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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 ..... ervices to its group companies in relation to the products during and after warranty period. The assessee has entered into an agreement with Alcon Laboratories Inc. dated 1.1.2002 in this regard. The assessee also distributes pharmaceutical products in addition to distribution of Ophthalmic Surgical products. For the AY 2016-17, the assessee filed the return of income on 30.11.2016 declaring a total income of Rs.36,07,89,840. The case was selected for scrutiny under CASS and a notice u/s. 143(2) was duly served on the assessee. Since the assessee had international transactions, the AO made a reference to the TPO for determination of arm's length price (ALP). Accordingly, the TPO completed the proceedings u/s. 92CA by making an adjustment of Rs.20,07,41,588. The AO passed the draft assessment order incorporating the transfer pricing (TP) adjustment. Besides, the AO also made disallowance of seminars, conventions and sales promotion expenses for an amount of Rs.1,58,88,337. Aggrieved, the assessee filed its objections before the DRP. As per the directions of the DRP the TP adjustment was enhanced to Rs.27,48,87,330. The DRP also confirmed the disallowance made by the AO towards semin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P adjustments towards AMP expenses was computed as Rs.25,87,94,919. Aggrieved by the final order of assessment passed in pursuant to the directions of the DRP the assessee is in appeal before the Tribunal. 7. The ld. AR submitted that the issue has been already considered by the coordinate bench of the Tribunal in assessee's own case for the AYs 2013-14 & 2014-15 in IT(TP)A No.2889/Bang/2017 & 3376/Bang/2018 dated 16.11.2022 as under:- "2.1 Facts of the issue are that the TPO has discussed in detail in para 9 of his order that AMP is an international transaction. He has also discussed that when the Indian subsidiary is discharging both the distribution and marketing functions, then both the functions need to be benchmarked separately. He has discussed in detail the various clauses of the "Distribution and Marketing Services" agreement with its AE w.e.f. 01/04/2006 to conclude that it is obligatory for the assessee (distributor) to undertake marketing activities on behalf of supplier (its AE). He has also referred that it is operating under the direct supervision and control of its AE. As the assessee has not benchmarked this marketing function, the TPO has benchmarked this trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, it has adopted the consignment model to distribute its products. Further, as per the website of M/s Parekh Integrated Solutions Ltd, it offers consignment services to various companies. This being the case, the taxpayer may have to provide required incentives to M/s Parekh Integrated Solutions Ltd to distribute its products, then that of its competitor's products. 6. Further, the warehousing & logistics function provided by M/s Parekh Integrated Solutions Ltd, does not result in any value addition of the taxpayer's products. On the other hand, facilities such cold storage/warehousing etc. are essentially required to maintain the composition of taxpayer's products, which are to be distributed. Therefore, such functions/Services are only incidental to the distribution function undertaken by M/s Parekh Integrated Solutions Ltd, for/on behalf of the taxpayer. Hence, the TPO has rightly considered the distribution commission paid as part of AMP expenses and therefore, it is requested that the Hon'ble DRP may kindly affirm the TPO's order." Considering the facts and circumstances of the case, and also considering the submissions of the assessee, we are of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... products from its AE is for distribution in India. It was submitted that assessee also renders services in relation to the products during and after warranty period. The Ld.AR submitted that, on one hand the revenue accepts the distribution activities and marketing activities carried on by assessee to be at arm's length whereas on the other hand while making the AMP expenditure the Ld. TPO holds that the selling and distribution expenses incurred by assessee promotes the intangibles of AE in India and the distribution expenses incurred being towards the products amounts to advertisement. 9.2 The Ld.AR submitted that, the Ld. TPO did not consider that the sales promotion expenses and the seminars and conventions carried on ease to educate the Indian market in respect of the products distributor by the assessee within the Indian territory he submitted that by these expenditures the assessee is promoting its own business in India as a distributor. The details of the expenditure are as under: 9.3 The Ld.AR submitted that, the revenue made adverse observation that assessee incurred excessive sales and distribution expenses and compared to the comparable companies by using CUP as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;s own case for assessment year 2009-10 and 2010- 11 on the same issue of AMP expenses. The Tribunal took the following view after extracting the decision of the Hon'ble Delhi High Court in the case of M/s Maruti Suzuki India Ltd. (supra). "21. Respectfully following the ratio of the decision of the Hon'ble Delhi High Court in the above cases, we hold that no TP adjustment can be made by deducing from the difference between AMP expenditure incurred by assessee-company and AMP expenditure of comparable entity, if there is no explicit arrangement between the assessee - company and its foreign AE for incurring such expenditure. The fact that the benefit of