EDWARDS LIFESCIENCES (INDIA) P.LTD,MUMBAI vs. ASST CIT CIR 9(2)(2), MUMBAI

आदेश / O R D E R PER M. BALAGANESH (A.M):

These appeals in 7198/Mum/2017 for A.Yrs.2012-13 & 2013-14 arise out of the order by the ld. Dispute

As the issues are identical, both the appeals are taken up together and disposed off by this common order for the sake of convenience.

M/s. Edwards Life Sciences (India) Pvt. Ltd., company reported the following international transactions during the year:- Sr. International Transactions Amount (in INR) Most appropriate No. method 1. Import of Finished Goods 53,99,17,607 Transactional net margin method 2. Aid from fellow subsidiaries 8,75,17,611 (TNMM') 3. Purchase of fixed assets 24.20,302 4. Reimbursement of expenses 23,13,283 Comparable Uncontrolled Price ('CUP') Method 5. Recovery of expenses 823,694 CUP 6. Recovery of cost of 10,22,028 defective goods Total 63,40,14,525/- 3.1. During the course of proceedings, the ld. TPO asked the assessee to submit the details in relation to travelling, advertising, conference, marketing and promotion expenses incurred by the assessee during the period under consideration. This information was sought in order to understand if any brand building activities were being conducted by the assessee as a service to its AE‟s. The assessee submitted the relevant information / documents in relation to above mentioned expenses such as back to back invoices, mail correspondence between doctors and the assessee, seminar registration receipt, travel ticket, hotel receipt etc.. The assessee explained the nature of each of the aforesaid expenditure in detail as under:-

M/s. Edwards Life Sciences (India) Pvt. Ltd.,

 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 CME’s held in different hospitals to create awareness of medical devices available in the market, printing books and video shooting expenses for Continuing Medical Education (CME Programme). etc.  Advertisement expenses: These expenses are incurred for placing advertisements in Indian Journal of Thoracic and Cardiovascular Surgery. Also, some portion of expenses were incurred in relation to advertisement for staff recruitments.  Travelling expenses: The expenses are incurred for employees travelling domestically and to foreign countries for business purposes. 3.2. The assessee also furnished the evidences with regard to the aforesaid expenses by way of a separate annexure. The assessee specifically pleaded that the above expenses incurred by the assessee are in relation to its own business and in respect of selling its products in India. As such, the AE does not garner any benefit from the same. It was specifically pointed out that “Edwards” is an established brand and that the assessee does not sell to end customer i.e., patients in India, the assessee has no reason to expend any amount to help or develop the brand of the AE. It was submitted that alternatively, the purpose of assessee incurring the above expenditure is to train, educate and make aware, the doctors of the latest development in the field of medicine, so as to help, familiarise the doctors who would need to perform the procedures on the patients.

M/s. Edwards Life Sciences (India) Pvt. Ltd., 3.3. The assessee submitted that it being the low risk distributor, had incurred advertisement expenses for distributing its products in Indian market. Accordingly, all the risk and returns in relation to the same is borne by the assessee and no benefit is passed on to the AE. Further, it was pleaded that the AMP expenses were incurred for advertisement mainly in the nature of scientific meetings, medical advice, awareness campaign, scientific sessions etc., in the designated reiterates wherein the products of Edwards India (i.e assessee) are sold.

3.4. The ld. TPO observed that assessee has incurred conference expenditure to the tune of Rs.2,65,70,521/- and marketing and promotion expenses to the tune of Rs.1,52,16,595/-. The assessee was asked to produce the details of the said expenditure. The assessee submitted vide letter dated 22/12/2015 that conference expenditure pertains to the expenditure incurred in sending the doctors who also happened to be clients of the assessee to training programmes/ seminars both in India and abroad. The expenditure includes air fair, lodging and boarding and conference fees. It was submitted that during the relevant financial year 2011-12, 126 Doctors were sent on the training programme out of which 26 were sent to abroad. These expenses were incurred by sponsoring Continuing Medical Education Programmes (CMES) held in different hospitals to create awareness of medical devices in the market, printing books and video shooting expenses for CME programme etc.

