Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, MUMBAI BENCHES “K”, MUMBAI
Before: ShriC.N.Prasad, JM & ShriM.Balaganesh, AM
O R D E R Per Bench : These are five appeals; four by the assessee for assessment years 2007-2008, 2008-2009, 2009-2010 and 2010-2011 and one cross appeal filed by the Revenue for assessment year 2010-2011. These appeals arise out of the direction of the learned Dispute Resolution Panel – IV, Mumbai (in short `the ld.DRP’) passed u/s144C(5) of the Income-tax Act, 1961 (in short `the Act’). Since identical issues are involved in these appeals, they were heard together and are being disposed off by this consolidate order, for the sake of convenience.
&Ors. M/s.Abbott Healthcare Private Limited.
Assessee’s appeal : Asst.Year 2007-2008 : 2. Ground No.2 raised by the assessee was stated to be not pressed by the learned AR at the time of hearing. Accordingly the same is dismissed as not pressed.
The only issue to be decided in assessee’s appeal for assessment year 2007-2008 is as to whether the ld.DRP was justified in upholding the Arm’s Length adjustment made in respect of marketing expenses of Rs.79,04,690 and cost allocation of Central Service Charges of Rs.15,74,895 in the facts and circumstances of the case.
The brief facts of this issue are that the assessee is a downstream subsidiary of Abbott Laboratories, USA and engaged in distribution of healthcare products. 99.99% of assessee’s shareholding is held by Abbott, Asia Holdings Limited, which in turn is a 100% subsidiary of Abbott, USA. The assessee imports healthcare products from its Associate Enterprises (AEs) for distribution in India. The assessee has entered into following international transactions:- Name of International Value (in Rs.) Method selected Transaction Import of healthcare 1,07,37,92,605 Transactional Net Margin products Method Central Service Charges – 1,24,26,530 Transactional Net Margin Cost Allocations method. Provision of Support 57,95,965 As per the note in Form Services No.3CEB Reimbursement of 47,63,131 Comparable Uncontrolled expenses (Receipts) Price Method Reimbursement of 36,33,919 Comparable Uncontrolled expenses (Payments) Price Method.
&Ors. M/s.Abbott Healthcare Private Limited.
The ld.TPO observed in his order that the assessee is a distributor exposed to normal risks. The furnished the transfer price study report benchmarking its international transaction using Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM). The assessee used the profit level indicator (PLI) as Operating Profit (OP) divided by AE sales. The assessee computed profit margin under the distribution segment at 3.41% as against the external comparability of 3.47%. Since the difference was well within the (+) / (-) 5% range permitted in the proviso to section 92C(2), the assessee concluded that its international transactions were at Arm’s Length. From the transfer pricing study report, the functions performed by supplying AEs are as under:-
“Functions performed by supplying AEs 4.4.3 Abbott is a broad-based healthcare conglomerate, its principal businesses being pharmaceuticals and medical products, including hospital-based medicines and devices, diagnostic tests and instruments and nutritional products. for children and adults. It is highly focused on research as well as effective and ethical marketing of its products. 4.4.4 The significant functions performed by the supplying AEs including Abbott (to the extent applicable) in this regard are as under: a. Research &Development (R&D) and Regulatory Approvals 4.4.5 R&D is a vital driver of the industry. Globally, Abbott invests a reasonable percent of its sales on research and new product development. In November 2000, Abbott formed the Global Research and Development Organization (,GPRD"). This newly formed, globally unified organization includes Pharmaceutical Drug Discovery, Community and Oral
&Ors. M/s.Abbott Healthcare Private Limited. Pharmaceutical Drug Development, Hospital Pharmaceutical Development, Abbott Bioresearch Center. and the Global Licensing and New Business Development group. Abbott has teams of scientists and clinical specialists who develop specialised Nutritional and healthcare products for infants, children, and adults. They are dedicated to quality research and innovation and to pursuing breakthroughs in nutrition and health. 4.4.6 In relation to obtaining the regulatory approvals, all information which is required to be filed with the Indian regulatory authorities is supplied by AHPL's AEs, which have undertaken the R&D to develop the products. Abbott has already registered these products in key markets. Accordingly, it possesses a great deal of data relevant to obtaining the approval in addition to product details. This information is also instrumental in assisting with the launch of and the marketing of the product in the Indian market place. b. Manufacturing 4.4.7 The supplying AEs carry out the manufacturing of the products sold in India, by AHPL, confirming international manufacturing standards. All product upgrades are also developed by these AEs. Hence, AHPL being a part of the Abbott group derives the benefit of procuring the finished products and promoting them in India. c. Marketing support 4.4.8 New product pre-marketing activities and training to the product management team is also one of the important activities that is carried out by the Abbott group. Apart from providing training in the latest techniques and practices in marketing, the focus and emphasis is on delivering quality products to customers and regular service to them in terms of medical product literature. Abbott believes in the scientific promotion of the products through participation in medical meetings - both within India and abroad. 4.4.9 Having considered the value adding functions of AHPL's product suppliers, a detailed functional overview of AHPL itself is now provided in the following section.”
&Ors. M/s.Abbott Healthcare Private Limited.
As per the TP Study report, the functions performed by the assessee are as under:-
“IMPORT OF HEALTHCARE PRODUCTS Functions performed by AHPL 4.4.10 AHPL imports healthcare products from AE's. All the imported products are developed and manufactured by AE's and AHPL does not perform any R&D functions. Activities that are in the nature of tests carried out by AHPL are for complying with the requirements of the Indian regulatory authorities. Therefore, AHPL's distribution functions form the last stage in Abbott's functional chain. The typical distribution chain is as depicted in Figure 5. a. Procurement and Ordering process 4.4.11 AHPL is responsible for forecasting the demand for its products and subsequently working out the procurement plan in advance on the basis at its long bridged business plans. 4.4.12 The quantity to be purchased is determined by the purchase team of AHPL on the basis ,of a monthly rolling forecast. As per the demand forecasts and procurement plans, purchase orders are placed with the supplying AEs or the regional distribution center at Singapore. AHPL is responsible for clearing the healthcare products through customs and completing related formalities. As regards imports of reagents, AHPL does not hold large quantity of healthcare products as these products have short shelf life. The Shipments are received on weekly basis while 'the lead time is around 15 days. b. Regulatory and legal formalities 4.4.13 AHPL is responsible for complying with all the requirements of the Indian regulatory authorities such as the Food & Drug Authority ('FDA') for registering new products to be sold in India. The regulatory requirements would include
&Ors. M/s.Abbott Healthcare Private Limited. activities like product testing,providing details for registration of the products, etc. However, it is pertinent to note that, all the information required to be filed with the regulatory authorities is provided by the AE:; supplying the healthcare products. c. Market Research and Strategic Marketing 4.4.14 AHPL carries out marketing function in respect of the products imported from its AEs. AHPL carries out market study and analysis. AHPL also carries out competitor analysis, ascertaining price data of similar products, market trends, etc. Further, AHPL's large field force of marketing representatives pay field visits to doctors and participate in medical conferences. As regards imports of reagents and diagnostic equipments, AHPL leverages on the promotional, scientific and technical materials developed by Abbott Germany/Additionally Abbott Germany provides AHPL service engineers with scientific and technical product training and other necessary support to enable' AHPL's employees market tile same effectively in Indio/ Further, AHPL makes use of some direct advertising (e.g. email newsletters and medical device trade journal advertisement) to increase awareness. AHPL also participates in industry trade shows and congresses in order to exhibit its product offerings. The marketing groups,approach prospective customers on a one-to-one basis.Live demonstrations,product, training, etc. are some of the marketing tools used by the marketing groups. d. Warehousing and Inventory Management 4.4.15 Warehousing forms an important part of AHPL's functions. In order to ensure quality maintenance of its products, AHPL has invested in having its own warehouses various parts of the country, thus enabling close proximity to the local markets. e. Distribution 4.4.16 Distribution is the key to a successful healthcare business in India. AHPL has distribution network in order to ensure timely delivery to customers in the market. Currently, AHPL has its own dedicated distribution channel to &Ors. M/s.Abbott Healthcare Private Limited. deliver its products to the target customer. The network consists of warehouses and C&F agents across II country, which supply to many stockists and retailers throughout the country. AHPL responsible for ensuring delivery of end products to the customers and collection receivables from its supply chain intermediaries. The distribution channel diagrammatically represented below: Finished Goods suppliers (AEs)
