ORGANON (INDIA) PRIVATE LIMITED,MUMBAI vs. DCIT, CIRCLE-12(1), KOLKATA, KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : KOLKATA [Before Hon’ble Shri M.Balaganesh, AM & Hon’ble Shri S.S.Viswanethra Ravi, JM] I.T.A Nos. 633 & 2459/Kol/2017 Assessment Years : 2012-13 & 2013-14 Organon (India) Pvt. Ltd. -vs- DCIT, Circle-12(1), Kolkata [PAN: AAACI 6949 R] (Appellant) (Respondent)

For the Appellant : Shri J.P. Khaitan, Senior Advocate For the Respondent : Shri P.K. Srihari, CIT DR

Date of Hearing : 17.09.2018 Date of Pronouncement : 24.10.2018

ORDER Per M.Balaganesh, AM

2 ITA Nos. 633 & 2459/Kol/2017 Organon India Pvt. Ltd. A.Yrs. 2012-13 & 2013-14 2. DETERMINATION OF ARM’S LENGTH PRICE (ALP) FOR ADVERTISING, MARKETING AND PROMOTION (AMP) EXPENSE

Ground Nos. 1.1 to 1.7 for Asst Year 2012-13 Ground Nos. 1.1 to 1.7 for Asst Year 2013-14

The facts of Asst Year 2012-13 are taken up for adjudication and the decision rendered thereon would apply with equal force for Asst Year 2013-14 also except with variance in figures.

2.1. The brief facts of this issue are that the assessee company performs value added distribution segment akin to secondary manufacturing i.e converts the raw materials imported from Associated Enterprises (AEs) into pharmaceutical formulations. The assessee does not possess any manufacturing facilities of its own. It outsources its entire production requirements to toll manufacturers / contract manufacturers on a licence basis. The company sources the various raw materials required to manufacture the formulations and gets it converted from third party toll-manufacturers. The return of income for the Asst Year 2012-13 was filed by the assessee company on 29.11.2012 declaring total income of Rs 32,99,14,180/-. During the course of scrutiny proceedings, the assessee’s case was referred to the Learned Transfer Pricing Officer (ld TPO) u/s 92CA of the Act for determination of ALP in respect of international transactions entered into with its AEs. The assessee company has undertaken following international transactions with its AEs during the financial year 2011-12 :-

Nature of Amount Amount ALP as Method followed transaction paid/payable as received/ determined by per books of receivable as per the assessee accounts books of accounts

3 ITA Nos. 633 & 2459/Kol/2017 Organon India Pvt. Ltd. A.Yrs. 2012-13 & 2013-14 Purchase of raw Rs. 981,00,862/- Rs. 981,00,862/- RPM materials Purchase of Rs. Rs. RPM Finished Goods 37,67,64,410/- 37,67,64,410/- Sale of Finished Rs. 2,44,12,613/- Rs. 2,44,12,613/- RPM Goods Recovery of Rs. 141,65,517/- Rs. 141,65,517/- Cost to Cost Expenses basis

2.2. As per the Transfer Pricing (TP) Study, it is stated that assessee purchases raw materials from MSD Oss B.V., N.V. Organon and Organon (Ireland) Limited (collectively referred to as ‘MSD Raw Material Suppliers’) for subsequent resale to third parties in India. The assessee purchases finished goods from Essex Chemie AG, Switzerland, Multilan AG, MSD Oss BV, N.V.Organon and Organon (Ireland) Limited (collectively referred to as ‘MSD Finished Goods Suppliers’) for subsequent resale to third parties in India. The assessee sells finished goods to N.V.Organon. The assessee recovers expenses incurred on behalf of P.T.Scering Plough Indonesia TBK and MSD International GmbH, Singapore (collectively referred to as ‘MSD Reimbursing Entities’). It was mentioned in the TP Study Report that the assessee was primarily engaged in the business of manufacturing and distribution of pharmaceutical formulations. Organo India was a part of the Akzo Nobel group headquartered in Netherlands (hereinafter referred to as “Akzo Group”). The Akzo Group based in the Netherlands, serves customers throughout the world with healthcare products, coatings and chemicals. Headquartered in Oss, Netherlands, the group plays a vital role in everyday life, manufacturing and supplying quality products that are crucial to modern society, products that millions of people use as part of their daily routine. Pursuant to the acquisition of Organon Biosciences N.V. (hereinafter referred to as “Organon N.V.”) by Schering- Plough from Akzo Nobel on November 19,2007, Organon India became a part of the Schering-Plough Group (hereinafter referred to as “SP Group”). 3

4 ITA Nos. 633 & 2459/Kol/2017 Organon India Pvt. Ltd. A.Yrs. 2012-13 & 2013-14 With effect from 4th November, 2009, Organon India became a part of Merck & Co. pursuant to the merger of Merck & Co., Inc., USA and Schering-Plough Corporation. Organon India was formerly known as Infar (India) Limited, was incorporated on August 30,1967. The holding of Organon India which was 49% at the time of formation was reduced to 40% consequent to FERA regulations and thereafter increased to 51% in 1996. The shareholding pattern as on March 31,2012 is 99.99%.

2.3. As per the TP Study Report, the assesee company operated in various therapeutic areas including Cardio Vascular, Contraception, Fertility, Neuro / Ophtha / Anesthesia and Primary Care as under:-

5 ITA Nos. 633 & 2459/Kol/2017 Organon India Pvt. Ltd. A.Yrs. 2012-13 & 2013-14

2.4 Functions performed by Organon India 2.4.1 Functions performed by OIPL in the course of its manufacturing operations 2.4.1.1 Import of raw materials During the financial year 2011-12 Organon India imported raw materials from its related parties as well as unrelated parties. The raw materials were processed further for the purpose of manufacturing finished products which were sold/ exported either to related or unrelated party. Organon India does not possess any manufacturing facilities of its own. It out sources its entire production requirements to toll manufacturers / contract manufacturers on a loan license basis. It sources the various raw materials required to manufacture the formulations and gets it converted from third party toll- manufacturers.

