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Income Tax Appellate Tribunal, “J” BENCH, MUMBAI
These are Cross appeals filed by the assessee M/s. Merck Limited [Assessee/ Appellant] as well as the DCIT Range 7/(2)/(1), Mumbai (the ld. AO) for A.Y. 2011-12 against the assessment order passed u/s.
2. The assessee is aggrieved by the assessment order has raised following grounds of appeal in .
“1. General 1 On the facts and circumstances of the case and in law, the Learned Assessing Officer (AO)/Hon‟ble Dispute Resolution Panel (DRP)/ Transfer Pricing Officer (TPO)(as the case may be) erred in – 1.1 Passing the order U/s. 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (the Act) making huge additions and disallowances on the basis of surmises, conjectures, presumptions and assumptions and without considering the papers and documents submitted as also submission jade during the course of assessment proceedings and the proceedings before the Hon‟ble Dispute Resolution Panel.
1.2 Passing the impugned order which is illegal and bad in law and consequently, null and void.
Transfer Pricing Issues:
2.1 Not upholding the alternate objection of the appellant that the learned AO did not satisfy himself about the necessity and requirement of referring the matter for determination of arm‟s length price in respect of the international transaction between the appellant and the AEs and hence, hence the reference by learned AO to the Learned TPO is illegal and bad in law; 2.2 Not upholding the objection of the appellant that the transfer pricing adjustment made under provisions of section 92CA of the Act cannot be tax as the same is not a “charging provision” under the Income-tax Act and there is no corresponding provision to charge “such adjustment” as income of the appellant under section 4 of the Act nor thereis any provision for such income to be taxed under section 5 of the Act.
2.3 Without prejudice to each of the above grounds, not upholding the appellant alternate grounds that the reference made by Learned Assessing Officer to the learned TPO in reference to the CBDT instruction no 10/2013 dated 05.08.13 as regards threshold limit of ₹ 15 crores for reference to him under “administrative limits” under said circular has no force of law and the reference made by following the said 2.4 Not upholding the grounds of the appellant while making huge transfer pricing adjustment on the basis of surmises and conjectures, assumptions and presumptions without considering the papers and documents submitted as also submissions made during the course of the Transfer Pricing/ DRP proceeding, Assessment proceedings and therefore, the Order passed is illegal and bad-in-law and therefore, the Order passed is illegal and bad-in-law and consequently, null and void.
2.5 Addition in respect of purchase of raw materials of ₹ 93,28,708/-:
On the facts and in the circumstances of the case, and in law, the Learned TPO erred in proposing an adjustment of rs. 3,97,18,708 and the Hon‟ble DRP further erred in confirming an addition of ₹ 93,28,708 in respect of international transaction of purchase of raw materials from associated enterprise(„AE‟).
(a) Rejection of Appellant’s Most Appropriate Method The learned TPO erred in proposing and the Hon‟ble DRP further erred in confirming the rejection of Transactional Net Margin Method (“TNMM”) considered as the most appropriate method in terms of Section 92C(2) of the Income-tax Act, 1961 („the Act‟) read with Rule 10B(1) of the Income-tax Rules, 1962 („the Rules‟)
The Learned TPO erred in proposing and the Hon‟ble DRP further erred in considering the TPO‟s action of selection of Comparable Uncontrolled Price („CUP‟) method as most appropriate method for determining the arm‟s length price of the international transaction ,without appreciating that the purported use of CUP data was not appropriate in terms of Rule 10B(2) and 10B(3) of the Rules.
(C) Cherry Picking Without prejudice to above, on the facts and in the circumstances of the case, and in law, the Learned TPO erred and the Hon‟ble DRP further erred in not considering that in case CUP method is considered as most appropriate method, the information of the raw material procured by other companies including USV, Intas and Torrent Pharma should also be called by using the powers under section 133(6).
(d)Non consideration of commercial and economic circumstances The Ld DRP and consequently the Ld. AO erred in confirming the TPO‟s action of selecting and application of the CUP method as the most appropriate method without appreciating the Appellant‟s commercial rationale and economic circumstances that the import of raw material from the AE was in relation to the use of trademark “Concor 5” licensed from the AE.