3.5. The ld. TPO on perusal of the FAR analysis of the assessee and the distribution agreement between the assessee and the AE, observed that assessee is merely a low risk distributor for AE‟s products without any value addition. Accordingly, TPO concluded that since the assessee being a low risk distributor, it is not supposed to carryout the aforesaid

M/s. Edwards Life Sciences (India) Pvt. Ltd., functions and it would lead to subsequent value addition to products in terms of knowledge (intangibles). The ld. TPO also referred to annual report of the AE which mentions that AE is supposed to conduct educational symposia and provide training to customers. The TPO referred to the provisions of Section 92B(1) of the Act together with its explanation thereon and concluded that the incurrence of the aforesaid AMP expenditure (AMP) would have to be construed as an international transaction and in view of the clause (d) of Explanation to Section 92B of the Act which reads as under:- ―Explanation: For the removal of doubts, it is hereby clarified that (i) the expression "international transaction" shall include— (a) ----------------------- (b) ----------------------- (c) ------------------------ (d) provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service;‖ 3.6. Accordingly, the ld. TPO concluded that assessee had incurred the expenditure on conference expenses, marketing and promotion expenses on behalf of the AE and for the benefit of AE. The assessee, however, replied to the show-cause notice by contending that because of incurring these expenditures which were purely in respect of selling its products in India, the assessee enjoyed the benefit of increase in sales. The assessee further pleaded that in the technology hungry era if it does not create awareness amongst end users regarding technology upgradation, it will lose its customers to competitors. The ld. TPO however, considered the same as marketing intangibles and accordingly resorted to benchmark the same by treating it as an international transaction. The ld. TPO concluded that the assessee has performed the aforesaid transactions on behalf of the AE which constitutes rendering of service to the AE for which purpose, the assessee ought to have charged the cost plus mark up on the same

M/s. Edwards Life Sciences (India) Pvt. Ltd., from the AE. The ld. TPO adopted the following five comparables with PLI of OP/OC and arrived at the mean margin thereon at 15.66%. Sr.No. Name of Comparables OP/OC 1 APITCO Limited 24.45% 2 Killick Agencies and 9.04% Marketing Ltd. 3 BVG India Ltd 24.22% 4 Axis Integrated Systems 10.27% 5 Marketing Consultant 10.32% Mean 15.66% 3.7. The ld. TPO applied this margin of 15.66% on total value of international transaction in respect of the subject mentioned transaction to the tune of Rs.4,17,87,116/- and arrived at the value of Rs.65,43,862/- thereon. Accordingly, the ld. TPO made an upward adjustment of Rs.4,83,30,978/- towards this transaction of advertisement, marketing and promotion expenditure. The ld. DRP upheld the action of the ld. TPO.

