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TMI Blog2023 (2) TMI 760X X X X Extracts X X X X X X X X Extracts X X X X ..... I 1320 - ITAT BANGALORE] Disallowance of seminars, conventions and sales promotion expenses - MCI Regulations applicable on pharmaceutical companies or not? - HELD THAT:- AO had primarily made disallowance by referring the CBDT Circular No.5/2012 dated 01.08.2012. In the larger interest of justice, in view of the latest judgment of M/s. Apex Laboratories Pvt. Ltd. [ 2022 (2) TMI 1114 - SUPREME COURT] which has examined the very same issue, it becomes necessary to examine the exact nature of expenses incurred by the assessee for Doctors from all angles. Therefore, for substantial question and cause, necessarily, the matter needs fresh verification by the A.O., especially in the light of the recent judgment of M/s. Apex Laboratories Pvt. Ltd. v. DCIT (supra) - the issues is remitted back to the AO to examine the details submitted in the light of the decision of the Apex Court after giving an opportunity of being heard to the assessee. It is ordered accordingly. Appeal by the assessee is partly allowed. X X X X Extracts X X X X X X X X Extracts X X X X ..... s" with effect from 01.04.2006. The TPO was of the view that incurring of AMP expenses by the assessee is enhancing the value of marketing intangibles of the AE and hence the assessee has to be compensated for the same. The TPO therefore treated the said expenses as a separate international transaction. The assessee submitted before the TPO that the sales and distribution expenses incurred by the assessee is not an international transaction and the incidental benefit accruing to the AE cannot be considered as provision of service. The assessee also submitted that when TNMM is applied analysing individual items of cost may not be appropriate and the bundled approach is relevant. The TPO computed the estimated percentage of AMP expenses incurred by the comparable companies @ 5.94% and accordingly worked out the excess AMP expenses incurred by the assessee as Rs.35,24,45,858 holding the same towards DEMPE function in favour of the AE. The TPO also arrived at the margin to be applied on AMP expenses based on the list of comparables' median margin of 12.98% and accordingly arrived at the TP adjustment as below:- Particulars Amount (Rs. In Lakhs) Excess AMP Incurred for the benefit of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not been compensated for the sales and distribution expenditure incurred. It is seen that the TPO has proved that the assessee has incurred far more expenses when it was compared to the companies involved in similar activity. He has mentioned that the assessee has spent substantial portion of money on brand awareness activities. He concluded that this has enhanced the brand image in India. The fact remains that the brand is owned by its AE and hence, the AE has certainly benefitted by the expenses incurred by the assessee. However, the assessee has not been compensated for this. Ld. DRP was in agreement with the arguments of the TPO and found no reason to interfere with the order of the TPO on this ground. 2.3 Finally, the Ld. DRP followed the earlier order of Ld. DRP in assessment year 2012-13 and observed as under:- "Having considered the submissions, (For above 4 grounds), it is observed from the perusal of the TP order (in paragraphs 6 to 11) that the TPO has examined the issues raised above and recorded a detailed reasoning before making an adjustment on AMP expenditure. While deciding the issue, the TPO has discussed and considered the submissions made by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (CAG) entered by the assessee with M/s Parekh Integrated Services Pvt Ltd, Consignment Agent (CA), responsibility is cast on the CA by Clause 11 (a) to provide: (a) The CA shall provide work space equivalent to 500 square feet at the zonal offices and 300 square feet at other locations including two cabins for the zonal mangers of Alcon at the Zonal offices. It is agreed between the Parties that the area of the above work space(s) may be increased or decreased by Alcon as ....The work space provided at the zonal offices and other locations shall include telephone facilities and other accessories of an office premises including but not limited to chairs, tables. CA shall also provide table space with telephone facility for each of Alcon's Area Managers when visiting the CA's warehouses. The assessee is having distribution activities in 38 locations across India as per the submissions made by the assessee vide letter dated 25.01.2016. Further, the Warehousing charge is inbuilt in the distributor's commission and accordingly, we are of the view that an estimated cost of 25% of distributors' commission could be treated as towards the cost relating to provision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no agreement between the assessee and the AE to make such expenditure in order to promote the intangibles of the AE in India. And in the absence of any specific requirement to make such expenditure on behalf of AE, the expenditures incurred by assessee cannot be treated to be an international transaction. In support, he placed reliance on the decision of Hon'ble Delhi High Court in case of Maruti Suzuki India Ltd. vs. CIT, reported in 381 ITR 117 and M/s. Sony Ericsson Mobile Communications Pvt. Ltd. vs CIT reported in 374 ITR 118. 9.5 On the contrary the Ld. CIT.DR placed reliance on orders passed by authorities below. 9.6 We have perused submissions advanced by both sides in light of records placed before us. 9.7 We know that the DRP refused to follow the above decisions of Hon'ble Delhi High Court by observing that these decisions have not been accepted by the Department and SLP has been filed before Hon'ble Supreme Court. 