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TMI Blog2021 (10) TMI 439X X X X Extracts X X X X X X X X Extracts X X X X ..... orted by any express agreement on record. Unless it was shown that there was such an arrangement which resulted into any direct or indirect benefit to the brand of assessee s AE, these transactions could not be regarded as international transaction u/s 92B as held by Hon ble Delhi High Court in the case of Maruti Suzuki India Ltd. V/s CIT[ 2015 (12) TMI 634 - DELHI HIGH COURT] . Disallowance u/s 37(1) on account of Medical Freebies - expenditure has been disallowed in terms of Indian Medical Council (Professional Conduct, Etiquette and Ethics) regulations, 2002 as applicable from 14/12/2009 - HELD THAT:- As in catena of judicial decision, it has been held that the aforesaid regulations apply to Medical Practitioners only and not to pharmaceutical companies incurring such expenditure. The amount so expanded would be an allowable deduction u/s 37(1) - the regulations as referred to by lower authorities to make the disallowance are not applicable to the assessee and thus, the disallowance is not sustainable in law. By deleting this addition, we allow assessee s ground of appeal. Thus we would hold that the given transactions could not be regarded as international transaction a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) as the Most Appropriate Method ( MAM ). 3.2 Under the facts and circumstances of the case and in law, the learned AO/ CIT(A) erred in not considering the submissions of the Appellant in relation to use of adjusted Gross Profit Margin ( GPM ) for applying RPM as the MAM. 3.3 Under the facts and circumstances of the case and in law, the learned AO/ CIT(A) erred in considering the selling and distribution expenses incurred as a value addition by the Appellant to the product and thus applying TNMM as MAM. 3.4 Under the facts and circumstances of the case and in law, the learned AO/ CIT(A) erred in relating the losses incurred by the Appellant to the pricing policy of the Appellant not being at arm's length. 3.5 Under the facts and circumstances of the case and in law, the learned AO/ CIT(A) erred in stating that the Appellant performed the function of guaranteeing the goods, and borne warranty risk in respect of distribution of pharmaceuticals. 4. Transfer Pricing adjustment in respect of incurring of significant AMP expenses: ₹ 24,186,002 4.1. Under the facts and circumstances of the case and in law, the learned AO/ CIT(A) erred in not appreciating that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e facts and circumstances of the case and in law, the learned AO/ CIT(A) erred in stating that the Appellant is incurring legal expenses in relation to patent violations cases which are being fought in India. 7. Under the facts and circumstances of the case and in law, the learned AO/ CIT(A) erred in segregating purchase of formulations and the alleged AMP expenses and in undertaking a separate transfer pricing adjustment for both the transactions. 8. Under the facts and circumstances of the case and in law, the learned AO/ CIT(A) erred in considering only judicial precedents which were in favour of the Revenue and failed to distinguish the judicial precedents (for RPM and AMP expenses) placed on record by the Appellant which were in favour of the Appellant. 9. Disallowance of expenses incurred on conference seminar and sales promotion under section 37(1) of the Act 9.1 On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in upholding the disallowance made by the learned AO ignoring the fact that CBDT Circular No. 5 of 2012 (the CBDT Circular) was issued on August 1, 2012 and hence, shall be applicable from AY 2013-14 only and not for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under: - 1. On the facts and circumstances of the case and in law, the Ld. CIT(A) is right in deleting M/s Priya International Ltd. comparable when the same was accepted as comparable in AY 2009-10. 2. On the facts and circumstances of the case and in law, the Ld. CIT(A) is justified inr ejecting M/s Priya International Ltd. as a comparable on the ground that it was dealing in petroleum product as against pharmaceuticals by the assessee, although the assessee had not raised this as a ground. 3. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not allowing mark up on AMP expenditure for benchmarking this international transaction after having accepted that there is an arrangement of AMP between AE and the assessee in respect of this transaction. 4. Alternatively, on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not following the aggregate approach for benchmarking the transaction by finding the suitable comparables with similar level of marketing functions, in view of decision of Delhi High Court in the case of Sony India. 1.4 The assessee being resident corporate assessee is stated to be engaged i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld not affect the operating margins earned by the assessee. It only impacts the gross margins since the import would only affect the cost of goods sold. However, the same could not convince Ld. TPO who held that TNMM would be the most appropriate method (MAM) to benchmark the transactions. The Profit Level Indicator (PLI) was taken as operating profit to operating revenue which in assessee s case worked out to -11.33% as pitied against PLI of 6.29% reflected by 6 comparable entities which have been tabulated in para-20 of Ld. TPO s order. Applying the same, Ld. TPO worked out TP adjustment of ₹ 1703. 