ALCON LABORATORIES (INDIA) PRIVATE LIMITED ,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE - 1(1)(1), BANGALORE

The ld. AO further found that the assessee company has not deducted tax at source on a sum of ₹ 220,529,064 and therefore invoking the provisions of section 40 (a) (ia) of the Act for non-deduction of tax at source made disallowance of the same at the rate of 30%. It was found that assessee disallowed ₹ 66,158,719. The AO after taking the explanation of the assessee found that TDS has not been deducted on total payment of ₹ 220,994,591/– as per form No. 3CD. Accordingly the disallowance works out to ₹ 66,298,377/– whereas the assessee itself has disallowed ₹ 66,158,719/– and therefore the balance disallowance of ₹ 139,568/– was made. Accordingly the total income of the assessee was computed at ₹ 1,735,615,397/– by the above draft order.

Aggrieved with the same the assessee preferred an objection before the learned Dispute Resolution Panel-1, Bangalore [DRP]. The ld. DRP passed its direction u/s. 144C(5) of the Act on 22 June 2024. According to the direction para No. 2.2.8 the disallowance of ₹ 246,660,121/– u/s. 37 (1) of the Act in violation of the guidelines of the Indian Medical Council was upheld. With respect to the determination of the arm's-length price of AMP expenditure were also confirmed. The several comparables objected by the assessee for determination of the arm's-length price of the AMP expenditure was also dismissed. Therefore the ld. DRP upheld the selections of comparable as well as upheld the addition with respect to the arm's- length price of the AMP expenditure. With respect to the imputation of interest on outstanding overdue receivable from its AE as per ground No. 5 were also rejected including the markup of 350 basis points over the six months LIBOR was also upheld.

Based on the direction of the ld. DRP, ld. TPO passed an order giving effect to the direction u/s. 144C of the Act on 18 July 2024 wherein the AMP expenditure reimbursable adjustment was retained at ₹ 920,901,042 and adjustment in respect of interest on delayed receivable was restricted to 22,79,192/–. Based on this the assessment order was passed which is under challenge before us. Thus the challenge in this appeal is with respect to addition of ₹ 6. 922,592,886/– on account of the excessive expenditure incurred towards AMP expenditure, addition of ₹ 2,279,192 on account of interest on overdue receivable and further the disallowance of ₹ 246,660,121/– of various expenditure incurred in violation to the IMC guidelines. The assessee has raised 35 grounds of appeals before us. One of the ground is with respect to disallowing the provision of gratuity amounting to ₹ 119,535,383/– u/s. 43B of the Act despite the fact that the assessee had suo motu disallowed the same in its return of income under the provisions of section 40A(7) of the Act but the Central Processing Centre [CPC] has once again made this disallowance which has resulted into double disallowance. The DRP was also requested to delete the above adjustment, but it refrained from adjudicating the same. Over and above this issue, the other issues are with respect to the chargeability of interest under various provisions of the Act as well as initiation of penalty proceedings u/s. 270A of the Act.

The ld. AR, Shri Percy Pardiwala, Senior Advocate, submitted that ground No. 1 is general in nature and ground No. 2 covers all the additions.

With respect to ground No. 3 – 21, he submits that these are the grounds relating to the adjustment on account of arm's-length price of the AMP expenses. He submits that that issue is squarely covered in favour of the assessee by the various decisions of the coordinate benches in assessee's own case. He referred to the decision of the coordinate bench for AY 2012–13 in placed at page No. 1305 – 1324, for AYs 2013-14 and 2014–15 (ITA No. 2889/Bang/2017 and for AY 2016 – 17 in to 4/Bang/2021, for AY 2017–18 in and for AY 2018–19 in ITA No. 1018/Bang/2022. Thus his submission was that this issue is squarely covered in favour of the assessee. Thus he submitted that that first the issue arose in case of the assessee for AY 2012 – 13 wherein as per order dated 29th April 2022, the addition of the arm's-length expenditure was made of ₹ 620,630,238/–. This ground is decided as per ground No. 2 – 10 as per paragraph No. 9 of the appellate order. The contention of the assessee therein was that assessee is merely acting as a distribution agent and carries on marketing activities and therefore the assessee is promoting its own business in India as a distributor. He further stated that the argument of the assessee therein was that addition was made by using the Brightline test. He submits that that the coordinate bench in paragraph No. 9.8 has referred that assessee is mandated to incur expenditure as per agreement