2.4.1.2 Functions performed in relation to import of raw materials Organon India imports raw materials from AEs as well as unrelated companies, which are used in the manufacturing of the final products. The nature of the pharmaceutical industry is such that the quality of inputs (specially the active ingredients) is of significant importance in determining the quality of the end product. Before a raw 5

6 ITA Nos. 633 & 2459/Kol/2017 Organon India Pvt. Ltd. A.Yrs. 2012-13 & 2013-14 material can be used in the production process, the quality parameters need to be set. Once the raw materials pass the quality control procedure, they can be used in the production process. In the case of Organon India, such quality testing is generally done by MSD Raw material Suppliers arid the raw materials are supplied by MSD Raw Material Suppliers itself: In the case of imports from unrelated entities quality testing is done by Organon India. Though, Organon India does some amount of quality testing, in case of active ingredients, Organon India relies on MSD Raw Material Suppliers. The functions performed in the course of purchase of raw materials are the general ones like receiving an indent, obtaining quotations, placing of purchase orders and payment to the suppliers.

2.4.1.3 Export of manufactured finished goods Organon India exports its products to AEs as well as unrelated companies. The exports to AEs comprise majority of bulk drugs and some quantity of formulation whereas those to unrelated companies comprise of only formulations. The various activities performed in the course of export are: a. Receipt of order For exports to AEs, programme schedule is prepared at the beginning of the year and shipments are made depending on the delivery schedule as requested by the buyer. In case of exports to unrelated parties, separate orders are received and shipment made according to the terms of the order. b. Production Scheduling At the time of preparing the annual production plan, the amount of capacity available for export is determined. Production is scheduled according to the delivery schedule for the exports. c. Quality Control Organon India has a well-established quality control system in place. Quality specifications for the entire process are established. These standards are monitored such 6

7 ITA Nos. 633 & 2459/Kol/2017 Organon India Pvt. Ltd. A.Yrs. 2012-13 & 2013-14 that they meet the specifications at all stages of production. The entire cost of quality control is borne by Organon India. The quality control system is uniform for all products and does not differentiate between export and domestic production. d. Marketing For the goods which are exported to AEs no marketing activities are required to be done as the quantum of exports to be made are predetermined at the beginning of the year through production scheduling. These are confirmed sales. However, in the case of exports made to the third parties, advertisement and sales promotion activities are undertaken by Organon India. e. Packaging Organon India has subcontracted its manufacturing operations to contract manufacturers who work under the strict supervision and control of Organon India. Sub-contractors are supplied with all the raw materials, packing materials, technology and techniques for manufacturing the finished products. The products either in the form of strips or pouches are finally packed in corrugated boxes. No differentiation is done in terms of packaging between exports and domestic production. f. Inventory Holding Since all the exports are on CIF basis, Organon India does not hold any inventory which is earmarked for a particular customer and the property of which has passed to the said customer. Moreover, since almost all sales are made on the basis of confirmed orders received from related/ unrelated parties, no significant inventories were held during the year. g. Dispatch Most of the export products are dispatched by air and the airline is selected by Organon India. h. Receipt of Money All exports are in euro or dollar terms and no exports are in rupee terms. i. Pricing 7

8 ITA Nos. 633 & 2459/Kol/2017 Organon India Pvt. Ltd. A.Yrs. 2012-13 & 2013-14 Pricing for exports of bulk drugs is dependent on international prices and are market determined. In the case of formulations, the prices are negotiated and the important determinants of price fixations are market conditions, brand recognition etc.

2.4.2. Distribution Independent pharmaceutical entities invest significant time and resources to generate new product lines, making it a risky exercise. However, being a part of a multi-product group like MSD provides operating companies like Organon India with the advantage of continuously introducing new products without assuming additional risk of spending on product development in order to accentuate its product portfolio. Organon India is engaged in sales and distribution of the pharmaceutical products developed by MSD Finished Good Suppliers. Organon India imports formulations from MSD Finished Good Suppliers and distributes or markets the same in the Indian market. Organon India has an elaborate distribution framework to supply formulations to the target clients. The network consists of clearing and forwarding (“C& F”) agents, distributors, stockiest and retailers performing diverse functions across the supply chain. Organon India’s supply chain is shown in the figure below:

Organon India has several C&F agents in its distribution network. These C&F agents provide products to distributors, who directly then deal with stockist. The stockist caters to the requirements of the retailers. Organon India carries out all functions related to identification of products for distribution in the Indian market, obtaining necessary local government or regulatory approvals. a. Logistics 8

9 ITA Nos. 633 & 2459/Kol/2017 Organon India Pvt. Ltd. A.Yrs. 2012-13 & 2013-14 Organon India determines and arranges logistics for import and domestic sale/export of finished b. Marketing and Promotion For the goods which are sold / exported to AEs no marketing activities are required. However, in case : sale/exports made to third parties, advertisement and marketing activities are undertaken by Organon India. c. Order booking from customers For exports to AEs, programme schedule is prepared at the beginning of the year and shipments are made depending on the delivery schedule sent by the buyer. In case of exports to unrelated parties, separate orders are received and shipment made according to the terms of the order. d. Order placement on suppliers Organon India performs the order placement function depending on the quantum of order received from related and unrelated parties. e. Inventory OIPL also performs the stocking functions in relation to this segment.

