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Income Tax Appellate Tribunal, DELHI BENCH ‘I-2’ : NEW DELHI
Before: SHRI S.V.MEHROTRA & SHRI A.T. VARKEY
PER A.T. VARKEY, JUDICIAL MEMBER :
This appeal, at the instance of the assessee, is directed against the assessment order dated 12.01.2015 passed u/s 143(3) r.w.s 144C of the I.T. Act.
2 The appellant has raised the following grounds of appeal: “1 That the assessing officer erred on facts and in law in completing assessment under section 144C/143(3) of the Income-tax Act, 1961(‘the Act’) at an income of Rs. 23,06,18,730 as against the income of Rs. 16,75,13,196 returned by the appellant.
2. That the assessing officer erred on facts and in law in completing assessment under section 144C/143(3) of the Income-tax Act, 1961(‘the Act’) at an income of Rs. 23,06,18,730 as against the income of Rs. 16,75,13,196 returned by the appellant. 2.1 That the assessing officer/ DRP erred on facts and in law in not appreciating that the free samples were neither ‘freebies’ not ‘gifts’ and were distributed by the appellant to doctors/medical practitioners on the specific written request of the latter. 2.2 That the assessing officer/DRP erred on facts and in law in not appreciating that no personal benefit has been conferred by the appellant to doctors/ medical practitioners in as much as the above free samples were to be used by the patients only. 2.3 That the assessing officer/DRP erred on facts and in law in not following the order of DRP in appellant’s own case for assessment year 2009-10 whereby similar disallowance made on account of free samples distributed to doctors/ medical practitioners were deleted.
3. That the assessing officer erred on facts and in law in making an addition of Rs. 88,85,591 on account of transfer pricing adjustment in respect of the ‘international transaction’ of business support services. On the basis of the order passed under section 92CA(3) of the Act by the TPO.
3.1 That the DRP/TPO erred on facts and in law in excluding the following companies from the set of comparables companies allegedly holding that these companies were not functionally comparable to the appellant: (i) Educational Consultant India Limited (‘ECIL’) (ii) ITDC Limited (‘ITDC’) (iii) In House Production Limited (‘IHPL’) (iv) Indus Technical & Financial Consultants Limited (‘ITFCL’)
3.2 That the assessing officer/DRP erred facts and in law in rejecting the following companies without appreciating that the relevant business segments of these companies were functionally comparables to the international transactions of business support services undertaken by the appellant:
Sr. Name of the company Comparable segment No. 1. Educational Consultant India Technical assistance and Limited human resource development 2. ITDC Limited Event management segment 3. In House Production Limited Healthcare division 3.3 That the assessing officer/DRP erred on facts and in law in rejecting the above companies from the set of comparable companies not appreciating that the relevant business segments of these companies were considered by the DRP for undertaking the benchmarking analysis in the preceding year. 3.4 The DRP/TPO erred on facts and in law in considering following companies as comparable not appreciating that these companies failed test of the comparability as provided in Rule 10B (2) of the Income Tax Rules: (i) Aptico Limited (ii) Global Procurement Limited (iii) HCCA Business Services Private Limited (iv) TSR Darashaw Limited
3.5 That the assessing officer/DRP erred on facts and in law in not considering the following comparable companies placed on record by the appellant during the course of proceedings before the DRP: (i) Microgenetics Systems Limited(“MGS”) (ii) CG-VAK Software & Exports Limited (“CG-VAK”) (iii) R Systems International 3.6 That the DRP/TPO erred on facts in law in not allowing comparability adjustment ton account of difference in working capital employed by the appellant vis-a- vis comparable companies considered by TPO, allegedly holding that the onus in this regard was on the appellant to demonstrate the reasons and calculation of working capital adjustment, which was not discharged. 3.7 That the DRP/TPO erred on facts and in law in not being consistent in denying on the claim of working capital adjustment by the appellant, when the same has been allowed in case of the other assessee. 3.8 That the DRP/TPO erred on facts and in law in not allowing risk adjustment to establish comparability on account of the appellant being a low-risk bearing captive service provider as opposed to the comparable companies. 3.9 That on the facts and in the circumstances of the case and in law, the assessing officer/TPO erred in rejecting the contention of the appellant regarding risk adjustment, allegedly holding that in absence of robust and reliable data, both for the appellant and for the comparables, risk adjustment cannot be considered for enhancing comparability 4 That the assessing officer erred on facts and in law in levying interest under Section 234B and Section 234C of the Act.”
The assessee is a wholly owned subsidiary of Eli Lilly Netherlands B.V. and engaged in the business of trading of formulations in the domestic market which is purchased from its AE’s and third parties. It is also into marketing and selling of life saving drugs formulations that find usage in the treatment of several disease segments ranging from Oncology, CNS, Cardiovascular, Cancer, Infectious diseases, Endocrine, etc. The assessee filed its return of income on 13.10.2010 declaring an income of Rs. 16,75,13,196/- which came to be assessed at an income of Rs. 23,06,18,730/- in an order dated 12.1.2015 u/s 144C/143(3) of the Act and hence this appeal by appellant company 4. Ground No. 1 is general and is therefore rejected.
Ground 2 to 2.3 relates to disallowance under section 37(1) of the Act of Rs. 5,42,19,943/- being expenditure incurred towards distribution of free samples to doctors/medical practitioners, holding the same to be incurred in contravention of the guidelines issued by Indian Medical Council read with circular 05/2012 issued by the CBDT.