AHPL Warehouses C&F Agents Stockists
Retailers, Doctors, Hospitals & Patients 4.4.17 On importing the formulations, the stocks are first received in the central warehouse and are then transferred to different C&F Agents based on the regional requirements. The stock of the C&F Agents belongs to AHPL. The C&F Agents provide handling services to AHPL. In this regard, AHPL compensates such C&F Agents towards handling services and rendering the infrastructure support. The stocks are sold from the central warehouses as well as C&F Agents to many stockists, which are then sold to retailers, doctors, hospitals &
&Ors. M/s.Abbott Healthcare Private Limited. patients. 4.4.18 As regards the import of reagents and diagnostic equipments, the stocks are received in warehouses in Ahmedabad. The reagents and diagnostic equipments are jointly marketed as diagnostic equipments could operate only with the reagents supplied by AHPL i.e. belonging to the Abbott Group. The equipments could be either sold on outright basis or may be placed on lease. CENTRAL SERVICE CHARGES 4.4.19 Since the financial year 2005-2006, AHPL has become subject to Europe Area Management ('EAM'). EAM is mainly related to healthcare business. Accordingly, AHPL has become a participant to the Service Center Agreement entered into by Abbott GmbH & Co. KG with various Abbott affiliates and agrees to reimburse Abbott GmbH & Co. KG directly for the portion of costs of the Service Center allocable to AHPL for availing services in the areas of strategic sales and marketing support; personnel support, training and product support; accounting, finance and MIS support. The participants to the agreement have realized that such services can be provided more effectively and efficiently for the group as a whole from a central location. 4.4.20 These services are in the nature of shared services and are therefore customized for the Abbott Group. The said services are mainly related to healthcare products. The transaction entered into by AHPL is identified as cost allocation. Further, based on the information available from AHPL, the basis of allocation to other Abbott affiliates is the same and there is no markup / profit element in the said charge. SUPPORT SERVICES 4.4.21 During the financial year 2006-2007, AHPL has rendered' incidental support services to Abbott Vascular Devices Holland BV, Netherlands and Abbott Laboratories Intl. Co, USA. The said associated enterprises have reimbursed the personnel costs in this regard to the assessee with a mark-up.
&Ors. M/s.Abbott Healthcare Private Limited. REIMBURSEMENT OF EXPENSES (RECEIPTS AND PAYMENTS) 4.4.22 These pertain to actual expenses incurred in relation to travel, conveyance, accommodation, promotion expenses, etc. These expenses are received/paid from/to Abbott affiliates on actual cost basis and do not involve any mark-up.” 7. The risks assumed by the AEs as well as the assessee are tabulated as under:-
Risk Category and Exposure to AHLP Exposure to supplying AEs Description Market Risk : Market risk AHLP uses pre launch The AEs will face an arises for a business due to market research analysis, indirect exposure in case increased competition and post launch surveillance to AHPL faces lower demand relative pricing pressures, make forecasts on total for the healthcare products change in demand patterns sales for each product. The due to change in the market and needs of customers, loss, if any, on account of structure. inability to develop lower / no demand for penetrate in a market, etc. products due to the change in market structure and customer needs will be borne by AHPL. This risk is reduced given the fact that Abbott has a dynamic research programme, which provides SHPL with a large suite of new products to choose and introduce in India, in line with customer requirements. Product / Service ability In case of import of The AE would bear this risk risk: Risks associated with healthcare products, AHPL as its reputation may be product / service failures has a back to back hampered due to defective including non-performance arrangement with its goods. to generally accepted or supplying AEs and hence regulatory standards. This bears minimal risks
&Ors. M/s.Abbott Healthcare Private Limited. could result in produce associated with product recalls and possible injuries failures, etc. to end-users. Inventory Risk : AHPL is responsible for In case, if the off-take is not This risk is associated with ensuring that sufficient in line with projections, the management of inventory in inventory of traded goods is AEs face an indirect risk. case of overstocking or maintained so that sales slow / non-moving are not lost due to stock- inventory resulting from a outs. rapidly changing and technology / price sensitive market. As a result the enterprise may be forced to bear a loss of margin on the inventory, or incur additional costs to dispose the same. Foreign Currency Risk : AHPL and its associated enterprises faces currency risk. The risk relates to the The respective Finance departments continuously potential impart on profits monitors the foreign exchange risk, and tries to hedge it that may arise because of adequately, as and when required. changes in foreign exchange rates. Credit Risk : This is the risk Credit risk arises as a result of sales to Indian customers arising from non-payment is borne by AHPL. of dues by customers. As regards the prime transaction discussed, the AEs are exposed to the credit risk.
The assessee, based on the Transfer Pricing Study Report, characterized itself as distributor exposed to normal risks while carrying out such business, which was accepted by the ld.TPO.
The ld.TPO observed that during the course of proceedings, the assessee was asked to submit details of Central Services Charges – cost allocation, which was submitted vide reply letter dated 17.09.2010. The ld.TPO observed that the assessee was not able to show as to how the gross allocation base was computed by the AE at Germany. The assessee
&Ors. M/s.Abbott Healthcare Private Limited. has claimed to have allocated following expenses out of gross base computed by its AE at Germany:- (i) Sales and Marketing Expenses 1,33,000 Euros (ii) Personnel Expenses 8,000 Euros (iii) Training Expenses 48,000 Euros (iv) Account and Miscellaneous 51,000 Euros
The ld.TPO observed that the assessee is selling its product in India only. It has already spent substantial amount of Rs.6.41 crore on sales and marketing in India. The total marketing expenses of the assessee arrived at 4.37% of its sale, whereas the corresponding expenditure of comparable companies was only 3.85%. Accordingly, he observed that by applying normal bright line method, the assessee should recover difference in percentage of 0.52%, working out to Rs.76.20 lakhs from its AE as it is only distributor of the products of the AE in India. With this observation, the ld.TPO show caused the assessee as to why the ALP sales and marketing expenses of 1,33,000 Euros be not determined at Rs.Nil. The assessee submitted vide letter dated 15.10.2010 that the AE allocates a portion of the budgeted expenses on quarterly basis, based on sales to each AEs, to whom the Central Services have been rendered. At the end of the year, the actual amount is determined based on which the final allocation for the year towards expenses gets crystallized. The costs captured by the AE gets allocated to the participating countries on the basis of net sales of diagnostics products to the customers in relation to total net sales of the diagnostic products by all participants to this customer. In this regard, the following documents were submitted by the assessee before the ld.TPO:-
&Ors. M/s.Abbott Healthcare Private Limited. (i) Copy of Service Agreement dated 01.12.1988, reviewed from time to time entered between Abbott Germany with its participating enterprises in various countries which includes the assessee. As per the said agreement, it is clear that Abbott Germany was willing to maintain a certain service centres for all the participants including the assessee. It was also provided in the said agreement that each participant-country including the assessee would share the cost of maintaining such service centres because it is a less expensive alternative than providing such services for itself. (a) Strategic sales and marketing support. (b) Personnel support services. (c) Training and product support services. (d) Accounting, finance and MIS support services. The said agreement also provided that an independent Accountant shall be appointed by mutual agreement by the parties so that the final cost allocation established by Abbott GmbH and in order to capture the total cost incurred by Abbott GmbH and the corresponding cost allocation made to respective participating countries including the assessee. Such audit certificate shall be circulated to each of the participant countries upon request made by them. (ii) Copy of certificate issued by Deloitte & Touche GmbH certifying the total cost incurred by Abbott Germany and cost allocation to respective participating countries including the assessee. As per the said certificate, the total cost incurred by the AE was 33135000 Euros and the cost allocated to Indian company, i.e., the assessee
&Ors. M/s.Abbott Healthcare Private Limited. was 239000 Euros working out to 0.72% being the share of Indian company based on turnover. The said total cost of 239000 Euros allocated to assessee-company comprises of the following:- (i) Sales and Marketing Expenses 1,33,000 Euros (ii) Personnel Expenses 8,000 Euros (iii) Training Expenses 48,000 Euros (iv)Account and Miscellaneous 51,000 Euros (iii) The details of Central Services Charges of Abbott GmbH allocated to the assessee-company in the nature of shared services and sample copies of inter-company debit notes and cost allocation sheet workings.