2.4.3. Recovery of Expenses During the FY 201 1-12, Organon India recovered certain expenses incurred by it on behalf of the MSD Reimbursing Entities. A 11 such transactions are based on cost to cost recovery of actual third party cost incurred by Organon India. The reimbursement of expenses represents actual costs which supported by third party bills.

2.4.4 Assets employed Any business requires assets (tangible or intangible) without which it cannot carry out its activities. Intangibles play a significant role in the functioning of a business and are accordingly more important. An understanding of the assets employed and owned by

10 ITA Nos. 633 & 2459/Kol/2017 Organon India Pvt. Ltd. A.Yrs. 2012-13 & 2013-14 Organon India provides an insight into the resources deployed by Organon India and their contribution to the business processes/economic activities of Organon India.

2.4.5. Tangibles owned by Organon India Organon India utilises its manufacturing facilities, distributing infrastructure, office premises, warehousing facilities, communication facilities, etc. for the purpose of its business.

2.4.6. Intangibles Organon India does not own any significant intangibles and does not undertake any significant research and development on its account that leads to the development of non-routine intangibles. Organon uses the trademarks, process, know-how, technical data software, operating/quality standards etc. developed/owned by the MSD Group companies. Accordingly, Organon India does not own any significant non-routine intangibles.

2.4.7. Risks Analysis The risk profile of Organon India vis-a-vis its AEs are provided in below with respect to the import of raw materials and manufacture oJ processed products through contract manufacturers, akin to value added distribution activities.

2.4.8. Market Risk Market risk is the risk that is incurred due to uncertainties in the market. Uncertainties can include fluctuations in costs, demand, and pricing. Market risk represents a standard risk borne by any firm involved in market driven transactions. All market risks with respect to the product including customer acceptance are borne by OIPL both in case of exports and domestic sales for its import of raw materials. On the other hand, the AEs

11 ITA Nos. 633 & 2459/Kol/2017 Organon India Pvt. Ltd. A.Yrs. 2012-13 & 2013-14 does not have any significant exposure to this risk in respect of sales made by Organon India.

2.4.9. Product liability risk Product liability risk is associated with product failures including non-performance to generally accepted or regulatory standards. This could result in product recalls and possible injuries to end- users. Product liability risks are borne by Organon India both in case of exports and domestic sales. However, any risk pertaining to the quality of API is not borne by Organon India with respect to the import of raw materials. On the other hand, the AEs does not have significant exposure to this risk in respect of sales made by Organon India. However, it bears the risk pertaining to the quality of API.

2.4.10. Technology Risk Technology risk arises if the market in which the company operates in is sensitive to introduction of products and technologies. Hence, in that case, business units may face loss of potential revenues to inefficiencies arising from obsolete infrastructure and tools as well as obsolescence of manufacturing processes. Technology risk is borne by Organon India with respect to the Indian market. On the other hand, the AEs does not have any significant exposure to this risk with respect to the Indian market.

2.4.11 R&D risk R&D risk relates to the loss associated with investment in products that do not become commercially viable. Organon India does not perform any R&O on its own account, it does not bear this risk. On the other hand the AEs engage in significant R&O for developing new products. Accordingly, the AEs have a significant exposure to this risk.

2.4.12. Credit Risk

12 ITA Nos. 633 & 2459/Kol/2017 Organon India Pvt. Ltd. A.Yrs. 2012-13 & 2013-14 Credit risk is the risk that a supplier will not receive payment from its customers. Credit risk is primarily determined by two factors: the credit-worthiness of customers and the amount of accounts receivables outstanding. Credit Risk for Organon India's customers is borne by Organon India. Organon India is responsible or monitoring debtors accounts.

2.4.13 Price Risk Price risk arises as a result of price pressures in the market resulting in price undercutting, and thereby adversely impacting profitability. Price Risk for Organon India's sales is borne by Organon India. The AEs does not have any exposure in this respect.

2.4.14 Inventory Risk Inventory risk is the risk that the inventory held by a company will become obsolete (unsellable) or depreciated before it can be sold. Organon India is responsible for managing the flow of inventory of raw materials and formulations to ensure that production is not disrupted and sales are not lost on account of stock-outs respectively. Organon India is responsible for ensuring sufficient inventory of traded goods is maintained so that sales are not lost due to stock-outs.

2.4.15 Foreign Exchange Risk Foreign exchange risk arises when there is a mismatch between the currencies in which an entity earn its revenues and incurs its expenses. Organon India faces currency risk while importing raw materials and formulations from AEs. The AEs does not have any exposure in this respect. The risk profile of Organon India vis-à-vis its AEs with respect to the trading activities are provided in table below:

13 ITA Nos. 633 & 2459/Kol/2017 Organon India Pvt. Ltd. A.Yrs. 2012-13 & 2013-14

2.5. The four international transactions reported hereinabove had been accepted at Arm’s Length by the ld TPO and no adjustment to ALP was made in the order u/s 92CA(3) of the Act dated 28.1.2016 for the Asst Year 2012-13.

