EDWARDS LIFESCIENCES (INDIA) PVT LTD,MUMBAI vs. ACIT-2(1)(1), MUMBAI

Ground No.1.1 is general in nature. Therefore, the same needs no separate adjudication.

Ground No.1.2 raised in assessee’s appeal was not pressed vide letter dated 18.06.2025 filed by the assessee. Accordingly, the same is dismissed as not pressed.

The issue arising in Ground No.2, raised in assessee’s appeal, pertains to Transfer Pricing Adjustment on account of advertisement, marketing and sale promotion (“AMP”) expenses incurred by the assessee.

The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is an indirect subsidiary of Edward Lifesciences Corporation, USA and a distributor of Cardiovascular range of product in India. The products distributed by the assessee fall within the cardiac care (which consists of heart valve therapy products, cardiac pulmonary products and RMI Products), critical care and vascular product line. For the year under consideration, the assessee filed its return of income on 26.02.2022 declaring a total income of ₹ 10,47,13,769/-. The return filed by the assessee was selected through CASS for complete scrutiny, inter alia, for the reason of high risk international transactions. During the year under consideration, the assessee entered into following international transaction with its Associated Enterprises. Sr. Nature of transaction Amount in (INR) Method used No.

Purchase of Traded Goods 57,34,48,498 Transactional Net Margin 2. Aid from fellow subsidiaries 39,17,89,834 Method (TNMM) 3. Purchase return of traded goods 2,58,03,811 4. Purchase of fixed assets 1,20,000 5. Reimbursement of expenses 1,26,25,776 6. Recovery of expenses 96,17,412 7. Tax cost on vesting of ESOPs 82,01,525 8. Payments in relation of ESPP/RSUs 88,86,288 Total 1,04,95,27,391

Pursuant the reference made by the Technical Unit under Section 92CA(1) of the Act to the Transfer Pricing Officer (“TPO”) for determination of arm’s length price (“ALP”) of the international transactions undertaken by the assessee, the TPO asked the assessee to submit the details in relation to advertisement, conference and marketing promotion expenses incurred by the assessee during the year under consideration. The assessee was also asked to show cause as to why the expenses relating to advertising, marketing, and conference expenses, along with educational and training expenses, should not be considered as brand-building expenses for Associated Enterprises, creating an intangible, and why they should not be treated as an international transaction. In response, the assessee submitted that the assessee operates as a limited risk distributor, and accordingly, it incurs conference and marketing promotion expenses to solicit customers and distribute its products in India, thereby increasing its sales. The assessee submitted that the benefits derived from incurring these expenses are enjoyed by the assessee by way of an increase in sales. It was further submitted that there is a need in assessee’s business to create awareness amongst the members about the availability of new technology in medical equipment and accordingly, in order to educate about the improved medical technology, and products offered by the assessee, these conferences and marketing promotion expenses were expended as a strategy to increase sales, like any other third- party distributor. It is further submitted that such expenses are incurred wholly and exclusively for the assessee’s own business, which were paid to the third parties in India that are not in any way related either to the assessee or its Associated Enterprises. In response to the show cause notice issued by the TPO, the assessee furnished the following details of expenses incurred by the assessee: - Sr. Nature of Expense Amount in (INR) No.

The assessee further provided the following details of specific expenses:- “Training expenses - These expenses are incurred in relation to the Assessee's employees growth like soft skill trainings, leadership training, finance related trainings, etc. Conference expenses - These expenses have been incurred in relation to travel and other costs of doctors in order for them to attend conferences to educate them about Edwards products offerings. Marketing promotion expenses - These expenses are incurred in relation to promote/ market Edwards products offered by the Assessee. These expenses are incurred by sponsoring Continuing Medical Education ('CME Programme') held in different hospitals to create awareness of medical devices available in the market, printing books and video shooting expenses for CMP programme etc.”

Before the TPO, the assessee further submitted that pursuant to the supplementary distribution agreements entered into by the assessee with the suppliers / Edwards group entities, the assessee received compensation from the supplying group entities, to enable the assessee to meet the arm’s length benchmark margin at the net level vis-à-vis the margin earned by the comparable companies. It was further submitted that accordingly, during the year under consideration, the assessee received an amount of ₹ 39,17,89,834/- as subvention income from its Associated Enterprises to help it achieving an arm’s length margin in India which effectively tantamount to compensating the assessee for any or all expenses relating to its distribution activities (including advertisement, marketing and conference expenses). Thus, it was submitted that even if it is assumed that such expenditure leads to brand building for its Associated Enterprises and presence of an international transaction, still the same has been recovered by the assessee by way of receiving the subvention income which is duly offered to tax and which is much higher than the proposed Transfer Pricing Adjustment. The assessee also placed reliance upon various judicial pronouncements wherein it has been held that mere incurring an AMP expenditure should not lead to inference of the existence of an international transaction and the Revenue has to prove with tangible material, the existence of arrangement, understanding or action in concert between the Associated Enterprises for the same.