FINDINGS OF THE LD.TPO 11. The ld.TPO observed in his order as under:- “7C I have considered the assessee’s submission and my observations are already detailed in Para 6A (supra). I conclude that assessee should have rather recovered a part of its own selling and marketing services from its AE and there is no question of making a payment for marketing expenses which it is only a distributor of health care products in India. Accordingly an adjustment of 1,33,000 equivalent to Rs.79,04,690 is made to arrive at arm’s length price (1 GBP = Rs.59,43 as of 31 March 2007). 7D In addition to it, since assessee has not submitted as to how the gross allocation base of its AE was computed and merely relied on the auditor’s certificate, which is also not forthcoming. The certificate vide Para 2 clearly disowns responsibility of legally correct assessment with regard to chapter VII of OECD transfer pricing rules. Further they clearly state that on sample basis they have examined the costs. In view of this, I further hold that entire cost allocation base is not at arm’s length price. Therefore a portion of the remaining cost
&Ors. M/s.Abbott Healthcare Private Limited. allocation is also adjusted to reach arm’s length price. Accordingly, 25% of the remaining cost allocation is adjusted to reach arm’s length price of Central Service Charges – Cost allocation.”
The ld. DRP upheld the action of the ld.TPO by observing as under:- “(i) Even if the assessee’s argument that the marketing expenses spent by the assessee for promotion of its products and sales is different from the sales and marketing expenses paid by the assessee to Abbott GmbH (on account of cost allocation to the assessee by the AE for the expenses incurred by the AE for providing sales and marketing) is correct, the payment is not justified at arm’s length as the assessee is a distributor and it is the manufacturer or the AE who would have to bear marketing expenses of the nature described by the assessee at arm’s length. This is due to the fact that the price paid for the imports would include and embed all such expenses incurred by the manufacturer at arm’s length. (ii) TPO has clearly observed that the average amount spent on marketing of comparable companies is only 3.85% and assessee is spending 4.37%. Thus the assessee already incurring itself on advertisement and marketing what an independent distributor in India is expected to spend or spending advertisement and marketing. (iii) The assessee has not shown / demonstrated as to how an arm’s length distributor has borne such expenses. 6.11 Considering the totality of the facts and circumstances of the case, the TP adjustment of Rs.94,79,585/- is approved, for the reasons given above by the DRP.”
Aggrieved, the assessee is in appeal before us.
We have heard the rival submissions. At the outset, we find that the assessee pursuant to the Service Centre Agreement had shared the cost
&Ors. M/s.Abbott Healthcare Private Limited. towards Central Services Charges in respect of sales and marketing expenses; accounting; finance and MIS support services; training and product support services; and personnel support services. The assessee being participant to the Service Centre Agreement entered into by Abbott GmbH with various Abbott affiliates had to absorb certain costs that were allocated by the group to various participants including the assessee- company. In other words, certain services as detailed in the Service Centre Agreement, which are already reproduced hereinabove, were to be rendered at Abbott GmbH Germany and the cost incurred thereon would have to be shared by all the participant countries including the assessee-company in the ratio of turnover. These services are in the nature of shared services and are therefore customized for the Abbott group. We find that Abbott GmbH allocated the portion of the budgeted expenses on quarterly basis, based on sales to each AEs to whom the Central Services were rendered. At the end of the year, the actual amount was determined based on which the final allocation for the year got crystallized. The total cost of services rendered by Abbott GmbH in the sum was 33135000 Euros and the assessee’s share out of that were 239000 Euros comprising of costs incurred towards strategic sales and marketing support services; training and product support services; accounting and finance and MIS support services and personnel support services. We find that the assessee had explained the nature of these individual services as under:-
“3.2.1. Strategic Sales and Marketing support Abbott GmbH invites Marketing Manager for upgrading their selling skills. This meetings are generally forums used to interact with Germany and other 'countries Marketing Manager and share their experience of selling which can be replicated in India.
&Ors. M/s.Abbott Healthcare Private Limited. This becomes more important when AHPL is launching new products. 'The benefits of products as well as positioning are shared with the Marketing managers. These acquired skills are used in India for the benefit of existing customer or potential customer. 3.2.2. Training and Product Support services : In this case, service engineers are invited for training during the launch of new instruments as well as for upgradation of existing skills. The service engineer is being familiarized with the product in technical' terms like how the Instruments 'function, how is the preventive maintenance done, how the instruments is installed at customer location, what are the precautions taken for installation etc. and other finer points of the instruments are explained in details. This training is of immense help when the instrument is launched in India. 3.2.3. Accounting Finance and MIS support services: ITS (Instrument tracking system), SEAS (Service Equipment Accounting System), DFAIFLEX are few package installed in AHPL. which are being maintained by Abbott GmbH, Germany. ITS system is used to track Instrument location in India whereas SEAS is used to calculate service equipment amortization and DFAIFLEX is used to generate reports by PGN for analysis, control and If necessary take corrective action. It is also a planning tool used to forecast and is also used for MIS. India also uses ADOC (order entry) and FMS (margin tracking) systems. 3.2.4. Personnel Support Services: HR functioning in Germany comes up with Incentive scheme for sales manager and then they also approve the same.”
The ld.TPO determined the arm’s length price of sales and marketing support services to the tune of 133000 Euros equivalent to Rs.79,04,690 at Rs.Nil and made adjustment to the same in transfer pricing order u/s &Ors. M/s.Abbott Healthcare Private Limited. 92CA(2) of the Act. We find that the assessee had justified the same in the following manner:- (a) The assessee gets characterized as a normal risk distributor, which has been accepted by the ld.TPO in his order. (b) From the risk profile of the assessee, which is not disputed, inventory risk lies with the assessee. (c) Since the assessee is bound to sell the imported products from AE in the local market in India, the entire distribution risks also vests with the assessee. (d) The expenditure that has been absorbed by the assessee by way of reimbursement to AE, based on gross cost allocation on shared services, were incurred in order to maintain the common methodology, manner of presentation of financial statements, common accounting policies and procedures in respect of various transactions of the group, which would enable smooth consolidation of financial statements at global level; MIS reporting system, common incentive schemes to all the employees of the group in the respective carter, proper training given to the respective employees of the respective participants for marketing the products of the assessee.