2.6. The ld TPO directed the assessee to submit complete details of advertisement and sales promotion expenditure including details of advertisement and matter dealt therein. The assessee was also asked to provide details of products which were advertised. The assessee submitted the details of expenditure incurred under the head AMP and selling expenses as under:-

14 ITA Nos. 633 & 2459/Kol/2017 Organon India Pvt. Ltd. A.Yrs. 2012-13 & 2013-14

15 ITA Nos. 633 & 2459/Kol/2017 Organon India Pvt. Ltd. A.Yrs. 2012-13 & 2013-14 2.7. The ld TPO issued show cause notice to the assessee on the ground that assessee had been developing the brands and the products owned by Merck Group and accordingly created marketing intangibles for the Merck Group, without being compensated for such activity. The list of AMP / Net Sales of the comparables selected by the assessee are as under along with AMP / Net Sales of Organon India :-

The ld TPO show caused that if the average AMP / Net Sales of the comparables are applied, then the quantum of expenditure under the head advertisement and sales promotion of assessee company would be 2.21% of Rs 185,70,15,451/- i.e Rs 4,10,40,041/- and that the excess AMP of assessee company attributable to creation of marketing intangibles for AE brands would be Rs 7,45,98,809/- ( 11,56,38,850- 4,10,40,041). The ld TPO observed that this expenditure undertaken by assessee company on behalf of AE be reimbursed on cost plus basis for which a mark up of 12% was sought to be added by the ld TPO in his show cause notice. Accordingly, the ld TPO proposed an adjustment of Rs 8,35,50,666/- ( 7,45,98,809 + 12% of Rs 7,45,98,809) on account of marketing intangibles.

16 ITA Nos. 633 & 2459/Kol/2017 Organon India Pvt. Ltd. A.Yrs. 2012-13 & 2013-14 a) AMP expenses does not constitute an international transaction. b) Without prejudice to the preliminary argument, that AMP expenses does not constitute an international transaction, it was pleaded that AMP expenses incurred by the assessee were in respect of its own business requirements / consideration s/ purposes and that all and any benefit resulting from such expenditure are to its own account ( in the form of increased sales and market share) and benefit , if any, to the overseas AEs, was purely incidental. c) Without prejudice to the preliminary argument, that AMP expenses does not constitute an international transaction, it was pleaded that the assessee has sufficient / substantial gross operating margin so as to be compensated for any alleged AMP expenses and the adjustment for AMP expenses had led to double taxation in the hands of the assessee since the assessee’s margins are already at Arm’s Length. The assessee has been adequately compensated by premium return for the excess AMP spend, if any, through the sale of products in the Indian market and its pricing policy for various international transactions with its AEs. The same is evident from the higher margins of the assessee compared to the comparables. It was also pleaded that the assessee has earned a gross margin , adjusted for AMP expenses, of 60.37% which is much higher when compared to comparable companies margins. Since the gross margins, adjusted for AMP expenses, earned by assessee from its trading activities are within the arm’s lendth range as per Indian TP regulations, the international transaction under review can be considered to be at arm’s length. Further the assessee is into paying any royalty for use of trademark or making any other payment to its AE which could be considered as another form of concession or subsidy given by the AE. d) Without prejudice to the preliminary argument, that AMP expenses does not constitute an international transaction, it was pleaded that application of Bright Line Test (BLT) is not in consonance with Indian TP regulations. The assessee submitted that the methodology adopted by the ld TPO to benchmark the AMP expenses using BLT does not fall under any of the five prescribed methods in the Indian TP 16

17 ITA Nos. 633 & 2459/Kol/2017 Organon India Pvt. Ltd. A.Yrs. 2012-13 & 2013-14 Regulations for computing the ALP of the international transactions. The sixth method in clause (f) of section 92C of the Act i.e ‘such other method as may be prescribed by the Board’ was not prescribed by the CBDT. Hence the five methods prescribed in the statute does not cover ‘bright line test’ (BLT) or the methodology followed by the ld TPO in the show cause notice. e) Without prejudice to the preliminary argument, that AMP expenses does not constitute an international transaction, it was pleaded that for bright line test, as per the OECD guidelines in para 1.42 thereon, the comparable companies should be similar in respect of the economically significant activities performed and responsibilities undertaken. f) Without prejudice to the preliminary argument, that AMP expenses does not constitute an international transaction, it was pleaded that the expenditure in the nature of selling and distribution expenses cannot be considered while computing the AMP spend ratio. The assessee submitted that the sales promotion expenses incurred by the assessee exclusively for the purpose of its own distribution channel requirement such as dealer / staff incentive, gifts, festival giveaways, market study expenses, etc are required to be excluded from the AMP expenses for computation of such ratios. These expenses were incurred by the assessee for development and maintenance of its own distribution channel and have no relation with development of any brands.

3.1. The assessee also provided the AMP expenses in the table below:- Advertising agency fee, business promotion expenses etc (A) 3,71,42,349

Selling expenses like dealer / staff incentive, gifts, Festival giveaways , market study expenses etc (B) 7,84,96,501

Total Expenses including Selling Expenses (C ) = (A) + (B) 11,56,38,850

Total AMP expenses excluding selling expenses 17

18 ITA Nos. 633 & 2459/Kol/2017 Organon India Pvt. Ltd. A.Yrs. 2012-13 & 2013-14 (D) = (A) 3,71,42,349

Operating Revenue of the Company (E) 185,70,15,451

AMP and Sales promotion expenses as a Percentage of sales (C ) / (E) 6.22%

AMP net of selling expenses as a percentage of sales (D) / (E) 2.00%

The assessee submitted the details of AMP expenditure incurred in a separate annexure along with its submission dated 18.12.2015. The invoices for the same on sample basis were also enclosed along with this submission.

