Depreciation allowed as plant & machinery on AC, telephone, office equipment

Himalaya Wellness Company Vs Deputy Commissioner of Income-tax (ITAT Bangalore)

There is no condition in section 32 that depreciation on plant and machinery is allowable only if they are used in the factory for manufacturing/production process. Assets like air conditioners, telephones, Samsung tab, office equipments and canteen equipments are in the nature of plant and machinery. Depreciation under section 32 is allowed.

Facts-

The assessee is engaged in the business of manufacture and sale of herbal pharmaceutical products (Ayurvedic medicaments and preparations), consumer / personal care products and animal health care products. AO referred the case to TPO to determine ALP in respect of international transactions entered with AE. TPO vide order u/s 92CA(3) suggested an adjustment.

AO also made the following corporate tax additions with regard depreciation on the ground that air conditioners, telephones, office equipments and canteen equipments are furniture and fixtures and not plant and machinery as claimed by the assessee.
DRP confirmed the AOs finding. Aggrieved, assessee preferred an appeal before the tribunal.

Conclusion-

With regard to TPO adjustment on transactions with AE, it is held that based on assessee own case in different Assessment Years, the said adjustments were deleted.

With regard to depreciation it is held that we find that most of the assets are air conditioners, telephones, Samsung tab, office equipments and canteen equipments. These assets are in the nature of plant and machinery. Depreciation under section 32 is allowed on assets used for the purpose of business of the assessee. It is not in dispute that these assets are used for the purpose of business of the assessee. The only grievance is these assets are not used in the factory for manufacturing/ production process. There is no condition in section 32 that depreciation on plant and machinery is allowable only if they are used in the factory for manufacturing/production process.

FULL TEXT OF THE ORDER OF ITAT BANALORE

This appeal at the instance of the assessee is directed against final assessment order dated 17.02.2022 passed u/s 143(3) r.w.s. 144C(13) of the I.T.Act. The relevant assessment year is 2017-2018.

2. The brief facts of the case are as follows:

The assessee is a partnership firm engaged in the business of manufacture and sale of herbal pharmaceutical products (Ayurvedic medicaments and preparations), consumer / personal care products and animal health care products. The return of income was filed on 30.11.2017 declaring total income of Rs.179,64,23,840. The return was processed u/s 143(1) of the I.T.Act on 03.03.2018.

Subsequently, assessment was selected for scrutiny by issuance of notice u/s 143(2) of the I.T.Act. The Assessing Officer during the course of assessment proceedings referred the case to the Transfer Pricing Officer (TPO) on 03.09.2019 to determine the Arm’s Length Price (ALP) in respect of the international transactions entered by the assessee with its Associated Enterprises (AEs). The TPO vide his order u/s 92CA(3) of the I.T.Act dated 25.01.2021 suggested an adjustment of Rs.231,39,79,272, which is as under:-

Particulars	TP Adjustment (in Rs.)
Sale of finished goods	62,76,71,500
Advertisement, Marketing  and  sales  promotion (AMP)	165,20,68,381
Royalty	3,42,39,391
Total	231,39,79,272

3. On receipt of TPO’s order, the A.O. passed draft assessment on 16.04.2021. The A.O., apart from incorporating the TP adjustment suggested by TPO, also made the following corporate tax additions in the draft assessment order.

Disallowance on account of	Amount (in Rs.)
Depreciation   i.e.   Re-characterisation   of plant and machinery	8,23,073
Sales promotion expenses on account of Doctors	3,73,86,390
Total	3,82,09,463

4. Aggrieved by the aforesaid draft assessment order, the assessee filed its objection before the Dispute Resolution Panel (DRP) on 31.05.2021. The DRP issued directions vide its order dated 12.01.2022 u/s 144C(5) r.w.s. 144C(8) of the I.T.Act. The DRP dismissed the objection of the assessee. The A.O. considering the directions of the DRP, passed final assessment order u/s 143(3) r.w.s. 144C of the I.T.Act dated 17.02.2022 and determined total income of Rs.414,86,12,580. Aggrieved by the final assessment order, the assessee has filed this appeal before the Tribunal. The concise grounds raised by the assessee read as follows:-

“

1. The Order of the Learned Assessing Officer (Ld. AO) in so far as it is prejudicial to the interest of the Appellant is not justified in law and on facts and circumstances of the case.