6. The relevant facts, as succinctly stated are that assessee had incurred an amount of Rs. 5,42,19,943/- towards distribution of free samples to doctors/medical practitioners. The Assessing Officer/DRP disallowed the whole of the above expenditure in view of the Circular No. 5/2012 [F. No. 225/142/2012-ITA-II] dated 01.08.2013 issued by the Central Board of Direct Taxes (‘CBDT’) read with Indian Medical Council (Professional
Conduct, Etiquette and Ethics) Regulations, 2002 observing that above free samples of medicines distributed by the appellant to doctors/ medical practitioners and others constituted gifts or freebies, which are not allowable in terms of Explanation to section 37(1) of the Act. The relevant portion of the order reads as under: “A bare reading of this extract clarifies that a) receiving of any gift by medical practitioner from a pharmaceutical company is violative of the regulations, whether that gift is for direct personal benefit of the doctor or not. b) the term gift has not defined in the IMC regulations, but in the given circumstances, and in view of the unholy profit- sharing nexus between medical practitioners and pharmaceutical industry prevalent today, which prompted IMC to amend its regulations in 2009, and exhaustive definition of the term ‘gift’ has to be applied, ‘Gift’ would, inter-alia, include free drug sample also. The assessee company has provided free sample to doctors/hospitals etc, which would result in influencing the discretion of such doctors/hospitals in favour of assessee’s medicines while recommending medicine to a patient. Thus, free sample are distributed to doctors so that they prescribe more and more of the assessee’s products in preference to other manufacturers products. This amounts to soliciting endorsement of the assessee’s products by the doctor. As per clause (h) of Regulation 6.8 of IMC Regulations, 2002, which has been reproduced above, endorsement of any during or product of the industry is also prohibited. Thus, distribution of free samples to doctors to get endorsement from them in return is also violative of IMC regulations and consequently, violative of section 37(1) of the I.T. Act. Without prejudice to the above, the assessee’ contention that distribution of free sample does not benefit doctors in any manner is also not acceptable. Free samples received by the doctor are given by the doctor to his/her patients, which helps in advancing his/her medical practice by generating goodwill. Lure of getting free medicine attracts more patents towards the doctor, thus benefiting his medical practice. Based on the observations above, expenses incurred towards free sample to doctors or medical practitioners are treated as disallowable. Disallowance of Rs. 5,42,19,943/- being expenses towards free sample to doctors is hereby made.”
Being aggrieved, the assessee has come up in appeal before us and brought to our notice the Standard Operating Procedure (‘SOP’) adopted by the assessee to distribute samples to doctors/medical practitioners. It was submitted that the sample so distributed to the doctors/medical practitioners by the appellant are in pursuance of the specific request being made by the latter and such samples are not distributed voluntarily/ suo-moto to any doctor/ medical practitioner in order to influence the latter’s discretion of prescribing its medicines to the patients. A reference was made to Regulation 6.8 of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, (as amended in 2009), which reads as under: “6.8.1 in dealing with pharmaceutical and allied health sector industry a medical practitioner shall follow and adhere to the stipulations given below: a) Gifts: A medical practitioner shall not receive any gift from any pharmaceutical or allied health care industry and their sales people or representatives.
Travel Facilities: A medical practitioner shall not accept any travel facility inside the country or outside including rail, air, ship, cruise tickets, paid vacations, etc. from any pharmaceutical or allied health care industry or their representatives for self and family members for vacation or for attending conferences, seminars, workshops, CME programme etc, as a delegate. c) Hospitality: A medical practitioner shall not accept individually any hospitality like hotel accommodation for self and family members under any pretext. d) Cash or Monetary Grants: A medical practitioner shall not receive any cash or monetary grants from any pharmaceutical and allied healthcare industry for individual purpose in individual capacity under any pretext. Funding from medical research study etc. can only be received through approved institutions by modalities laid down by law/rules/guidelines adopted by such approved institutions in a transparent manner. It shall always be fully disclosed. e) Medical Research: A medical practitioner may carry out, participate in work in research projects funded by pharmaceutical and allied healthcare industries. A medical practitioner is obliged to know that the fulfilment of the following items (i) to (vii) will be imperative for undertaking any research assignment/project funded by industry for being proper and ethical. Thus, in accepting such a position a medical practitioner shall:
(i) Ensure that the particular research proposal(s) has the due permission from the competent concerned authorities.
(ii) Ensure that such a research project(s) has the clearance of national/state/institutional ethics committee/bodies.
(iii)Ensure that it fulfills all the legal requirements prescribed for medical research;
(iv) Ensure that the source and amount of funding is publically disclosed at the beginning itself; (v) Ensure that proper care and facilities are provided to human volunteers, if they are necessary for the research project(s).
(vi) Ensure that undue animal experimentations are not done and when these are necessary they are done in a scientific and humane way; (vii) Ensure that while accepting such an assignment a medical practitioner shall have the freedom to publish the results of the research in the greater interest of the society be inserting such a clause in the MOU or any other document/agreement for any such assignment. f) Maintaining Professional Autonomy: In dealing with pharmaceutical and allied healthcare industry a medical practitioner shall always ensure that there shall never by any compromise either with his/her own professional autonomy and/or with the autonomy and freedom of the medical institution. g) Affiliation: A medical practitioner may work for pharmaceutical and allied healthcare industries in advisory capacities, as consultants, as researchers, as treating doctors or in any other professional capacity. In doing so, a medical practitioner shall always:
(i) Ensure that his professional integrity and freedom are maintained; (ii) Ensure that patients interest are not compromised in anyway; (iii) Ensure that such affiliations are within the law; (iv) Ensure that such affiliations/employments are fully transparent and disclosed.