3.2. The assessee also submitted that without prejudice to the aforesaid arguments, the AMP expenses incurred by it was not excess when compared with the comparable companies. In this regard, it was pointed out that the ld TPO had taken comparable companies from TP documentation maintied by the assessee company and determined average AMP spend of the comparable companies in relation to sales at 2.21%. For the case of the assessee, the ld TPO had determined the AMP spends to sales at 6.22%. However, as pointed out above, any expense which has been incurred by the assessee exclusively for the purpose of its own distribution channel requirement such as dealer / staff incentive, gifts, festival giveaways, market study expenses etc are required to be excluded from the AMP expenses for computation of such ratios. Once the selling and distribution expenses are excluded, then the ratio of AMP to sales for the assessee will come down to 2%. Hence the assessee had not incurred any excess AMP when compared to comparable companies and the adjustment as proposed in the show cause notice should not be valid.

19 ITA Nos. 633 & 2459/Kol/2017 Organon India Pvt. Ltd. A.Yrs. 2012-13 & 2013-14 3.3. The assessee also submitted that the ld TPO had proposed an adhoc mark up of 12% over and above the alleged excess AMP expenditure incurred by the assessee, which is erroneous.

4.1. Based on the above, the ld TPO concluded that the entire amount of AMP expenses of Rs 6,73,86,252/- is to be considered as expenditure for creation of marketing intangibles for the AE, which should be compensated by the AE to the assessee. The ld TPO further observed that he had already taken into consideration that no royalty or 19

20 ITA Nos. 633 & 2459/Kol/2017 Organon India Pvt. Ltd. A.Yrs. 2012-13 & 2013-14 trademark fee has been charged by the AE on the distributor. The assessee replied that it was compensated by not getting charged by the AE towards any royalty or trademark fee. In this regard, the ld TPO observed that there has been no mention that whether the product or process patent of the drugs distributed by the assessee have been expired or not or how many drugs out of the drugs distributed still have unexpired product patent. In case of drugs whose product or process patent have been expired, no royalty can be chargeable. Accordingly, the ld TPO rejected the claim of the assessee that it was compensated by the AE through exemption of royalty payment.

4.2. The ld TPO accordingly determined the ALP of marketing intangibles created by the assessee for the Merck Group by way of incurring AMP expenditure and made a mark up of 5% of the quantum of AMP expenditure determined in the sum of Rs 6,73,86,252/- above and computed the ALP as under:-

Quantum of AMP as determined above 6,73,86,252/- Add: Mark up of 5% 33,69,313/- ALP of Marketing Intangibles 7,07,55,565/-

Accordingly, the ld TPO made an upward adjustment of Rs 7,07,55,565/- for the Asst Year 2012-13 on account of ALP of Marketing Intangibles created by the assessee for the AEs.

21 ITA Nos. 633 & 2459/Kol/2017 Organon India Pvt. Ltd. A.Yrs. 2012-13 & 2013-14 a) Deca Durabolin b) Novelon c) Recagon

The assessee submitted the details of advertisement and sales promotion expenses of Rs 35,98,000/- containing scientific session charges and journals as under:-

The assessee also requested the ld DRP to admit and consider these evidences as additional evidences as the same could not be filed before the ld TPO / ld AO due to paucity of time or in absence of specific query by the ld TPO.

5.1. The ld DRP sought for a remand report from the ld TPO admitting the aforesaid evidences together with calling for further details to be filed by the assessee vide its remand proceedings in F.No.DRP-2/2016-17/669 dated 20.10.2016. The assessee duly

22 ITA Nos. 633 & 2459/Kol/2017 Organon India Pvt. Ltd. A.Yrs. 2012-13 & 2013-14 submitted the requisite details before the ld TPO as directed by ld DRP with a copy marked to ld DRP as under:- a) Information for atleast 5 years in regard to turnover, gross profit, net profit, selling and distribution expenses, AMP expenses, royalty payment, intra-group service charge payment, purchase of key components from the AE. b) Confirmation by the assessee that none of its AEs make any direct sales in India. c) Information on the business model of the MNE group in different countries. d) Global TP Policy of the MNE group in regard to all the international transactions listed in Form 3CEB and also the policy in regard to the advertising, market development, brand development and other marketing expenses. In this regard, the assessee submitted that it operates as an independent entity from its AEs, and AEs have no role to play in its day to day operation. Therefore, the assessee is unable to comment on the global TP policy of the MNE group. However, it can be easily said that all the transaction of the Merck Group adheres to the arm’s length principle. e) Information on competitors (domestic and global) and also market research reports. f) Marketing strategy of the taxpayer / guidance afforded by parent (supported by contemporaneous documents as evidence) in developing marketing strategy for Indian market ; complete budgeting process, particularly in regard to advertising and market promotion, right from the stage of planning to final approval ; information on the marketing budger, advertising plans/ designs, core advertising message, implementation of strategy and the actual involvement of the parent and subsidiary in this area of work ; correspondence and communications dealing with marketing budget, marketing spend and marketing strategy between the employees of the taxpayer and the employees of the AE and channel of submission and level of approval of the taxpayer – both internally in the taxpayer company. g) All agreements between the taxpayer and the AEs (including the owner of marketing intangibles) in connection with licensing and use of brand name, trademark etc and technology - In this regard, the assessee clarified that it has only distribution 22