2. The Directions of the Hon’ble Dispute Resolution Panel (DRP) in so far as the same are prejudicial to the interest of the Appellant are not justified in law and on facts and circumstances of the case.

3. AS REGARDS, THE DISALLOWANCE OF DEPRECIATION / ADDITIONAL DEPRECIATION CLAIMED:

4.1 The Ld. AO is not justified in disallowing the depreciation / additional depreciation on plant and machinery by re-characterising the assets as furniture and fixtures without any cogent reasons.

4.2 The Ld. AO has failed to appropriately apply the classification of assets as given in section 2(11) of the Income tax Act, 1961 read with Rule 5 of the Income Tax Rules, 1962 and also erred in ignoring the classification of these assets as machineries under the Central Excise Act, 1944 Act.

4.3. The Ld. AO has erred in not applying the functionality test for the classification of the assets; erred in ignoring the features of the assets; erred in disregarding the predominant purpose of the asset; failed to understand the dynamics of the integrated manufacturing activities of the Appellant and usage of the assets.

4.4 Erred in disregarding the classification methodology accepted by the Department over the years, under the principles of consistency.

5 AS REGARDS DISALLOWANCE OF EXPENDITURE INCURRED IN CONNECTION WITH THE PRODUCT PROMOTION WITH DOCTORS:

5.1 The Ld. AO is not justified in disallowing the sales promotion expenditure of ₹3,73,86,390/- being 20% of ₹ 18,69,31,949/- out of total sales promotion expenditure of ₹ 1,58,71,72,696/- of the Appellant holding the expenditure as unconfirmed and unethical.

5.2 The Officers below erred in ignoring the Hon’ble Tribunal’s order in the Appellant’s own case of AY 2005-06, AY 2013-14; AY 2014-15; AY 2015-16 and 2016-17 wherein the identical addition made under this head has been deleted.

5.3 The Ld. AO has failed to appreciate the fact that in substance the items are low cost sales promotion items as under:

Cost per unit	Amt. of expenditure (₹)	% of expenditure disallowed
Each    item     costing less than ₹ 100/-	13,34,39,656	71%
Each    item     costing less than ₹ 500/-	5,34,92,293	29%
Each items costing More than ₹ 1,000/-	Nil	0%
Total	18,69,31,949

As could be seen from the above, majority of the items are low cost items given with logo of the appellant as product promotional items, but the Ld. AO failed to appreciate the same and disallowed the same without any basis and the same is incorrect especially when 71% of the promotional items cost less than ₹ 100/-per unit, 29% of items cost less than ₹ 500/- per unit.

6 The officers below failed to consider and appreciate the percentage of relevant expenses to sales is normal and hence reasonable in fact percentage of expenditure declined during the current AY 2017-18 in comparison to the immediate assessment years as under:

Year	Assessment year	%    of   relevant  expenditure to sale	Amount of expenditure disallowed   in    the scrutiny  assessment on adhoc basis ( ₹ )	Whether the disallowance  was deleted by the Hon’ble Tribunal
1	2010-11	1.02%	Nil	NA
2	2011-12	1.83%	Nil
3	2012-13	1.32%	Nil
4	2013-14	1.33%	2,69,43,488	Yes, vide Para no. 15, Page no. 13
5	2014-15	0.81%	2,15,42,441	Yes, vide Para 6.2, page no. 15
6	2015-16	0.83%	2,75,80,291	Yes, vide Para no. 17, page no. 11
7	2016-17	0.78%	2,89,02,874	Yes, vide Para no. 5.2, page no. 9
8	2017-18	0.77%	3,73,86,390	Under appeal

6.1 The Officers below are not justified in sitting in the armchair of the Appellant, erred in holding the expenditure as gifts, failed to understand the business exigencies and operational dynamics of the Appellant. The Officers below erred in the order in holding the sales promotion expenses as gifts, erred in disallowing the expenditure arbitrarily on adhoc basis in spite of the Appellant having furnished the details of expenditure, item details, photo of the articles wherein the logo of Appellant Firm was embossed, relevant bills and satisfied the test of Genuineness which remained uncontroverted and there was no material to hold that the relevant expenditure was not incurred by the Appellant u/s 37(1) of the Act

6.2 The Officers below erred in seeking confirmation in the absence of specific provision in the Act. The Officers below also erred in taking the contradictory stands in the order.

