ASTRAZENECA PHARMA INDIA LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1(1)(1), BANGALORE

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

This appeal by assessee is directed against the assessment order passed by National e-Assessment Centre, Delhi u/s 143(3) r.w.s. 144C(13) r.w.s. 144B of the Act dated 30.4.2021. The assessee has raised following grounds of appeal:

GENERAL

PART I – CORPORATE TAX GROUNDS

Adjustment of INR 40,88,471/- pertaining to disallowance of employee stock compensation expense

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 2 of 37 stock compensation plan amounting to INR 40,88,471; 3. erred in holding that the above expenditure is capital in nature and accordingly not allowable under section 37 of the Act, ignoring the fact that said expense has been incurred wholly and exclusively for the purpose of the business of the Appellant;

Deduction in respect of education cess and secondary higher education cess under section 37(1) of the Act

PART II – TRANSFER PRICING (“TP”) GROUNDS:

General Ground:

erred in law and on facts, in making Transfer Pricing adjustment of INR 6,19,06,837 pertaining to purchase of raw materials and sale of finished goods to AE under Manufacturing segment and Transfer Pricing adjustment of INR 35,67,86,587 towards selling, marketing and distribution expense incurred by the Appellant;

Rejection of TP study of the Appellant

Adjustment of INR 6,19,06,837 pertaining to purchase of raw materials and sale of finished goods to AE under Manufacturing segment

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 3 of 37 8. erred in rejecting Panacea Biotec Ltd. as a comparable on the ground that it is persistent loss making comparable without appreciating that it has operating losses in only one out of three years and is not a persistent loss- making company; 9. erred in rejecting the following comparables due to non-availability of current year data without appreciating that under the revised TP guidelines, comparable having data for previous financial years can be taken as comparable even if current year data is not available;

► Dymes Pharmachem Ltd ► Shasun Pharmaceuticals Ltd ► Axa Parenterals Ltd

► Wockhardt Ltd ► Strides Pharma Science Ltd

► Natural Remedies Pvt Ltd ► JB Chemicals & Pharmaceuticals Ltd ► Ipca Laboratories Ltd. ► Alkem Laboratories Ltd. ► Cipla Ltd. ► Centaur Pharmaceuticals Pvt. Ltd. ► Shilpa Medicare Ltd. ► Natco Pharma Ltd. ► Divi'S Laboratories Ltd.

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 4 of 37 while computing the Operating Cost (“OC”) of manufacturing segment and thereby computing incorrect operating margin of the Appellant. 15. without prejudice to above, erred in not restricting the transfer pricing adjustment to the value of international transaction; 16. without prejudice to above, erred in not making suitable adjustments to account for differences in the risk profile of the Assessee vis-à-vis the comparables.

Adjustment of INR 35,67,86,587 towards selling, marketing and distribution expense incurred by the Appellant (treated as AMP expenditure)

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 5 of 37 comparables engaged in manufacturing for benchmarking AMP transaction for manufacturing segment and comparables engaged in trading for benchmarking AMP transaction for trading segment for the purpose of determining excess AMP expenditure incurred by the Appellant; 25. without prejudice to the above, erred in considering ‘Other method’ as the Most Appropriate Method (“MAM”) and identified companies engaged in advertisement/ marketing support services as comparable to determine the ALP for comparability purpose; 26. Without prejudice to the above, erred by not appreciating that even if the incurrence of excess AMP expenditure is considered as cost, the net margin of the Appellant computed based on TNMM is higher than the net margin earned by comparable companies and meaning thereby that Appellant has already been adequately remunerated/ compensated for AMP as well. 27. erred in levying a mark up of 12.98% on excessive selling, marketing and distribution expense incurred by the Appellant for alleged mark up on account of AMP expenditure thereby making a TP adjustment of INR 9,33,81,824 28. without prejudice to the above, erred in accepting the following companies as comparables though the same is not functionally comparable to the companies rendering marketing services: ► Ugam Solutions Pvt Ltd. ► Majestic Research Services & Solutions Ltd. ► Killick Agencies & Mktg. Ltd. ► Scarecrow Communications Ltd.

Short grant of TDS credit by Rs. 58,51,750

Interest under section 234B

Penalty under section 271(1)(c) of the Act

The Appellant craves, to consider each of the above grounds of appeal without prejudice to each other and craves to leave or add, alter, delete or modify all or any of the above grounds of appeal.

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 6 of 37 A) Directions of Hon’ble Dispute Resolution Panel – 1, Bangalore (DRP’) issued without quoting mandatory Document Identification Number (‘DIN’) and without digital signature and hence assessment order passed in pursuant thereto is liable to be quashed • Final assessment order dated 30 April 2021 is bad in law as DRP directions under section 144C(5) of the Act dated 23 March 2021 are issued without quoting mandatory DIN, without digital signature, without recording reasons for passing manual order and without obtaining prior written approval for issuance of manual communication from the Chief Commissioner/Director General of Income-tax, thereby making DRP directions bad in law and deemed to never have been issued as per CBDT Circular No. 19 of 2019 dated 14 August 2019. Thereby the final assessment order passed pursuant thereto is also bad in law and liable to be quashed.

2.1 The assessee further raised an additional ground vide letter dated 25.3.2024, which is as under:

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 7 of 37 AO observed that E-SOP expenses claimed are capital in nature and hence they are not liable as expenses. The assessee contended that expenses are in revenue nature as it is part of salary/employee cost which was incurred in relation to employees of the assessee and they are paid as incentive with a view to motivate and encourage the employees. Restricted Stock Units (RSU) were issued at discounted premium to the employees under the incentive plan to compensate the employees for the continuity of their services and the company had stated that it neither raised any share capital under the incentive plan nor issued shares to its employees out of its capital and hence, there is no change in fixed capital of the assessee. 7. The ld. A.R. submitted that AstraZeneca PLC, UK (“AZUK”) had introduced a Long-term Incentive Stock Computation Plan (“Incentive Plan”) to its employees to attract and retain the best people across the group. As per the Plan, Restricted Stock Units (“RSU”) are granted to eligible individual employees of the Assessee. One RSU represents one share of AZUK purchased on London Stock Exchange and such RSU vests in the hands of employees of the Assessee at the end of 3 years. At the end of 3 years, RSUs are automatically exchanged for the same number of AZUK shares and the employees have the option to either hold or sell the shares. The Assessee grants RSU on a specific date in a year and the Assessee recognizes the expenses during the vesting period on a time proportion basis. The fair market value as on the date of grant is recovered by AZUK from the Assessee whenever employees of the Assessee exercises the RSU. The Assessee considers the fair market value as on the date of exercising as value of perquisite under section 17 of the Act and collect/ deduct tax accordingly. Ld. AO had disallowed the expenses on the basis that the same are capital in nature. Further, Ld. DRP upheld the disallowance merely on the basis that the ESOP issue is pending before the Supreme Court in the case of Lemon Tree Hotels.