He also explained the facts of the case by looking at the order of the ld. TPO dated 10 July 2023, he submitted that in paragraph No. 4.2 the ld. TPO has recorded based on the perusal of the financial statement that assessee has incurred the expenditure of ₹ 12,545 lakhs in respect of distributor, commission, sales commission, travel and conveyance expenses and Seminar and Convention, that these expenses are 12.25% of the total sales of the company. Thereafter he referred to the profile of the assessee company wherein it is stated that (paragraph No. 3.1 of the TPO’s order) that that assessee distributes the products of Alcon group companies in India and provides marketing support and maintenance services to its group companies in relation to the products during the year and after the warranty period. For this purpose assessee has entered into an ongoing agreement with Alcon Laboratories Inc. on 1 January 2001. Indian entity also distributes the pharmaceutical products of Alcon group in addition to distribution of ophthalmic surgical products. India imports various materials for distribution in India. Therefore he submits that the assessee is merely a distributor, he submits that agreement of the assessee is placed at paper book page No. 1 wherein the distribution and marketing service agreement effective as on the 1st April 2006 is entered into with Switzerland Co. Thus he further referred to section 3 of the agreement to show that the assessee is carrying on marketing activities as described in section 3.2 in the territory for products for which it has been appointed as distributor. He submits that assessee will execute the marketing plan for the territory that has been developed by or at the expense of the supplier. The distributor will assess and provide information and make recommendations regarding the identification of target audience, implementation of the marketing plan, appropriate product positioning within the territory, optimal pricing within established guidelines, product file and labelling and contribute to the regulatory effort, organise, contact and manage relationship with opinion leaders, manage all issues related to all country customers such as physician Association, pricing authorities and monitor new trends. It will also look at the medical inquiries, complaints, adverse events, medical information, promotional material and reimbursement. He further referred to the service agreement entered into on 12 March 2014 wherein also he stated that services to be provided by the assessee is as the principal may reasonably request from time to time which would be reimbursed to the assessee at a markup of 15%. He further referred to the transfer pricing study report placed at page No. 510 of the paperbook and functions are recorded at page No.

He further referred to the page No. 540 of the transfer pricing study report wherein the distribution segment shows the operating margin of the assessee on sales at the rate of 4.52% by considering the profit level indicator of operating revenue/operating expenses and further in the Business Support Segment the margin of the assessee was computed at 15.25% considering the profit level indicator of operating revenue/operating

The ld. TPO’s order was referred to by the ld. CIT DR and he referred to page No. 209 paragraph No. 8 of the order of the ld. TPO, he submitted that distribution and marketing services agreement provides for AMP functions to be carried out by the taxpayer under the overall control and supervision of the associated enterprises. He referred to the agreement and also stated that it is obligatory for the assessee to undertake marketing activities on behalf of its AE. He further stated that assessee is operating under the direct control and supervision of its AE and the entire market strategy and the marketing plan is devised by the overseas company from Switzerland. He further stated that the expenses in relation to marketing are agreed to be reimbursed to the assessee company therefore it is apparent that the assessee company has spent some money on marketing on behalf of its AE which has not been reimbursed adequately. It was further stated that the person who bears the risk relating to AMP activity is entitled to all the excess profits generated on account of the function. He further referred to paragraph No. 8.2 wherein referring to the provisions of section 92B it was stated that mutual agreement/arrangement can be inferred from the conduct of the taxpayer and therefore it becomes a separate international transactions to be benchmarked. He further referred to paragraph No. 8.3 where conduct of the taxpayer was demonstrated which clearly shows the presence of an arrangement for promotion of marketing intangibles. The ld. TPO referred that the taxpayer distributes the products imported from its AE through its authorised distributor. Though the company does not make direct sales to the hospitals and medical professional, it has a dedicated team of sales/marketing representatives whose primary job is to promote the products of its AE among the hospitals and doctors community. It was further stated that doctors and hospitals are not concerned about the brand of the medicine that they prescribe, they are concerned only with the generic medicine that would treat the ailment of their patients. It was further stated that assessee has a big team of marketing professionals who are entrusted with the field job of meeting the medical practitioners and promoting the brand and products of its AE. The ld. TPO has reported a specific incident that since financial year 2018–19, the assessee company contacted with a leading Indian cricketer to endorse its brand and during the relevant financial year it ran a promotional campaign with the tagline "never compromise". Thus it was stated that the taxpayer company incurs huge expenditure on the employees engaged in sales promotion which results in promotion of the marketing intangibles of its AE situated outside India. He further stated that distribution function and the advertisement marketing and promotions are two distinct and separate functions therefore it cannot be said that when the distribution