M/s. Edwards Life Sciences (India) Pvt. Ltd., 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 ld. 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. The training expenses has been incurred in relation to the assessee's employee's growth like soft skill trainings, leadership training, finance related trainings, etc. The nature of Conference expenses is travel and other costs of doctors in order for them to attend conferences to educate them about Edward's products offerings. The marketing promotion expenses are incurred in relation to promote/ market Edward's products offered by the assessee in India. These expenses are incurred by sponsoring symposia and events held in different hospitals to create awareness of medical devices available in the Indian market. This could be in the nature of publications, books, advertisements, training modules etc. 3.5 Such expenses are incurred wholly and exclusively for the assessee’s own business, which are paid to third parties in India that are M/s. Edwards Life Sciences (India) Pvt. Ltd., not in any way related either to the assessee or its AEs. The assessee has the sole discretion of deciding the form, manner, content and timing of the advertising. The direct benefit in terms of increased sales, market share etc. resulting from such conference and marketing promotion expenses is to the assessee's own account‖ 5.1. We find the crucial aspect which has been ignored by the lower authorities while adjudicating the issue in dispute before us was that the assessee was in respect of subvention income from its AEs. This was received pursuant to supplementary distribution agreements entered into by the assessee with the AEs wherein the assessee received compensation from the AEs to enable it to meet the arm‟s length benchmark margin at net level vis-à-vis margin earned by the comparable companies. Based on such distribution agreement, the AE agreed to compensate the assessee in case it does not earn the arm‟s length margin on its own. Accordingly, during the year, the assessee had received the subvention income from its AEs to help it achieving an arm's length margin in India, which effectively tantamount to compensating the assessee for all the expenses relating to its distribution activity. Hence, even for a moment if it has to be assumed that incurrence of the aforesaid various expenditure by the assessee were on behalf of the AE and would constitute services rendered by the assessee to its AE which in turn would lead to an international transaction thereof is to be accepted, still it could be safely concluded that the assessee had recovered from its AE by way of subvention income which has been duly offered to tax by the assessee. It is not in dispute that the subvention income so offered in the sum of Rs.8,75,17,611/- is much higher than even the adjustment contemplated by the ld. TPO in the sum of Rs.4,83,30,978/- which includes the mark up of 15.66%. We find that the ld. AR had placed major reliance on this as an alternative argument wherein by considering the subvention income, the assessee‟s operating margin is higher than

M/s. Edwards Life Sciences (India) Pvt. Ltd., the arithmetic mean operating margin of 4.92% earned by independent distributors and hence any sort of conference and related expenses, if at all were to be considered, are already included / benchmarked under the net margin based analysis and accordingly there cannot be any adjustment to ALP thereon. The ld. DR relied on the findings of the ld. DRP with regard to the aspect of subvention income received by the assessee and made an elaborate arguments only on the aspect that assessee being a low risk distributor, need not have incurred the aforesaid expenditure to the tune of Rs.4.17 Crores and those expenditures were incurred only for promotion of brand building of the AE in India and hence, it would result in „marketing intangibles‟ and accordingly, would constitute rendering of services by the assessee to its AE which are to be adequately compensated by the AE to the assessee. Hence, he vehemently relied on the orders of the lower authorities.

5.2. We also find that the ld. AR made a specific submission that the ld. DRP and the ld. TPO had made reference to the annual report of certain AE wherein it was stated that the AE is supposed to conduct educational symposia and provide training to customers. In this regard, it was pleaded that such reference does not preclude the operational distribution subsidiaries for performing their respective distribution functions. It was argued that the annual report talks about entire Edwards group including all subsidiaries and affiliates and it does not say that the operational subsidiaries are debarred from / not required to undertake such functions or that the entire liability at the group level. It is a general statement about the group‟s business activity and its profile. It was argued that the lower authorities have picked up some lines from the annual report which was not apparently submitted by the assessee but rather obtained by the ld. TPO independently. It was specifically brought to the notice of the M/s. Edwards Life Sciences (India) Pvt. Ltd., Bench that the Annual report relied upon by the lower authorities was not that of the AE which had given subvention income to the assessee herein. Therefore, it was submitted that the remarks made in one of the group entities annual report which had not even entered into any international transaction with the assessee cannot constitute any agreement or arrangement with the assessee and hence, cannot be relied upon. This was not controverted by the ld DR before us. We find lot of force in this specific argument of the ld. AR.

5.3. In view of the aforesaid findings in the facts and circumstances of the case, we are inclined to grant relief to the assessee on the ground that subvention income received by the assessee is much more than even the entire ALP adjustment made by the ld. TPO and upheld by the ld. DRP towards advertising, marketing, sales promotion, conference expenses etc., and in view of this decision, the other arguments made by the ld. AR that the incurrence of said expenditure was only for its benefit in the form of increase in turn over and there was no brand building of AE pursuant to incurrence of such expenditure and that it does not fall within the ambit of an international transaction u/s.92B of the Act, need not be gone into. The Grounds raised by the assessee in this regard are disposed off accordingly.