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 8 of 37 7.1 He submitted that ESOP’s are in the nature of staff welfare expenses. Instead of paying salary in cash, ESOPs are granted to the employees as model to remunerate the employees and to retain them. ESOP expenses are not in relation to extension of business/ acquisition/ replacement of any of an asset of a permanent character. ESOP expenses are incurred for the purpose of running of the business effectively as it helps to retain the employee talent, thereby reducing the attrition of employees and reducing the additional recruitment cost of hiring new employees, training the employees etc. 7.2 In this regard, he placed reliance on the decision of the Special Bench in the case of Biocon Ltd vs DCIT [2013] 35 taxmann.com 335 – (Jurisdictional Bangalore Tribunal) which has held that difference in the fair market value of shares and the amount at which shares are issued to employees under ESOP are employee cost. Hence, such expenditure is not in the nature of capital expenditure and the same needs to be allowed as revenue expenditure. Further, he submitted that the Special Bench has held that discount on issue of ESOP are to be allowed during the period of vesting. The relevant extract of the judgment has been provided below for our reference:

“9.2.6……….It is quite basic that the object of issuing shares can never be lost sight of. Having seen the rationale and modus operandi of the ESOP, it becomes out-and-out clear that when a company undertakes to issue shares to its employees at a discounted premium on a future date, the primary object of this exercise is not to raise share capital, but to earn profit by securing the consistent and concentrated efforts of its dedicated employees during the vesting period. Such discount is construed, both by the employees and company, as nothing but a part of package of remuneration. In other words, such discounted premium on shares is a substitute to giving direct incentive in cash for availing the services of the employees. There is no difference in two situations viz., one, when the company issues shares to public at market price and a part of the premium is given to the employees in lieu of their services and two, when the shares are directly issued to employees at a reduced rate. In both the situations, the employees stand compensated for their effort. …………………..It follows that the discount on premium under ESOP is simply one of the modes of compensating the employees for their services and is a part of their remuneration. Thus, the

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 9 of 37 contention of the revenue that by issuing shares to employees at a discounted premium, the company got a lower capital receipt, is bereft of any force. By no stretch of imagination, such discount can be described as either a short capital receipt or a capital expenditure. It is nothing but the employees cost incurred by the company.” (Emphasis supplied)

7.3 He submitted that the said judgment of the Special Bench is affirmed by Hon’ble Karnataka High Court [2021] 430 ITR 151 dated 11 November 2020. The relevant extracts of the said judgment is reproduced as under:

“9.In the instant case, the ESOPs vest in an employee over a period of four years i.e., at the rate of 25%, which means at the end of first year, the employee has a definite right to 25% of the shares and the assessee is bound to allow the vesting of 25% of the options. It is well settled in law that if a business liability has arisen in the accounting year, the same is permissible as deduction, even though, liability may have to quantify and discharged at a future date. On exercise of option by an employee, the actual amount of benefit has to be determined is only a quantification of liability, which takes place at a future date. The tribunal has therefore, rightly placed reliance on decisions of the Supreme Court in Bharat Movers supra and Rotork Controls India P. Ltd., supra and has recorded a finding that discount on issue of ESOPs is not a contingent liability but is an ascertained liability.

7.4 Further, he submitted that the Hon’ble Bangalore Tribunal in the case of Kotak Mahindra Bank Ld. (ITA No. 934/Bang/2014) dated 5 August 2021 has followed the aforesaid Karnataka High Court decision and has allowed the deduction of ESOP expenses.

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 10 of 37 7.5 He submitted that in the case of Biocon Ltd (supra) shares of Biocon itself were issued to its employees, similar to the fact of the Assessee, shares of holding company were issued to the employees of the subsidiary and Bangalore Tribunal in the case of Novo Nordisk India Pvt. Ltd., Vs. DCIT (ITA No. 1275/Bang/2011), relying on the decision of jurisdictional co-ordinate Special Bench in case of Biocon Ltd (supra), held that the difference in the fair market value of shares of the parent company and price at which shares are issued to the employees of India subsidiary is a revenue expenditure in the hands of Indian company. The relevant extract of the case law has been provided below for our reference:

“19. In the present case, there is no dispute that the liability has accrued to the assessee during the previous year. The only question to be decided is as to whether it is the expenditure of the assessee or that of the parent company. We are of the view that the observations of the CIT(A) in para 5.6 of his order that these expenses are the expenses of the foreign parent company is without any basis and lie in the realm of surmises. The foreign parent company has a policy of offering ESOP to its employees to attract the best talent as its work force. In pursuance of this policy of the foreign parent company, allowed its subsidiaries/affiliates across the world to issue its shares to the employees. As far as the assessee in the present case which is an affiliate of the foreign parent company is concerned, the shares were in fact acquired by the assessee from the parent company and there was an actual outflow of cash from the assessee to the foreign parent company. The price at which shares were issued to the employees was paid by the employee to the Assessee who in turn paid it to the parent company. The difference between the fair market value of the shares of the price at which shares were issued to the employees was met by the Assessee. This factual position is not disputed at any stage by the revenue. In such circumstances, we do not see any basis on which it could be said that the expenditure in question was a capital expenditure of the foreign parent company. As far as the assessee is concerned, the difference between the fair market value of the shares of the parent company and the price at which those shares were issued to its employees in India was paid to the employee and was an employee cost which is a revenue expenditure incurred for the purpose of the business of the company and had to be allowed as deduction. There is no reason why this expenditure should not be considered as expenditure wholly and exclusively incurred for the purpose of business of the assessee.” (Emphasis supplied)

7.6 Similarly, Bangalore Tribunal in the case of Qlik Tech India Private Limited vs DCIT (ITA No.1140/Bang/2018) has relied on the judgment of jurisdictional co-ordinate Bench ruling in case of

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 11 of 37 Novo Nordisk (supra) and Biocon (supra) and has held that expenditure claimed by the Company is not a capital expenditure and the same needs to be allowed as revenue expenditure. The relevant extract of the judgment has been provided below for our reference: “The facts in the present case and in the case of Novo Nordisk India Pvt. Ltd. Vs. DCIT (supra) are similar because in the case of Novo Nordisk India Pvt. Ltd. Vs. DCIT (supra) also, employees of its foreign affiliates of Novo Nordisk A/S, Denmark (“NNAS”) were entitled to purchase shares of NNAS at a price less than the market price. In that case also, the difference between the fair market value of the shares of the parent company on the date of issue of shares and the price at which these shares were issued by assessee to its employees was reimbursed by the assessee to its parent company and this sum reimbursed was claimed as expenditure in the profit and loss account of the assessee company as employees cost. Hence there is no difference in facts. Hence, we find no reason for not following these two binding Tribunal orders rendered in the case of Novo Nordisk India Pvt. Ltd. vs. DCIT (supra) and Biocon Limited vs. DCIT (supra). Respectfully following these two Tribunal orders, we decide the main issue in favour of the assessee.” (Emphasis supplied)

7.7 He submitted that similar finding has also been upheld by various tribunals in the following cases: • Novozymes South Asia Pvt. Ltd. [IT(TP)A No.894/Bang/2018] dated 29 June 2021 • Molecular Connections Pvt. Ltd. (ITA No. 937/Bang/2019) (Bang ITAT) • Cerner Healthcare Solutions India (P.) Ltd. [IT(TP)A No. 254/Bang/2021] dated 18 May 2022 • Flipkart India Pvt. Ltd. (2023) (200 ITD 670) (Bang Trib.) 7.8 The ld. A.R. submitted that during the course of hearing, the Ld. Department Representative had raised an argument that the ESOP amount is considered as part of APA application and thus, the same should not be allowed as deduction under Section 37(1) of the Act. In this regard, he submitted that APA application has been filed in order to determine the arm length’s margin and does not cover deduction of expenses under section 37 of the Act. APA application covers the details relating to payment and not in