99 Lacs as tabulated in para-21.5 of the order. 4.3 Another adjustment was on account of Advertisement, Marketing and Promotion expenses (AMP). It was noted by Ld. TPO that the Bristol Myers Squibb group was one of the largest integrated health and personal care companies in the world and a pharmaceutical leader in anti-cancer treatments and cardiovascular therapies with a strong position in anti-infective area. The group, through its divisions and subsidiaries, is engaged in discovery, development, licensing, manufacturing, marketing, distribution and sale of pharmaceutical p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng companies. The transaction was international transactions as supported by the decision of Special bench of Delhi Tribunal in M/s LG Electronics India Pvt. Ltd. V/s ACIT (29 Taxmann.com 300) which has approved the application of Bright Line Test to benchmark such transactions. Finally, adopting benchmarking rate of 8.54%, the excess expenditure was identified as ₹ 497.40 Lacs which were to be further marked-up by 12.25%. Finally, AMP adjustment was computed at ₹ 558.33 Lacs. Since this adjustment was separately made, Transfer Pricing (TP) adjustment under trading segment was to be suitably reduced after excluding AMP expenditure. Accordingly, TP adjustment in trading segment was revised to ₹ 1206.59 Lacs. Both these adjustments were proposed in order u/s 92CA(3). These adjustments were ultimately incorporated by Ld. AO in assessment order dated 16/04/2014. 4.5 Another addition made in assessment order was disallowance of Medical freebies u/s 37(1). The same stem from the fact that the assessee incurred expenditure on conferences and seminars which were alleged to be in violation of regulations issued by Medical Council of India (MCI). The assessee controver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch has absorbed high GP margins of the assessee, Therefore, TNMM as adopted by Ld. TPO was appropriate method for benchmarking. Having said so, Ld.TPO was directed to exclude one comparable entity namely M/s Priya International Limited which computing the adjustment since that entity was held to be non-comparable. 5.3 Regarding AMP adjustment, Ld. CIT(A) observed that these expenses were incurred directly or indirectly for promoting the sale of four new drugs and other old drugs manufactured by assessee s AE abroad and the expenditure was done to create awareness about the pharmaceutical formulations among the doctors and medical fraternity like hospitals and doctors to first make them familiar about the names of new drugs, their usefulness in curing the diseases and their availability in India. The assessee conducted seminars and functions and sponsored various programs where the utility of pharmaceutical formulations were explained by the assessee and in the process, expenses on travel, accommodation and other charges, freebies etc. were incurred by the assessee. The sponsorship seminars and programs served the purpose of popularizing the name of company as well its products a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer Pricing (TP) adjustment in trading segment. It could be seen that the assessee has adopted RPM method as most appropriate method while benchmarking the transactions. Using this method, the assessee s margins have been shown to be higher than mean margins of comparable entities. However, Ld. TPO has rejected the method and adopted TNMM as the most suitable method and proposed TP adjustment in the order. The Ld.CIT(A) while upholding the action of Ld. TPO has directed for exclusion of one comparable entity i.e. M/s Priya International Ltd. since that entity has been held to be non-comparable entity. 7. We find that, as rightly pointed out by Ld. Sr. Counsel, the issue of adoption of Most Appropriate Method came up before this Tribunal in assessee s own case for AY 2009-10 vide ITA No. 1969/Mum/2014 order dated 28/08/2019 wherein the bench, in para-11, upheld the adoption of RPM as MAM by observing as under: - 11. We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements relied upon by them. Admittedly, the assessee is engaged in the business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the objections of the assessee as regards the rejection of the comparables did not find any infirmity in the view taken by the TPO, and concurred with his view that as per Rule 10B(4) companies having a different year ending could not have been selected as comparables. Also, the specific claim of the assessee that one of the comparable viz. M/s Daga Global Chemicals ltd. was erroneously rejected by the TPO on the ground that it had a different year ending, despite the fact that the latters financials clearly revealed that it had a similar year ending on 31.03.2009, had not found favour with the DRP. It was observed by the DRP, that the said company viz. M/s Daga Global Chemical Ltd could not be selected as a comparable for three reasons viz. (i) that, the company had about 50% purchases from imports in respect of trading goods whereas the assessee has 100%, imports from its AE; (ii) that, the