such AMP expenditure would also ensure to its foreign AE is not sufficient to infer existence of international trans action. The onus lies on the revenue to prove the existence of international transaction involving AMP expenditure between the assessee-company and its foreign AE. We also hold that that in the absence of machinery provisions to ascertain the price incurred by the assessee-company to promote the brand values of the products of the foreign entity, no TP adjustment can be made by invoking the provisions of C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever overruled in Maruti Suzuki India Ltd. v. Addl. CIT [2011] 335 ITR 121 (SC) wherein the Hon'ble Supreme Court left the question whether AMP expenses gives raise to international transaction or not open with the following observations: "In this case, the High Court has remitted the matter to the Transfer Pricing Officer ("the TPO" for short) with liberty to issue fresh show-cause notice. The High Court has further directed the Transfer Pricing Officer to decide the matter in accordance with law. Further, on going through the impugned judgment of the High Court dated July 1, 2010, we find that the High Court has not merely set aside the original show cause notice but it has made certain observations on the merits of the case and has given directions to the Transfer Pricing Officer, which virtually conclude the matter. In the circumstances, on that limited issue, we hereby direct the Transfer Pricing Officer, who, in the meantime, has already issued a show cause notice on September 16, 2010, to proceed with the matter in accordance with law uninfluenced by the observations/directions given by the High Court in the impugned judgment dated July 1, 2010. The Transfer Pricin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MSIL. There were various models of Suzuki motor cars manufactured by MSIL and each model was covered by a separate licence agreement. Under these agreements, granted licence to MSIL to manufacture that particular car model and provided technical know-how and information and right to use Suzuki's patents and technical information. It also gave MSIL the right to use Suzuki's trade mark and logo on the product. Pursuant to this agreement, MSIL was using the co-brand, i.e., Maruti Suzuki trade mark and logo for more than 30 years. This cobrand could not be used by SMC and was not owned by it. The clauses in the agreement between MSIL and SMC indicated that permission was granted by SMC to MSIL to use the co- brand "Maruti Suzuki" name and logo. The mere fact that the cars manufactured by MSIL bore the symbol "S" was not decisive as the advertisements were of a particular model of the car with the logo "Maruti- Suzuki". The Revenue had been unable to contradict the submission of MSIL that the co-brand mark "Maruti-Suzuki" in fact did not belong to SMC and could not be used by SMC either in India or anywhere else. The decision in the case of Sony Ericsson requires that the mark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inancial interest, it could not be presumed that advertising, marketing and sales promotion expenses incurred by the assessee were at the instance or on behalf of the foreign company. The initial onus was on the Revenue to demonstrate through some tangible material that the two parties acted in concert and further that there was an agreement to enter into an international transaction concerning advertising, marketing and sales promotion expenses." 19. In the light of the law as it exists today, we shall examine the arguments of the rival parties. There has been no agreement between Essilor International which owns the various brands set out by the TPO in his order and the Assessee to incur any Advertisement and Marketing or Sales promotion expenses. None of the other reasons given by the TPO which have been explained by the Assessee and set out in the earlier paragraph can be the basis to hold that there was in fact an international transaction in the matter of incurring of AMP expenses by the Assessee. The order of the Tribunal in Assessee's own case for A.Y.2009-10 and 2010-11 in our view requires to be followed and there are no reasons whatsoever to take a different view. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 22.69 7. Nihilent Ltd. 15.94 29.19 33.12 25.64 8. Persistent Systems Ltd. 23.95 30.4 35.1 29.25 9. Infobeans Technologies Ltd. 35.19 20.92 42.6 32.71 10. Aspire Systems (India) Pvt. Ltd. 33.63 30.45 37.21 33.55 11. Infosys Ltd. 38.62 41.38 36.16 38.74 12 Thirdware Solutions Ltd. 30.18 42.46 48.17 39.86 13 Cybage Software Pvt. Ltd. 62.06 68.3 68.97 66.03 35th percentile 2 0.87 Median 25.64 65th Percentile 32.71 11. Accordingly the TPO arrived at the TP adjustment as given below:- Particulars Formula Amount (in Rs.) Taxpayers operating revenue OR 17,39,31,132 Taxpayers operating cost UDC 15,12,44,40 Taxpayers operating profit OP 2,26,86,669 Taxpayers PLI OP/OC 15.00% 35th Percentile Margin of comparable set 20.87%. Adjustment Required (if PLI < 35th Percentile) Yes Median Margin of comparable set M 25.64% Arm's Length Price ALP = (1+M)*OC 19,00,23,543 Price Received OR 17,39,31,132 Shortfall being adjustment ALP-OR 1,60,92. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and lasts till maintenance, trading of software products, software validation and a wide range of healthcare BPO services. The ld. AR submitted that in the annual report of the company, no segmental break-up is available nor does the revenue break-up towards various activities undertaken by the company is available. It is therefore contended that the company is to be excluded. Infobean Technologies Ltd. 18. The company is included by the TPO on the ground that it is functionally comparable and is purely into software development. The DRP upheld the inclusion by stating that the company is a service company primarily rendering software services and the operational revenue stream is entirely from software services. The DRP also held that the high profitability criteria cannot be considered for exclusion since the company is found to be functionally comparable in terms of Rule 10B. 19. The ld. AR submitted that the company is engaged in custom application development, content management system, enterprise mobility and big data analytics (pg. 1947 & 1980 of PB-II). As per the company's website, it is entrepreneurial entity engaged in providing custom development services to offsho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 014-15 wherein this company is excluded as comparable. 7.2 The Ld. DR, on the other hand, submitted that this company is engaged in rendering of software services and, hence, functionally comparable to assessee company. 7.3 We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. The coordinate bench of this Tribunal in ITA No. 2233/Hyd/2018 for AY 2014-15, directed the AO/TPO to exclude this company from the list of comparables for determining ALP by observing as under: 21. Having regard to the rival contentions and the material on record, we find that the Coordinate Bench of the Tribunal in the following case has considered similar objections of the assessee therein to direct exclusion of this company from the final list of comparables. For the purpose of ready reference, the relevant paragraph is reproduced below: "18. We have heard the rival contentions and perused the record. The first aspect is the functional comparability of concern which has been finally selected to be comparable. In respect of Infobeans Systems Pvt. Ltd., the financials of said concern clearly reflect that in addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal profitability earned from software development services, outsourced product development services and Healthcare BPO services. 47. When we examine profit & loss account at page 873 of the annual report paper book, software development and service charges are shown in composite manner with no segmental profitability. In these circumstances, we are of the considered view that Inteq is not a suitable comparable vis-a-vis the taxpayer which is a routine software development service provider working on costplus mark up model, hence ordered to be excluded from the final set of comparables." 21.1 In view of the above order of the Tribunal, we direct the AO/TPO to exclude this company from the list of comparables. 22. Respectfully following the decision of the coordinate bench we hold that Inteq Software Pvt. Ltd and Infobeans Technologies Ltd., be excluded from the list of comparables." 22. Respectfully following the decision of the coordinate bench we hold that Inteq Software Pvt. Ltd and Infobeans Technologies Ltd., be excluded from the list of comparables. Disallowance of seminars, conventions and sales promotion expenses - Ground no.31 23. The AO during the course of ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Court in the case of Confederation of Pharmaceutical Industry v. CBDT writ petition No. 10793 of 2012-J wherein validity of the said CBDT circular was challenged, the Himachal Pradesh High Court held that the said circular is valid and the Indian Medical Council (Professional Conduct. Etiquette and Ethics) Regulations, 2002 governing professional ethics of Doctors issued is salutary which is in the interest of public and patient. The Punjab and Haryana High Court has vide decision In CIT vs. M/s. Kap Scan and Diagnostic Centre (P.) Ltd. (2012) 25 taxmann.com 92/344 ITR 476 has confirmed disallowance of commission as not allowable under section 37(1) being against public policy prohibited by law. Based on factual matrix of the case as emerging from the records, the travel expenses incurred by the assessee company were in the form of seminar and conventions which bears the cost of doctors to undertake foreign tours in the guise of seminars and conferences and sales promotion expenses which includes various facilities provided by the company to doctors. These expenses are directly hit by Explanation to section 37. It is well accepted and settled proposition that regulations are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d under section 37 of the IT Act." 24. The DRP upheld the disallowance by stating that - "As the MCI regulations are towards promoting a public interest, a narrow and pedantic view contrary to public interest and objectives of the regulation cannot be taken. The validity of the regulation has been already upheld by the courts. In the light of the above, the proposed disallowance is upheld." 25. The Ld. AR submitted that the AO has accepted the honorarium paid to the Doctors whereas he as disallowed the travel expenses. The ld. AR also submitted that these expenses are not freebies given to the Doctors, but are incurred towards making the Doctors aware of the performance of the products of the assessee, who use these products in surgeries. The ld. AR further submitted that all the relevant details and supporting with regard to these expenses are already submitted before the AO which would substantiate the claim of the assessee. 26. The ld DR relied on the order of the lower authorities. 27. We have heard rival submissions and perused the material on record. It is pertinent to note that prior to the judgment of the Hon'ble Apex Court in the case of M/s. Apex Laboratories Pvt. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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