Without prejudice to above, on the facts and in the circumstances of the case, and in law, the Learned TPO and the Hon‟ble DRP further erred in not considering that in case CUP method is considered as most appropriate method, the price charged by the third party in the same geographical market should be considered as comparable transaction.
(f) Incorrect application of CUP Method Without prejudice to the above, in case CUP method is considered as most appropriate method, suitable adjustments should be made on account of difference in the quality of raw material, contractual terms and market share of the finished product.
(g) Use of secret data On the facts and in the circumstances of the case, and in law, the Ld DRP and consequently the Ld. AO erred in confirming the TPO‟s action of not considering the provisions of Rule 10C(2)(c) of the Rules; which provides that in selecting the most appropriate method, the availability, coverage and reliability of data necessary for the application of method should be taken into account; while applying the CUP method on the basis of data sourced by the TPO under Section 133(6) of the Act without appreciating that the Appellant could not have access to such data.
On the facts and in the circumstances of the case, and in law, the Learned AO/ the Hon‟ble DRP erred in disallowing ₹ 9,35,446/- U/s. 14A of the Act read with Rule 8D, though however, it was contended that- (a) The appellant did not incur any expenditure to earn the tax free income during the year except an amount of ₹ 3 lakhs estimated by it as a proportionate salary cost of the employee of the company who devoted part of his time for making investment in Mutual Funds etc. for the appellant.
(b) There was no person except the aforesaid person who devoted time for investment of surplus fund as authorized by the Board of Directors and there is no involvement of any other person except the said person in investment of surplus funds.
(c) In the appellant‟s own case, the Hon. Tribunal has held in its Order for assessment year 2007-08 that only 1% of the exempt income was liable to be disallowed under Section 14A of the Act.
4. Distribution of free samples – ₹ 3,00,62,583/-:
On the facts and in the circumstances of the case, and in law the Learned AO/ the Hon‟ble DRP erred in –
(i) disallowing cost of samples distributed of ₹ 3,00,62,583/- on the ground that the issue was elaborately discussed in the previous years and (ii) not following the directions of the Hon. Income Tax Appellate Tribunal in appellant‟s own case in respect of assessment year 2003- 04 wherein, it has been directed that upon furnishing the details, i.e. names, addresses of the Doctors to whom the samples order of the Hon. Income Tax Appellate Tribunal was brought to the notice of the Hon. DRP/ Ld. A.O.
(iii) disregarding the details furnished as regards the names, address and quantities distributed for the entire year in the CD format and not verifying the details submitted to him by issuing the notice u/s. 133(6) as mentioned to him by and wrongly stating that he could not carry out so called independent investigation of the samples distributed.
(iv) without prejudice to the above and in the alternate not allowing the said expenditure as “trading loss” since there was no doubt that the stocks were manufactured by the company on which excise duty is paid and the said items were not lying with the company in its closing stock as at the year end.
5. Sales promotion- conference expenses – ₹ 62,59,227/- (a) disallowing an amount of ₹ 62,59,227/- incurred in respect of sales promotion conference expenses, being the expenses incurred towards conference, seminars and symposiums towards spreading awareness of new techniques, issues and developments, medical treatment of related therapeutic areas and such conferences were for the purpose of promoting and helping medical profession by sharing of specialized knowledge in the medical field.
(b) applying the CBDT‟s Circular 5/2012 issued on 1StAugust,2012 to assessment year under reference, being A.Y. 2011-12.
(c) not considering the submission of the assessee that expenses incurred on conferences, seminars and symposium for doctors was not an offence or was not prohibited by any law.
6. Interest U/s. 234D ₹ 12,34,499:
On the facts and in the circumstances of the case, and in law, the Learned AO/ the Hon‟ble DRP erred in charging interest U/s. 234D of ₹ 12,34,499/- as the appellant was not liable to pay the same.