23 ITA Nos. 633 & 2459/Kol/2017 Organon India Pvt. Ltd. A.Yrs. 2012-13 & 2013-14 agreement between its AEs for its operation in India, which was submitted before the ld TPO at the time of assessment proceedings. It was specifically clarified that there is no specific and separate licensing / trademark and technology agreement with its AE for assessee’s operation. h) Information on brand royalty and the basis of setting the royalty rate. Group policy in this regard. Policy with regard to whether the AE undertakes to promote the market for the goods in India or any other country. And whether while fixing the royalty rate such factors are taken in to account and agreements governing royalty - In this regard, it was clarfied that the assessee does not pay any royalty to its AE, hence the same is not applicable. i) Information on the registration and patenting of trade and marketing intangibles like brand name, mark, trade name etc by the AE in India - In this regard, it was submitted that Merck Group owns the brand name and trademarks and Organon India (assessee herein) has only been granted an exclusive right to use the brand to sell the products in the designated territory. AE is the owner of all trademark / brand intangibles that it licenses. Accordingly, the ownership provides prerogatives of control – legal rights to license the trademarks / brands, assert or grant exclusivity, deter competition, and an obligation to protect the trademark and brand against infringement in all the markets where the trademarks / brands have been registered. Therefore, any expenses in these areas are borne by the AE. However, the assessee being separate legal entity, is not privy to such information. j) Information on any infringement of any registered brand name etc in India and a history of any legal action / disputes – In this regard, it was submitted that there has been no history of any infringement of registered brand name in India, and neither any history of legal disputes and actions. k) Information on all type of advertising , marketing and promotion expenses (as mentioned in the profit and lsos account) for a particular year and amounts for a period of 5 years. Details also in respect of launching of new products and expenses incurred – 23

24 ITA Nos. 633 & 2459/Kol/2017 Organon India Pvt. Ltd. A.Yrs. 2012-13 & 2013-14 These details were provided ina separate annexure . It was clarified that no new products have been launched by the assessee. l) Information on local market surveys in regard to marketing and market share and evaluation of the effectiveness of marketing strategy and role of the AE for the same – In this regard, it was clarified that all the activities are carried out by the assesee either on its own or by engaging third party market research analysts and does not involve the AEs for the same and there would be no interference of the AE in the same. m) Details of various employees of the tax payer involved with marketing of goods sold, advertising, sales promotion schemes, all issues relating to brnad, and their reporting structure. n) Details of employes (name, role, emoluments) of the assessee who have functional or administrative reporting to the employees of the AEs - In this regard, it was clarifid that no employee of the assessee functionally report to any employee of AE for its day to day operations. It is pertinent to mention that assessee has independent functional employee structure and employee of assessee interact with employees of AE on a need basis only. Further, the managing director of the assessee administratively report to the Chairman of the Company appointed by the Parent company of Organon India (assessee). The approach of the AE towards assessee’s business is that of stewardship, consultative and facilitative , with assessee taking all its decisions on a bottom’s up basis. o) Details fo list of personnel of the AE in regard to the marketing and advertising (DEMPE) functions along with the purpose as also the correspondence with regard to the objective of the visit – In this regard, it was submitted that no personnel from AEs had any involvement in the marketing and advertising functions of the assessee. Furhter, no employees of AE have visited assessee in this regard. p) Agreements with market research agencies, advertisement agencies, brand ambassadors, sponsorship agreement etc and the involvement of the AE in the selection of the same supported by bills / invoices – In this regard, the assaessee submitted on 24

25 ITA Nos. 633 & 2459/Kol/2017 Organon India Pvt. Ltd. A.Yrs. 2012-13 & 2013-14 sample basis an agreement with market research agency and clarified that it does not have any brand ambassadors / sponsorship agreement with any third parties. Furtehr it was reiterated that the AEs of the assessee have no involvement in these activities altogether. q) Information along with evidence on all the risks assumed by taxpayer, risk mitigation undertaken and risks in practice materialized in India and who has borne the loss due to the same. What were the reimbursements / compensation / subvention by the AE in this regard to the taxpayer - In this regard, it was submitted that the assessee operates as an independent company in India and bears all risks in relation to its functions and activity. Till date, there is no major loss incurred by the assessee in India, which can demonstrate that the risks in practice are borne by the assessee itself. r) Information on valuation of various brands, trade marks or other marketing intangibles in the MNE group and contribution of Indian operations and customer base towards the same – In this regard, it was submitted that it is important to hightlight that the ultimate parent of the assessee i.e Merck and Co . Inc. USA is a global pharmaceutical giant with operation in multiple countries with turnover in billions of dollars. Whereas the assessee, in India is a company with a turnover of Rs 187 crores in the relevant financial year. This clearly shows that the operation of the assessee is miniscule when compared to its parent, therefore the contribution by the Indian operation to its intangible and customer base, is insignificant / minimal to the Merck group as a whole. It was further submitted that the assessee does not have information regarding valuation of various brands, trade marks or other marketing intangibles in the MNE group. s) Information on any business restructuring that has taken place in the MNE group in the last 5 years and till date, including sale of any part or whole of the business and contribution of marketing intangibles in the valuation of any part or whole of the business – In this regard, it was submitted that in 2009, there was a merger between

26 ITA Nos. 633 & 2459/Kol/2017 Organon India Pvt. Ltd. A.Yrs. 2012-13 & 2013-14 Merck & Co. Inc. and Schering Plough Corporation. The relevant details were submitted in the TP Study Report.

5.2. The ld DRP upheld the action of the ld TPO in determining the ALP of AMP expenditure treating the same as an international transaction vide its directions u/s 144C(5) of the Act dated 8.12.2016. The assessee later filed a rectification application under Rule 13 of IT (Dispute Resolution Panel) Rules, 2009 which was dismissed by the ld DRP vide its proceedings on 17.1.2017. The ld AO in the final assessment order dated 31.1.2017 made an adjustment of Rs 7,07,55,565/- towards AMP expenditure. Aggrieved, the assessee is in appeal before us.