In view of the above, we hold that the assessee obviously had to incur certain advertisement and marketing expenses for distribution of its products. In any case, we also hold that the ld.TPO cannot look into the propriety of incurrence of expenses by the assessee. The role of ld.TPO is to see whether all transactions carried out by the assessee with its AEs fall within the ambit and meaning of international transaction u/s 92B of the Act and that whether the same was transacted at arm’s length price, for which &Ors. M/s.Abbott Healthcare Private Limited. purpose the determination of price should be made in accordance with any of the methods prescribed in the statute u/s 92C of the Act. From the Transfer Pricing Study Report, the functions performed by supplying AEs and functions performed by the assessee are enumerated in detail. One such functions performed by the AE to all the participants companies including the assessee-company was marketing support services, which admittedly include new product pre-marketing activities and training given to the product management team by Abbott Group at global level. The training is imparted on the latest techniques and practices in marketing, the focus and emphasis is on delivering quality products to customers and regular services to them in terms of medical, product literature. Apart from this, marketing support services rendered by AEs also includes scientific promotion of the products through participation in medical meetings, both in India and abroad. Obviously, the AEs at global level had to incur expenses for rendering these services, which are meant for all participating countries across the globe. Hence, those costs ought to be shared by all the participating companies. It is not disputed that the total cost incurred by the group and the cost allocation made to assessee-company under each head was duly certified by an independent Accountant, who was appointed for this specific purpose in accordance with the conditions laid out in the Service Centre Agreement. When such costs that had been allocated to the assessee-company had been absorbed by making the payment to AEs for the services rendered by AEs (which is not disputed by the Revenue before us), then the action of the lower authorities in determining the arm’s length price of such services at Rs.Nil is unwarranted.
&Ors. M/s.Abbott Healthcare Private Limited.
We also find from one of the functions performed by the assessee- company is towards “Market Research and Strategic Marketing”. Under this category, the assessee carries out marketing functions in respect of the product imported from its AEs. Apart from carrying out market study and analysis, the assessee carries out competitor analysis, ascertains price data of similar products, market trends etc. In addition, the assessee’s field force of marketing representatives pay field visits to Doctors and participate in medical conferences. As regards imports of reagents and diagnostic equipments, the assessee leverages on the promotional, scientific and technical material developed by Abbott Germany. Additionally, Abbott Germany provides the assessee, service engineers with scientific and technical product training and other necessary support to enable the assessee’s employees market the same effectively in India.
Apart from rendering strategic marketing functions, the assessee also carries out warehousing and inventory management functions and distribution functions in India. Hence, the assessee carries significant risks as a distributor in this normal course of distribution process. We find from the risk profile of the assessee that the assessee is exposed to significant market risks and loss, if any, on account of lower / no demand for product due to the change in the market structure and customer needs would have to be borne by the assessee. This risk is reduced substantially because of the presence of dynamic research programme of Abbott Germany, which provides the assessee with a large suite of new products to choose and introduce in India, in line with customer requirements. The assessee also has to maintain sufficient inventory of traded goods so that the sales are not reduced for want of stock. Hence, significant inventory risks coupled with the &Ors. M/s.Abbott Healthcare Private Limited. carrying cost of interest also lies with the assessee. This is mitigated by timely supply of quality goods by the assessee to the AEs so that the assessee does not get into the situation of stock out. The entire group risk arising as a result of sales to Indian customers is borne by the assessee. Hence, the assessee had to mandatorily leverage and mitigate those risks by providing quality products and following consistent practice at par with the global practices for which the shared costs were reimbursed to AEs.
We find that the co-ordinate Bench decision under similar circumstances had decided this issue in the case of Firmenich Aromatics India Pvt. Ltd. v. ACIT in for assessment year 2012- 2013 [order dated 23.04.2018], wherein it was held as under:-
“21. We have considered rival submissions and perused materials on record in the light of decisions relied upon. Though, the Transfer Pricing Officer has alleged that the assessee failed to furnish any evidence to substantiate its claim that the payment made to the AE for availing Information System Services, however, the material on record reveal that the assessee has not only undertaken a bench marking process for determining the arm’s length price of the transaction in the transfer pricing study report which was filed before the Transfer Pricing Officer, but, other relevant and necessary documents like copy of the agreement, invoices raised, certificate from independent Chartered Accountant Firm, KPMG, details of users were also furnished before the Transfer Pricing Officer. Therefore, the allegation of the Transfer Pricing Officer that the assessee has not furnished the necessary details is not totally correct. In any case of the matter, non-furnishing of certain documentary evidences, as alleged by the Transfer Pricing Officer, does not empower him to embark on determining the arm’s length price of the international transaction on estimation basis. Further, a reading of the Transfer Pricing Officer’s order makes it clear that &Ors. M/s.Abbott Healthcare Private Limited. his finding on the issue is contradictory. On the one hand, he has observed that the assessee has failed all the three tests, including, whether the services have actually been provided, on the other hand, he has accepted that the AE has provided the software. Thus, he has accepted that the AE has provided the software. Thus, ultimately, what the Transfer Pricing Officer disbelieves is the quantum of payment. Accordingly, he has proceeded to estimate the price of the services rendered by the AE at Rs.1,62,05,000. Though, the Transfer Pricing Officer has observed that he has applied CUP method for determining the arm’s length price, however, he has not brought on record even a single comparable to support the arm’s length price determined by him even on estimate basis. The estimation of service charges on so called man hour basis is without any supporting material. Similarly, the estimation of cost of software at Rs.1 crore is without any basis. Thus, it is very much clear that the determination of arm’s length price by the Transfer Pricing Officer is not as per any one of the methods prescribed under section 92C of the Act r/w rule 10B. As discussed elsewhere in this order, such determination of arm’s length price on ad-hoc / estimation basis is not permissible under the scheme of the Act as the Transfer Pricing Officer is duty bound to determine the arm’s length price by following any one of the most appropriate method prescribed under the statute. It is relevant to observe, the DRP has approved the determination of the arm’s length price by the Transfer Pricing Officer without properly appreciating the implication of the relevant statutory provisions. As regards the observations of the DRP regard the report of the MPMG, it is necessary to observe that the KMPG report is not an audit report but was furnished by the assessee to support the attribution of cost. Therefore, it cannot be said that it is a qualified report. It is further relevant to observe, the material submitted before us, which also forms part of the Transfer Pricing Officer’s record, indicates that the cost of the software has been allocated to 40 group companies across the globe who are using the software and related services and assessee’s share in cost allocation works out to 2.3%. Moreover, when the Transfer Pricing Officer himself agrees that the AE has provided software and certain services, there is no reason for not accepting the payment made
&Ors. M/s.Abbott Healthcare Private Limited. to the AE to be at arm’s length in the absence of any contrary evidence brought on record and by simply applying the benefit test. If the Transfer Pricing Officer did not agree to the arm’s length price shown by the assessee it was open for him to determine the arm’s length price by applying one of the most appropriate methods being backed by supporting material. Without complying to the statutory provisions, the Transfer Pricing Officer certainly cannot determine the arm’s length price on ad-hoc / estimation basis. Our reasoning in paragraph 11 to 15 will equally apply to this issue also. Accordingly, we delete the adjustment made to the arm’s length price of payment made towards availing information system services from AE. This ground is allowed.”