The Ld. CIT DR vehemently submitted that the reasons given by the ITAT for AY 2012-13 are not at all based on the facts of the case of the assessee. It merely relied up on some other judgements of the coordinate bench. He submits that decisions bereft of the facts of the case of the assessee, is not a biding precedent. The ld CIT DR refers to the decision sand submits that revenue disputes that these expenses are not for the business of the assessee as no distributor in normal circumstances would have hired a cricketer to advertise the product of the AE. He submits that decision in case of Essilor relied up on by the Bench is distinguishable. He submits that assessee has neither shown the agreement with the cricketer nor the facts that under whose instructions this advertisements is given. He also submitted that assessee has failed to show that whether the expenditure are for its own business and to what extent. He submitted that conduct of the assessee speaks louder than the agreement in this case. Therefore he urged not to follow the decision of the coordinate Benches in assessee’s own case

The ld. CIT DR vehemently submits that finding recorded by the bench in para no 9.8 of its order that 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 promotion in India, is devoid of any merit. That is the dispute by the ld. TPO. That is the dispute of the ld. DRP and that is what is contended here. He once again referred to the findings of ld. DRP to show that. He submits that following that decision would render a great injustice to revenue as the view canvassed here is disputing the facts itself as recorded by ITAT. He further submits that it is not the case here that ld DRP refused to follow any judicial precedents. He submits that strangely, the assessee did not submit despite these decision for number of years in favour of the assessee either before ld. TPO or before ld. DRP, for the reason that these decision of ITAT are not on the facts but merely following decision of AY 2012-13 which itself is in dispute here. He submits that none of the above decision considers that DEMPE function of marketing intangibles performed by the assessee.

The ld. Sr. Advocate vehemently supported the orders of the coordinate Bench in assessee's own case and stated that there is no change in the agreement and facts are also similar and therefore the decision of the coordinate bench rendered in case of the assessee are required to be followed. He further stated that judicial discipline requires that if there is no change in the facts and circumstances of the case, the orders of the coordinate Bench in assessee's own case on similar set of facts are required to be followed.

During the course of hearing, the Bench raised a query whether the decision of the coordinate Benches relied up on by the ld. AR in case of the assessee are challenged and pending before the Hon’ble High Court as the points raised by the ld. CIT DR, the information was not available.

We have carefully considered the rival contention and perused the orders of the learned lower authorities. We find that the facts of the case for assessment year 2012–13 till 2017–18 wherein the coordinate Bench has decided the issue in favour of the assessee squarely covers this issue also before us in favour of the assessee. Though all the decision of the coordinate benches are following the order in case of assessee for AY 2012-13.

In M/s. Alcon Laboratories (India) Pvt. Ltd. Versus The Deputy Commissioner of Income Tax, Circle – 1 (1) (1), Bangalore. [2022] 99 ITR (Trib) 357 (ITAT [Bang]) 2022 (12) TMI 238 - ITAT BANGALORE coordinate bench for AY 2012-13 has held that: -

On Ground no 22-23 , Relating to adjustment in respect of interest on delayed receivable we find that the ld. AR has stated that Outstanding receivable from associated enterprises are part of the sales function of the Assessee. It has not charged any interest from any party including an unrelated party and therefore there is no reason to charge interest from associated enterprises. It was also stated that that the associated enterprises also have not charged any interest on overdue receivable from the Assessee . In view of this, he relied upon the decision of the Hon’ble Delhi High Court in case of Kusum Healthcare and Sony

The ld. DR supported the order of the learned lower authorities and submitted that assessee has not charged interest on overdue outstanding receivable from its associated enterprises and therefore it is a separate international transaction which needs to be benchmarked separately. He submitted that all the reasons given by the ld. AR that it is a part of sales function has already been held that the outstanding receivable till the due credit period should only be considered part of the sales function and not beyond the agreed sales credit. He further stated that it is immaterial that the assessee is not charging any interest from its associated enterprises non-associated enterprises and further it is also immaterial that the associated enterprises has also not charged any interest on dues received from the assessee. He submitted that this consideration does not merit at all. Accordingly, he submitted that there is no infirmity in the order of the learned lower authorities so far as the interest is considered as a separate international transaction on overdue receivable from assessee’s associated enterprises. With respect to the rate of interest, he submitted that the appropriate rate has been charged by the ld. TPO and confirmed by the ld. DRP. He further stated that the decision relied upon by the assessee of the Hon’ble Delhi High Court

We have carefully considered the rival contentions and perused the orders of the learned lower authorities. We find that the outstanding dues from the AE are not received by the assessee in time. We have also considered the paragraph #12.20 of the order of the ld. TPO wherein he has categorically mentioned that the assessee has not been able to discharge its burden of proof and substantiate its claims that adjustment towards interest on overdue receivable is not justified. The assessee further failed to demonstrate that the selected comparables had similar overdue receivables and no separate adjustment is required for interest on overdue receivable. We also consider the paragraph number 12.17 of the order of the ld. TPO where the assessee has also failed to show that the delay in payment of receivable was compensated by the AE through a set off in any other transaction. Thus, we do not find any infirmity in the order of the learned lower authorities in inputting that international transaction of interest on overdue receivable from its associated enterprises is a separate international transaction and is also required to be benchmarked separately. By virtue of explanation 1 ( c) of section 92 B of the Act, it is an international transaction “capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business; Thus, it needs to be benchmarked separately.