5.4. The above decision rendered for A.Y.2012-13 would apply with equal force in A.Y.2013-14 also on the said issue. However, we find that the ld. TPO while adjudicating the issue on similar grounds had additionally applied Bright Line Test (BLT) to justify his adjustment to ALP which is reflected in para 17.3 of his order as under:-

M/s. Edwards Life Sciences (India) Pvt. Ltd.,

Particulars Amount in INR Total sales 835,287,811 Arm's length level of AMP exp. (% of sale} 3.29% Arm's length AMP 27,480,969 Amount actually spent on AMP exp. 38,147,558 Amount spent in excess of 'bright-line' and on creation of 10,666,589 marketing intangible Mark-up® 7. 09% 756.261 The amount by which the assessee company should have 11,422,850 been reimbursed by A.E, and for which the adjustment is proposed to be made 5.5. We find that the application of Bright Line Test has been negatived by the Hon‟ble Delhi High Court in the case of Maruti Suzuki India Ltd., reported in 381 ITR 117. Hence, the action of the lower authorities would not be justified even on that count. Accordingly, the ground No. 2 raised by the assessee for A.Y.2013-14 is disposed off in line with the A.Y.2012- 13 supra and in view of the decision of Hon‟ble Delhi High Court supra.

6.1. We have heard rival submissions. We find that this issue is already decided in favour of the assessee in its own case by the order of this M/s. Edwards Life Sciences (India) Pvt. Ltd., Tribunal in A.Y.2010-11 in dated 20/11/2018 wherein on similar grounds it was held as under:-

―3. Rival contentions have been heard and record perused. Facts in brief are that the assessee is engaged in the business of distributing the heart therapy products and related medical equipments manufactured by its group companies. The assessee mainly sells products falling within the cardiac care which consist of heart valve therapy products, cardiac pulmonary products & RMI products, critical care and vascular product lines. The assessee sells the products mainly to hospitals and other medical institutions. During the year under consideration, the assessee filed its return of income ('ROI') on 4 October 2010, declaring a total income of Rs. 4,10,27,764. The case of the assessee was selected for scrutiny assessment vide notice dated 20/09/2011 issued u/s.143(2) of the IT Act.

4. During the course of assessment proceedings, the Assessing Officer ('AO') called various information/ documents, including information & submission in connection with allowability of advertising and sales promotion expenditure of Rs. 5,10,93,756. After considering the factual and legal submission made by the assessee, the AO completed the assessment proceedings and passed the assessment order dated 13 March 2014 under section 143(3) of the IT Act. In the said order, the AO without accepting assessee's contention made the following disallowances: (a) Conference expenses of Rs. 1,65,51,331 - Rs. 1,60,71,341 incurred from 14 December 2009 to 31 March 2010 - Rs 4,79,990 disallowed on pro rata basis for the period 10 December 2010 to 13 (b) Entertainment expenses of Rs, 1,08,885 incurred from 14 December 2009 to 31 March 2010.

5. Against the above order of AO, assessee approached to CIT(A).

6. By the impugned order CIT(A) partly confirmed the addition on account of disallowance of expenditure of Rs.33,30,321/- incurred towards appointment of faculty doctor or assessee’s consultant doctor in a medical conference out of conference expenses of Rs.1,65,51,331/-. CIT(A) given relief of Rs.31,98,259/- and Rs.8,06,705/-. The CIT(A) has also allowed to relief in respect of expenditure incurred on lunch and snacks of own staff amounting to Rs.61,242/-. Finally CIT(A) confirmed the disallowance of Rs.1,21,14,020/- incurred on doctors or their

M/s. Edwards Life Sciences (India) Pvt. Ltd., professional association by observing that same was prohibited by MCI regulations.