company was into trading in bulk chemicals and solvents whereas the assessee was into ready to sell/use pharma products; and (iii) that, the company had subsidiaries in Dubai China. Further, as had been observed by us hereinabove, the DRP also upheld the rejection of segmentation of the dist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit margin in the open market; (v) the adjusted price arrived at under sub-clause (iv) is taken to be an arm's length price in respect of the purchase of the property or obtaining of the services by the enterprise from the associated enterprise. As is discernible from a perusal of Rule 10B(1)(b) of the Income Tax Rules, 1962, it can safely be gathered that RPM is the best suited method for determining the ALP of an international transaction, in a case where the goods purchased by an assessee from its AE are thereafter resold without any value addition to unrelated parties. Our aforesaid view is supported by the order of the coordinate benches of the Tribunal viz. (i) M/s Videojet Technologies India Pvt. Ltd. Vs. ACIT, Circle-10(3), Mumbai (ITA No. 6956/Mum/2012, dated 28.05.2019; (ii) Burberry India Pvt. ltd. Vs. ACIT, Circle-5(1), new Delhi ITA No.758/Del/2017, dated 22.06.2018; and (iii) Nokia India Pvt. Ltd. Vs. DCIT, Circle-13(1), new Delhi (2014) taxmann.com 492 (Delhi-Trib).In the aforementioned cases, it was observed by the Tribunals that a close scrutiny of sub-clause (i) and (v) along with the remaining sub-clauses of Rule 10B(1)(b) of the Income Tax Rules, 1962 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , RPM, CPM then they should be given a preference, and it is only where the said traditional methods have been rendered inapplicable that under such circumstances TNMM should be resorted to. Accordingly, in the backdrop of the aforesaid facts of the case before us, we are of the considered view that the assessee had rightly selected RPM for benchmarking its transactions of importing of formulations from its AEs, as against TNMM. 13. We shall now advert to the observations of the TPO/DRP on the basis of which the application of RPM by the assessee for benchmarking its transactions with the AE had been rejected by them. As is discernible from the orders of the lower authorities, the core issue that had weighed in the mind of the lower authorities while rejecting the RPM as the most appropriate method was that neither the complete information about the business profile and financial data of the comparables selected by the assessee was available in the public domain, nor the same was furnished by the assessee. We have given a thoughtful consideration to the aforesaid observations of the TPO/DRP and are unable to persuade ourselves to subscribe to the view taken by them. We are of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies in the domestic market. Our aforesaid view is further fortified by the orders of the various coordinate benches of the Tribunal viz.(i) Burberry India Pvt. Ltd. Vs. ACIT, Circle-5(1), New Delhi, ITA No.758/Del/2017, dated 22.06.2018;(ii) Horiba India (P.) Ltd. vs. DCIT (81 taxmann.com 209 (Delhi - Trib); (iii)Fresenius Kabi India Pvt. Ltd. vs. DCIT(ITA No. 235/Pun/2013); (iv). ACIT vis. Kobelco Construction Equipment India Ltd (ITA No.6401/Del/2012);(v)Systems Pvt. Ltd. vs. DCIT vice versa (ITA No. 683/Hyd/2014); and (vi).Frigoglass India (P.) Ltd. vs. DCIT(2014) 149 ITD 429 (Delhi). In terms of our aforesaid observations, we are of the considered view that the TPO/DRP while dislodging the RPM adopted by the assessee for benchmarking its international transactions, had lost sight of the fact that only the transaction of import of goods by the assessee from its AEs was to be benchmarked and all other functions carried out by the assessee having no nexus with the said import transactions were thus not relevant for the said benchmarking analysis. Be that as it may, we are unable to subscribe to the view taken by the TPO/DRP that merely for the reason that complete information ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the ratio of the same would be applicable to the present appeal since facts are more or less similar. Similar is the view in various other decisions of Mumbai Tribunal which could be tabulated as under: - (i) Kellogg India Pvt. Ltd. v/s. ACIT (2020; 121 taxmann.com 303) (ii) Nivea India Pvt. Ltd. v/s. ACIT (2018; 92 taxmann.com 165) (iii) Johnson Johnson Pvt. Ltd. v/s. ACIT (2019; 105 taxmann.com 230) (iv) India Medtronic Pvt. Ltd. v/s. DCIT (ITA No. 1600/Mum/2015) (v) Synthes Medical Pvt. Ltd. v/s. ACIT (2019; 109 taxmann.com 183) (vi) Godrej Consumer Products Ltd. v/s. ACIT (ITA Nos. 1102 1211/Mum/2015) By relying upon all these decisions, we would hold that the given transactions could not be regarded as international transaction as defined under section 92B of the Act and therefore, no transfer pricing adjustment could have been made by the Transfer Pricing Officer in this regard. The grounds raised by the assessee stands allowed which makes revenue s grounds infructuous. 9. The last issue to be adjudicated is disallowance u/s 37(1) on account of Medical Freebies. It is evident that the expenditure has been disallowed in terms of Indian Medical Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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