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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 ..... e statute u/s 92C of the Act. It is not disputed that the total cost incurred by the group and the cost allocation made to assessee-company under each head was duly certified by an independent Accountant, who was appointed for this specific purpose in accordance with the conditions laid out in the Service 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. The lower authorities were not justified in determining the arm's length price in respect of marketing expenses at Rs.Nil as against the claim of ₹ 79,04,690. - Decided in favor of assessee. Bad debts - landlord refused to refund the deposit. - deposit was duly written off in the books of account by the assessee - Held that:- the ground raised by the Revenue itself is patently wrong inasmuch as the Revenue is expecting the assessee to comply with the conditions of section 36(2) of the Act by offering the income in the hands o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Comparable Uncontrolled Price Method. 5. The ld.TPO observed in his order that the assessee is a distributor exposed to normal risks. The furnished the transfer price study report benchmarking its international transaction using Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM). The assessee used the profit level indicator (PLI) as Operating Profit (OP) divided by AE sales. The assessee computed profit margin under the distribution segment at 3.41% as against the exte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 considered the value adding functions of AHPL's product suppliers, a detailed functional overview of AHPL itself is now provided in the following section. 6. As per the TP Study report, the functions performed by the assessee are as under:- IMPORT OF HEALTHCARE PRODUCTS Functions performed by AHPL 4.4.10 AHPL im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 parts of the country, thus enabling close proximity to the local markets. e. Distribution 4.4.16 Distribution is the key to a successful healthcare business in India. AHPL has distribution network in orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining and product support; accounting, finance and MIS support. The participants 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, e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e off-take is not in line with projections, the AEs face an indirect risk. Foreign Currency Risk : The risk relates to the potential impart on profits that may arise because of changes in foreign exchange rates. AHPL and its associated enterprises faces currency risk. The respective Finance departments continuously monitors the foreign exchange risk, and tries to hedge it adequately, as and when required. Credit Risk : This is the risk arising from non-payment of 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y was willing to maintain a certain service centres for all the participants including the assessee. It was also provided in the said agreement that each participant-country including the assessee would share the cost of maintaining such service centres because it is a less expensive alternative than providing such services for itself. (a) Strategic sales and marketing support. (b) Personnel support services. (c) Training and product support services. (d) Accounting, finance and MIS support services. The said agreement also provided that an independent Accountant shall be appointed by mutual agreement by the parties so that the final cost allocation established by Abbott GmbH and in order to capture the total cost incurred by Abbott GmbH and the corresponding cost allocation made to respective participating countries including the assessee. Such audit certificate shall be circulated to each of the 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 participatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on is adjusted to reach arm's length price of Central Service Charges - Cost allocation. 12. The ld. DRP upheld the action of the ld.TPO by observing as under:- (i) Even if the assessee's argument that the marketing expenses spent by the assessee for promotion of its products and sales is different from the sales and marketing expenses paid by the assessee to Abbott GmbH (on account of cost allocation to the assessee by the AE for the expenses incurred by the AE for providing sales and marketing) is correct, the payment is not justified at arm's length as the assessee is a distributor and it is the manufacturer or the AE who would have to bear marketing expenses of the nature described by the assessee at arm's length. This is due to the fact that the price paid for the imports would include and embed all such expenses incurred by the manufacturer at arm's length. (ii) TPO has clearly observed that the average amount spent on marketing of comparable companies is only 3.85% and assessee is spending 4.37%. Thus the assessee already incurring itself on advertisement and marketing what an independent distributor in India i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rketing Manager and share their experience of selling which can be replicated in India. This becomes more important when AHPL is launching new products. 'The benefits of products as well as positioning are shared with the Marketing managers. These acquired skills are used in India for the benefit of existing customer or potential customer. 3.2.2 Training and Product Support services : In this case, service engineers are invited for training during the launch of new instruments as well as for upgradation of existing skills. The service engineer is being familiarized with the product in technical' terms like how the Instruments 'function, how is the preventive maintenance done, how the instruments is installed at customer location, what are the precautions taken for installation etc. and other finer points of the instruments are explained in details. This training is of immense help when the instrument is launched in India. 