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 12 of 37 relation to amounts debited to P&L A/c which needs to be claimed as deduction. Thus, considering the above judicial precedents, he requested us to kindly direct the Ld. AO to delete the disallowance of ESOP expenses made under Section 37(1) of the Act. 8. The ld. D.R. submitted that ESOP issue is covered by APA dated 16.6.2023. No further deduction to be allowed. 9. We have heard the rival submissions and perused the materials available on record. In our opinion, this is an allowable expenditure in view of the judgement of jurisdictional High Court in the case of CIT Vs. Biocon Ltd. (430 ITR 151), wherein held that ESOP was allowable as a deduction u/s 37(1) of the Act as the primary object is not to waste capital to earn profit by securing consistent service of employees. 9.1 In the present case also, assessee debited Rs.40,88,471/- towards employee stock compensation plan. This expenditure has been incurred by assessee in relation to employees of the assessee and they are paid as incentive with a view to motivate and encourage the employees. Restricted Stock Units (RSU) were issued at discounted premium to the employees under the incentive plan to compensate the employees for the continuity of their services and the company had stated that it neither raised any share capital under the incentive plan nor issued shares to its employees out of its capital and hence, there is no change in the fixed capital of the assessee. In view this, it is allowable expenditure. However, we note that when assessee claims it as an expenditure as it is relating to the employees welfare, the assessee should have deducted the TDS subject to this claim of assessee is liable u/s 37 of the Act as held by Special Bench in para 11 to 11.5 of the order and confirmed by the Hon’ble Karnataka High Court in the case of Biocon Ltd. Accordingly, the issue is remitted to the file of ld. AO to verify whether there was due deduction of TDS on the expenditure debited to the P&L account towards ESoP in the

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 13 of 37 assessment year under consideration and decide it afresh in the light of above judgement of jurisdictional High Court. Ordered accordingly. 10. Next ground Nos.17 to 28 for our consideration are with regard to AMP expenditure towards selling/marketing, distribution expenses incurred by the assessee. 11. The ld. A.R. submitted that the Ld. TPO considered the AMP expenses of INR 71,94,28,537 incurred by the Assessee during FY 2015-16 towards value added functions under the AMP activities. The Ld. TPO undertook a separate comparability analysis for companies engaged in providing marketing related functions, thereby determining the arm’s length margin of 2.42% to 16.34% with a median of 12.98% on operating cost and added the same to the entire cost of AMP expenses of INR 71,94,28,537 to arrive at an adjustment of INR 81,28,10,361. Directions of the Ld. DRP pursuant to objections filed by the Assessee 11.1 He submitted that the Ld. DRP in its directions held that from the terms of the distribution agreement, the Assessee is required to provide market, development and other support to expand the market for AEs products in India. Thus, there is an arrangement or agreement with AEs for promoting AEs products in India. The Ld. DRP also directed the Ld. TPO to compute the nominal advertisement expenditure incurred by a distributor by taking into account the AMP expenses incurred by the final set of comparables selected by the Ld. DRP for the distribution segment. Accordingly, the Ld. DRP directed the Ld. TPO to compute the excess AMP spend over and above the nominal advertisement expenditure incurred by the comparables and compute the mark- up on the same. Order Giving Effect (“OGE”) to the Ld. DRP directions

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 14 of 37 11.2 The Ld. TPO issued an OGE to the directions of the DRP by re-computing the total AMP adjustment as INR 35,67,86,587 by arriving at the non-routine AMP expenditure as INR 31,57,96,235 plus an arm’s length markup of 12.98%.

11.3 The ld. A.R. submitted that the Assessee during the year had incurred selling, marketing and distribution expenses amounting to INR 71.94 crores. Out of the above, an amount of INR 66.69 crores was pertaining to the AE segment and remaining amount of INR 5.27 crores was pertaining to the Non-AE Segment. AMP expenses incurred by the Assessee are in the nature of external speaker fees, commercial sponsorship, hospitality, advertising production fees, audio visual & digital media materials, domestic traveling, air travel and other promotional cost. AMP not an international transaction in absence of an arrangement between the Assessee and AE

11.4 He submitted that the AMP expenses incurred by the Assessee cannot be considered as a separate international transaction as there is no arrangement/ agreement between the Assessee and its AE to incur such AMP expenses on behalf of its AE. In support of the above argument that AMP expense is not an international transaction, the Assessee submitted that Section 92B of the Act defines “international transaction” as under:

“(1) For the purpose of this section and sections 92, 92C, 92D and 92E, “international transaction “ means a transaction between two or more associated enterprises, either both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services , or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or appointment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any or more of such enterprises.

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 15 of 37 (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purpose of sub-section (1), be [deemed to be an international transaction] entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise [where the enterprise or the associated enterprise or both of them are non-residents irrespective of whether such other enterprise is a non-resident or no].”

11.5 Thus, it can be concluded from the above definition of international transaction that in order for a transaction to be an international transaction it should be (i) between two or more AEs, or (ii) between the Assessee and a third party, wherein the terms of the transaction are determined in substance by the AE. Further, the Assessee also wish to draw your attention to clauses (1) (a) to (e) of the explanation to Section 92B of the Act which list the transactions which can be construed to be international transactions. While this might only be an illustrative list, it is pertinent to note that it does not list AMP as a transaction. Continuing on this note, he highlighted the amended definition of an “international transaction”. As per the Act, an international transaction under Explanation (1)(b) to section 92B is defined to include: “the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licenses franchises, customer list marketing channel, brand, or commercial rights of similar nature”

Clause (ii) of the said Explanation reads as follows-

"the expression intangible property" shall include-marketing related intangible assets, such as trademarks, trade names, brand names, logo….” 11.6 Therefore, he submitted that it can be seen and interpreted that under the amended/expanded definition of the term "international transaction" the purchase, sale, transfer, lease or use of intangible property has been classified as an international transaction. Intangible property has been defined to include

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 16 of 37 marketing related intangible assets such as trade-marks, trade names, brand names and logos etc. Accordingly. where two AEs engage in a transaction, which involves the purchase, sale, transfer lease or use of intangible property, the same shall be classified as an international transaction. Under Chapter X it is required that arm's length determination is undertaken for an "international transaction" and not a "function" of such transaction. Therefore, the Assessee submitted that every expenditure forming part of the function cannot be construed as a "transaction". 11.7 He submitted that the AMP expenses incurred by the Assessee are only for increasing the sales of the Assessee in India and thus the Assessee do not enhance the brand of the AE in India warranting any additional compensation. Such AMP expenses are routine in nature and are incurred by the Assessee in the ordinary course of business. He drew reference to the Formulation, Packaging and Distribution (“FPD”) agreement dated 20 June 2005, entered between the Assessee and the AE wherein Assessee is a Distributor. A copy of the said agreement has also been submitted as Annexure 2 with the TPO in the response to show cause notice issued by the TPO dated 11 October 2019. The relevant extracts of the said agreement are reproduced as under for our reference:

“6. Distributor’s resale obligations

6.1. The distributor shall use its best endeavors to promote and procure the resale of the products in the market in accordance with all relevant statutory requirements and in accordance with all relevant trade association or other voluntary standards.