Further with respect to the credit period, the learned transfer pricing officer has considered 30 days credit period as reasonable. Before us it is disputed that the credit of 60 days should be considered. We find that there is no justification or evidence produced before us to show that general credit period granted by the assessee to the non associate enterprises is also for 60 days. Fact clearly shows that according to article 3.2 of the agreement of services, it says assessee should have received the amounts invoiced within 30 days therefore there is no reason to grant the credit for 60 days to the assessee from outstanding due receivable from its associated enterprises. With respect to the benchmark interest rate adopted by the learned transfer pricing officer of LIBOR plus 400 basis points , no evidence was lead before us that it is not arms’ length, however several judicial precedents were cited to show that in case of such a transaction of capital financing the LIBOR

Coming to ground #24-27 of the appeal wherein the seminar and convenience expenses of Rs. 24,66,60,121/- were disallowed under section 37 of the Act shows that the submission filed by the assessee in response to the notice issued, the assessee has claimed the above expenditure as expenditure on account of seminar and convention expenses. A show cause notice was issued to the assessee on 21st of March 2022 disallowing the above expenditure. In response to the show cause notice the assessee filed submission on 24th March 2022 wherein it is stated that Indian Medical Council regulations would not be applicable to the pharma company like the assessee and therefore the aforesaid expenditure incurred by the assessee it must not be covered by the Explanation to section 37 of the Act. This submission was considered, and it was held by the ld. AO that in view of the decision of the Hon’ble Supreme Court in case of Apex Laboratories Limited, the above decision squarely covers that this expenditure could not be allowed to be assessee. Accordingly, the same was disallowed. When the assessee approached the learned dispute resolution panel, claim of the assessee that it submitted certain documents on 27 September 2022 and the remand report from the learned assessing officer was called for. Such a remand report was never received and despite that the action of the learned assessing officer was confirmed. Therefore, assessee is in appeal on this ground.

The ld. AR submitted that identical issue in the earlier years also arose wherein on the identical ground most of the expenses such as advertisement expenses, promotional material, National sales meeting expenses under the head seminar and convention expenses were verified and, on that basis, these expenses were allowed and held that they are not hit by the above provisions. He further stated that when the remand report of the assessing officer has not been received, the learned dispute resolution panel without giving an opportunity of hearing and verifying those expenses, confirmed the disallowance.

The learned departmental representative vehemently supported the orders of the learned lower authorities.

We have carefully considered the rival contention and perused the orders of the learned lower authorities and found that during the course of hearing before the learned dispute resolution panel the assessee furnished the information about the expenditure, however, despite calling for the remand report, the learned dispute resolution panel did not wait for the remand report of the assessing officer, which was never received during the course of hearing before the panel, but the panel confirmed the disallowance. It is also the claim of the assessee that in the earlier years, the learned assessing officer has granted relief to the assessee with respect to most of the expenses. These expenses are in the nature of advertisement expenses, promotional materials, some sales meeting and seminar expenses which is under the head of seminar and convention expenses. It is a fact that the learned assessing officer has not found them to be violative of the provisions of section 37 of the act or the decision of the honourable Supreme Court. In view of these facts, we restore the whole issue back to the file of the learned assessing officer with a direction to follow the decision of the honourable Supreme Court in its letter and spirit and verify each of the expenditure. If those are found to be not in violation of the decision of the honourable Supreme Court, same should be allowed. Accordingly ground No. 24 – 29 of the appeal are allowed with above direction.

Ground No. 30 is with respect to the double disallowance under section 43B of the act of ₹ 119,535,383 wherein the claim of the assessee is that it has SUO Moto disallowed the same in its return of income under the section 40A (7) of the act. On hearing the parties, we restore this issue back to the file of the learned assessing officer with a direction to delete the same disallowance if it is found to be the double disallowance and the assessee has disallowed the same in its computation of income. Accordingly ground No. 30 of the appeal is allowed as above.

Ground No. 31 – 34 are against living of the interest under various provisions of section 234A, B, C and F of the act which are consequential in nature and therefore same are dismissed.

Ground No. 35 is with relation to the initiation of penalty proceedings under section 270A of the act which is premature and hence dismissed.

Accordingly appeal of the assessee is partly allowed.