Endorsement: A medical practitioner shall not endorse any drug or product of the industry publically. Any study conducted on the efficacy or otherwise of such products shall be presented to and/or through appropriate scientific bodies or published in appropriate scientific journals in a proper way.”
On the basis of the aforesaid regulations, it was contended that doctors/medical practitioners are prohibited from receiving, inter-alia, any gift or cash or monetary grants or travel facility from any pharmaceutical or any allied healthcare industry. It was submitted that as per Medical Council guidelines only those freebies which confer personal benefit to the medical practitioner directly could only be considered to be in violation of the Medical Council’s guidelines. It was submitted that in the present case, samples are distributed by the assessee only on the specific written requests of the doctors/medical practitioners for their patients, therefore, the above distribution does not constitute a gift. The assessee also made reference to Circular No. 5/3/2009-PI-II issued by Ministry of Chemicals & Fertilizers, Department of Pharmaceuticals, dated 19.03.2012, in relation to Uniform Code of Pharmaceutical Marketing Ethics (“UCPMP”) wherein also the distribution of free samples to a person qualified to prescribe such product subject to certain conditions is permitted. A reference was drawn to the following extract from the aforesaid code: “5. Samples
5.1 Free samples of drugs shall not be supplied to any person who is not qualified to prescribe such product.
5.2 Where samples of products are distributed by a medical representative, the sample must be handed directly to a person qualified to prescribe such product or to a person authorized to receive the sample on their behalf.
5.3 The following conditions shall be observed in the provision of samples to a person qualified to prescribe such product:
(i) Such samples are provided on an exceptional basis only (see (ii) to (vii) below) and for the purpose of acquiring experience in dealing with such a product; (ii) Such sample packs shall be limited to prescribed dosages for three patients for required course of treatment; (iii) Any supply of such samples must be in response to a signed and dated request from the recipient; (iv) An adequate system of control and accountability must be maintained in respect of the supply of such samples; (v) Each sample pack shall not be larger than the smallest pack present in the market; (vi) Each sample shall be marked "free medical sample- not for sale" or bear another legend of analogous meaning; (vii) Each sample shall be accompanied by a copy of the most up-to- date version of the Product information (As required in Drug and Cosmetic Act. 1940) relating to that product.
5.4 A pharmaceutical company shall not supply a sample of a drug which is an antidepressant, hypnotic, sedative or tranquillizer.
5.5 The companies will maintain details, such as product name, doctor name, Quantity of samples given, Date of supply of free samples distributed to Healthcare practitioners etc.
Gifts 6.1 No gifts, pecuniary advantages or benefits in kind may be supplied, offered or promised to persons qualified to prescribe or supply drugs, by a pharmaceutical company or any of its agents i.e. distributors, wholesalers, retailers etc. 6.2 Gifts for the personal benefit of healthcare professionals and family members (both immediate and extended) (such as tickets to entertainment events) also are not be offered or provided.”
Further, reference was also made to the provisions of Drugs and Cosmetics Act, 1945 wherein the distribution of free samples had been held to be permissible, i.e. not against the public policy, subject to certain conditions. The relevant extracts of such regulations has relied upon as below: “65 (18): No drug intended for distribution to the medical profession as free sample which bears a label on the container as specified in clause (viii) of sub-rule (1) of rule 96, and no drug meant for consumption by the Employees’ State Insurance Corporation, the Central Government Health Scheme, the Government Medical Stores Depots, the Armed Forces Medical Stores or other Government institutions, which bears a distinguishing mark or any inscription on the drug or on the label affixed to the container thereof indicating this purpose shall be sold or stocked by the licensee on his premises.”
On the basis of above, it was submitted that assessee had, as per the terms of the SOP(supra), provided free samples only on the specific written requests of doctors/medical practitioners. In other words, there is no voluntary act on behalf of the assessee in distributing such samples to the doctors/medical practitioners.
Moreover, such samples are used by the patients of the doctors and not by the doctor himself. It was submitted that such samples could not, in any manner, be said to be covered within the ambit of the term ‘gift’, much less conferring any benefit to such doctors/medical practitioners.
Further AR contended that similar disallowance of expenses on sample distribution was made while completing the assessment for the assessment year 2009-10 as well. It was submitted that assessee had challenged the said order before DRP and the DRP vide order dated 05.09.2013, inter alia, deleted the said disallowance. It was thus prayed that issue relating to allowance of expenses on sample distribution is squarely covered in favour of appellant by the order of DRP for the assessment year 2009-10 and therefore disallowance made may be deleted.
The ld. DR supported the action of the authorities below.
Having considered the rival submissions we find that in the immediately preceding assessment year DRP by an order dated 5.9.2013 had deleted the identical disallowance by observing as under:
“6.11.3 The Panel has carefully considered the submissions made by the assessee and also gone through the relevant Act/Rules/ Guidelines. For understanding the intent of the government on this issue, it would be relevant to refer to the UCPMP and reproduce the relevant provisions.
This is a voluntary code of marketing practices for Indian Pharmaceutical Industry for the present and its implementation will be reviewed after a period of implemented effectively by the Pharma Association/companies, the Government would consider making it a statutory code.
1…… 2…… 3…… 4……. 5 Samples 5.1 Free sample of drugs shall not be supplied to any person who is not qualified to prescribe such product.