9.8 It is not the case of the revenue that assessee is mandated to incur such expenditure as per any agreement between the assessee and a. It is also not disputed that these expenditures incurred by assessee or towards its own business promotio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure incurred by comparable companies, it cannot be inferred that there existed international transaction between assessee-company and its foreign AE. Therefore, the question of determination of ALP on such transaction does not arise. However, the transaction of expenditure on AMP should 'co treated as a part of aggregate of bundle of transactions on which TNMM should be applied in order to determine the ALP of its transactions with its AE. In other words, the transaction of expenditure on AMP cannot be treated as a separate transaction. In the present case, we find from the TP study that the operating profit cost to the total operating cost was adopted as Profit Level Indicator which means that the AMP expenditure was not considered as a part of the operating cost. This goes to show that the AMP expenditure was not subsumed in the operating profitability of the assessee-company. Therefore, in order to determine the ALP of international transaction with its AE, it is sine qua non that the AMP expenditure should be considered a part of the operating cost Therefore, we restore the issue of determination of ALP, on the above lines, to the file of the AO/TPO. The grounds of ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he existence of an international transaction. Similar decision was also rendered by the Hon'ble Delhi High Court in the case of CIT (LTU) v. Whirlpool of India Ltd., 381 ITR 154. The bright line test which was applied by the AO in the present case was also applied by the AO in the aforesaid cases. The bright line test which was accepted by the Special Bench of ITAT in the case of L.G. Electronics India Pvt. Ltd. v. ACIT (2013) 22 ITR (Trib.) 1 (Del)(SB) was held by the Hon'ble Delhi High Court to be not correct. In the case of Maruti Suzuki (supra), the facts were Maruti Suzuki India Ltd. (MSIL) was engaged in the manufacture of passenger cars in India. It was a subsidiary of SMC, a Japanese company. MSIL started its business in 1982 as a Government of India owned company. SMC was selected as the business partner independently by MSIL. The co-branded trade mark "Maruti- Suzuki" was used since the inception of MSIL. A licence agreement was entered into between MSIL and SMC in October 1982 for its models M-800, Omni and Gypsy. By the agreement, MSIL was permitted to use the co-branded trade mark "Maruti- Suzuki" on the vehicles. In the assessment of MSIL f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich was higher than that of the comparable companies whose profit margin was 4.04 per cent. Therefore, applying the transactional net margin method it must be stated that there was no question of a transfer pricing adjustment on account of advertisement, marketing and sales promotion expenditure. The advertisement, marketing and sales promotion expenses incurred by MSIL could not be treated and categorised as an international transaction under section 92B of the Act." 18. In the case of Whirlpool of India Ltd. (supra), it was held that there had to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the arm's length price. The transfer pricing adjustment was not expected to be made by deducing from the difference between the excessive advertising, marketing and sales promotion expenditure incurred by the assessee and the advertising, marketing and sales promotion expenditure of a comparable entity that an international transaction existed and then proceeding to make the adjustment of the difference in order to determine the value of such advertising ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able in terms of Functions performed, Assets employed and Risks assumed (FAR) analysis and other aspects of determination of ALP does not require any consideration. Therefore the addition made on account of determination of ALP of AMP expenses in AY 2011-12 to 2014- 15 is directed to be deleted." 10. In our view the above view by the coordinate bench requires to be followed, and there are no reasons whatsoever to take a different view. Respectfully following the above view, we redirect the Ld.AO/TPO to delete the addition made towards AMP expenses. 3.1 In view of the above order of the Tribunal, taking a consistent view, we allow these grounds taken by the assessee in both the appeals for the assessment years 2013-14 & 2014-15." 8. The facts being identical in the year consideration respectfully following the above decision, we direct the AO/TPO to delete the addition made towards ALP determined for AMP expenses. TP adjustment in IT support services - Ground Nos.21 to 30 9. The assessee has declared a margin of 13.04% in the IT service segment as computed below:- Particulars IT Support Services Sales 17,39,31,132 Les: Direct expenses 15,12,44,463 Operating Profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... based on the application of upper turnover filter. The ld. AR submitted that the turnover of the assessee is Rs.17 crores. The TPO while applying the turnover filter applied only the lower turnover filter of Rs.1 crore but did not apply the higher turnover filter of Rs.200. Accordingly, the ld. AR prayed for the exclusion of these comparables. 14. We heard the rival submissions. The Tribunal in the case of Autodesk India Pvt. Ltd. Vs. DCIT (2018) 96 Taxmann.com 263 (Bangalore-Tribunal), took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7. of the decision held as that high turnover is a ground for excluding companies as not comparable with a company that has low turnover. The following were the relevant observations: 17.7. We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt.Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing anal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon'ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra). 15. In view of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e revenue and 147% increase in the profit after tax which clearly demonstrates that the company has undergone abnormal year of operations during AY 2016-17. 