We also find that the co-ordinate Bench of this Tribunal in the case of Dresser Rand India Pvt. Ltd. v. ACIT reported in 53 SOT 173 (Mumbai) dated 07.09.2011 under similar circumstances had held as under:-
“8. We find that the basic reason of the Transfer Pricing Officer's determination of ALP of the services received under cost contribution arrangement as 'NIL' is his perception that the assessee did not need these services at all, as the assessee had sufficient experts of his own who were competent enough to do this work. For example, the Transfer Pricing Officer had pointed out that the assessee has qualified accounting staff which could have handled the audit work and in any case the assessee has paid audit fees to external firm. Similarly, the Transfer Pricing Officer was of the view that the assessee had management experts on its rolls, and, therefore, global business oversight services were not needed. It is difficult to understand, much less approve, this line of reasoning. It is only elementary that how an assessee conducts his business is entirely his prerogative and it is not for the revenue authorities to decide what is necessary for an assessee and what is not. An assessee may have any number of qualified accountants and management experts on his rolls, and yet he may decide to engage services of outside experts for auditing and management consultancy; it is not for the revenue officers to question assessee's wisdom in doing so. The Transfer Pricing Officer was not only going much beyond his powers in questioning commercial wisdom of assessee's decision to take benefit of expertise of Dresser Rand US, but also beyond the powers of the Assessing Officer. We do not approve this approach of the revenue authorities. We have further noticed that the Transfer Pricing Officer has made several observations to the effect that, as evident from the analysis of financial performance,
&Ors. M/s.Abbott Healthcare Private Limited. the assessee did not benefit, in terms of financial results, from these services. This analysis is also completely irrelevant, because whether a particular expense on services received actually benefits an assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can have any role in determining arm's length price of that service. When evaluating the arm's length price of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. Similarly, whether the AE gave the same services to the assessee in the preceding years without any consideration or not is also irrelevant. The AE may have given the same service on gratuitous basis in the earlier period, but that does not mean that arm's length price of these services is 'nil'. The authorities below have been swayed by the considerations which are not at all relevant in the context of determining the arm's length price of the costs incurred by the assessee in cost contribution arrangement. We have also noted that the stand of the revenue authorities in this case is that no services were rendered by the AE at all, and that since there is no evidence of services having been rendered at all, the arm's length price of these services is 'nil '. The Dispute Resolution Panel has also confirmed these findings of the Transfer Pricing Officer and the Assessing Officer. However, we have noted that vide letter dated 25th January, 2010 (acknowledged to have been received in DRP office on 28th January, 2010), the assessee has filed a huge compilation of papers, running into almost three hundred pages, including copies of reports, e-mails and other documents evidencing the rendering of services. Yet, the DRP simply brushed aside these documents by simply observing that "The DRP has perused the submissions of the assessee and the documents. In view of the DRP, such documents do not prove the receipt of services by the assessee ascertained (asserted ?) to be provided by its AE, and, accordingly, the action of the Assessing Officer in treating the cost of such services at zero is confirmed". When we perused these documents, which were filed before us as "Paper- book Vol. II", we found that the assessee has given sufficient evidence of the services having been actually rendered to the assessee. There are contemporaneous evidences by way of exchange of e-mails, reports, guidance notes which show that the assessee received the services from the AE. All these evidences were before the DRP, but there is not even a whisper about what was the nature of these documents, why does the DRP find these documents to be not satisfactory, what is the kind of evidence that was necessary to prove the factum of services having been availed, and what precisely is the reason that these documents cannot be relied upon. The soul of an order is in its reasoning, and unless the reasons for coming to a conclusion in the order are not set out, it is not possible to do a meaningful scrutiny of the order, but we find no reasoning at all in the order passed by the DRP. We may in this regard refer to the observations made by Hon'ble Supreme Court in the case of Union of India v. M.L Capoor AIR &Ors. M/s.Abbott Healthcare Private Limited. 1974 SC 87, wherein Their Lordships have, inter alia, observed as follows: "If the statute requires recording of reasons, then it is the statutory requirement and, therefore, there is no scope for further inquiry. But even when the statute does not impose such an obligation it is necessary for the quasi-judicial authorities to record reason as it is only visible safeguard against possible injustice and arbitrariness and affords protection to the person adversely affected. Reasons are the links between the material on which certain conclusions are based and the actual conclusions. They disclose how the mind is applied to the subject-matter for a decision, whether it is purely administrative or quasi-judicial. They should reveal rational nexus between the facts considered and the conclusion reached. Only in this way can opinions or decisions recorded be shown to be manifestly just and reasonable." 9…….
10. Once we come to the conclusion that the assessee has indeed received the services from the AE the next question which we have to decide is as to what is the arm's length price of these services received under cost contribution agreement. It hardly needs to be emphasized that even cost contribution arrangement should be consistent with arm's length principle, which, in plain words, requires that assessee's share of overall contribution to the costs is consistent with benefits expected to be received, as an independent enterprise would have assigned to the contribution in hypothetically similar situation. In the case before us, as evident from the cost contribution agreement, the costs have been shared at average of percentage of (i) head count to the total count and (ii) sales revenue to total revenue. The assessee's share of head count is 3.90 per cent and of total revenue is 3.30 per cent and, accordingly, 3.50 per cent being average of these two parameters, is taken as the cost contribution ratio. We see no infirmity in this contribution being taken as an arm's length contribution to the costs. The TPO's objection to this arrangement was two fold first, that the cost should be shared in the ratio of actual use of services; and second, that the costs should be charged to the assessee as per Indian employee costs. None of these objections has any legally sustainable merits. There is no objective way in which use of services can be measured and as is the commercial practice even in market factors driven situation, the costs are shared in accordance with some objective criterion, including sales revenues and number of employees. The question of charging as per domestic employee costs cannot be a basis of allocation the costs because such an allocation will deal with some hypothetical pricing whereas the allocations are to be done for the actual costs incurred. As it is an allocation of costs on the basis of actual costs and the fact of expenditure is not even in dispute, the dispute is confined to the basis on which cost allocations must take place, and since we find the basis of allocation of costs as reasonable, no interference is really called for. In any case, we have noted that the assessee has adopted TNMM as most appropriate method, and &Ors. M/s.Abbott Healthcare Private Limited. the revenue authorities have neither made an effort to show as to how this method is not appropriate to the facts of this case, nor shown as to which other prescribed method of ascertaining arm's length price of services received under CCA will be more appropriate to these facts. In view of these discussions, we hold that arm's length price adjustment of Rs. 10,55,00,000 made towards sharing of costs under the cost contribution agreement was unwarranted, and we delete the same.”
In view of the above, we hold that the lower authorities were not justified in determining the arm’s length price in respect of marketing expenses at Rs.Nil as against the claim of Rs.79,04,690.
With regard to the remaining expenses like - (i) Personnel Expenses 8,000 Euros (ii) Training Expenses 48,000 Euros (iii) Account and Miscellaneous 51,000 Euros. The ld.TPO had made adhoc disallowance of 25% and held that 75% of the said expenditure were at arm’s length price. We hold that there is no basis for the ld.TPO to arrive at this conclusion when the entire cost allocation sheet duly certified by an independent Accountant was very much placed before him for his examination. In any case, the ld.TPO cannot make any adhoc disallowance while determining the ALP of international transaction. His duty is to determine the ALP by following any of the five methods prescribed in section 92C of the Act r.w.s. 10B of the I.T.Rules. In this regard, we find that the Hon’ble jurisdictional High Court in the case of CIT v. Johnson & Johnson reported in of 2014 dated 07.03.2017 had held as under:-
“(d) We find that the impugned order of the Tribunal upholding the order of the CIT(A) in the present facts cannot be found fault with. The TPO is mandated by law to determine the ALP by following one of the methods prescribed in Section 92C of the &Ors. M/s.Abbott Healthcare Private Limited. Act read with Rule 10B of the Income Tax Rules. However, the aforesaid exercise of determining the ALP in respect of the royalty payable for technical knowhow has not been carried out as required under the Act. Further, as held by the CIT(A) and upheld by the impugned order of the Tribunal, the TPO has given no reasons justifying the technical knowhow royalty paid by the Assessing Officer to its Associated Enterprises being restricted to 1% instead of 2%, as claimed by the respondent assessee. This determination of ALP of technical knowhow royalty by the TPO was ad-hoc and arbitrary as held by the CIT(A) and the Tribunal. (e) In the above view, the question as proposed does not give rise to any substantial question of law. Thus, not entertained.”