6.2. The distributor shall at its own expense and at all times:

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 17 of 37 6.2.1. promptly fulfill all orders for the products placed by customers, insofar and to the extent that the products are made available to it by AstraZeneca;

6.2.2. maintain an appropriately resourced and suitably qualified sales force to promote and sell the products in the market;

6.2.3. provide adequate technical information and assistance regarding the products to its customers as required; and

6.2.4. comply with all legal requirements relating to the importation, storage, transportation and sale of the products.”

11.8 He submitted that from the above obligations, it implies that the Assessee is under its own obligation to promote and sale the products in the Indian market. The Assessee has not entered into any specific/separate agreement with its AE to undertake any brand promotion/marketing related activities on behalf of its related party. The agreement only refers to using the best efforts to distribute the products or promote products in a commercially reasonable manner, the terms of the agreement does not provide that Assessee has to share the AMP expenses and that even if AE was benefitted indirectly by the AMP expenditure incurred by Assessee, it could not be inferred that it had entered into an agreement for promoting AZ brand or sharing AMP expenses. The agreement only refers to using the best efforts to distribute the products or promote products in a commercially reasonable manner, the terms of the agreement does not provide that Assessee has to share the AMP expenses and that even if AE was benefitted indirectly by the AMP expenditure incurred by Assessee, it could not be inferred that it had entered into an agreement for promoting AZ brand or sharing AMP expenses. Thus, it can be concluded that the selling and marketing expenses are incurred exclusively for furtherance of Assessee’s own business. Thus, the AMP expenses incurred by the Assessee for its own business purposes does not tantamount to an international transaction.

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 18 of 37 Presumption made by Ld. TPO/DRP that there is an arrangement 11.9 First and foremost the Assessee would like to submit that the aforesaid intercompany agreement was submitted to the Ld. TPO Annexure 2 to the response to show cause notice issued by the TPO dated 11 October 2019 at Pg. No. 2511 to 2563 of Factual paperbook. The Ld. AO after considering the said agreement was unable to prove from the clauses of the agreement that there is an arrangement and merely on the basis presumption has stated that there is an arrangement between the Assessee and its AE. He submitted that the same is clearly evident from the relevant extracts of the TPO order reproduced as under for our reference: (Para 7.1.1. to 7.1.3 on page 34 to 35 of the TP order Para 8.4 on page 44 of the TP order): “7.1 Issue Of AMP: - 7.1.1 The taxpayer cannot be categorized as a simple manufacturer cum trader, as on perusal of the profit and loss account of the taxpayer it is seen that, the taxpayer has incurred huge expenditure towards marketing and selling amounting to R \ .719,428,537, The taxpayer has therefore performed some value addition functions, which a routine manufacturer cum distributor would not. 7.1.2 It is obvious that the taxpayer, being the part of entire group is not suitably compensated berth AE for performing the functions for advertisement and marketing. It is to be ompanied here that, the taxpayer has put in its efforts /finances for the promotion of brand name of the AE. No prudent businessman or concern shall put in his/ its efforts/ finance without receiving any compensation. reimbursement party. No unrelated parties would be agreeing to do this job unless, apart from of expenses, assured return is also earned by it. Here it is seen that, despite the efforts/finance put in by the taxpayer, it has not been compensated for is seen that despite the , would the taxpayer put in similar efforts / finance without being the been a third services and without any mark up?

7.1.3 It is seen that the ratio of AMP expenditure to sales incurred by the comparable company selected by the taxpayer, is much lower than the ratio of AMP expenditure to Sales, incurred by the taxpayer. The TPO is therefore of the view that, the taxpayer has incurred much higher expenditure than the industry average on AMP, which is due to the additional function of promoting the intangibles of the AE and which should have been reimbursed by the AE to the taxpayer, with a markup.”

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 19 of 37

8.4 “Conduct of the taxpayer along with the agreement clearly shows the presence of an arrangement for promotion of marketing intangibles”

As clearly spelt out in the BEPS report, the conduct of the taxpayer needs to be analysed to decipher the functions carried out by each of the enterprise in the Multinational group. The relevant portion of the BEPS report is reproduced hereunder for easy reference: "It is, therefore, particularly important in considering the commercial or financial relations between associated enterprises to examine whether the arrangements reflected in the actual conduct of the parties substantially conform to the terms of any written contract, or whether the associated enterprises' actual conduct indicates that the contractual terms have not been followed, do not reflect a complete picture of the transactions, have been incorrectly characterized or labelled by the enterprises, or are a sham. Where conduct is not fully consistent with economically significant contractual terms, further analysis is required to identify the actual transaction. Where there are material differences between contractual terms and the conduct of the associated enterprises in their relations with one another, the functions they actually perform, the assets they actually use, and the risks they actually assume, considered in the context of the contractual terms, should ultimately determine the factual substance and accurately delineate the actual transaction". (paragraph 1.46 in Section D.1.1. of chapter 1 of OECD guidelines revised through BEPS final report)”

11.10 Therefore, despite being in possession of the intercompany agreement, the Ld. TPO was not able to prove that there was an arrangement and has proceeded on a presumption that there is an arrangement between the Assessee and the AE for incurring AMP expenses on behalf of the AE. Thus, addition made on basis of such presumption is invalid and liable to be deleted.

11.11 Further the Assessee would like to submit that the aforesaid intercompany agreement was submitted to the ld. DRP vide submission dated 20 December 2019. The ld. DRP after considering the said agreement was unable to prove from the clauses of the agreement that there is an arrangement and merely on the basis presumption has stated that there is an arrangement between the Assessee and its AE. The same is clearly evident from

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 20 of 37 the relevant extracts of the TPO order reproduced as under for our reference: (Para 2.4.1 of Pg. 31 of DRP directions):

“2.4.1 Having considered the submissions, we note that the assessee has undertaken various advertisement, sales promotion, new product launches and marketing activities, in the promotion and sale of Astrazenca pharamaceutical products in India. The products promoted are patented products of the assessee AEs; and the legal owner of such intangibles is the assessee's Associated Enterprises located outside India. The assessee imports goods under the trading segment and sells them in India. The taxpayer advertises the brand of AE through various forms of promotions. It is improbable to believe that the assessee carried out the advertisement and promotion activities unilaterally without the concurrence and discussion of AE as to the marketing strategies to be adopted in India, and as to the content to be incorporated in the advertisement. The taxpayer has not denied the fact that the legal owner of such intangibles is the taxpayer's Associated Enterprise located outside India. An independent third party would not undertake such activities without adequate compensation. From the conduct of the taxpayer in engaging in various promotion and marketing activities incurring substantial AMP expenses to enhance the market share for AE's brands in India, it can be reasonably deciphered that it has an arrangement with its Associated Enterprise to promote the brands owned by such Associated Enterprise.”