27 ITA Nos. 633 & 2459/Kol/2017 Organon India Pvt. Ltd. A.Yrs. 2012-13 & 2013-14 through the contract manufacturer are subjected to levy of Excise Duty and the Central Excise Department had duly levied and collected Excise Duty from the assessee company. Hence it would be factually incorrect to state that the assessee is not a manufacturer at all and only distributor simplicitor. Accordingly, the argument advanced by the ld DR in this regard requires to be dismissed. We hold that the AMP expenditure is not an international transaction and hence there is no need to determine the ALP of the same. We find that the co-ordinate bench of this tribunal in the case of Philips India Ltd vs ACIT in ITA No. 2489/Kol/2017 dated 4.4.2018 for Asst Year 2013-14 had held as under:- 11. We have heard the rival submissions. At the outset, we find that the ld TPO, ld AO and the ld DRP had categorically accepted the basic fact that the assessee is a manufacturer and also engaged in distribution of products. While this is so, we are not able to comprehend the argument advanced by the ld DR that assessee is only a distributor and thereby the decision of Sony Ericsson would apply to the case. We find that since the assessee is a manufacturer cum distributor as accepted by the lower authorities, the decision rendered in Maruti Suzuki supra would be applicable to the assessee’s case, since the contention of the ld DR that assessee is only distributor, is not emanating from the records of the lower authorities. We find that the issue under dispute before us is squarely addressed by this tribunal in assessee’s own case for the Asst Year 2011-12 supra wherein it was held :-

“43. We have heard the rival submissions and perused the materials available on record. The preliminary issue here arises whether the AMP expenses constitute the international transactions so as to attract the provisions of transfer pricing of the Income Tax Act, 1961. The claim of the Ld. AR is that the AMP transaction does not represent the international transaction between the AE’s therefore no question of determining the ALP of AMP transactions. We find force in the argument of the ld. AR in the given facts and circumstances. Therefore, in our considered view the AMP cannot be regarded as international transaction. In holding so we find the support & guidance from the judgment of Hon’ble Delhi High Court in the case of Maruti Suzuki India Limited vs. CIT reported in 381 ITR 117 wherein it was held as under:

“51. The result of the above discussion is that in the considered view of the court the Revenue has failed to demonstrate the existence of an international transaction only on account of the quantum of AMP expenditure by MSIL. Secondly, the Court is of the view that the decision in Sony Ericsson Mobile Communications India (P) Ltd. case (supra) holding that there is an international transaction as a result of the AMP expenses cannot be held to have answered the issue as far as the present Assessee MSIL is concerned since finding in Sony Ericsson to the above effect is in the context of those Assessees whose cases have been disposed of by that judgment and who did not dispute the existence of an international transaction regarding AMP expenses.”

28 ITA Nos. 633 & 2459/Kol/2017 Organon India Pvt. Ltd. A.Yrs. 2012-13 & 2013-14 In view of we note that the facts of the above cases are identical to the present issue, thus, the principle laid down by the Hon’ble Delhi High Court in the case of Maruti Suzuki India Limited (supra) are applicable to the instant case. Respectfully following the same we dismiss the ground of appeal filed by the Revenue.”

Respectfully following the same, the upward adjustment made by the ld TPO and upheld by the ld DRP is hereby directed to be deleted. Accordingly, the Grounds 3 , 4.2 & 4.3. raised by the assessee are allowed.”

Respectfully following the same, we hold that the AMP expenditure is not an international transaction so as to determine the ALP of the same.

6.1. We find that the ld DR argued that the assessee’ name in India is ‘Organon India Pvt Ltd’ and that the word ‘Organon’ is not an Indian word and it is the name of the AE. Hence it is the name and brand of the AE that is getting sold in India and accordingly he pleaded that AMP expenditure is an international transaction. With regard to the usage of the word ‘Organon’ as name of the assessee in India, we find that it is the products manufactured by Organon India that really matters and not the company which manufactures. In any case, mere usage of a foreign word does not make it automatic to fall with in the ambit of an international transaction. For example, in respect of usage of the product Savlon, which comes in liquid form or as antiseptic cream etc, was previously manufactured by Johnson & Johnson and now manufactured by ITC Ltd. It is to be understood that the product is sold because of the name ‘Savlon’ and not because it is manufactured by Johnson & Johnson or by ITC Ltd. Hence the usage of the foreign word ‘Organon’ in the name of the assessee company does not enable its products to be sold in the open market. We find that the assessee had given the details of products manufactured by it before the ld DRP which was also subject to remand proceedings and from the said products list that are enclosed in 412 to 448 of the paper book, we find that the products are sold only by its relevant name in the open market and not by the manufacturers of it. Hence the incurrence of AMP expenditure in the

29 ITA Nos. 633 & 2459/Kol/2017 Organon India Pvt. Ltd. A.Yrs. 2012-13 & 2013-14 instant case cannot be attributed as towards incurred for brand promotion of the AE, thereby requiring any compensation.

6.2. We find that the entire AMP expenditure has been incurred and paid only to third parties and not to AEs. The assessee pleaded that the same had been incurred for the purpose of its business and for its products and hence the same are not eligible to be compensated by the AEs. It was submitted that there was no transfer of marketing intangibles. The assessee also pleaded that it was not promoting any of the brands of the AEs in India in order to be eligible to be compensated. We find that the revenue had only assumed that the assessee had promoted the brand of the AE by incurring AMP expenditure in India thereby warranting any compensation. In this regard, we find lot of force in the arguments of the ld AR that the assessee had not paid any royalty or trademark fee to its AEs and had been benefitted by the excess premium return in the sale price of goods. The AMP expenditure is duly factored into the said pricing fixed by the AEs. In the instant case, we find that the international transactions with AEs of purchase of raw materials, purchase of finished goods, sale of finished goods and recovery of expenses have been duly accepted to be at Arm’s Length. Then the AMP expenditure also is required to be accepted at Arm’s length as it is already factored in the pricing.