In view of the aforesaid factual observations in the light of evidences available on record and respectfully following the decision of the Hon’ble jurisdictional High Court in the case of Johnson & Johnson (supra), we hold that the action of the Revenue in accepting only 75% of the expenses to be at arm’s length is not correct. Accordingly, we direct the ld.TPO to consider the entire 1,07,000 Euro (8,000 + 48,000 + 51,000) in respect of three expenses as stated supra, as the expenditure incurred for the purpose of business of the assessee and which is determined to be at arm’s length and accordingly no adjustment in that regard is called for.
We also find that this issue is common in other appeals also for assessment years 2007-2008, 2008-2009, 2009-2010 and 2010-2011 with the following minor variance, which are tabulated herein below:-
&Ors. M/s.Abbott Healthcare Private Limited.
Asst.Year Marketing Perconnel Training and Accounting, strategic sales support product support Finance and support MAM support 2008-2009 ALP at Nil 2009-2010 ALP at Nil 2010-2011 ALP was determined at Rs.25 lakh on ad-hoc basis.
Our findings given in assessment year 2007-2008 would hold good for other assessment years also, which are in appeal before us. Accordingly, the grounds raised
by the assessee with regard to Transfer Pricing Adjustment in respect of these Central Services Charges are allowed for all the assessment years. CORPORATE TAX ISSUES : Asst. Year 2008-2009
26. The Ground No.1 raised by the assessee is with regard to the action of the ld. DRP in upholding the disallowance made u/s 14A of the I.T.Act r.w.r.8D of I.T.Rules in the total sum of Rs.10,34,897/-.
The brief facts of this issue are that the assessee derived exempt income of Rs.1,71,82,504/- towards dividend on units of liquid mutual funds. The assessee suo moto made disallowance u/s 14A of the Act in the sum of Rs.1,29,907/-. The basis of such disallowance made by the assessee voluntarily are as under:-
Sl. Name of the Proportionate Time No. of days Salary cost 14A No. person whom time spent per spent spent per (CTC) (D) Disallowan devotes time in month (in hrs.) per year year (C) ce (in INR) investment activity (A) (B) (figure as per (E=D/365* C) B/S) (being 8 hrs. per day) 1. 2 24 3 2675403 21990 Mr.ShrihariShidhay e
&Ors. M/s.Abbott Healthcare Private Limited. 2. Mr.UpenMaru 2 24 3 1086142 8927 3. Mr.AnilDeshpande 16 192 24 926579 60926 4. Mr.FirozeRehman 2 24 3 3414562 28065 10000 Administrative Expenses (Printing stationary, telephone, fax etc.) Grand Total 129907
The ld. AO however disregarded this method without giving any finding or satisfaction as to why the disallowance made by the assessee is incorrect having regard to the amounts of the assessee and proceeded to make disallowance under Rule 8D(2) of the I.T. Rules by applying second and third limb thereon. Accordingly, the disallowance was finally determined at Rs.10,34,897/- by the ld. AO after reducing the amount already disallowed by the assessee in the sum of Rs.1,29,907/- in the return of income. The action of the ld. AO was upheld by the ld. DRP.
Aggrieved, the assessee is in appeal before us.
We have heard the rival submissions. We find that the ld. A.O had not recorded any satisfaction at the outset as to why the disallowance made by the assessee was incorrect having regard to the accounts of the assessee in terms of section 14A(2) of the Act r.w.r. 8D(1) of the I.T. Rules. Without recording such satisfaction, the ld. AO cannot proceed to computation mechanism provided in Rule 8D(2) of the I.T. Rules. In this regard, the reliance was placed in the decision of the co-ordinate Bench of the Tribunal in the case of Solvay Pharma India Limited v. ACIT [ITA No.1536/Mum/2017 – order dated 26.09.2018] wherein it was held as under:-
“5. Having heard the rival submissions, we are of the view that there is merit in the contentions of the assessee. A perusal of the investment portfolio of the assessee would show that the assessee has invested in four schemes of mutual
&Ors. M/s.Abbott Healthcare Private Limited. funds, out of which two items have been brought forward from earlier years. During the year under consideration, the assessee has made new investments in only two schemes. Since investment activity of the assessee is limited as stated above, in our view, the Assessing Officer was not justified in invoking provisions of Rule 8D of the I.T. Rules without recording dissatisfaction on the methodology adopted by the assessee. Considering low level of investment activity, we are of the view that the disallowance of Rs.2.19 lakhs made by the assessee u/s. 14A of the Act would meet the requirements of section 14A of the Act. Accordingly, we set aside the order passed by the Solvay Pharma India Limited (Now merged with Abbott India Limited) 3 learned CIT(A) and direct the Assessing Officer to accept the disallowance made by the assessee.”
Respectfully following the aforesaid decision, we direct the ld.AO to delete the disallowance made u/s 14A of the Act in the sum of Rs.10,34,897/-. Accordingly, Ground Nos.1.1 to 1.3 raised by the assessee are allowed.
The Ground No.2 raised by the assessee with regard to the action of the ld. DRP in confirming the addition of Rs.12,250/- made on account of AIR information.
The brief facts of this issue are that the ld. AO observed that from the ITS details (AIR information) reflected in the website of the Department that there was a transaction at Sr.No.11 of ITS taken on 02.12.2011 to the tune of Rs.12,250/- against the name of the assessee. The assessee was asked to reconcile the same. The assessee stated that this transaction does not pertain to it and corresponding TDS reflected thereon also was not claimed by it in the return of income. The ld. AO, however, did not heed to this contention of the assessee and proceeded to make addition of Rs.12,250/- as non-reconciled entry in the data while completing the assessment. This action of the ld. AO was upheld by the ld. DRP.
&Ors. M/s.Abbott Healthcare Private Limited. 34. Aggrieved, the assessee is in appeal before us.
We have heard the rival submissions. The assessee had categorically denied that the transaction in the sum of Rs.12,250/- does not pertain to it. The assessee had also stated that the corresponding TDS amount relatable to such transaction, was also not claimed by it in the return of income. The assessee is a large size company and is part of a multinational group and had maintained its accounts meticulously. In such scenario, asking the assessee to reconcile some data, which is reflected in ITS data of the Income-tax Department, which when not reconciled, cannot fasten any tax liability on the assessee. Accordingly, we delete the addition of Rs.12,250/-. Accordingly, Ground Nos. 2.1 to 2.3 raised by the assessee are allowed.
Ground No.3 raised by the assessee is with regard to the action of the ld. DRP in confirming the disallowance of Rs.20,04,446/- being 20% of unreconciled transaction in the AIR information by holding that the same are incurred for the purpose of business.
The brief facts of this issue are that the assessee was shown ITS data amounting to Rs.2,45,09,749/- during the course of assessment proceedings out of which, the assessee could produce details in respect of Rs.65.96 lakhs. The ld. AO, accordingly, proceeded to disallow 20% of the remaining sum of Rs.1,79,09,749/- (being the unreconciled portion) and made disallowance of Rs.35,81,950/- thereon by holding that the said expenses were not incurred for the purpose of business. The assessee submitted that the said AIR information submitted by the ld. AO was in respect of credit cards of American Express Bank Limited, which were issued by the &Ors. M/s.Abbott Healthcare Private Limited. assessee-company to its employees to enable the employees to incur certain expenses for and on behalf of the assessee-company by using such credit card. The employees had to first incur the expenditure on behalf of the assessee by using the credit card and later seek reimbursement of the same from the assessee-company by producing necessary supporting evidences thereon. The assessee stated before the ld. DRP that these details were called for, for the first time by ld. AO only on 26.12.2011 directing the assessee to furnish on the very next date i.e. on 27.12.2011. Within the short span of time, the assessee could furnish the details only to the tune of Rs.65.96 lakhs. It was pleaded that no defects or infirmities were found in respect of the details so filed for Rs.65.96 lakhs. Again on 29.12.2011, the assessee could further submit the details to the tune of Rs.73.38 lakhs, which was not at all considered by the ld. AO while framing the assessment. The ld. DRP observed that the assessee had furnished details for further additional amount of Rs.78.87 lakhs and accordingly confirmed the disallowance at the rate of 20% in respect of the remaining sums for which details were not furnished by the assessee even before the ld. DRP. Accordingly, the disallowance was sustained at Rs.20,04,446/- pursuant to the directions of the ld. DRP.
Aggrieved, the assessee is in appeal before us.
We have heard the rival submissions. We find that the assessee had furnished the details before the ld. AO within the available short span of time. Even though the assessee could not furnish the details of entire expenses even before the ld. DRP, that alone cannot fasten the liability on the assessee when no defects in any manner whatsoever or infirmities were &Ors. M/s.Abbott Healthcare Private Limited. found by the ld. AO or by the ld. DRP with regard to the details filed by the assessee. In the instant case we find that the disallowance had been made at the rate of 20% on unreconciled portion of expenses based on AIR information on an adhoc basis. We find that the books of account filed by the assessee were not rejected by the ld. AO by pointing out some defect thereon. Hence, no disallowance of expenditure could be made on an adhoc basis. Accordingly, the disallowance of Rs.20,04,446/- made by the assessee is hereby directed to be deleted. Accordingly, Ground Nos.3.1 to 3.3 are allowed.
Ground No.5 raised by the assessee is general in nature and does not require any specific adjudication. : Asst. Year 2009-2010
Ground Nos. 1 and 2 raised by the assessee for assessment year 2009-2010 are similar to ground No.1 and 2 raised for assessment year 2008-2009 and the decision rendered thereon would apply with equal force for this assessment year also, except with variance in figures. Accordingly, Ground Nos.1.1 to 1.3 and 2.1 to 2.3 raised by the assessee for assessment year 2009-2010 are allowed.
Ground No.3 for assessment year 2009-2010 with regard to disallowance of expenses for the sum of Rs.9,80,859/- on account of unreconciled portion based on AIR information in respect of credit card transactions of the assessee. We find that this issue is similar to ground No.2 raised by the assessee for assessment year 2008-2009. We find that during
&Ors. M/s.Abbott Healthcare Private Limited. the year under appeal the assessee had paid total credit card expenses of Rs.3,12,86,108/-, out of which, the assessee could submit details to the tune of Rs.2,91,21,367/- before the ld. AO. The remaining sum of Rs.21,64,741/- was disallowed by the ld. AO being the unreconciled portion of expenses based on AIR information. Before the ld. DRP, the assessee submitted that AMEX had revised its AIR on 18th March, 2013, wherein transactions in the name of the assessee stood reduced to Rs.3,01,02,227/-, thereby reducing unreconciled portion of expenses to Rs.11,83,882/-. It was pleaded that no unaccounted expenses were paid by the assessee to AMEX Bank. The unexplained unreconciled portion represented personal expenses of employees incurred in the AMEX credit card given by the assessee-company to those employees, which had to be borne only by the employees and not by the assessee-company. Hence, the same were not reimbursed by the assessee to the employees. This reply did not hold water before the ld. DRP. Accordingly, the ld. DRP reduced the disallowance to Rs.11,83,882/-.
Aggrieved, the assessee is in appeal before us.
We have heard the rival submissions. We find that the assessee had given reasonable explanation, that out of the total AMEX credit card expenses, the portion attributable to the personal side of the expenses of the employees, cannot be reimbursed to the employees by the assessee- company as the same would not be treated as expenditure incurred for the purpose of the business of the assessee. Moreover, we find that the assessee was able to furnish details to the tune of Rs.2.91 crores as against the total sum of Rs.3.01 crores. Hence, there cannot be any disallowance in the facts of the instant case. We also hold that the reasons given by us for &Ors. M/s.Abbott Healthcare Private Limited. assessment year 2008-2009 for Ground No.3 would apply with equal force for this assessment year also.
The Ground No.4 raised by the assessee for assessment year 2009- 2010 is questioning the transfer pricing adjustment of Rs.2,38,29,880/- in respect of payment of Central Services Charges to its AEs. We find that the ld. TPO had also stated that the assessee had not proved the benefit received by it pursuant to incurrence of said expenditure by way of reimbursement to AEs. This observation was made in addition to regular observations made in respect of the very same issue in assessment years 2007-2008 and 2008-2009. We have decided the impugned issue in favour of the assessee for assessment years 2007-2008 and 2008-2009. We also find with regard to the assessee’s passing the benefit test out of incurrence of the impugned expenditure, the case law relied upon by the ld. AR on the decision of this Tribunal dated 23.04.2018 (supra), come to the rescue of the assessee and accordingly we held that no transfer pricing adjustment is warranted in the facts of the instant case even on that count. Accordingly, Ground Nos 4.1 to 4.3 raised by the assessee are allowed. :Asst. Year 2010-2011 : Assessee’s Appeal :
The Ground Nos.1.1 to 1.3 raised by the assessee are similar to that of Ground No.1 raised by the assessee for assessment year 2007-2008. Hence the decision rendered for assessment year 2007-2008 would apply with equal force for this assessment year also. Accordingly, Ground Nos 1.1 to 1.3 are allowed.
&Ors. M/s.Abbott Healthcare Private Limited. 47. In view of our decision for Ground Nos.1.1 to 1.3 for assessment year 2010-2011, the adjudication of Ground No.2 is only academic in nature. Accordingly, the same may be treated as allowed.
:Asst. Year 2010-2011 : Revenue’s Appeal :
The Ground No.1 raised by the Revenue is with regard to the action of the ld. DRP in deleting the addition made towards bad debts of Rs.41.65 lakhs. The brief facts of this issue are that the ld. AO observed that the assessee had claimed a sum of Rs.41,65,500/- as deduction towards write off of doubtful deposits. On a query from the A.O., the assessee submitted that it had paid security deposit to the landlord for taking the premises on lease for the purpose of its business and that the said deposit was to be refunded on vacation of premises by the assessee. The assessee vacated the premises in time. But the landlord refused to refund the deposit. Despite several efforts, the assessee could not recover the said deposit from the landlord. Accordingly, the assessee thought it fit to write off the said deposit and claimed the same as deduction u/s 28 of the Act as irrecoverable deposits. Reliance in this regard was placed on the decision of the Hon’ble jurisdictional High Court in the case of IBM World Trade Corporation v. CIT reported in 186 Taxman 412 and the decision of this Tribunal in the case of United Motors (India) Limited v. ITO reported in 6 Taxmann.com 32. The ld. AO, however, disregarded the contention of the assessee and disallowed the sum of Rs.41,65,500/- towards write off of doubtful deposits in the assessment. The ld. DRP appreciated the photocopies of five separate agreements entered by the assessee with the landlord demonstrating the write off of security deposit outstanding amounting to Rs.41.65 lakhs along
&Ors. M/s.Abbott Healthcare Private Limited. with copies of email correspondences explaining the reasons for refusing refund inspite of peaceful vacation of the premises by the assessee. These were admitted as additional evidence by the ld. DRP and the remand report from the ld. AO was called for. In the remand report, the ld. AO did not make any comment on the evidences submitted by the assessee. Instead the ld. AO tried to raise certain fresh issues, which are as follows:-
(a) The provision for doubtful debt was made by the assessee within months of shifting in the rented premises. (b) Contrary to the claim made by the ARs during the remand proceedings, the website of the Ministry of Corporate Affairs (hereinafter referred to as `MCA’) shows the company to be `active’. (c) The assessee has not taken any legal action for return of the deposits. (d) The deposits were not written off in the books.
The assessee filed rejoinder to the remand report submitted by the ld. AO by making the following observations :-
(a) The data of making of the provision is not important. It was made once the assessee felt that the return of the deposit had become doubtful. (b) The MCA website lists all companies as active, regardless of their being under liquidation and continues to do so till they are wound up and cease to exist.
&Ors. M/s.Abbott Healthcare Private Limited. (c) The AO has sought to step into the shoes of the assessee and has opined about the best way to run the business, when he has questioned the non-initiation of legal action. (d) The deposits have indeed been written off in the books for FY 2009-10 (relevant to AY 2010-11).
The ld. DRP appreciated the evidences submitted by the assessee which remained uncontroverted by the ld. AO in the remand proceedings and having taken note of the fact that the said deposit was duly written off in the books of account by the assessee, held that the assessee is entitled for deduction u/s 28 of the Act.
Aggrieved, the Revenue is in appeal before us.
We have heard the rival submissions. It is not in dispute before us that the said rental deposit / lease deposit was paid by the assessee for taking the premises on lease for the purpose of business of the assessee. The payment of said lease deposit was to the tune of Rs.41.65 lakhs by the assessee to the concerned landlord. It is not in dispute that the assessee had vacated the said leased premises in a peaceful manner. The ld. DRP had taken note of various email correspondences and various actions taken by the assessee for recovering the rental deposit from the landlord after vacating the said leased premises. We find that the assessee had categorically stated that the said leased deposits were indeed written off in the books for the financial year 2009-2010 relevant to the assessment year 2010-2011. This fact remained uncontroverted by the Revenue before us. Hence, we hold that when the lease deposit was paid for the purpose of &Ors. M/s.Abbott Healthcare Private Limited. business, and when the said lease deposit become irrecoverable, despite having efforts from the side of the assessee and when there is a categorical finding by the ld. DRP that the landlord had suffered major losses on account of acquisition of excessive real estate, which eventually led to wound up his business, the irrecoverability of the deposit paid by the assessee stands duly proved. The assessee had also duly written off the said irrecoverable deposit in its books. We also find that the ground raised by the Revenue itself is patently wrong inasmuch as the Revenue is expecting the assessee to comply with the conditions of section 36(2) of the Act by offering the income in the hands of the assessee in earlier years. The ground also suggests that the assessee had made claim u/s 36(1)(vii) of the Act, which in the instant case is not claimed by the assessee. The assessee has claimed deduction only u/s 28 of the Act after duly satisfying the conditions laid down for such claim. Hence, the Ground No.1 raised by the Revenue deserves to be dismissed on this count itself. Hence, in our considered opinion, the same is allowable as deduction u/s 28 of the Act, which have been rightly deleted by the ld. DRP, which does not require any interference. Accordingly, Ground No.1 raised by the Revenue is dismissed.
Ground No.2 raised by the Revenue is with regard to the action of the ld. DRP in deleting the addition of bogus purchases of Rs.21,78,563/-. The brief facts of the case are that the assessee was asked to produce the details of purchases made by it from two parties, i.e., (i) M/s.Tulsiani Trading Pvt. Ltd. for Rs.6,31,688/- and (ii) M/s.Vaastu Trading Co. for Rs.15,46,875/-. The ld. AO observed that these two parties were informed to the I.T. Department as alleged bogus dealers by the Sales Tax Department, Mumbai. In response to this query, the assessee submitted copies of &Ors. M/s.Abbott Healthcare Private Limited. invoices furnished by M/s.Tulsiani Trading Pvt. Ltd. and M/s.Vaastu Trading Co., along with delivery challans, copies of relevant bank statements, evidences to prove that the payment made by the assessee to those parties, confirmations from the forwarding agent confirming the said purchase transaction and stock registers evidencing the movement of goods. The assessee further submitted before the ld. AO that it had duly discharged VAT liability on the said purchases. The ld. AO directed the assessee to produce those parties to examine the genuineness of the transactions. The assessee failed to produce them. Accordingly, the ld. AO treated the said purchases made from these two parties as bogus purchases. The ld. AO also made observation in his order without prejudice to the aforesaid contention that the assessee had produced bank statements stating that the payments were made by account payee cheques to those parties in respect of the purchases made by the assessee from them. The assessee contended that the actual delivery of goods took place while the suppliers have denied such transactions before the Sales Tax Department. Accordingly, the ld. AO concluded that the assessee must have purchased the goods in cash from undisclosed sources and had taken accommodation entries from these two parties. He also observed that since the purchases were made in cash, the same would otherwise be disallowed u/s 40A(3) of the Act also. Accordingly, the sum of Rs.21,78,563/- was disallowed in the assessment by the ld. AO. The ld. DRP deleted the addition by observing as under:-
“9.3 Decision – We have carefully considered the AO’s order and the assessee’s submissions. It is clear that one of the two reasons for this disallowance appears to be a communication from the Sales Tax Department listing out providers of bogus bills, in which the two suppliers in question found mention. The &Ors. M/s.Abbott Healthcare Private Limited. other one appears to be the inability of the assessee to produce the said parties before the AO. On the other hand, the assessee furnished extensive documentation in the form of delivery challans, invoices, bank statements, books of accounts, etc. to substantiate that actual purchases took place. While the said communication from the Sales Tax Department is only a communication, there being no sworn statements of the two parties available, there really is no basis for mounting an addition on this count. The other matter against the assessee viz. non- production of the two parties has been, in our view, adequately explained by the assessee on the time-lag of four years, those being the only transactions with the said parties and closure of business by the two parties. Once more, this cannot form the basis of an addition. The documentation produced by the assessee e.g. bank statements have also not been followed up the AO to their logical end for disproving the assessee’s case. In these circumstances, we are unable to sustain this addition.”
Aggrieved, the Revenue is in appeal before us.
We have heard the rival submissions. We find that the ld. DRP had given a categorical finding that all the documents were duly submitted by the assessee demonstrating the audit trails for the entire transaction. In view of the detailed reasoning given by the assessee, which remained uncontroverted by the Revenue before us, we do not find any infirmity in the order of the ld. DRP in this regard. Accordingly, Ground No.2 raised by the Revenue is dismissed.
To sum up – (i) Asst.Year 2007-2008 filed by the assessee is partly allowed. (ii) for Asst.Year 2008-2009 filed by the assessee is allowed.
&Ors. M/s.Abbott Healthcare Private Limited.
(iii) for Asst.Year 2009-2010 filed by the assessee is allowed (iv) ITA No.1797/Mum/2015 for Asst.Year2010-2011 filed by the assessee is allowed (v) ITA No.2383/Mum/2015 for Asst.Year 2010-2011 filed by the Revenue is dismissed
Order pronounced on this 30th day of January, 2019. Sd/- Sd/- (C.N.Prasad) (M.Balaganesh) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated : 30th January, 2019. Devdas* Copy of the Order forwarded to :
1. 1. The Appellant 2. The Respondent. 3. The CIT, Mumbai. 4. The DRP-IV, Mumbai.
5. The DR, ITAT, Mumbai 6. Guard file. आदेशानुसार/ BY ORDER, सत्यापित प्रतत //True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपीऱीय अधिकरण, म ुंबई / ITAT, Mumbai
&Ors. M/s.Abbott Healthcare Private Limited.