11.12 Further, in Para 2.4.4. on page 33 of the DRP’s directions, the ld. DRP has referred to an agreement dated 24 March 2015 between the Assessee and its AE to arrive at a conclusion that there is an arrangement with the AE for promotion of AE’s intangibles in India. The relevant extracts reproduced as under for our reference:

“2.4.4 The perusal of the agreement dated 24.3.2015 entered between the assessee and Astrazeneca AB substantiates the existence of an agreement/arrangement with AE for promotion of AE’s intangibles in India………………….” 11.13 However, the ld. A.R. submitted that the intercompany agreement referred to by the ld. DRP is not relevant in the current scenario. Therefore, despite being in possession of the intercompany agreement, the ld. DRP was not able to prove that there was an arrangement and has proceeded on a presumption that there is an arrangement between the Assessee and the AE for

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 21 of 37 incurring AMP expenses on behalf of the AE. Thus, addition made on basis of such presumption is invalid and liable to be deleted. Thus, the Ld. TPO/ld. DRP has failed to prove that there is an arrangement between the Assessee and AE and thus, the transaction of AMP expense cannot be treated as a separate international transaction in absence of an arrangement between the Assessee and AE. In this regard, the he placed reliance on the Delhi High Court's ruling of Commissioner of Income tax Vs. Whirlpool of India Limited [ITA 610/2014, 228/2015 & CM No.5751/2015], whereby the Hon’ble Delhi High Court has held the following:

“35. It is for the above reason that the BLT has been rejected as a valid method for either determining the existence of international transaction or for the determination of ALP of such transaction. Although, under Section 92B read with Section 92F (v), an international transaction could include an arrangement, understanding or action in concert, this cannot be a matter of inference. There has to be some tangible evidence on record to show that two parties have “acted in concert”. 36. The expression "acted in concert" has been interpreted by the Supreme Court in Daiichi Sankyo Company Ltd. v. Jayaram Chigurupati 2010(6) MANU/SC/0454/2010, which arose in the context of acquisition of shares of Zenotech Laboratory Ltd. by the Ranbaxy Group. The question that was examined was whether at the relevant time the Assessee i.e., Daiichi Sankyo Company and Ranbaxy were “acting in concert” within the meaning of Regulation 20(4) (b) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

In para 44, it was observed as under: “The other limb of the concept requires two or more persons joining together with the shared common objective and purpose of substantial acquisition of shares etc. of a certain target company. There can be no "persons acting in concert" unless there is a shared common objective or purpose between two or more persons of substantial acquisition of shares etc. of the target company. For, de hors the element of the shared common objective or purpose the idea of "person acting in concert" is as meaningless as criminal conspiracy without any agreement to commit a criminal offence. The idea of "persons acting in concert" is not about a fortuitous relationship coming into existence by accident or chance. The relationship can come into being only by design, by meeting of minds between two or more persons leading to the shared common objective or

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 22 of 37 purpose of acquisition of substantial acquisition of shares etc. of the target company. It is another matter that the common objective or purpose may be in pursuance of an agreement or an understanding, formal or informal; the acquisition of shares etc. may be direct or indirect or the persons acting in concert may cooperate in actual acquisition of shares etc. or they may agree to cooperate in such acquisition. Nonetheless, the element of the shared common objective or purpose is the sine qua non for the relationship of "persons acting in concert" to come into being.” 37. The provisions under Chapter X do envisage a ‘separate entity concept’. In other words, there cannot be a presumption that in the present case since WOIL is a subsidiary of Whirlpool USA, all the activities of WOIL are in fact dictated by Whirlpool USA. Merely because Whirlpool USA has a financial interest, it cannot be presumed that AMP expense incurred by the WOIL are at the instance or on behalf of Whirlpool USA. There is merit in the contention of the Assessee that the initial onus is on the Revenue to demonstrate through some tangible material that the two parties acted in concert and further that there was an agreement to enter into an international transaction concerning AMP expenses. Absence of an international transaction involving AMP expense

… Conclusion

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 23 of 37 11.14 Further in this regard, the he placed reliance on the Bangalore Tribunal's ruling of Nike India (P.) Ltd. Vs. Deputy Commissioner of Income tax [ITA 203/Bang/2021 - AY 2016-17], whereby the Bangalore Tribunal has held the following:

“9. We have heard the rival submissions and perused the material on record. The Tribunal in assesse’s own case for assessment year 2015-2016 (supra) had held that the assessee is a full-fledged distributor of NIKE product and on examination of royalty agreement, it was held by the Tribunal for assessment year 2015-2016 that there is no clause which mandated incurring of any AMP expenses. It was held by the Tribunal that in the absence of written agreement between the assessee and its AE requiring the assessee to incur AMP expenses, the same cannot be regarded as an international transaction at all. The relevant finding of the Tribunal reads as follows:-

’13. The sum and substance of the same is that there should be existence of an agreement to incur AMP expense between the assessee and the foreign AE either expressed or there must be circumstances indicating compulsion to incur AMP expenses………As rightly contended by the assessee, this agreement cannot be construed as an arrangement for incurring AMP expenses for the following reasons.

…e. A mere acknowledgement by NEON that the Assessee incurs marketing expenses, cannot be construed to be as an arrangement between Assessee and NEON for incurring such expenses.”

Further, the agreement states that "the licensor acknowledges that licensee incurs significant marketing expenses which directly impacts licensee's net operating margin” – the same further strengthens the fact that the assessee is a full fledged distributor requiring to incur marketing related expenses to operate in a competitive market and does not in any way indicate a mandate from NEON to assessee to incur such expenses. Accordingly, we hold that no clause of the royalty agreement requires the assessee to mandatorily incur any AMP expenses in the absence of which it is very clear that no written agreement exists between the assessee and its AE requiring the assessee to incur the AMP expenses. We therefore hold that the incurring of AMP expenses cannot be regarded as an international transaction at all and therefore the impugned addition cannot be sustained and the same is directed to be deleted.”

11.15 Further, the he placed reliance on the Hon’ble Mumbai Tribunal’s ruling of India Medtronic Private Limited Vs. Deputy Commissioner of Income tax [ITA 1600/Mum/2015 - AY 2010-11], whereby the Hon’ble Mumbai Tribunal has held the following:

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 24 of 37

“3.4. We have heard the rival submissions. We find that the TPO had held that aseesee should have been compensated by its AE for the AMP expenditure incurred by it. We have gone through the agreements entered in to by the AEs with the assessee, that in the agreements there is no condition about sharing of AMP, that the agreements talks of using best efforts to market and distribute the product or promote the products in a commercially reasonable manner. In our opinion, these terms do not give any indication that the AE and the assessee had to share AMP expenses. Secondly, if the AE was benefitted indirectly by the AMP expenditure incurred by the assessee, it cannot be held that it had entered into agreement for sharing AMP expenses. We are also of the opinion that Bright Line Method should not have been applied by the TPO.” 11.16 Further he placed reliance on the following judicial precedents wherein it is held that AMP is not an international transaction:

• Maruti Suzuki India Limited (2010) (328 ITR 210) (Delhi HC) • Honda Siel Power Products Limited (2016) (283 CTR 322) (Delhi HC) • Wrigley India (P.) Ltd. (ITA No. 656/Del/2016) dated 25 September 2018 affirmed by Hon’ble Delhi High Court in (2023) (459 ITR 2) (Del HC) • Acer India Private Limited [IT(TP)A No. 502 & 2387/Bang/2017) dated 10 May 2019 • Nike India Pvt Ltd. [IT(TP)A. No. 202/Bang/2021) dated 26 July 2022 • Alcon Laboratories India Pvt Ltd [IT(TP)A No. 2889/Bang/2017 and 3376/Mum/2018] dated 16 November 2022 • Essilor India Pvt. Ltd. [IT(TP)A No. 448/Bang/2022] dated 21 October 2022 • Alcon Laboratories India Pvt. Ltd. [IT(TP)A No. 2889/Bang/2017] dated 16 November 2022 11.17 Thus, from the above, it can be concluded that there is no arrangement between the Assessee and AE for incurring AMP