The TPO, vide order dated 23.10.2023 passed under section 92CA(3) of the Act, disagreed with the submissions of the assessee and held that giving the intensity of the AMP functions carried out by the assessee, it can be concluded that these vital functions should actually be carried out by the Associated Enterprises (being the entrepreneur), which has been assigned to the assessee. The TPO further held that this assignment can be inferred from the conduct of the parties, and thus, there is an existence of an arrangement by which the brand owned by the Associated Enterprises is being promoted by the assessee by incurring AMP expenses. The TPO further held that the assessee has a well-established network for sales, marketing, and distribution of branded products manufactured by the Associated Enterprises, which resulted in the creation of marketing intangible in favour of the Associated Enterprises in India, and the same is an international transaction that calls for benchmarking. The TPO, by adopting the Bright Line Test (i.e., by considering the AMP/Sales ratio) of the comparable companies, concluded that the assessee is not being suitably compensated for the development of marketing intangible. Thus, therefore, by considering the AMP/Sales ratio of suitable comparable, which comes to 3.1%, as an arm’s length margin and further adding the mark up of 7.02% (being the arithmetic mean of operating profit to operating cost of the companies which are exclusively functioning as advertising and marketing services), the TPO computed the ALP of the international transaction relating to AMP expenses leading to creation of marketing intangible benefitting the Associated Enterprises at Rs.92,12,,742/-.

The Assessing Officer (“AO”), vide draft assessment order dated 20.11.2023 passed under section 144C(1) of the Act, computed the total income of the assessee at Rs.11,39,26,511/- after incorporating the Transfer Pricing Adjustment made by the TPO. The assessee filed detailed objections before the learned DRP against the Transfer Pricing Adjustment made by the TPO, again reiterating its submission, inter alia, that the assessee pursuant to the supplementary distribution agreement received subvention payment from the Associated Enterprises and thus the assessee has been adequately compensated by its Associated Enterprises for all its functions. The assessee also placed reliance upon the decision of the Co-ordinate Bench in its own case for assessment years 2012-13 and 2013-14, wherein a similar adjustment made on account of incurring AMP expenses was deleted. The learned DRP, vide its directions dated 30.08.2024 passed under section 144C(5) of the Act, upheld the findings of the TPO that there is an arrangement, understanding or action in concert between the assessee and its Associated Enterprises, whereby the assessee has incurred non-routine expenditure in the form of AMP expenses for providing services of brand building to the Associated Enterprises for which no adequate compensation has been received. Accordingly, the learned DRP held that there is clearly an international transaction covered under the provisions of section 92B of the Act. As regards the reliance placed by the assessee upon the decisions of the Hon’ble Delhi High Court, wherein the adoption of the Bright Line Test for computing the Transfer Pricing Adjustment was rejected, the learned DRP held that the issue has not attained finality as the Department has filed appeal before the Higher Judicial Forum. In conformity with the directions issued by the DRP, the AO passed the final assessment order computing the total income of the assessee at Rs.11,39,26,511/- after adding the Transfer Pricing Adjustment of Rs.92,12,742/-. Being aggrieved, the assessee is in appeal before us.

During the hearing, the learned Authorized Representative (“learned AR”), at the outset, by referring to the submissions made by the assessee before the lower authorities submitted that the assessee was adequately compensated by its Associated Enterprises as it received a subvention payment of Rs.39,17,89,834/- for the functions rendered by it which is much higher than the Transfer Pricing Adjustment of Rs.92,12,742/- made by the TPO. The learned AR further submitted that the said subvention has resulted in an arm’s length benchmark margin at the net level vis-à-vis the margin earned by the comparable companies. By referring to the decision of the Co- ordinate Bench of the Tribunal rendered in assessee’s own case for assessment years 2012-13 and 2013-14, the learned AR submitted that on the basis that subvention income received by the assessee was much more than the entire Transfer Pricing Adjustment made by the TPO, the Co-ordinate Bench of the Tribunal granted relief to the assessee and deleted similar Transfer Pricing Adjustment made on account of incurring AMP expenses by the assessee.

On the other hand, the learned Departmental Representative (“learned DR”) submitted the very fact that the assessee received subvention income from the Associated Enterprises goes on to prove that there was an arrangement between the assessee and the Associated Enterprises for rendering marketing functions in India on behalf of the Associated Enterprises.

We have considered the submissions of both sides and perused the material available on record. We find that the Co-ordinate Bench of the Tribunal in assessee’s own case in M/s. Edwards Lifesciences (India) Pvt. Ltd. v/s. ACIT in ITAs No.1189 and 7198/Mum/2017, for assessment years 2012- 13 and 2013-14, vide order dated 10.07.2019, while deleting the Transfer Pricing Adjustment made on account of incurring AMP expenses by the assessee, observed as follows: - “5. We have heard the rival submissions and perused the order of the Id. TPO, submissions made by the assessee before the ld. TPO and ld. DRP, objections raised by the assessee before the ld. DRP and arguments of both the Counsels before us and the paper book of the assessee together with the judicial pronouncements relied upon to which our attention was drawn by both the counsels before us. From perusal of the same, we find that the nature of expenditure incurred by the assessee was to create produce awareness among doctors in order to make them aware about the technology and product benefits; to educate and make the doctors aware about the latest products available in the market. We find that the expenditure incurred were in the nature of scientific meetings, medical advice, awareness campaign, scientific sessions, training etc., The various arguments by the Id. AR by referring to various documents in the paper book and the appeals are summarised as under:- "3.1 The assessee's industry is highly competitive, any new product development and technological change characterize the areas in which the assessee compete. To help broaden awareness of products and technologies, the assessee conduct educational symposia and provide training to physician, hospital executive, service line leadership, and clinical-based customers. 3.2 The need in assessee's business which is technologically upgrading at every step is to create awareness among the doctors about the availability of new technology in medical equipment. Accordingly, in order to educate about the improved medical technology products offered by the assessee, these conference and marketing promotion expenses are expended worth INR 2.65 crores and INR 1.52 crores respectively, like any other independent third party distributor. 3.3 The assessee has incurred conference and marketing promotional expense in order to create awareness of its products in the Indian market which is amongst the doctors in order to make them aware about the technology and product benefits. These expenditures have been incurred in order to educate and make aware the doctors about the latest products available in the market which is in the nature of scientific meetings, medical device awareness campaign, scientific sessions, etc. 3.4 Further, it is via marketing promotion, conference sponsorship, doctor's participation in medical conferences, etc. that the doctors are being made aware about path-breaking medicine and its technology in the Western world.

As noted in the foregoing paragraphs, in the present case, it has been consistently contended by the assessee before the lower authorities that during the year under consideration, pursuant to the supplementary distribution agreement, the assessee received subvention income of Rs.39,17,89,834/- from its Associated Enterprises to help it achieve an arm’s length margin in India, which effectively tantamount to compensating it for all expenses relating to distribution activity (including advertisement, marketing and conference expenses). We find that in this regard during the transfer pricing assessment proceedings, the TPO specifically issued notice on 05.10.2023 asking the assessee to provide detailed working of the amount received as subvention income and other details such as the agreement under which the payment was made, how the said amount was determined and the benchmarking of the transaction after considering the subvention payment. Replying to the aforesaid notice, the assessee vide its letter dated 10.10.2023, forming part of the paper book from pages 236-238, provided the details as sought by the TPO and submitted that after considering the subvention payment of Rs.39,17,89,834/-, the assessee achieved the arm’s length operating sales margin of 6.92%. We find that similar submissions were also made before the learned DRP, as noted on pages 37–39 of the DRP’s direction. However, the aforesaid submissions of the assessee were not dealt with by any of the lower authorities, and the impugned Transfer Pricing Adjustment was made by considering the incurring of AMP expenses as an international transaction. It is pertinent to note that the objective of the entire exercise of Transfer Pricing Benchmarking analysis is to arrive at an arm’s length remuneration, which the assessee should have earned from rendering the distribution services to its Associated Enterprises and once the assessee has shown that the income earned by it including the subvention income of Rs.39,17,89,834/- has resulted in an arm’s length margin in India vis-à-vis the margin earned by the comparable companies, any further adjustment is unwarranted and uncalled for, particularly when the subvention income received by the assessee is much more than the entire Transfer Pricing Adjustment of Rs.92,12,742/- made by the TPO. Therefore, on this basis alone, we do not find any merits in the Transfer Pricing Adjustment made by the TPO and upheld by the learned DRP.

It is further evident from the record that the TPO for making the impugned addition has adopted the Bright Line Test, which was held to be not having any statutory mandate by the Hon’ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT, reported in (2015) 374 ITR 118 (Del). We find that this was also one of the basis for deleting a similar Transfer Pricing Adjustment by the Co-ordinate Bench of the Tribunal in the decision cited supra. Accordingly, in view of our aforesaid findings, without going into any other aspect of the issue involved, the impugned Transfer Pricing Adjustment is deleted. As a result, Ground No.2 raised in assessee’s appeal is allowed.

Ground No.3 raised in assessee’s appeal pertains to the initiation of penalty proceedings under section 270A of the Act, which is premature in nature. Accordingly, Ground No.3 is dismissed.

Ground No.4 raised in assessee’s appeal pertains to the levy of interest under section 234B of the Act, which is consequential in nature and therefore, needs no separate adjudication.

In the result, the appeal by the assessee is partly allowed. Order pronounced in the open Court on 30/06/2025