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TMI Blog2020 (3) TMI 416X X X X Extracts X X X X X X X X Extracts X X X X ..... ground that as held by honourable Madras High Court it strengthens the transfer of IPR and as held by honourable Karnataka High Court it fell into the realm of definition under section 32. No decision from honourable jurisdictional High Court has been cited before us. In this view of the matter honourable Apex Court decision in the case of Vegetable Products Ltd. [ 1973 (1) TMI 1 - SUPREME COURT] has to be followed. In the said case law honourable court had expounded that if two constructions are possible the one in favour of assessee should be adopted. Since the decision of the learned CIT(A) is in accordance with the ratio arising from the decision of honourable Karnataka High Court and honourable Madras High Court as above we do not find any infirmity in the same in absence of any direct jurisdictional High Court decision on the subject. Hence we uphold the order of ld CIT(A) on this issue Applicability of provision of section 43A - CIT(A CIT(A) held that since this criteria is not fulfilled as person from whom business is acquired is also an Indian company hence, he has held that section 43A is not at all applicable - HELD THAT:- CIT(A) in his adjudication has not considered th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and that of the AO be restored. 3. Grounds of appeal raised by the assessee read as under : "On the facts and in the circumstances of the case and in law, the learned CIT(A)/Assessing officer has: Transfer pricing grounds 1. Erred in upholding the arm's length price determination of the learned Transfer pricing officer ('TPO') in relation to the international transaction of payment Central Service Charges of ₹ 3,87,44,898/- to ₹ 84,79,431/-, thus making an adjustment of ₹ 3,02,65,467/-; 2. Erred in not accepting the economic analysis undertaken by the Appellant which was in accordance with the provisions of the Act read with the Rules for establishing the arm's length price of the international transactions and arbitrarily selecting comparable uncontrolled price method as the 'most appropriate method' to benchmark the international transaction; 3. Erred in not accepting the combined transaction/ bundled approach of benchmarking adopted by the Appellant in its transfer pricing documentation and proceeding to determine the arm's length price of international transactions on a standalone basis by rejecting transaction net margin met ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear the assessee has made payment of ₹ 38,744,898/- to Abbott GmbH& Co. KG (AE) as the assessee had entered into service center agreement dated 09.11.2005 (supplementary agreement to the main agreement dated 01.12,1988) with the AE. It was submitted vide letter dated 19.01.2015 that during the year, the assessee has been allocated the following sums relating to 'Payment for Central Service Charges' viz.:- Nature of the Service Amount in Euro Amount in Indian Rupees Marketing and Strategic Sales Support 376,667 22,910,414 Personnel Support 11,551 702,549 Training arid Product Support 121,071 7,364,053 Accounting, Finance and MIS support 127,711 7,776,882 Total 637,000 38,744,898 6. During tine course of assessment proceedings and vide note sheet entry dated 14-01-2015, the AR of the assessee was asked to furnish details regarding the central service charges paid. He was also asked to furnish the explanation regarding expected/actual benefits, justification regarding such payments being made in an arm's length situation along with the documentary evidence to support the stand. Assessee in response justified the payment of Central servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finance and MIS support 127,711 7,776,882 Total 637,000 38,744,898 The assessee had submitted that payment of central service charges have been benchmarked by TNMM by comparing the operating results of assessee's distribution segments with functionally uncontrolled transactions. The TPO was of the view that the act does not say that TNMM is to be applied at the enterprise level and once TNMM is applied, all the international transaction are at arm's length. So just because TNMM is applied at the enterprise level, it does not automatically follow that each class of transaction including central service charges are at arm's length. The TPO has analysis the Central Service Charge under the CUP method. Reliance was placed in the case of Star India Pvt. Ltd. Vs ACIT (2008-TIOL- 426- ITATMUMBAI) wherein it was held that distinctive activities are to be analyzed separately. The TPO also placed reliance in the case of UCB India Pvt. Ltd (317 ITR 292 (AT)(MUM) It is seen that the appellant has two product lines. One is pharmaceuticals products and the second is medical healthcare products. The transaction which is presently under discussion is the medical/healthc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 30.1.2019 and the ITAT had deleted the transfer pricing adjustment. 10. Per contra, learned Departmental Representative did not dispute the above proposition. 