20. The ld. AR further relied on the decision of Finastra Software Solutions India P. Ltd. v. DCIT, IT(TP)A No.268/Bang/2021 dated 28.11.2022 with regard to the exclusion of the above two companies. 21. We notice that the coordinate Bench in the case of Finastra Software Solutions (supra) has considered the exclusion of Inteq Software and Infobean Technologies and held that - " 21. We have heard the rival contentions and perused the material on record. We notice that the coordinate bench in the case of NTT Data FA Insurance Systems (India) Pvt. Ltd (supra) has considered the issue of exclusion of Inteq Software Pvt. Ltd. and Infobeans Technologies Ltd. and held as under: - "18. We have heard the rival submissions and perused the materials available on record. In our opinion, this comparable was considered by the Hyderabad Tribunal in the case of ADP Pvt. Ltd. in ITA No.227 & 228/Hyd/2021 dated 3.2.2022 at para 7 page 3678 to 3680 wherein held as under:- 7. "Infobeans Technologies Ltd.: The ld. AR of the assessee submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n which was providing software development services to its associated enterprises. Applying the same set of reasoning as in the paras hereinabove, we hold that Infobeans Systems Pvt. Ltd. is not comparable to the assessee". 22. Respectfully following the same, we direct that Infobeans be excluded from the final list of comparables in this case also. 7.4 On perusal of the order of the coordinate bench of this Tribunal and on perusal of the financial statements of Infobeans Technologies Ltd., we observe that the company is functionally not comparable and no segmental details are available. Therefore, the coordinate bench did not consider this company as comparable in assessee's own case for AYs 2014-15 & 2015-16. Respectfully following the decision of the coordinate bench, we direct the AO/TPO to exclude this company from the final list of comparables." 18.1 Same view was taken by the Tribunal in the case of Global Logic India Pvt. Ltd. Vs. DCIT reported in (2022) 134 Taxmann.com 35 for the assessment year 2016-17. Respectfully following above judgement, we are inclined to direct the AO/TPO to exclude this company from the list of comparables." 19.**** 20.**** ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aware of the working and performance of its products and therefore these expenses are claimed as having a direct nexus to the business of the assessee. The AO did not accept the submissions and disallowed the expenditure by stating as under:- "However, the nature of these expenses are prohibited by law. These expenses are prohibited by regulation 6.4.1 of the Indian Medical Council (Professional conduct, Etiquette and Ethics) Regulations. 2002 which existed during the assessment year 2013-14 which created bar on the physicians on receiving gifts gratuities, commissions or bonus in consideration of or return for the referring, recommending or procuring of any patients for medical, surgical or other treatment. The expenditure has been admittedly incurred by the assessee with an objective to encourage doctors to recommend their optical -items and pharmaceutical products dealt within by the assessee to the patients. so that sales and profitability of the assessee company increases which clearly reflect that these are legal gratification which are prohibited by law. The CBDT brought a Circular No. 5 of 2012 dated 1-8-2012 which is clarificatory and clarifies that any expenses incur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Order in Council, rule or other instrument made under such Act. Similarly, under Constitution of India the word law' in context of fundamental rights is defined under article 13(3)(a) and includes any ordinance, order, byelaw, rule, regulation, notification, custom or usage having in the territory of India the force of law. Thus, the Indian Medical Council (Professional conduct. Etiquette arid Ethics) Regulations, 2002 has force of law as it was promulgated in exercise of the powers conferred under section 20A read with section 33(m) of the Indian Medical Council Act, 1956 (102 of 1956), the Medical Council of India, with the previous approval of the Central Government, made the regulations relating to the Professional Conduct, Etiquette and Ethics for registered medical practitioners, namely the Indian Medical Council (Professional conduct, Etiquette and Ethics) Regulations, 2002 and hence these regulations shall be covered under the definition of law' and hence is covered under explanation to section 37. For claiming the expenses under section 37 which is a residuary sector', it is essential that the expenses are not covered under clauses of Sections 30 to 36 and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be followed and each of the expenditure needs to be evaluated to see if the disallowance is justified. It was claimed that even if the criteria as laid down in CBDT Circular and also the MCI Regulation (as now affirmed by the Hon'ble Apex Court is applied), the expenditure incurred towards contractual obligation with Doctors and employees of pharmaceutical companies does not call for disallowance. In the present case, the A.O. had primarily made disallowance by referring the CBDT Circular No.5/2012 dated 01.08.2012. In the larger interest of justice, in view of the latest judgment of the Hon'ble Apex Court, which has examined the very same issue, it becomes necessary to examine the exact nature of expenses incurred by the assessee for Doctors from all angles. Therefore, for substantial question and cause, necessarily, the matter needs fresh verification by the A.O., especially in the light of the recent judgment of the Hon'ble Supreme Court in the case of M/s. Apex Laboratories Pvt. Ltd. v. DCIT (supra). For the aforesaid purpose, the issues is remitted back to the AO to examine the details submitted in the light of the decision of the Apex Court after giving an opportunity of b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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