7. Assessee is in further appeal before us. It was argued by learned AR Mr. Madhur Agarwal that assessee had filed a breakup of the advertising and sales promotion expenditure and also filed detailed submission on allowability of advertisement and sales promotion expenditure vide letter dated 20 February 2014. Pursuant to this, the assessee also submitted sample supporting documents in respect of the conference expenditure vide its submission dated 28 February 2014.

M/s. Edwards Life Sciences (India) Pvt. Ltd., illness/disease and learn about newer therapies. We found that the disallowance was made by the AO by relying on the CBDT Circular dated 01.08.2012 onwards. However, the Circular was not applicable because it was introduced w.e.f.01.08.2012. i.e. assessment year 2013-2014, whereas the relevant assessment year under consideration is 2010-2011 and 2011-2012. Accordingly, we do not find any merit in the disallowance so made by the AO in both the assessment years under consideration.‖ 11. Reliance was also placed by learned AR on the order passed by the Co-ordinate Bench on similar facts in the case of Solvay Pharma India Ltd., 169 ITD 13. As per learned AR, MCI guidelines cannot be applied to the pharma company and it is only applicable to the practicing doctors.

M/s. Edwards Life Sciences (India) Pvt. Ltd., proceedings, the AO sought the breakup of the advertisement and sales promotion expenditure incurred during the year. In response to this, the assessee vide submission dated 20 February 2014, submitted a detailed breakup of the advertisement and sales promotion expenditure and also made its submission on the allowabiiity of the conference expenditure (forming part of the advertisement and sales promotion expenditure) in light of the Circular stating that the said Circular is not applicable to the assessee.

19. With regard to the expenditure alleged to be incurred on purchase / hiring materials during conference amounting to Rs.8,06,705/- we found that these expenses represent printing, stationery, Xerox charges, and stall designing charges incurred by the assessee in relation to the sponsoring of conferences like Atlas, CTCOMCON, IACTA etc. These

M/s. Edwards Life Sciences (India) Pvt. Ltd., expenses are also not incurred on the doctors/medical practitioners and are incurred wholly and exclusively for the purpose of business.

20. With regard to the expenditure incurred for participation / sponsorship of conference amounting to Rs.87,36,056/- we found that these expenses represent the sponsorship charges of the conferences, seminars like CTCON, IACTA, CME's etc paid by the assessee. This expenditure is incurred by the assessee to promote and create awareness about its product. These expenses are also not incurred on the doctors/medical practitioners and are incurred wholly and exclusively for the purpose of business.

21. From the record we found that AO has disallowed these expenditure by observing that these expenses are incurred by the staff on behalf of doctors and accordingly is a freebie which is not allowable in the light of circular. As per our considered view these expenses are not in the nature of gifts, travel facilities, hospitality, cash or monetary grants to doctors. The MCI guidelines prohibits accepting gifts, travel facilities, hospitality, cash or monetary grants etc by doctors from pharmaceutical and allied health sector companies. These expenses have been incurred by the staff of the assessee or the assessee during the conferences and in relation to sponsorship of conferences. It is abundantly clear that they are not incurred for the doctors neither do they provide any benefit to doctors. Further, these expenses are incurred by the assessee in day to day course of its business and are not prohibited by the MCI guidelines.

22. In respect of expenditure incurred in connection with medical conference attendance of faculty doctors or doctors who are consultant of assessee we found that the business exigencies demand updating of knowledge of the doctors/surgeons to implant/use assessee's products. To achieve this objective, the assessee has to incur expenses in connection with facilitation of doctors / surgeons to attend medical conferences organised by well known medical organizations like Indian Association of Cardio Vascular Thoracic Anesthesiologist, Indian Society of Critical Care Medicine, etc. In this regard, Clause 6.8.1.(b) of MCI guidelines which prohibit doctors from accepting travel facilities for conference where they are 'delegates'. The MCI guidelines do not prohibit the doctors from accepting the travel facility for conference where they are faculty. Also, clause 6.8.i(g) of the MCI Guidelines allows a doctor to work for a pharmaceutical and allied health sector companies in advisory capacity, as consultant, as researcher, as treating doctors or in any other professional capacity. Accordingly, the assessee has appointed certain doctors as consultant to the company.