12. Upon careful consideration, we find that the identical issue was considered by the ITAT in assessee's own case in earlier year referred above. The conclusion of the Tribunal is gainfully referred as under :- 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 countr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtization and DFAIFLEX is used to generate reports by PGN for analysis, control and If necessary take corrective action. It is also a planning tool used to forecast and is also used 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 ₹ 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany 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. 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 mate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 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 that there is no basis for the ld.TPO to arrive at this conclusion when the entire cost allocation sheet duly certified by an independent Accountant was very much placed before him for his examination. In any case, the ld.TPO cannot make any adhoc disallowance while determining the ALP of international transaction. His duty is to determine the ALP by following any of the five methods prescribed in section 92C of the Act r.w.s. 10B of the I.T. Rules. In this regard, we find that the Hon'ble jurisdictional High Court in the case of CIT v. Johnson & Johnson reported in ITA No.1030 of 2014 dated 07.03.2017 had held as under:- "(d) We find that the impugned order of the Tribunal upholding the order of the CIT(A) in the present facts cannot be found 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 pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e precedent as above, we set aside the orders of the authorities below and decide the issue in favour of the assessee. 14. In the result, assessee's appeal is allowed. Revenue's appeal : Apropos issue of depreciation of non-compete fees. 15. The Assessing Officer in this case it is noted that the assessee has claimed depreciation @ 25% of non-compete fees of ₹ 5,13,54,60,000/- paid as part of slump sale agreement. On enquiry in this regard, the assessee responded as under :- i. A non-compete is a negative right restraining another person from competing. As a part of contractual obligations, if a buyer secures such a right it is clear that he has in fact secured an invaluable right. ii. Non-compete right is a "business or commercial right". The fee is in lieu of which the assessee has secured right to carry on business without any competition from Piramal (post-acquisition for 8 years), iii. Such business right is of "similar nature" to know-how, patents, copyrights, trademarks, licences and franchises, iv. Reliance is placed on a. CIT vs Ingersoll Rand International Ind. Ltd. [2014] 48 taxmann.com 349 (Karnataka High Court) b. Pentasoft Tec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commercial rights of similar nature" so according to appellant ron compete fees falls under the residuary clause Reliance was placed on following case laws 1. CIT vs. Ingersoll Rand International India Ltd (2014) 227 Taxman 176 (Karnataka High Court) 2. Pentasoft Technologies Ltd. Vs DCIT (2014)222 Taxman 209 (Madras High Court). The appellant submitted that without prejudice if you are not in agreement with the Appellant's contention that in alternative payments made towards non compete fees may be treated a revenue expenses laid out for purpose of the business, and allowable in the year in which the expenses was incurred (F.Y. 2010-11). It further submitted that expenses may be allowed proportionality as deferred revenue expenses allowable over a period of eight years. From the above analysis it is seen that the appellant's expenditure or non compete fees can be claimed as deduction u/s 37(1) of the IT Act. There are many judgements which do not consider non compete Tees as capital expenditure. Relying on the following case laws I am of the considered opinion that the appellant can be given deduction u/s 37(1) as deferred revenue expenditure allowable for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it fell into the realm of definition under section 32. No decision from honourable jurisdictional High Court has been cited before us. In this view of the matter honourable Apex Court decision in the case of Vegetable Products Ltd. (88 ITR 192) has to be followed. In the said case law honourable court had expounded that if two constructions are possible the one in favour of assessee should be adopted. Since the decision of the learned CIT(A) is in accordance with the ratio arising from the decision of honourable Karnataka High Court and honourable Madras High Court as above we do not find any infirmity in the same in absence of any direct jurisdictional High Court decision on the subject. Hence we uphold the order of ld CIT(A) on this issue Apropos issue of applicability of provision of section 43A : 22. On this issue the Assessing Officer observed that during the assessment year under consideration, foreign exchange gain of ₹ 308,16,00,000/- on restatement of purchase consideration payable by assessee to Piramal is credited to the profit and loss account in compliance with the Accounting Standard 11 - The effects of change in foreign exchange rate' - which provides for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red base domestic formulation business. He referred to the business transfer agreement entered following some important definition as under :- "Business" means the business of researching, developing, formulating, manufacturing, selling, marketing, distributing, importing or exporting generic pharmaceuticals products in finished form (including the Products and the R&D Products) and related services of the base: domestic