7. Initiation of Penalty Proceedings U/s. 271(1)(c) of the Act:
On the facts and in the circumstances of the case, and in law, the Learned TPO/AO/ the Hon‟ble DRP
8. The above grounds of appeal are distinct and separate and without prejudice to each other.
9. It is humbly prayed that the reliefs as prayed for hereinabove and/or such other reliefs as may be justified by the facts and circumstances of the case and as may meet the ends of justice should be granted.”
The learned AO is also aggrieved by the directions of Ld. DRP and therefore has raised following 2 grounds of appeal in ITA No. 1798/MUM/2016:
“1. On the facts and in the circumstances of the case, Hon‟ble DRP erred in deleting the adjustment on account of value of technical service appreciating the fact that the assessee failed to substantiate that the assessee has benefited from the services so availed, the cost of services as incurred by the AE, the basis of allocation/allocation keys used by the AE to allocate the proportionate cost to the assessee and the quantification of the cost of services actually rendered by the AE to the assessee.
2. On the facts and in the circumstances of the case and in law, the Hon‟ble DRP erred in deleting the addition on account of disallowance u/s. 2(24)(x) r.w.s. 36(1) of the Act by holding that provisions of Section 43B of the Act are applicable without appreciating the fact that the issue was not governed
The brief facts of the case shows that assessee is a company engaged in the business of manufacturing of pharmaceutical. It is subsidiary of Merk Group, Germany.
It filed its return of income on 29.11.2011 declaring income of ₹ 105,73,75,060/-. The return of income was picked up for scrutiny.
The ld. Assessing Officer noted that assessee has entered into 8 different kind of international transactions. The AO referred the matter to the ld. TPO for examination of arm‟s length price of those international transactions. The TPO noted that assessee has entered into international transactions of purchase of raw materials, payment of technical know-how fees, payment of royalty, purchase of other goods, sell of finished goods, Income of commission and reimbursement of expenses paid and received. All these international transaction were benchmarked using the Transactional Net Margin Method as most appropriate method. The business of the assessee is divided into 2 different business lines
The learned TPO examined that assessee has purchased raw materials from its associated enterprises.In A.Y. 2010-11, Transactional Net Margin Method adopted by the assessee was rejected and Comparable Uncontrolled Price Method (CUP) was applied. The differential price was applied to the quantity of raw material consumed. For this year, the TPO obtained information u/s. 133(6) of the Act from M/s. Unichem laboratories limited about the purchase rate of Bisoprolol Fumarate (BF) which was confronted to assessee on 18.11.2014. The rate of Unichem laboratory was ₹33,086 Per.Kg. and the price paid by the assessee was ₹62,211 Per.Kg. Therefore the TPO issued show caused notice to the assessee asking as to why the arm‟s length price of international transaction of purchase of raw material should not be determined using the CUP method and making the adjustment on account of difference on
The learned TPO rejected the contention of the assessee adopted external CUP and held that 10% adjustment in the price is allowable. The AO/TPO also considered the volume discount. The CUP price was determined at ₹ 33,086 Per.Kg. It was applied on total quantity consumedof 407.30Kg and thereafter adjustment of ₹ 93,28,708/- was made to the international transaction of import of material.
The assessee has also paid technical consultancy ₹ 3,30,90,000/- which was also benchmarked using TNMM method. The assessee paid the above fees for support of engineering of production and quality control, training, advising, etc. It was a fixed fee of ₹ 3,00,00,000/- Per Annum plus applicable taxes. The ld. TPO asked the assessee to satisfy whether the services have been rendered or not. On the basis of the documents submitted by the assessee, the ld. TPO held that he needs to makea reasonable estimate of whatever services rendered by the associated enterprises. He estimated the actual use a. Disallowed ₹92,158/- on account of delay in payment of employees contribution of provident fund. He also made a disallowance u/s. 14A of ₹ 9,35,446/- whereas the dividend income received was ₹1,50,014/-. b. Assessee has debited a cost of free sample and physician sample of ₹ 06,01,25,166/-. The ld.AO allowed 50% of such expenditure and made a disallowance of ₹ 03,00,62,583/-. c. Assessee has also incurred the conference expenditure of ₹ 62,59,227/- towards travel and gift to the Doctors.Same was also disallowed by ld. Assessing Officers.