5.2 Where sample of products re distributed by a medical representative, the sample must be handed directly to a person qualified to prescribe such product or to a person authorized to receive the sample on their behalf 5.3 The following conditions shall be observed in the provisions of samples to a person qualified to prescribe such product. i) Such samples are provided on an exceptional basis only (see (ii) to (vii) below) and for the purpose of acquiring experience in dealing with such a product ii) Such sample packs shall be limited to prescribed dosages for three patients for required course of treatment iii) Any supply of such sample must be in response to a signed and dated request for the recipient iv) An adequate system of control and accountability must be maintained in respect of the supply of such samples v) Each sample pack shall not be larger than the smallest pack present in the market
Each sample shall be marked “free medical sample-not for sale” or bear another legend of analogous meaning vii) Each sample shall be accompanied by a copy of the most up to date version of the product information (As required in Drug and Cosmetic Act; 1940) relating to that product 6 Gifts 6.1 No gifts, pecuniary advantages or benefits. In kind may be supplied offered or supplied drugs by a pharmaceutical company or any of its agents i.e. distributors, wholesalers, retailers etc.
6.2 Gifts for the personal benefit of healthcare professionals and family members (both immediately and extended) (such as tickets to entertainment events) also are not be offered or provided 7 Relationship with Healthcare professionals 7.1 Travel facilities…….
7.2 Hospitality…….
7.3 Cash or monetary grants…… Where there is any item missing, the code of MCI as per “Indian Medical Council (professional conduct, etiquette and ethics) Regulation, 2002 as amended time to time will prevail”
6.11.4 Thus it is evident from the above that a clear distinction has been made between the free samples, gifts, travel facilities, hospitality and cash or monetary grants. It would accordingly be incorrect to put samples in the definition of gifts being separately categorized in Para 5 & 6 of the UCPMP respectively. It is noticed from the CBDT Circular No. 5/2012 that it refers the IMC Regulations 2002 which imposed a provision on the medical practitioner for taking any gift, travel facility, hospitality, cash and medical grant from the pharma sector. The Government of India has clearly demarcated the operation nature of each term in the UCPMP, which has been discussed above and therefore, it cannot be said that the term ‘Gift’ covers free samples also.
6.11.5 Moreover a medical practitioner is bound by the IMC Regulations 2002. Para 7.8 of the said regulations read as under:
7.8 A registered medical practitioner shall not contravene the provisions of the Drugs and Cosmetics Act and regulations made there under. Accordingly 1 Prescribing steroids/psychotropic drugs when there is no absolute medical indications; 2 Selling schedule “H” and “L” drugs and poisions to the public except to his patient”
In contravention of the above provisions shall constitute gross professional misconduct on the part of the physician.”
6.11.6 It is noticed from the above that the medical practitioner is to adhere to the provisions of the Drugs and Cosmetics Act and regulations made there under. The relevant regulations 65(18) applicable to the license/distributor and regulation 95 regards as under:
65(18) No drug intended for distribution to the medical profession as free sample which bears a label on the container as specified in clause (viii) of sub-rule () of rule 96 and no drug meant for consumption by the Employees State Insurance Corporation. The Central Government Health Scheme, the Government Medical Stores Depots, the Armed Forces Medical Stores or other Government institutions, which bears a distinguishing mark or any inscription on the drug or on the label affixed to the container thereof indicating this purpose shall be sold or stocked by the licensee on his premises
Prohibition of sale or distribution unless labeled-subject to the other provisions of these Rules, no person shall sell or distribute any drug (including a patent or proprietary) unless it is labeled in accordance with these Rules.” Thus, it becomes evident that even the Drugs and Cosmetics Act and regulations made there under do not prohibit the licensee or a medical practitioner to distribute the free samples, albeit following prescribed conditions. On this account also, the Panel observes that the free samples cannot be said to have been covered by a wider definition of ‘Gift’. 6.11.7 Moreover, as held by the Hon’ble Supreme Court in the case of Eskayef Pharmaceuticals (245 ITR 116), “the object of distribution of the samples of the drugs to the doctors is to make them aware that such drugs are available in the market in relation to the cure of a particular affliction and, therefore, to persuade them to prescribe the same in appropriate cases and this is tantamount to publicity and sales promotion.” Accordingly, such expenditure cannot be said to be disallowable u/s 37(1) of the Income-tax Act in the hands of the Pharma companies distributing such free samples to doctors. 6.11.8 In the light of the details discussion made above, the Panel holds that the free samples are not covered by the IMC regulations of 2002 (as amended in 2009) read with CBDT circular no. 5/2012, UCPMP and the Drugs and Cosmetic Act and regulations made there under. Accordingly the O is directed to delete the proposed addition on this account. Accordingly the AO is directed to delete the proposed addition on this account.”(Emphasis supplied)”
The above order has acquired finality and no appeal there from has been preferred by the revenue. In light of the above and in accordance with principle of consistency the disallowance is held to be legally untenable. In support of the above conclusion
Apex Court in the case of CIT vs. Excel Industries 358 ITR 295 wherein it has been held as under:
“29. In Radhasoami Satsang Saomi Bagh v. Commissioner of Income Tax, [1992] 193 ITR 321 (SC) this Court did not think it appropriate to allow the reconsideration of an issue for a subsequent assessment year if the same "fundamental aspect" permeates in different assessment years. In arriving at this conclusion, this Court referred to an interesting passage from Hoystead v. Commissioner of Taxation, 1926 AC 155 (PC) wherein it was said:
Parties are not permitted to begin fresh litigation because of new views they may entertain of the law of the case, or new versions which they present as to what should be a proper apprehension by the court of the legal result either of the construction of the documents or the weight of certain circumstances. If this were permitted, litigation would have no end, except when legal ingenuity is exhausted. It is a principle of law that this cannot be permitted and there is abundant authority reiterating that principle. Thirdly, the same principle, namely, that of setting to rest rights of litigants, applies to the case where a point, fundamental to the decision, taken or assumed by the plaintiff and traversable by the defendant, has not been traversed. In that case also a defendant is bound by the judgment, although it may be true enough that subsequent light or ingenuity might suggest some traverse which had not been taken.