formulation and mass market branded formulation (Truecare™) businesses of Seller and PHL Pharma Private Limited (including the divisions set forth on Exhibit E) and such businesses are conducted in India and any Emerging Market by Seller and PHL Pharma Private Limited immediately prior to the date of this Agreement (subject to changes prior to Closing permitted in accordance with Section 7.2), but specifically excluding Other Businesses. It is agreed and understood that the Business does not include any Excluded Assets or Excluded Liabilities; "Intellectual Property" means all of the following anywhere in the world and all legal rights, title or interest in, under or in respect of the following arising under applicable Law, whether or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other assets, rights and properties which Seller acquired from Hoechst Marion Roussel Limited related to the research, development, formulation, manufacture, sale, marketing and distribution of Haemaccel solely within India, Nepal and Sri Lanka. Clause (c) to Section 2.5 further states with regard to Intellectual Property: (c) Effective as of the Closing, Seller, on behalf of itself and its Affiliates, shall grant to Purchaser and its Affiliates for a fixed-term of eight (8) years, an irrevocable, exclusive (even with respect to Seller and its Affiliates) and royalty-free right and license (with the right to grant sublicenses to distributors, agents and wholesalers (but only to the extent necessary to distribute pharmaceutical products on behalf of Purchaser), and to third party manufacturers (but only to the extent necessary to manufacture on behalf of Purchaser)) to use the Seller Corporate Namejbr purposes of making, luwing made, using, selling, offering to sell, importing or exporting generic pharmaceutical products in finished form in India, Nepal and Sri Lanka; provided, however, that the present license shall not be construed to limit the right of Seller and its Affilia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peting Activities in India and/or any Emerging Market; ..." 25. Referring to the above the Assessing Officer held as under :- "8.5. From the reading of above definitions and sections, it can be said that the capital assets acquired by the assessee relates to business in India, Nepal, Sri Lanka and Emerging Markets. The Goodwill acquired by the assessee is clearly not an India specific right but it is from country outside India as well. The brand name of Piramal Healthcare goes beyond India. The Intellectual Property rights are defined as worldwide rights/title/interest. The non-compete relates to India and Emerging Markets. There are many other clauses which reinforce the argument. As per the provisions of section 43 A, if any payment is made towards the whole or a part of the cost of the asset, then the increase/decrease in foreign exchange, the same has to be reduced from the cost of the asset. The provisions of the section applies to the assessee. The copyrights, trademarks, intellectual property, non-compete fees, etc. are the capital assets which are acquired from a country outside India. 8.6. In view of above, the amount of ₹ 306,55,23,898/- is reduced from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e above order Revenue is in appeal before us. We have heard both the counsel and perused the records. We find that as per section 43A relevant provision read as under :- "43A. Special provisions consequential to changes in rate of exchange of currency. Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset in any previous year from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange during any previous year after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency (as compared to the liability existing at the time of acquisition of the asset) at the time of making payment- (a) towards the whole or a part of the cost of the asset; or (b) towards repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset along with interest, if any, the amount by which the liability as aforesaid is so increased or reduced during such previous year and which is taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lanka and other. In this view of the matter learned CIT(A)'s finding is not at all sustainable. Since learned CIT(A) has not considered all aspect of the reasoning given by the Assessing Officer for making the addition, we deem it appropriate to remit this issue to the file of learned CIT(A) to consider them afresh and pass a speaking order on this issue. Needless to add the assessee should be granted adequate opportunity of being heard. 29. Before parting we may add that the assessee in its submission has referred to the decision of Hon'ble Delhi High Court in the case of CUB Pty Ltd. Vs. UOI vide order dated 25.7.2016. Learned CIT(A) in his adjudication has neither referred to this decision nor dealt with the aspect of Assessing Officer's order that the asset acquired included a reference to Sri Lanka and Nepal. However, in this regard, we note that the said decision of Hon'ble Delhi High Court was with respect to section 9(1)(i) of the Act. It was not rendered in connection with section 43A of the Act. It is settled law that decision has to be considered in terms of context in which it is rendered. 30. In the result, this appeal by the Revenue is partly allowed. Orde ..... X X X X Extracts X X X X X X X X Extracts X X X X
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