Accordingly, the income was computed at ₹113,35,07,736/-against returned income of ₹ 105,73,75,060/-.
a. following its own direction for A.Y. 2010-11, upheld that CUP is the most appropriate method and further as the ld. TPO has also granted adjustment of 10% to the import price confirmed the adjustment on account of import of BF. b. On the transfer pricing adjustment with respect to technical services, the addition was deleted because of the decision of the co- ordinate bench in assessee‟sown case on the c. It also deleted the disallowance of ₹92,158 in respect of late payment of employees contribution towards ESIC following the decisions of Hon‟ble Bombay High Court in Ghadge Patil Transport Limited. d. On the issues of disallowance u/s. 14A, the order of the ld. AO was upheld. e. On the disallowance of free physician sample and sells promotion expenditure the action of the ld. TPO/AO was confirmed.
The directions were passed on 23.12.2015. Based on this the ld. AO passed the final assessment order 25.01.2016. Therefore, the assessee is aggrieved
In the result, filed by the Assessing Officer is partly allowed.
Now we come to the appeal of the assessee contesting the addition of ₹93,28,708/- in respect of purchase of raw material bisoprolol. The assessee has adopted Transactional Net Margin Method but the ld. TPO applied CUP Method and obtained data from Unichem Laboratory and worked out the external CUP price ₹33,086 Per.Kg. He granted a quality adjustment on 10% and thereafter made the adjustment of above sum. The ld. DRP confirmed the same.
The ld. Authorized Representative submitted that this issue is covered in assessee‟s own case by the order of the co-ordinate bench for A.Y. 2009-10 & 2010-
The ld. DR submitted that the issue is squarely covered against the assessee in assessee‟s own case
We have carefully considered the rival contention and pursued the orders of the lower authorities. We find that identical issue arose in the case of the assessee for A.Y. 2009-10, 2010-11 and for A.Y. 2009-10 wherein for order dated 31.03.2016 has upheld the applicability of CUP Method, confirming the rejecting of TNMM as the most appropriate method. The co-ordinate Bench also considered the reasonable quantity of 20kg only. In view of this, principally Co-ordinate Bench decision in respect of the assessee is required to be followed. The Co-ordinate Bench in Para No. 15 it also agreed with the simple average of the prices. The Coordinate bench 2016] 69 taxmann.com 45 (Mumbai ) in case of assessee deserves to be followed. 021. The assessee has contended that if the order of the co-ordinate Bench A.Y. 2009-10 is followed. The simple average works out to be ₹47,772 Per.kg. and it will reduced the adjustment substantially.
In view of this, we direct the AO/TPO to restrict the adjustment following the order of the co-ordinate
The Ground No. 3 with respect to the disallowance u/s. 14A of ₹9,35,446/-. It was not pressed, hence dismissed.
With respect to the Ground No. 4 and Ground No. 5 regarding free sample distributed where the AO restricted the disallowance of 50% and with respect to the sales promotion, conference expenses the disallowance of ₹ 62,59,227/- was made.
On the issue of distribution of free sample the assessee submitted that the disallowance in support of free sample has been deleted by the co-ordinate bench in assessee‟s own case for past several years and therefore same should be followed.
with respect to the sales promotion disallowance , ld AR referred to the note on sales promotion and details of such expenses stating that same should be allowed as this are expense incurred for the purpose of business of the assessee.
The ld. Departmental Representative vehemently submitted that both these issues are covered by the decision of Hon‟ble Supreme Court in case of Apex Laboratory Private Limited Vs. DCIT in 135 taxmann.com 286.
With respect to Ground no 5 of conference expenses We find that the issued is squarely covered against the assessee by the decision of the Hon‟ble Supreme Court in case of Apex Laboratories Limited [ supra]. Accordingly, Ground No. 5 is dismissed. 030. Ground No. 1 is general in nature and Ground No. 6 & 7 with respect to the interest and penalty are premature and hence dismissed.
Order pronounced in the open court on 05.12.2022.