16. For the aforesaid reasons stated above the disallowance made are deleted and grounds raised are allowed.
17. Ground No. 3 to 3.9 relates to Transfer Pricing Adjustment of Rs. 88,85,591/- on account of provision of business support services.
18. That during the relevant assessment year, the assessee had undertaken the following international transactions:
Sr. Types of International Transaction Method Total Value No. selected of Transaction 1 Purchase of Formulations TNMM 150,21,21,570 2 Co-ordination of Clinical Trials in TNMM 19,87,41,111 India 3 Provision of Business Support TNMM 7,57,78,032 Services 4 Payment of interest on external CUP 35,93,979 commercial borrowings 5 Write back of liabilities due to - 1,28,52,359 AEs 6 Cost reimbursements to AE’s - 33,73,457
From the above, it is noticed that assessee received an amount of Rs. 7,57,78,032/- for business support services in the instant year.. The assessee sought to justify the consideration received for the international transactions entered into with the AEs to be at ALP. The assessee submitted a Transfer Pricing Report adopting operating profits to the total cost as its profit level indicator (hereafter ‘PLI’) for the transfer pricing study. The assessee applied the transactional net margin method (hereafter
'TNMM'), which was considered to be the most appropriate method for the purposes of benchmarking the international transactions. The assessee's operating profit margin (i.e. operating profit/total cost) was computed at 9.26% and the assessee claimed that the same was comparable with other companies rendering business support services. For the purposes of the transfer pricing study, the assessee used multiple year data and chose 11 companies as comparable on the basis of the search conducted in the public data bases Prowess and Capital line plus and computed the weighted average mean as the result of the benchmarking analysis as under:
Sr. Name of the Company Weighted average No. OP/TC (%) 1 Access India Advisor Limited 34.77% 2 Asian Business Exhibition & 18.10% Conferences Ltd. 3 Educational Consultant Ind Limited 4.37% (Segment) (Technical assistance & HRD) 4 ICRA Management Consulting Services 0.06% Limited 5 IDC (India) Limited 12.30% 6 In House Production Limited (Segment) 1.51% (Healthcare division) 7 ITDC Limited 5.31% 8 Ma Foi Global Services -0.54% 9 Ma Foi Management Consultants 3.61% Limited 10 Overseas Manpower Corpn. Limited 3.23% 11 Times Innovative Media Limited -2.21% Average 7.23%
It was submitted that since arithmetic average of the operating profit margin of the said comparables was computed at 7.23% and the price charged in its international transactions is more than the said arithmetical mean price, the price charged in the international transactions has been treated as at arm’s length.
The Assessing Officer referred the matter to the TPO. The TPO, by an order dated 23rd January, 2014, under section 92CA(3) of the Act, computed the TP adjustment at Rs. 88,85,591/- (Rupees Eighty Eight Lacs Eighty Five Thousand Five Hundred and Ninety One). The TPO accepted the method adopted by the assessee (i.e. TNMM), but rejected the benchmarking report after having been found the defects in the TP analysis carried on by the taxpayer and holding that the data used in computation of the arms length price is not reliable and correct. The TPO also rejected the assessee's claim for any adjustment on account of working capital provided to the assessee and/or risks borne by the AE. 22. Further, TPO applied the following filters for selection of comparable companies in order to benchmark the international transaction of provision of business support services: i) Companies whose data is not available for FY 2009-10 are excluded ii) Companies whose Market/Business Support Service income < Rs. 1 Cr. are excluded
Companies whose revenue from Market/Business Support Services is less than 75% of total operating revenues are excluded iv) Companies having more than 25% related party transactions of income are excluded v) Companies having different financial year ending (i.e. not March 31, 2010) or data of the company does not fall within 12 month period i.e. 01.04.2009 to 31.03.2010, are rejected vi) Reject companies that have employee cost less than 25% of total cost. vii) Companies that are having peculiar economic circumstances are excluded. viii) Companies that are functionally different from the taxpayer are excluded.