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 25 of 37 expenses on behalf of the AE and thus, the AMP expenses incurred cannot be considered as an international transaction. New Product launch expense of INR 12,48,03,318 is a different transaction 11.18 The ld. A.R. submitted that the Ld. Department Representative during the course of hearing has argued that the said New Product launch expense of INR 12,48,03,318 is an AMP transaction. In this regard, he submitted that during FY 2014-15, the Assessee had entered into agreement with its AEs, as per the terms of which, the Assessee would receive reimbursement of certain costs incurred for marketing and promotion of new launch products. During FY 2015-16, INR 12,48,03,318 was incurred for marketing and promotion of new launch product. This cost was to be recovered from the Group companies after set off of any upfront fees received for the new launch products as per the Distribution and Services Agreement entered between the Assessee and third parties i.e. Sun Pharma Laboratories Ltd. and Dr. Reddy’s Laboratories Ltd. 11.19 He submitted that during the year the Assessee had received upfront fees of Rs. 5,60,00,000 from Dr. Reddy’s Laboratories Ltd. and Rs. 31,50,00,000 from Sun Pharma Laboratories Ltd. totalling to Rs. 37,10,00,000. On perusal of the above, since the upfront fees recovered was in excess as compared to cost of marketing and promotion of new launch product of Rs. 12,48,03,318, no recovery was made from the group company in respect of said marketing and promotion expenses of new launch product since the Assessee had received excess amount from the third party. The tabulation of the same is as under for your Honours reference:

Particulars Amount (Rs.) Cost of marketing and promotion of new 12,48,03,318 launch product Less: Upfront fees received from third party (37,10,00,000) Excess upfront fees (24,61,96,682)

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 26 of 37

11.20 Thus, he submitted that the said transaction is totally different and no mention about the same is also made in the Formulation and Packaging agreement and has no relation with AMP expenses. Further, said product launch expense has been treated as separate transaction by the Ld. AO/TPO and has not linked the same with AMP expenses and has also not discussed about the same. Thus, the argument raised by the Ld. Department Representative is baseless and not relevant for the issue under consideration. Thus, he prayed that in absence of an arrangement/agreement between the Assessee and AE for incurring AMP expenses, the same cannot be considered as an international transaction, thus he requested us to kindly delete the TP adjustment on account of AMP expenses. A. AMP is part of combined TNMM as per Advance Pricing Agreement (‘APA’) 11.21 Without prejudice to the above arguments, he submitted that there is no requirement to benchmark the AMP transaction separately as the Assessee has arrived at arm’s length margin for the manufacturing and trading segments by including AMP expenses in its operating cost base. He submitted that the said argument was already taken by the Assessee before the Ld. TPO as well ld. DRP. However, the Ld. TPO vide para 8.2.5 and 8.2.6 at Page 41 of TP order and Ld. DRP vide para 2.4.12 at Page No. 38 of DRP directions has rejected the said argument of the Assessee. The relevant extracts of the same are reproduced as under for our reference:

TPO order:

8.2.5 What Indian transfer pricing rules allow is aggregation of closely linked transactions, Ind emphasis being on the word "closely. ‘Closely’ implies something that is intimate, intricate and inherent to the transaction. For

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 27 of 37 example, in a trading function the purchase of finished goods and the purchase of spares can be called closely linked. But where the functions are separate, the transactions cannot be stated to be closely linked. Therefore, law permits aggregation of international transactions with a safeguard in the word "closely", so that the concept the does not get unnecessarily stretched. This further corroborates the interpretation that the intent of the law is transaction by transaction approach and set off of on transaction against the other transaction is not permissible.

There may not be a correlation between the international transactions related to the manufacturing and/or distribution activity of a taxpayer and the international transaction related to its AMP expense/marketing functions. For example, a taxpayer in India may be importing most of its finished goods from a contract manufacturer (non-AE) in China. A very small portion of the finished goods may be imported from the AE. But all the imported goods (both from AE and non-AE) may be sold in India under the AEs brand name. The Indian subsidiary will incur huge AMP expense that has no correlation with the volume of goods that it imports from the AE.

8.2.6 Similarly, in the case of a manufacturer, the Indian subsidiary may be sourcing all its raw material locally. The international transaction may only be payment of royalty and payment for technical services (which may be a lump sum agreed amount with no relation to sales). But to sell the goods locally (under the AEs brand), it may incur huge AMP expenses. Hence, it cannot be said with certainty that the transaction of manufacturing/distribution and the AMP functions are interconnected. The point being made here is that manufacturing, distribution and marketing are independent of each other, in the context of the international transactions that are associated with these functions. DRP directions”

“2.4.12 Thus, it could be seen that it has been clearly laid down that Distribution and AMP are two different international transactions, but could be aggregated for the purpose of ALP analysis provided that the external comparables also perform similar AMP functions, and if no such comparable company could be identified, then the AMP transaction has be analysed separately by adopting appropriate method. The plea that the acceptance of TNMM at entity Vavel would not warrant a separate analysis and adjustment on the AMP transaction, is liable to be rejected as there was no comparison made as to the AMP functions, while accepting the Distribution function to be at ALP. Such a plea raised before the ITAT in the above referred decisions were rejected. Therefore, the TPO's action in analysing the AMP transaction separately is justified and upheld.”

The Appellant has taken this argument before your Honours. In this 2. regards, the Appellant submits that the arm’s length margin for manufacturing and trading segments has been agreed under a combined Transactional Net

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 28 of 37 Margin Method (“TNMM”) approach in the APA agreement between the Appellant and the CBDT for the period AY 2016-17 to AY 2020-21. As per the said APA agreement, the definition of operating costs for both 3. the manufacturing and trading segments includes selling and marketing expenses. (Refer Pg. No. 3 to 8 of the APA agreement). The relevant extracts of the APA agreement enclosed herewith for your Honour’s ready reference:

Trading Segment

“(d) “operating expense in relation to trading segment” (hereinafter referred to as ‘OE2’) means all the costs incurred in the previous year by the Applicant in relation to the trading segment during the course of its normal operations, including: (i)……………………….. (ii)………………………… …………………………. (xiii) cost incurred towards marketing, advertisement and business promotion activities in relation to the trading segment. Manufacturing Segment:

(c) “operating expense in relation to manufacturing segment” (hereinafter referred to as ‘OE1’) means all the costs incurred in the previous year by the Applicant in relation to the manufacturing segment during the course of its normal operations, including: (i)……………………….. (ii)………………………… …………………………. (xiii) cost incurred towards marketing, advertisement and business promotion activities in relation to the manufacturing segment.” 11.22 Further, he submitted that the APA agreement has determined the arm’s length operating margin for the manufacturing segment at 9.70% and arm’s length operating margin for the trading segment at 6.50%. The relevant extracts of the APA agreement reproduced as under for our reference:

“6. Arm’s Length Price

6.1. The Arm’s Length price of the covered transactions shall be as follows:

(a) The covered transactions mentioned in item (a) of sub-clause 3.1above shall be considered to be at arm's length in a previous ye if the Applicant

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 29 of 37 maintains an OPM1 of not less than 9.7% manufacturing segment for the said previous year,

(b) The covered transactions mentioned in item (b) of sub-clause 3.1 above shall be considered to be at arm's length in a previous year if the Applicant maintains an OPM2 of not less than 6.5% in trading segment for the said previous year, and

11.23 Thus, he submitted that the aforesaid Arm’s length operating margin for manufacturing segment as well as trading segment as per APA has taken into consideration the AMP expenses while computing operating expense. Thus, no separate adjustment needs to be made with respect to AMP expenses. The computation of operating margin which substantiates that the AMP expenditure is already benchmarked and considered while computing operating margin as per APA for manufacturing and trading segments for AY 2016-17 is reproduced as under for our reference:

Trading Manufacturing Particulars Ref (Amount in (Amount in INR) INR) Income Sales A 51,15,30,465 3,57,70,75,051 Add: Operating Income Income from sale of distribution B - 37,10,00,000 rights Profit on sale of property, plant C 41,254 2,88,488 and equipment Scrap sale D 7,60,359 - Total Operating Revenue (OR) E = A+B+C+D 51,23,32,078 3,94,83,63,539

Expenditure Materials F 16,07,16,791 1,31,96,73,864 Depreciation G 5,11,54,076 5,19,72,368 Selling, marketing and H 2,58,34,442 64,08,47,845 distribution expenses Other operating cost I 40,40,89,598 1,49,28,26,611 Less: Net loss on foreign J (3,19,026) (22,30,910) currency transactions

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 30 of 37 Less: Provision for doubtful K (1,71,738) (12,00,948) loans and advances Less: Loss allowance as per expected credit loss model L (97,532) (6,82,028) (Provision for doubtful debts) M = Operating Cost (OC) 64,12,06,612 3,50,12,06,803 F+G+H+I+J+K+L

Operating profit (OP) N = E - M -12,88,74,534 44,71,56,736

Operating profit/Operating O = N/E -25.15% 11.33% revenue

Agreed margin as per APA 9.70% 6.50% (on operating revenue)

Revised Operating Profit 4,96,96,212 -

11.24 In this regard, the ld. A.R. placed reliance on the Hon’ble Delhi High Court’s ruling of Sony Ericsson Mobile Communications India Pvt Ltd vs. Commissioner of Income tax [374 ITR 118 (Del)], whereby the Hon’ble Delhi High Court has held the following: “101. However, once the Assessing Officer/TPO accepts and adopts TNM Method, but then chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation/segregation, it would as noticed above, lead to unusual and incongruous results as AMP expenses is the cost or expense and is not diverse. It is factored in the net profit of the interlinked transaction. This would be also in consonance with Rule 10B(1), which mandates only arriving at the net profit margin by comparing the profits and loss account of the tested party with the comparable. The TNM Method proceeds on the assumption that functions, assets and risk being broadly similar and once suitable adjustments have been made, all things get taken into account and stand reconciled when computing the net profit margin. Once the comparables pass the functional analysis test and adjustments have been made, then the profit margin as declared when matches with the comparables would result in affirmation of the transfer price as the arm’s length price. Then to make a comparison of a horizontal item without segregation would be impermissible.”

11.25 Further, the ld. A.R. placed reliance on the Hon’ble Bangalore Tribunal’s ruling of HP India Sales Private Limited Vs. The Joint Commissioner of Income tax [ITA No. 524/Bang/2017 –

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 31 of 37 AY 2012-13], whereby the Hon’ble Bangalore Tribunal has held the following:

“9. The decision of the Delhi High Court in Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT [2015] 374 ITR 118 was followed and it was held that the bright line test followed by the Revenue in making the AMP TP adjustment cannot be accepted. In the present case also, no material is brought on record by the TPO to establish the existence of an arrangement, understanding or action in concert with the AE for incurring the AMP expenses for the benefit of the AE. Merely because the AE has a financial interest, it cannot be presumed that AMP expenses incurred by the assessee are at the instance or on behalf of the associated enterprise. In the absence of any international transaction relating to AMP expenses, the impugned TP adjustment cannot be sustained. Moreover, the TPO having accepted the ALP of other international transactions at the entity level, proceeded to make a separate TP adjustment for the AMP expenses. At para 4.2 of the TPOs order, the TPO has given a finding that the net margins earned by the taxpayer from the product segment is 3.82% and that at the entity level is 7.29%. The margin earned by the taxpayer at the entity level as calculated by the TPO is 2.50%. Hence, no adverse inference drawn by the TPO in respect of the distribution segment results. Thus, the TPO has accepted the entity level margins earned by the assessee but proceeded to make TP adjustment on AMP expenses. The Hon’ble Delhi High Court in Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT [2015] 374 ITR 118 held that once the revenue accepts the entity level margins as per the most appropriate method, it would be inappropriate to treat a particular expenditure as a separate international transaction. It was held that such an exercise would lead to unusual and absurd results. Relevant observations from the above decision in this context are as under:- “101. However, once the Assessing Officer/TPO accepts and adopts TNM Method, but then chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation/segregation, it would as notice above lead to unusual and incongruous results as AMP expenses is the cost or expense and is not diverse. It is factored in the net profit of the inter-linked transaction. This would be also in consonance with Rule 10B(J)(e), which mandates only arriving at the net profit margin by comparing the profits and loss account of the tested party with the comparable. The TNM Method proceeds on the assumption that functions, assets and risk being broadly similar and once suitable adjustments have been made, all things get taken into account and stand reconciled when computing the net profit margin. Once the comparables pass the functional analysis test and adjustments have been made, then the profit margin as declared when matches with the comparables would result in affirmation of the transfer price as the arm's length price. Then to make a comparison of a horizontal item without segregation would be impermissible.”

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 32 of 37 …11. Respectfully following the above judgment of the Hon’ble Delhi High Court, we delete the AMP TP adjustment of Rs. 25,09,60,200 and the mark up thereon amounting to INR 3,93,75,655.”

11.26 Further, the ld. A.R. placed reliance on the Hon’ble Bangalore Tribunal’s ruling of Lenovo (India) Private Ltd Vs. The Deputy Commissioner of Income tax [ITA No. 2833/Bang/2017 – AY 2013-14], whereby the Hon’ble Bangalore Tribunal has held the following:

“It is submitted that this Tribunal for A.Y. 2015-16 (supra) remanded the issue on AMP back to the Ld. TPO to verify the net operating margin earned by assessee with respect to the trading segment.

The Ld.AR submitted that Hon’ble Delhi High Court in case of Sony Ericsson Mobile Communications P. Ltd. v. CIT reported in 374 ITR 118 (Del) on an identical issue has observed as under: “101. However, once the Assessing Officer/TPO accepts and adopts TNM Method, but then chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation/segregation, it would as noticed above, lead to unusual and incongruous results as AMP expenses is the cost or expense and is not diverse. It is factored in the net profit of the interlinked transaction. This would be also in consonance with Rule 10B(1), which mandates only arriving at the net profit margin by comparing the profits and loss account of the tested party with the comparable. The TNM Method proceeds on the assumption that functions, assets and risk being broadly similar and once suitable adjustments have been made, all things get taken into account and stand reconciled when computing the net profit margin. Once the comparables pass the functional analysis test and adjustments have been made, then the profit margin as declared when matches with the comparables would result in affirmation of the transfer price as the arm’s length price. Then to make a comparison of a horizontal item without segregation would be impermissible.”