3.2.3 Accounting Finance and MIS support services: ITS (Instrument tracking system), SEAS (Service Equipment Accounting System), DFAIFLEX are few package installed in AHPL. which are being mai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the ambit and meaning of international transaction u/s 92B of the Act and that whether the same was transacted at arm's length price, for which purpose the determination of price should be made in accordance with any of the methods prescribed in the statute u/s 92C of the Act. From the Transfer Pricing Study Report, the functions performed by supplying AEs and functions performed by the assessee are enumerated in detail. One such functions performed by the AE to all the participants companies including the assessee-company was marketing support services, which admittedly include new product pre-marketing activities and training given to the product management team by Abbott Group at global level. The training is imparted on the latest techniques and practices in marketing, the focus and emphasis is on delivering quality products to customers and regular services to them in terms of medical, product literature. Apart from this, marketing support services rendered by AEs also includes scientific promotion of the products through participation in medical meetings, both in India and abroad. Obviously, the AEs at global level had to incur expenses for rendering these services, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge suite of new products to choose and introduce in India, in line with customer requirements. The assessee also has to maintain sufficient inventory of traded goods so that the sales are not reduced for want of stock. Hence, significant inventory risks coupled with the carrying cost of interest also lies with the assessee. This is mitigated by timely supply of quality goods by the assessee to the AEs so that the assessee does not get into the situation of stock out. The entire group risk arising as a result of sales to Indian customers is borne by the assessee. Hence, the assessee had to mandatorily leverage and mitigate those risks by providing quality products and following consistent practice at par with the global practices for which the shared costs were reimbursed to AEs. 19. We find that the co-ordinate Bench decision under similar circumstances had decided this issue in the case of Firmenich Aromatics India (P.) Ltd. v. Dy. CIT [2018] 96 taxmann.com 649 (Mum. - Trib.), wherein it was held as under:- 21. We have considered rival submissions and perused materials on record in the light of decisions relied upon. Though, the Transfer Pricing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not permissible under the scheme of the Act as the Transfer Pricing Officer is duty bound to determine the arm's length price by following any one of the most appropriate method prescribed under the statute. It is relevant to observe, the DRP has approved the determination of the arm's length price by the Transfer Pricing Officer without properly appreciating the implication of the relevant statutory provisions. As regards the observations of the DRP regard the report of the MPMG, it is necessary to observe that the KMPG report is not an audit report but was furnished by the assessee to support the attribution of cost. Therefore, it cannot be said that it is a qualified report. It is further relevant to observe, the material submitted before us, which also forms part of the Transfer Pricing Officer's record, indicates that the cost of the software has been allocated to 40 group companies across the globe who are using the software and related services and assessee's share in cost allocation works out to 2.3%. Moreover, when the Transfer Pricing Officer himself agrees that the AE has provided software and certain services, there is no reason for not accepting the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcial wisdom of assessee's decision to take benefit of expertise of Dresser Rand US, but also beyond the powers of the Assessing Officer. We do not approve this approach of the revenue authorities. We have further noticed that the Transfer Pricing Officer has made several observations to the effect that, as evident from the analysis of financial performance, the assessee did not benefit, in terms of financial results, from these services. This analysis is also completely irrelevant, because whether a particular expense on services received actually benefits an assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can have any role in determining arm's length price of that service. When evaluating the arm's length price of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. Similarly, whether the AE gave the same services to the assessee in the preceding years without any consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a meaningful scrutiny of the order, but we find no reasoning at all in the order passed by the DRP. We may in this regard refer to the observations made by Hon'ble Supreme Court in the case of Union of India v. M.L Capoor AIR 1974 SC 87, wherein Their Lordships have, inter alia, observed as follows: If the statute requires recording of reasons, then it is the statutory requirement and, therefore, there is no scope for further inquiry. But even when the statute does not impose such an obligation it is necessary for the quasi-judicial authorities to record reason as it is only visible safeguard against possible injustice and arbitrariness and affords protection to the person adversely affected. Reasons are the links between the material on which certain conclusions are based and the actual conclusions. They disclose how the mind is applied to the subject-matter for a decision, whether it is purely administrative or quasi-judicial. They should reveal rational nexus between the facts considered and the conclusion reached. Only in this way can opinions or decisions recorded be shown to be manifestly just and reasonable. 9. ** ** ** ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not appropriate to the facts of this case, nor shown as to which other prescribed method of ascertaining arm's length price of services received under CCA will be more appropriate to these facts. In view of these discussions, we hold that arm's length price adjustment of ₹ 10,55,00,000 made towards sharing of costs under the cost contribution agreement was unwarranted, and we delete the same. 21. In view of the above, we hold that the lower authorities were not justified in determining the arm's length price in respect of marketing expenses at Rs.Nil as against the claim of ₹ 79,04,690. 22. With regard to the remaining expenses like - (i) Personnel Expenses 8,000 Euros (ii) Training Expenses 48,000 Euros (iii) Account and Miscellaneous 51,000 Euros. The ld.TPO had made adhoc disallowance of 25% and held that 75% of the said expenditure were at arm's length price. We hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n other appeals also for assessment years 2007-2008, 2008-2009, 2009-2010 and 2010-2011 with the following minor variance, which are tabulated herein below:- Asst. Year Marketing strategic sales support Perconnel support Training and product support Accounting, Finance and MAM support 2008-2009 ALP at Nil 2009-2010 ALP at Nil 2010-2011 ALP was determined at ₹ 25 lakh on ad-hoc basis. 25. Our findings given in assessment year 2007-2008 would hold good for other assessment years also, which are in appeal before us. Accordingly, the grounds raised by the assessee with regard to Transfer Pricing Adjustment in respect of these Central Services Charges are allowed for all the assessment years. CORPORATE TAX ISSUES ITA No.7595/Mum/2012 : Asst. Year 2008-2009 26. The Ground No.1 raised by the assessee is with regard to the action of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowance under Rule 8D(2) of the I.T. Rules by applying second and third limb thereon. Accordingly, the disallowance was finally determined at ₹ 10,34,897/- by the ld. AO after reducing the amount already disallowed by the assessee in the sum of ₹ 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/Mum/2017 - order dated 26.09.2018] wherein it was held as under:- 5. Having heard the rival submissions, we are of the view that there is merit in the contentions of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 ₹ 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 ₹ 2,45,09,749/- during the course of assessment proceedings out of which, the assessee could produce details in respect of ₹ 65.96 lakhs. The ld. AO, accordingly, proceeded to disallow 20% of the remaining sum of ₹ 1,79,09,749/- (being t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... find 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 ₹ 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 ₹ 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 is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... currence of said expenditure by way of reimbursement to AEs. This observation was made in addition to regular observations made in 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 de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. (b) Contrary to the claim made by the ARs during the remand proceedings, the website of the Ministry of Corporate Affairs (hereinafter referred to as 'MCA') shows the company to be 'active'. (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 eviden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hence, in our considered opinion, the same is allowable as deduction u/s 28 of the Act, which have been rightly deleted by the ld. DRP, which does not require any interference. Accordingly, Ground No.1 raised by the Revenue is dismissed. 53. Ground No.2 raised by the Revenue is with regard to the action of the ld. DRP in deleting the addition of bogus purchases of ₹ 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 ₹ 6,31,688/- and (ii) M/s.Vaastu Trading Co. for ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. The documentation produced by the assessee e.g. bank statements have also not been followed up the AO to their logical end for disproving the assessee's case. In these circumstances, we are unable to sustain this addition. 54. Aggrieved, the Revenue is in appeal before us. 55. We have heard the rival submissions. We find that the ld. DRP had given a categorical finding that all the documents were duly submitted by the assessee demonstrating the audit trails for the entire transaction. In view of the detailed reasoning given by the assessee, which remained uncontroverted by the Revenue before us, we do not find any infirmity in the order of the ld. DRP in this regard. Accordingly, Ground No.2 raised by the Revenue is dismissed. 56. To sum up - (i) ITA No.535/Mum/2012 for Asst.Year 2007-2008 filed by the assessee is partly allowed. (ii) ITA No.7595/Mum/2012 for Asst.Year 2008-2009 filed by the assessee is allowed. (iii) ITA No.1320/Mum/2014 for Asst.Year 2009-2010 filed by the assessee is allowed (iv) ITA No.1797/Mum/2015 for Asst.Year2010-2011 filed by the assessee is allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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