During the course of proceedings, the assessee submitted updated margin of comparable companies identified in the transfer pricing document with current year profits available for 9 companies. The TPO, applied the aforesaid criteria of acceptance/ rejection and accordingly, rejected/accepted following companies from the set of companies submitted by the assessee: Sr. Name of the Company Remarks of the TPO No. 1 Cyber Media India Online Limited This is a suitable formerly IDC (India) Limited comparable 2 Indus Technical & Financial Fails turnover filter Consultants Ltd. applied by the TPO 3 Educational Consultant Ind Functionally not Limited (Segment) comparable (Technical assistance & HRD) 4 HT Music & Entertainment Co. Functionally not Ltd. comparable 5 Ma Foi Global Search Services Different year ending Ltd. and it also fails positive networth filter 6 ICRA Management Consulting Functionally not Services Limited comparable 7 ITDC Limited (Segment) Functionally not comparable 8 In House Production Limited Functionally not (Segment) comparable (Healthcare division) 9 Overseas Manpower Corpn. Functionally not Limited comparable
Also, the TPO brought following companies in the final set of comparable companies which were rejected by the assessee in its transfer pricing study on account of functional dissimilarity:
Sr. Name of the Company OP/TC (%) No. 1 Aptico Limited 9.91% 2 Global Procurement Consultants 37.19% Limited 3 HCCA Business Services Pvt. Ltd. 20.05% 4 Quadrant communications Limited 13.11% 5 TSR Darashaw Limited 41.15% 6 Cameo Corporate Services Limited 8.26%
In pursuance thereof, the final set of 8 comparable companies considered by the TPO in the impugned order, having an average operating profits of 22.08% is as under:
Sr. Name of the Company OP/TC (%) No. (without Forex) 1 Cyber Media India Online Limited 14.85% formerly IDC (India) Limited 2 Aptico Limited 40.09% 3 Global Procurement Consultants 37.19% Limited 4 HCCA Business Services Pvt. Ltd. 20.05% 5 Quadrant communications Limited 13.11% 6 TSR Darashaw Limited 41.15% 7 Cameo Corporate Services Limited 8.26% 8 ICRA Management Consulting Services 1.94% Limited Arithmetic Mean 22.08%
Accordingly, the TPO computed an adjustment of Rs.88,85,591/- to the total income of the assessee on account of difference in arm’s length price of provision of business support services by the assessee to its associated enterprises, as under:
Operational Cost for Business Support 6,93,50,936 Service Segment Arm’s Length Price at a margin of 122.08% 8,46,63,623 Price received 7,57,78,032 Adjustment 88,85,591
Upon receiving the Draft Assessment Order forwarded by the Assessing Officer to assessee on 31.03.2014 under section 143(3) of the Act read with section 144C(1) of the Act, the assessee filed its objections to the same before the Dispute Resolution (hereafter ‘DRP’) against the adjustment proposed by the Assessing Officer in its draft order. The DRP vide its order dated 16.12.2014, rejected the objections raised by the assessee in its order and confirmed the above adjustment and, following which addition of Rs. 88,85,591 was made in the final order dated 12.1.2015 u/s 143(3)/144C of the Act 28. The learned counsel for the assessee during the course of hearing that once M/s Educational Consultant India Ltd., M/s ITDC Ltd. and M/s In House Production Ltd. are included in the set of comparables and furthermore M/s TSR Darashaw Ltd. is excluded from set of comparables, then the margin of the appellant is within the range. 29. Having regard to the above submission, we take up the comparable Educational Consultant India Limited (EDCIL) (Technical assistance & HRD) (Segment). The TPO/DRP has excluded the above comparable on the ground that the company is involved in educational consultancy business and is not providing any services, hence it is functionally different and cannot be accepted.
Having considered the rival submissions we find that the aforesaid company was held to be valid comparable in our own order for Assessment year 2009-10 by holding as under: “19 We have heard the rival submissions and, perused the material on record. In the present case, the assessee wants inclusion of EDCIL, a government company, in the final set of comparables adopted by TPO/DRP. The assessee inter-alia submitted that in the appellants own case for the assessment year 2008-09. DRP had directed the TPO to consider the aforesaid segment, namely, ‘Technical Assistance’ and ‘Human Resource’ as comparable to the assessee and since the business of EDCIL and assessee has remained unchanged from preceding years, EDCIL continues to be comparable to the assessee and there exists no legitimate reason to reject the company in the year under consideration. The assessee placed his reliance on the judgment of Hon’ble Supreme Court in the case of CIT vs. Excel Industries Limited 358 ITR 295, wherein their Lordships reiterated the law laid down in Radhasoami Satsang vs. CIT 193 ITR 321 to hold that, where a fundamental aspect permeating through the different assessment years have been found as a fact one way or the other, and the parties have allowed the position to be sustained by not challenging the order, it is not allowed to change the position in any subsequent year. Having gone through the order dated 30.8.2012 for Assessment year 2008-09 in the case of appellant, it is stated that DRP has held in regard to the above comparable as under: “1 Educational Consultants India Ltd. (EDCIL) According to the assessee EDCIL offer support services in the following areas:
Student placement Secondment of experts Procurement services Testing and recruitment services Technical support group Training and Management Services The company operates in three segments:
Technical Assistance, Institutional Development and Human Resources Development. The services provided under Technical Assistance and Human Resource Development have been considered as comparable to the nature of services provided by the assessee to its AE.
Further, we wish to submit the EDCIL was accepted as comparable to the assessee by the learned TPO during the assessment proceedings for AY 2007-08 as well as earlier years. Hence since the business of EDCIL and the assessee has remained unchanged from last year, EDCIL continues to be comparables to the assessee and there exist no legitimate reason to reject the company this year.”
After considering the above facts, we find that functionally it is comparable and TPO is directed to include it in the list of comparables for computation of ALP”
21 For the foregoing reason and there being no change in the facts for the instant assessment year, the AO/DRP is directed to include EDCIL in the final set of comparable companies. Reliance in this regard is placed on the following observation of the Mumbai Bench of the Tribunal in the case of ACIT vs. NGC Network India (P) Ltd. 10 taxmann.com 140 wherein it has been held as under:
“These comparables and the method of computation of arm’s length price has been accepted by the department in the subsequent assessment year i.e. 2004-05. Therefore in our view comparables selected by the assessee have to be adopted for the purpose of computation of transfer pricing adjustments this year also.”