6.3. We also find that the ld TPO and ld DRP had sought to include the selling expenses incurred in SLE REPS PROMO – PRINT of Rs 2,62,10,736/- and EDUINFO- SPEAKER HO of Rs 69,53,430/- as part of AMP expenditure and the same has been included to bench mark the ALP of AMP expenditure. In this regard, we find that these expenditures are purely related to products of the assesee and not for any brand. We also find that the assessee while incurring the total expenditure towards AMP and Selling Expenses, had duly bifurcated the same by identifying at the time of incurrence itself whether the said expenditure constitutes AMP expenditure or Selling Expenses. 29

30 ITA Nos. 633 & 2459/Kol/2017 Organon India Pvt. Ltd. A.Yrs. 2012-13 & 2013-14 This bifurcation of expenditure had been ignored by the revenue in the instant case. We find that if these two items are excluded, then the AMP expenditure incurred by the assessee is at Arm’s length even after the mark up of 5%. Hence no separate discussion is required herein with regard to the validity of mark up of 5%. Hence in any case, there cannot be any adjustment to ALP of AMP expenditure in the instant case.

6.4. In view of the aforesaid observations in the facts and circumstances of the case and respectfully following the judicial precedents relied upon hereinabove, we allow the Grounds raised by the assessee in this regard for the Asst Years 2012-13 and 2013-14.

31 ITA Nos. 633 & 2459/Kol/2017 Organon India Pvt. Ltd. A.Yrs. 2012-13 & 2013-14 A H IVF and Infertility Research Centre Pvt Ltd 2,50,000 2011-12 Association of tamil Nadu Members of RCOG 2,00,000 2011-12

Since the aforesaid expenses related to prior period which is not allowable as deduction in the year under consideration, the ld AO disallowed the same in the final assessment order. Aggrieved, the assessee is in appeal before us.

8.1. We have heard the rival submissions. We find that the incurrence of expenses towards scientific session charges and journals to the tune of Rs 12,50,000/- as stated supra for the purpose of business of the assessee is not in dispute in the final assessment order of the ld AO. The said payments were also duly subjected to deduction of tax at source by the assessee. The only dispute is that it relates to earlier year as per the TDS certificate issued by the assessee to those parties. The ld AR stated that no deduction was claimed by the assessee towards the same in the Asst Year 2011-12 which fact may be verified by the ld AO. On the contrary, the ld DR vehemently objected to the issue getting remanded back to file of ld AO for fresh verification as no details were filed by the assessee. We find only from the details filed by the assessee together with the TDS certificates, the ld AO had arrived to the conclusion that the part of the expenditure in the sum of Rs 12,50,000/- pertains to Asst Year 2011-12. Moreover, we find that in the draft assessment order, the ld AO had proposed the disallowance of entire scientific session charges and journals in the sum of Rs 35,98,000/- as not incurred for the purpose of business and whereas the ld DRP held that the expenditure is for the purpose of business. The ld AO in the final assessment order pursuant to the directions of the ld DRP, changed his stand and observed that part of the expenditure does not relate to the year under consideration. Hence it could be seen that there is a shift in stand by the ld AO and the assessee was not given any opportunity to make its submissions in this regard. In these facts and circumstances, we deem it fit and appropriate, to remand this

32 ITA Nos. 633 & 2459/Kol/2017 Organon India Pvt. Ltd. A.Yrs. 2012-13 & 2013-14 issue to the file of ld AO for verification of the same as to whether the said expenditure was claimed as deduction in Asst Year 2011-12 by the assessee. If it is found to have been claimed, then the assessee should not be given deduction in Asst Year 2012-13. If not, then the assessee should be granted deduction for the same as there is no change in tax rates in both the years and incurrence of the said expenditure for the purpose of business is not in dispute. Accordingly, the Ground Nos. 2.2. and 2.3. raised by the assessee for Asst Year 2012-13 are allowed for statistical purposes.

9.1. We have heard the rival submissions. We find that the Service Tax Provisions as amended by Finance Act 2012 contains Section 75 and Section 76 thereon. The interest is charged on the assessee for delayed payment of service tax as per section 75 thereon. The penalty is charged on the assessee under section 76 thereon for failure to pay 32

33 ITA Nos. 633 & 2459/Kol/2017 Organon India Pvt. Ltd. A.Yrs. 2012-13 & 2013-14 service tax, interest under section 75 thereon. We find that the amount under dispute in the sum of Rs 1,257/- represents interest paid under section 75 of the Act which is purely compensatory in nature and hence allowable as deduction. It is not penalty paid under section 76 of the service Tax Rules so as to make it penal in nature. Accordingly, the Ground No. 2.4. raised by the assessee is allowed.

Sd/- Sd/- [S.S. Viswanethra Ravi] [ M.Balaganesh ] Judicial Member Accountant Member

Dated : 24.10.2018 SB, Sr. PS Copy of the order forwarded to: 1. Organon India Pvt. Ltd., Plot No.C-56, Block-G, 7th Floor, Platina Building, Bandra Kurla Complex, Bandra (East), Mumbai-400098 2. DCIT, Circle-12(1), Kolkata, Aayakar Bhawan, P-7, Chowringhee Square, Kolkata- 700069. 3..C.I.T.(A)- 4. C.I.T.- Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata.