MSD PHARMACEUTICALS PVT. LTD.,NEW DELHI vs. ADDL. CIT, SPECIAL RANGE- 6, NEW DELHI

Grievance of the assessee, in substance, is twofold- first, against the addition of Rs 23,83,92,783 made by the Assessing Officer, in respect of arm’s length price adjustment for advertising promotion and marketing (AMP) expenses by applying the bright line test (BLT), made on protective basis; and- second, against denial of set off in respect of brought forward business losses to the extent of Rs 26,25,85,933 by holding that, in view of the additions made by the Assessing Officer to the returned in the preceding assessment years, no part of the business losses, incurred in the preceding years, survives for adjustment in the present assessment year.

So far as the “protective addition” in respect of ALP adjustment of Rs 23,83,92,783 is concerned, we have noted that, in the Transfer Pricing Officer had held that an ALP adjustment of Rs 51,06,32,341 is required to be made to the AMP Expenses on the basis of Intensity Adjustment. However, this adjustment, as a result of the working capital adjustment etc directed by the DRP, has now been deleted by the Assessing Officer himself. In the TPO’s order, however, it has been noted that so far as the application of Bright Line Test is concerned, though this issue is decided against the assessee by Hon’ble jurisdictional High Court, the “protective” addition is being made on this basis to protect the interests of the revenue, since the matter is pending before Hon’ble Supreme Court. When matter travelled to the DRP, it was noted the DRP confirmed this stand by observing as follows:

It was in this backdrop that the Assessing Officer reiterated the ALP adjustment of Rs 23,83,92,783 by observing as follows:

The assessee is aggrieved and is in appeal before us.

Having heard the rival contentions and having perused the material on record, we are unable to see any merits in the impugned ALP adjustment of Rs 23,83,92,783 on, what has been termed as, protective basis. Learned Departmental Representative has not even disputed that the issue is covered against the revenue authorities by binding judicial precedents, but his worry is about protecting legitimate interests of the revenue. These apprehensions, however, are not really justified. There is no dispute that the application of bright line test, for making ALP adjustments in respect of the AMP expenses, is held to be unsustainable in law by Hon’ble jurisdictional High Court, and the TPO himself states so in so many words. It is also elementary that it is not, cannot be, open to us to disregard the binding judicial precedents and uphold the application of bright line test, for determining the ALP adjustment in respect of AMP expenses, merely because a binding judicial precedent from Hon’ble jurisdictional High Court has been challenged by the revenue authorities before the Hon’ble Supreme Court. The binding nature of a judicial precedent, as long as it holds the field i.e. is not overturned, remains unaffected by whether or not it has been challenged before a higher forum. As a corollary to this legal position, the impugned addition of Rs 23,83,92,783 must stand deleted. The very concept of protective addition is relevant only when an income is SA No.619/Del/2 Assessment year: 2013-14 Page 4 of 5 to be added in the hands of more than one taxpayer, in a situation in which there is an element of ambiguity as to in whose hands the said income can be rightly brought to tax. That’s not the case before us. In our humble understanding, therefore, the concept of ‘protective assessment’, as is known to the income tax law, has no application in the cases like the one before us.

In view of the above discussions, the addition of Rs 23,83,92,783 stands deleted.

So far as the question of set off of the brought forward business losses is incurred, learned representatives fairly agree that the matter is required to be remitted to the file of the Assessing Officer for fresh adjudication in the light of the result of the appellate proceedings in respect of the preceding assessment years in which the related disputed additions have been made. It is pointed out by the learned counsel that, in any event, the assessee has claimed set off of the loss of Rs 26,25,85,933 incurred in the assessment year 2012-13 which could not have been set off for the prior years, and the only year following the said assessment year is the year before us. It is also pointed out that the ALP adjustment, in respect of AMP expenses by applying the bright line test (BLT), which is now decided in favour of the assessee. While learned Departmental Representative did not really address on all these aspects, he fairly agreed to our suggestion that the matter is required to be examined afresh by the Assessing Officer in the light of outcome of the appellate proceedings for the other assessment years as also by way of a speaking order dealing with the specific contentions of the assessee. In the light of this undisputed position within a narrow compass of material facts, we remit the matter to the file of the Assessing Officer for fresh adjudication in the light of our above observations. We also direct the assessee to fully cooperate with the Assessing Officer in expeditious disposal of the remanded proceedings. Ordered, accordingly.

In the result, the appal is partly allowed.