22 Thus, after including EDCIL in the final set of comparable companies considered by the TPO, the average operating profit to cost margin of the comparable companies works out to 14.98%, as under:
Sr. Name of the Company OP/TC No. (%) 1 Best Mulyankan Consultants 9.91% Ltd. 2 IDC (India) Ltd. 10.46% 3 Basiz Fund Services Pvt. 46.75% Ltd. 4 Indus Technical & Financial 6.45% Consultants Ltd. 5 Immacs Management 14.54% Services Ltd. 6 Shristi Urban Infrastructure 8.66% Development Ltd. 7 Choksi Laboratories Ltd. 23.19% 8 In House Productions 2.51% (Segment) 9 WAPCOS Ltd. (Segment) 23.60% 10 Educational Consultant India 3.80% Limited (Technical assistance & HRD Segment) Average 14.98% 23 Since, the operating profit to cost of the appellant at 9.82% is within the +/-5% range of the average operating profit to cost ratio of the aforesaid 10 comparable companies at 14.98%, the international transaction of provision of business support services of assessee during the relevant year is considered to be at arm’s length and the adjustment made by the TPO in the impugned order is liable to be deleted, for this reason alone. The grounds are allowed to the extent discussed above.”
Following the same EDCIL is held to be functionally comparable to the appellant and therefore included in the final set of comparable companies.
Now taking up M/s ITDC Ltd., the TPO/DRP has rejected the said comparable by holding that the event management segment as considered by the assessee as comparable does not match to the profile of the assessee. It was held that ITDC owns hotels, motels, inns, resorts providing short term lodging faculties including accommodation in house boats and hence this is not a suitable comparable. 33. The counsel for the assessee that ITDC operates in the following segments: • Hotel/Restaurants operations, • Ashok Creative (Tourism promotion division) • Ashok International Trade [Duty Free Shops/Duty Paid Shops Operations] • Ashok Travel and Tour Operations • Ashok Reservation and Marketing Service Division (“ARMS”) and • Ashok Consultancy & Engineering Division
He further submitted that for the purpose of the comparability analysis, the “ARMS” segment has been considered comparable to the appellant’s business.
The DR argued for the exclusion of the said comparable.
Having considered the rival submission we find that ITDC operates in the various segments, and for the purpose of the comparability analysis, the “SEL” & “ARMS” & Misc Operations segment has been considered comparable to assessee’s business. The relevant segment provides event management services, which identifies and coordinates with various service agencies for its clients and the same is comparable to the nature of services rendered by the assessee to its AEs. The services rendered by the company under the ARMS segment, as noted from the website of the company are reproduced as under: “Management Consultancy and Advisory Services: These envisage assistance in project management, recruitment of personnel, imparting in-house on-the-job-training of hotel staff. ITDC can also offer group-marketing services through its network of Ashok Reservation and Marketing Services (ARMS) all over India. • Preparation of cost-benefit analysis and budgetary support • Operation of hotels, business centres, convention halls, banqueting, etc. • Preparation of Master Plans for development of tourism.”
In view of the above ITDC is directed to be included in the final set of comparables.
So far as M/s In House Production Ltd., it is noted that TPO/DR excluded the said comparable on the ground that such company is an ITES company engaged in medical transcription. He has held that during financial year 2009-10 as per prowess database 69.33% of its income was from medical BPO and 15.05% from programme rights and hence it is functionally different and was rejected as a comparable.
Before us the learned counsel submitted that the said company has two segment namely healthcare; and media division. It was submitted that under the healthcare division, IHPL provides access to information, relating to healthcare technology including management practices and knowledge databases to healthcare delivery institutions and health professionals in India, which is similar to the information/knowledge being provided by the appellant to its associated enterprises on the market conditions in India and accordingly for the purposes of comparability analysis, the “Healthcare” segment of the company has been considered comparable to the appellant. Having considered the rival submission, we notice that the said company has also been considered comparable by the DRP in AY 2008-09 and AY 2009-
10. The relevant extract from the order of DRP for AY 2008-09 is as follows: “According to the assessee “the IHPL, the company has two main business segments, namely - Media Division and - Healthcare In the media division, the company is engaged in sale of programming software and right.
Under the Healthcare division IHPL, provides access to information, relating healthcare technology including management, practices and knowledge database to healthcare delivery institutions and health professional in India. This is similar to information/knowledge being provided by the assessee to its AEs on industrial products related to automotive electronics and factory automation in India. Hence, this division is comparable to the assessee.”
DRP has examined the above contentions and submission of the assessee. We find that functionally it is comparable and TPO is directed to include it as a comparable for computing ALP. Relevant extract from DRP order of AY 2009-10 is as follows:
2 In House Functionally Functionally According to the Production different similar assessee “the IHPL the Limited company has two main business segments, namely-media Division and Healthcare. In the media division, the company is engaged in sale of programming software and related rights. Under the Healthcare division
IHPL provides access to information relating healthcare technology including management practices and knowledge database to healthcare delivery institution and health professional in India. This is similar to information/knowledge being provided by the assessee to its AEs. Hence, this division is comparable to the assessee. DRP has examined the above contentions and submission of the assessee. We find that functionally it is comparable for computing ALP.
Having regard to the above we find force in the submission of assessee and as such direct the inclusion of M/s In House Production Ltd.
Further so far as M/s TSR Darashaw Ltd. is concerned, the TPO/DRP have held that the said company is engaged in BPO services, payroll processing services, registrar and transfer agents services etc. which are in the nature of business support services and therefore was retained as a comparable in the final set of comparables.
The learned AR submitted that the TPO has included TSR Darashaw Ltd. in the final set of companies with an operating profit margin of 41.15%. In this regard, it was submitted that the company is a BPO Company providing payroll process outsourcing services to its customers. It was further submitted that during the year under consideration, the company has selected a new global payroll ERP application called RAMCO for its fast growing payroll business. Further, the company in its annual report has clearly provided that it is deriving its income from the following business segments, namely, share registry and transfer services, depository services, record management and fund management, corporate and fixed deposit management services. Moreover, it was submitted that the company has identified three business segments namely, registrar and transfer agent activity, records management activity and payroll and trust activity in the annual report. In view of the above, it was submitted that the services provided by TSRDL are far more complex than the business support services provided by assessee to its AEs. The company is engaged in providing altogether different set of services and therefore it is functionally different from the appellant company. The assessee, in this regard, has also placed reliance on the of the Hon’ble Delhi Bench of Tribunal in the case of Microsoft Corporation India Pvt. Ltd. vs. DCIT in ITA No.
5766/Del/2011 wherein it was held that TSR Darashaw is not functionally comparable to the company providing marketing support services and was directed to be excluded from the final set of comparable companies. The learned DR supported the inclusion of said comparable.
Having considered the rival submissions it is seen that Delhi Bench of Tribunal in the case of M/s Microsoft Corporation Ltd. vs. DCIT has held that TSR Darashaw is not functionally comparable to the company providing marketing support services and has observed as under: “16. This company was chosen by the assessee as comparable in its transfer pricing study report. The TPO accepted the functional comparability of this segment of the company with the assessee’s marketing support services agreement. The ld. AR contended that this company was wrongly included in the list of comparables and the same should be excluded. The ld. DR objected to the exclusion of this company on the ground that since the assessee voluntarily included it in the final set of comparables, now it cannot turn around to contend its incomparability.
We are not inclined to uphold the objection taken by the ld. DR on the inclusion of this company as comparable merely on the fact that the assessee treated it as comparable in its TP study report. It goes without saying that there can be no estoppel against correctness. If the assessee inadvertently includes a company in its final set of comparables, which is, in fact, not comparable, he has a right to agitate before the authorities that this company may be excluded. This right of the assessee does not, in any manner, prejudice the powers of the authorities to examine the comparability of the company which is sought to be excluded. If, on making such an analysis, the authorities find that the company so agitated as functionally incomparable, is comparable, then there can be no reason to exclude the same. If, however, the company turns out to be functionally dissimilar from the assessee, then, there can be no rationale in continuing to treat it as comparable despite the functional variation. The crux is that what really matters is the actual comparability and not the wrong view canvassed by the assessee in the original reporting. What is true for the assessee is equally true for the Revenue as well. The authorities are fully competent to consider the comparability of the companies treated by the assessee as comparable. If the analysis undertaken by the TPO shows that some of the companies so construed by the assessee as comparable are, in fact, not comparable, then, such companies are liable to be excluded. The Special Bench of the Tribunal in the case of DCIT vs. Quark Systems (P) Ltd. (2010) 132 TTJ (Chd) (SB) 1, has held that an assessee is entitled to raise a claim for the first time before the tribunal even through an additional ground that a company was wrongly included in the list of comparables. In view of the foregoing discussion, we are of the considered opinion that the objection taken by the ld. DR in outrightly rejecting the assessee’s contention, is untenable.
Coming to the merits of comparability, we find that this company has three segments, which inter alia include: ‘Pay Roll and Trust Fund activity (Pay Roll).’ It is this segment which has been considered by the assessee as comparable. This company on an overview is a broking and investment banking house. Its other segments are : ‘Registrar and Transfer Agent activity (R&D)’ and ‘Records management activity (Records).’ The segment of ‘Pay Roll’ was considered by the assessee as comparable in its TP study report and the same is now assailed. Under the ‘Pay Roll’ segment, this company undertakes pay roll and employee trust fund administration and management. When we compare the nature of pay roll activity undertaken by this company with the marketing support services rendered by the assessee to its AEs, we find that both are way apart from each other. There can be no logical comparison between a specific pay roll services rendered by a company to its clients with the marketing support services rendered by the assessee to its AEs. This company is, therefore, directed to be excluded from the final set of comparables.”
Following the above decision M/s TSR Darashaw is held to be not functionally comparable to the appellant and is directed to be excluded from the set of comparable companies.
Having regard to the above conclusion we find that as a result of the above inclusion of M/s Educational Consultant India Ltd., M/s ITDC Ltd. and M/s In House Production Ltd. and exclusion of TSR Darashaw Ltd. in the final set of comparable, the average operating profit to cost ratio works out to 6.30% as under:
Sr. Name of the Company OP/TC (%) No. (without Forex) 1 Cyber Media India Online Limited 14.85% formerly IDC (India) Limited 2 Quadrant communications Limited 13.11% 3 Cameo Corporate Services Limited 8.26% 4 ICRA Management Consulting Services 1.94% Limited 5 Educational Consultant Ind Limited 7.37% (Segment) (Technical assistance & HRD) 6 ITDC Limited (Segment) -5.50% 7 In House Production Limited (Segment) 4.09% (Healthcare division) Average 6.30% Assessee’s Margin 9.26%
Since the operating profit to cost margin of the appellant at 9.26% is higher than the operating profit to cost ratio of the comparable companies at 6.30%, the adjustment made by the AO/TPO/DRP, in relation to international transaction of provision of business support services, is deleted. In view of the above conclusion, we do not find, it necessary to adjudicate as to the comparability of inclusion of ‘Aptico Limited’, ‘Global Procurement Consultants Limited.’ and HCCA Business Services (P) Ltd., and the objection of the assessee in respect of these two companies are kept open. The grounds are allowed to the extent discussed above.
As far as Ground No. 4 is concerned i.e. with regard to levy of interest under section 234C, it is held that interest under section 234C is leviable on the shortfall of advance tax as compared to the tax due on returned income.
In the result, the appeal of the assessee stands allowed.
Order pronounced in open court on this 24th day of November, 2015.