M/s. Edwards Life Sciences (India) Pvt. Ltd.,

23. From the record we also found that the assessee does not provide any personal gifts or free holiday packages to doctors and hence no expense is incurred for such unethical practice. Furthermore, the products dealt in by the assessee are very different than those dealt in by pharmaceutical companies. The assessee deals in cardiovascular products. While the products manufactured by pharmaceutical companies are low priced products with a longer life cycle, the products of assessee are high end technology products either implanted inside human body or used for monitoring patients which have short life cycle due to quick technologically upgradation.

M/s. Edwards Life Sciences (India) Pvt. Ltd., it can apply only to Medical Practitioners and Physicians and not to the pharmaceutical companies. Further, MCI Act, 1956 does not apply pharmaceutical companies and consequently MCI Regulations 2002 cannot apply to such companies.

M/s. Edwards Life Sciences (India) Pvt. Ltd.,

24. We observe that the CBDT Circular dated 1-8-2012 (supra) in its clarification has enlarged the scope and applicability of 'Indian Medical Council Regulation 2002' by making it applicable to the pharmaceutical companies or allied health care sector industries. Such an enlargement of scope of MCI regulation to the pharmaceutical companies by the CBDT is without any enabling provisions either under the provisions of Income Tax Law or by any provisions under the Indian Medical Council Regulations. The CBDT cannot provide casus omissus to a statute or notification or any regulation which has not been expressly provided therein. The CBDT can tone down the rigours of law and ensure a fair enforcement of the provisions by issuing circulars and by clarifying the statutory provisions. CBDT circulars act like 'contemporanea expositio' in interpreting the statutory provisions and to ascertain the true meaning enunciated at the time when statute was enacted. However the CBDT in its power cannot create a new impairment

M/s. Edwards Life Sciences (India) Pvt. Ltd., adverse to an assessee or to a class of assessee without any sanction of law. The circular issued by the CBDT must confirm to tax laws and for purpose of giving administrative relief or for clarifying the provisions of law and cannot impose a burden on the assessee, leave alone creating a new burden by enlarging the scope of a different regulation issued under a different act so as to impose any kind of hardship or liability to the assessee. In any case, it is trite law that the CBDT circular which creates a burden or liability or imposes a new kind of imparity, same cannot be reckoned retrospectively. The beneficial circular may apply retrospectively but a circular imposing a burden has to be applied prospectively only. Here in this case the CBDT has enlarged the scope of 'Indian Medical Council Regulation, 2002' and made it applicable for the pharmaceutical companies. Therefore, such a CBDT circular cannot be reckoned to have retrospective effect. The free sample of medicine is only to prove the efficacy and to establish the trust of the doctors on the quality of the drugs. This again cannot be reckoned as freebies given to the doctors but for promotion of its products. The pharmaceutical company, which is engaged in manufacturing and marketing of pharmaceutical products, can promote its sale and brand only by arranging seminars, conferences and thereby creating awareness amongst doctors about the new research in the medical field and therapeutic areas, etc. Every day there are new developments taking place around the world in the area of medicine and therapeutic, hence in order to provide correct diagnosis and treatment of the patients, it is imperative that the doctors should keep themselves updated with the latest developments in the medicine and the main object of such conferences and seminars is to update the doctors of the latest developments, which is beneficial to the doctors in treating the patients as well as the pharmaceutical companies.

6.2. The facts adjudicated in A.Y.2010-11 in assessee‟s own case and the decision rendered thereon would apply mutatis mutandis to the issue in dispute before us for A.Y.2013-14 also in view of identical facts.

M/s. Edwards Life Sciences (India) Pvt. Ltd., Accordingly, the Ground Nos.3 to 5 raised by the assessee for A.Y.2013- 14 are allowed.

Order pronounced in the open court on this 10/07/2019