(Emphasis supplied) The Hon’ble High Court also held that: “where the learned AO/TPO accepts comparables as a bundled transaction, AMP expenditure cannot be treated as a separate international transaction. The relevant extract of the ruling is as follows: “…(v) Where the Assessing Officer/TPO accepts the comparables adopted by the assessed, with or without making adjustments, as a bundled transaction, it would be illogical and improper to treat AMP

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 33 of 37 expenses as a separate international transaction, for the simple reason that if the functions performed by the tested parties and the comparables match, with or without adjustments, AMP expenses are duly accounted for. It would be incongruous to accept the comparables and determine or accept the transfer price and still segregate AMP expenses as an international transaction…”

(Emphasis supplied) It is observed that the Coordinate Bench of this Tribunal has remanded the issue to verify the net profit margin were at arm’s length. The Tribunal also observed that in the event they are at arm’s length, no separate addition needs to be made. For the year under consideration, the Ld.TPO in para 4.1 has given a categorical finding in the transfer pricing order that, the operating margin earned by the assessee in the trading segment is at arm’s length and no adverse inference is to be drawn with respect to the Arm’s length price of the Distribution segment.

Under such circumstances, we do not deem it necessary to remand this issue back to the Ld. AO/TPO.

Respectfully following the above, we uphold CPM to be MAM in computing the ALP of the trading segment. Further, based on the categorical observation by the Ld. TPO regarding the trading segment to be at arm’s length, we direct the Ld. AO/TPO to delete the adjustment proposed, in respect of the AMP expenses as it cannot be treated as international transactions in the present facts of the case.”

11.27 Further, the he placed reliance on the Hon’ble Bangalore Tribunal’s ruling of Herbalife International India Pvt. Ltd. [IT(TP) A No. 440/Bang/2022 – AY 2017-18], whereby the Hon’ble Bangalore Tribunal has held the following:

“3.23 We also find merit in the submission of the Ld. Counsel that, if the net profit margin meets the Arm's length price, then no separate addition needs to be made. Considering the fact that no adverse inference is drawn by the Ld.TPO in respect of the Manufacturing segment which means that the Ld.TPO has accepted the overall margins of the said segment and respectfully following decision of the Hon'ble Delhi Court in the case of Sony Ericsson (supra), we direct the Ld.TPO to delete the adjustment made towards the AMP.”

11.28 Further, the ld. A.R. submitted that in para 2.4.11 of the DRP directions, the Ld. DRP has relied on the decision of Hon’ble Delhi Tribunal in case of Toshiba India Pvt. Ltd. (ITA No. 1357/Del/2017)

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 34 of 37 and BMW India Pvt. Ltd. (ITA No. 1406/Del/2015) for rejecting the combined TNMM approach followed by the Assessee. However, it is pertinent to note that in the said decision, the Hon’ble Tribunal has relied on the principles laid down by Hon’ble High court in case of Sony Ericsson (supra) which is in favour of the Assessee. Thus, the aforesaid decisions relied by the Assessee does not support the contention raised by the Department for combined TNMM. Thus, considering the aforesaid that AMP expenses is already benchmarked and considered while computing operating margin as per APA for manufacturing and trading segment, the ld. A.R. requested that no further adjustment is warranted with respect to the AMP expenses. The ld. D.R. submitted as follows: 12. • AMP expenses no details • No details given in the TP study of the "functional analysis" of assessee and AE as to the various functions performed by them in regard to the distribution and sale of AZ products. • No details furnished with regard to the global policy of the group regarding advertisement, market development, brand development and other marketing expenses. • Incurred substantial marketing expenses of Rs. 71.94 crores towards advertisement and marketing. • Incurred marketing expenses of Rs. 12.48 crores for New Launch marketing expenditure. o AE & Non-AE segment details not furnished. o Distribution & AMP Functions are 2 separate international Transactions • Distribution & AB-AP Functions are 2 separate international Transactions - Are inter-twinned - to be aggregated –

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 35 of 37 • She placed reliance on following precedents:- • M/S Toshiba India Pvt. Ltd. vs DCIT (ITA No.1357/De1/2017/2012-13 dated 01.09.2017. • BMW India Pvt. Ltd. (ITA No.1406/De1/2015/ A.Y.2010-11 dated 10.11.2017.

 AMP Expenses specifically excluded by APA dated 16.6.2023:

 As per Para 14 of APA, AMP expenses is specifically excluded. • This goes to prove the “Deliberate attempt” of the parent company in burdening the Indian Entity with expenses and not reimbursing the expenses for development of its brand.  Assessee of TNMM at Entity Level to be rejected  Matter to be remanded for non-furnishing complete details

“The plea that the acceptance of TNMM at entity level would not warrant a separate analysis and adjustment on the AMP transaction is liable to be rejected as there was no comparison made as to the AMP functions. while accepting the Distribution function to be at ALP. Such a plea raised before the ITAT in the above referred decisions were rejected. " (Emphasis supplied)

12.2 The ld. D.R. further submitted that the AMP expenditure is not covered under the Advance Pricing Agreement (APA) entered newly by assessee with CBDT and therefore, AMP adjustment made by the TPO being separate international transaction shall sustain.

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 36 of 37 “17. We have heard the rival contentions in the light of the evidences available on records, arguments put forth as well as judicial citations relied upon. Upon careful consideration of the impugned APA signed between the assessee and the CBDT, we find that the said APA is valid for AYs 2014-15 to 2018-19 and hence all the four pending appeals would fall under the purview of said APA. It is noted that Para- 3, 4, 5, & 6 clearly lay down the scheme of working which has to be followed by the assessee while reporting its business affairs. It is also be noted that the assessee has reported its financial transactions in complete fulfilment of the stipulations postulated in the said APA. Accordingly, there was no case for any adjustment to be made by the TPO and for the DRP to reiterate TPO’s actions. The addition made by the AO is thus in conflict with the agreements done in the APA and consequently deserves to be quashed and set aside. Accordingly, the addition made by the AO vide his order dated 05.10.2018. In compliance to directions of DRP dated 27.09.2018 is deleted and the ground of appeal no.2 raised by the assessee is allowed.”

13.1 In view of the above latest order of the Tribunal on the impugned issue, in our opinion, it is appropriate to remit the issue to the file of ld. AO/TPO as the benefit of this order was not available to the AO/TPO at the time of deciding the issue by them. Accordingly, the issue in dispute is remitted to the file of ld. AO/TPO to be decided in the light of above order of the Tribunal cited (supra).

Sd/- Sd/- (Soundararajan K.) (Chandra Poojari) Judicial Member Accountant Member

Bangalore, Dated 25th June, 2024. VG/SPS

IT(TP)A No.284/Bang/2021 M/s. AstraZeneca Pharma India Limited, Bangalore Page 37 of 37

Copy to:

Asst. Registrar, ITAT, Bangalore.