors driven situation, the costs are shared in accordance with some objective criterion, including sales revenues and nu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d fault with. The TPO is mandated by law to determine the ALP by following one of the methods prescribed in Section 92C of the Act read with Rule 10B of the Income Tax Rules. However, the aforesaid exercise of determining the ALP in respect of the royalty payable for technical knowhow has not been carried out as required under the Act. Further, as held by the CIT(A) and upheld by the impugned order of the Tribunal, the TPO has given no reasons justifying the technical knowhow royalty paid by the Assessing Officer to its Associated Enterprises being restricted to 1% instead of 2%, as claimed by the respondent assessee. This determination of ALP of technical knowhow royalty by the TPO was ad-hoc and arbitrary as held by the CIT(A) and the Tribunal. (e) In the above view, the question as proposed does not give rise to any substantial question of law. Thus, not entertained." 23. In view of the aforesaid factual observations in the light of evidences available on record and respectfully following the decision of the Hon'ble jurisdictional High Court in the case of Johnson & Johnson Ltd. (supra), we hold that the action of the Revenue in accepting only 75% of the expenses to be at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The ld. AO however disregarded this method without giving any finding or satisfaction as to why the disallowance made by the assessee is incorrect having regard to the amounts of the assessee and proceeded to make disallowance under Rule 8D(2) of the I.T. Rules by applying second and third limb thereon. Accordingly, the disallowance was finally determined at Rs. 10,34,897/- by the ld. AO after reducing the amount already disallowed by the assessee in the sum of Rs. 1,29,907/- in the return of income. The action of the ld. AO was upheld by the ld. DRP. 29. Aggrieved, the assessee is in appeal before us. 30. We have heard the rival submissions. We find that the ld. A.O had not recorded any satisfaction at the outset as to why the disallowance made by the assessee was incorrect having regard to the accounts of the assessee in terms of section 14A(2) of the Act r.w.r. 8D(1) of the I.T. Rules. Without recording such satisfaction, the ld. AO cannot proceed to computation mechanism provided in Rule 8D(2) of the I.T. Rules. In this regard, the reliance was placed in the decision of the co-ordinate Bench of the Tribunal in the case of Solvay Pharma India Ltd. v. ACIT [IT Appeal No.1536/Mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction in the sum of Rs. 12,250/- does not pertain to it. The assessee had also stated that the corresponding TDS amount relatable to such transaction, was also not claimed by it in the return of income. The assessee is a large size company and is part of a multinational group and had maintained its accounts meticulously. In such scenario, asking the assessee to reconcile some data, which is reflected in ITS data of the Income-tax Department, which when not reconciled, cannot fasten any tax liability on the assessee. Accordingly, we delete the addition of Rs. 12,250/-. Accordingly, Ground Nos. 2.1 to 2.3 raised by the assessee are allowed. 36. Ground No.3 raised by the assessee is with regard to the action of the ld. DRP in confirming the disallowance of Rs. 20,04,446/- being 20% of unreconciled transaction in the AIR information by holding that the same are incurred for the purpose of business. 37. The brief facts of this issue are that the assessee was shown ITS data amounting to Rs. 2,45,09,749/- during the course of assessment proceedings out of which, the assessee could produce details in respect of Rs. 65.96 lakhs. The ld. AO, accordingly, proceeded to disallow 20% of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd that the books of account filed by the assessee were not rejected by the ld. AO by pointing out some defect thereon. Hence, no disallowance of expenditure could be made on an adhoc basis. Accordingly, the disallowance of Rs. 20,04,446/- made by the assessee is hereby directed to be deleted. Accordingly, Ground Nos.3.1 to 3.3 are allowed. 40. Ground No.5 raised by the assessee is general in nature and does not require any specific adjudication. ITA No.1320/Mum/2014 : Asst. Year 2009-2010 41. Ground Nos. 1 and 2 raised by the assessee for assessment year 2009-2010 are similar to ground No.1 and 2 raised for assessment year 2008-2009 and the decision rendered thereon would apply with equal force for this assessment year also, except with variance in figures. Accordingly, Ground Nos.1.1 to 1.3 and 2.1 to 2.3 raised by the assessee for assessment year 2009-2010 are allowed. 42. Ground No.3 for assessment year 2009-2010 with regard to disallowance of expenses for the sum of Rs. 9,80,859/- on account of unreconciled portion based on AIR information in respect of credit card transactions of the assessee. We find that this issue is similar to ground No.2 raised by the assessee for as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of the very same issue in assessment years 2007-2008 and 2008-2009. We have decided the impugned issue in favour of the assessee for assessment years 2007-2008 and 2008-2009. We also find with regard to the assessee's passing the benefit test out of incurrence of the impugned expenditure, the case law relied upon by the ld. AR on the decision of this Tribunal dated 23.04.2018 (supra), come to the rescue of the assessee and accordingly we held that no transfer pricing adjustment is warranted in the facts of the instant case even on that count. Accordingly, Ground Nos 4.1 to 4.3 raised by the assessee are allowed. ITA No.1797/Mum/2015 :Asst. Year 2010-2011 : Assessee's Appeal : 46. The Ground Nos.1.1 to 1.3 raised by the assessee are similar to that of Ground No.1 raised by the assessee for assessment year 2007-2008. Hence the decision rendered for assessment year 2007-2008 would apply with equal force for this assessment year also. Accordingly, Ground Nos 1.1 to 1.3 are allowed. 47. In view of our decision for Ground Nos.1.1 to 1.3 for assessment year 2010-2011, the adjudication of Ground No.2 is only academic in nature. Accordingly, the same may be treated as all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;. (c) The assessee has not taken any legal action for return of the deposits. (d) The deposits were not written off in the books. 49. The assessee filed rejoinder to the remand report submitted by the ld. AO by making the following observations :- (a) The data of making of the provision is not important. It was made once the assessee felt that the return of the deposit had become doubtful. (b) The MCA website lists all companies as active, regardless of their being under liquidation and continues to do so till they are wound up and cease to exist. (c) The AO has sought to step into the shoes of the assessee and has opined about the best way to run the business, when he has questioned the non-initiation of legal action. (d) The deposits have indeed been written off in the books for FY 2009-10 (relevant to AY 2010-11). 50. The ld. DRP appreciated the evidences submitted by the assessee which remained uncontroverted by the ld. AO in the remand proceedings and having taken note of the fact that the said deposit was duly written off in the books of account by the assessee, held that the assessee is entitled for deduction u/s 28 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the ld. DRP in deleting the addition of bogus purchases of Rs. 21,78,563/-. The brief facts of the case are that the assessee was asked to produce the details of purchases made by it from two parties, i.e., (i) M/s.Tulsiani Trading Pvt. Ltd. for Rs. 6,31,688/- and (ii) M/s.Vaastu Trading Co. for Rs. 15,46,875/-. The ld. AO observed that these two parties were informed to the I.T. Department as alleged bogus dealers by the Sales Tax Department, Mumbai. In response to this query, the assessee submitted copies of invoices furnished by M/s.Tulsiani Trading Pvt. Ltd. and M/s.Vaastu Trading Co., along with delivery challans, copies of relevant bank statements, evidences to prove that the payment made by the assessee to those parties, confirmations from the forwarding agent confirming the said purchase transaction and stock registers evidencing the movement of goods. The assessee further submitted before the ld. AO that it had duly discharged VAT liability on the said purchases. The ld. AO directed the assessee to produce those parties to examine the genuineness of the transactions. The assessee failed to produce them. Accordingly, the ld. AO treated the said purchases made from these ..... X X X X Extracts X X X X X X X X Extracts X X X X
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