6.3 The Officers below erred in the order by not appreciating the fact that the Appellant had to incur the relevant business expenditure of sales promotion wholly for the purpose of business, which is common in the medicine and therapeutic world. The purpose of the expenditure was not personal, social or fringe benefit of medical practitioners, nor the Appellant had not given the same as inducement for prescribing drugs, nor the same was brought out either by the medical council report or during the course of assessment. Hence, the addition is contrary to Article no. 265 of the Constitution.

6.4 The Officers below erred by importing the unconnected and irrelevant provisions of Indian Medical Council Act, 1956 and erred in supplying the interpretation ‘what has not been provided in the MCI regulation or the Income Tax Act, 1961 as enacted by the Parliament’.

6.5 The Hon’ble DRP erred in relying on case laws which are not applicable to facts and circumstances to that of the Appellant.

7 Double addition on the same item: The Ld. AO erred in making the additions twice over viz. under corporate additions as above and under the head AMP expenses in TP provisions is bad in law.

8 AS REGARDS THE TRANSFER PRICING ADJUSTMENTS:

8.1 As regards reference made u/s 92CA (1) by the Ld. Assessing Officer is without satisfying the conditions of section 92CA (1) and Ld. Principal CIT/ CIT is not justified in approving such reference mechanically:

8.2 The Officers below erred in ignoring the Hon’ble Tribunal’s order in the Appellant’s own case of AY 2011-12; AY 2010-11; 2012-13; 2013-14; 2014-15; 2015-16 and 2016­17 wherein the identical addition made under this head has been deleted.

8.3 The Ld. Assessing Officer is not justified in making reference to the Ld. TPO u/s 92CA(1) of the IT Act without there being any just cause thus the reference to the Ld. TPO was mechanically made and bad in law and without satisfying the conditions precedent thereto, without application of mind, contrary to the provisions of the Act and jurisprudence.

8.4 The Hon’ble DRP has failed to appreciate that as the reference u/s 92CA (1) of the IT `Act being bad & void-ab-initio, the draft Assessment Order and the impugned assessment order passed by the Ld. Assessing Officer is invalid rendering all the subsequent proceedings as bad.

8.5 The Hon’ble DRP has failed to appreciate that as the reference u/s 92CA (1) being bad & void-ab-initio, the impugned Assessment Order passed by the Ld. Assessing Officer is barred by limitation in terms of section 153 (1) of the IT Act.

8.6 As regards treating the Appellant, The Himalaya Drug Company FZCO, The Himalaya Drug Company USA, PT. The Himalaya Drug Company, The Himalaya Drug Company Pte Ltd, The Himalaya Drug Company Ltd, Latvia, Himalaya Wellness (Cayman) Ltd, Cayman, and The Himalaya Drug Company (PTY) Ltd -South Africa, Green Planet Industries LLC, Himalaya Global Research Centre FZ, Gulf Centre for soap and chemical industries LLC, Soaps and chemical industrial & trading Co (Scitra), Quality Wipes LLC as associated enterprises as defined u/s 92A of the IT Act.

8.7 The Hon’ble DRP and the Ld. TPO have erred in holding that the Appellant and The Himalaya Drug Company FZCO, The Himalaya Drug Company USA, PT. The Himalaya Drug Company, The Himalaya Drug Company Pte Ltd, The Himalaya Drug Company Ltd, Latvia, Himalaya Wellness (Cayman) Ltd, Cayman, and The Himalaya Drug Company (PTY) Ltd -South Africa, Green Planet Industries LLC, Himalaya Global Research Centre FZ, Gulf Centre for soap and chemical industries LLC, Soaps and chemical industrial & trading Co (Scitra), Quality Wipes LLC are associated enterprises when the conditions of section 92A(2) of the IT Act are not present.

8.8 As regards rejection of the TP study done by the Appellant under TNMM and adoption of CPM as the Most Appropriate Method:

8.9 The Hon’ble DRP is not justified in upholding the action of the Ld. TPO in rejecting the Transfer Pricing study carried out by the Appellant under TNMM.

8.10 The Hon’ble DRP is not justified in upholding the action of the Ld. TPO in rejecting ALP determined by the Appellant under TNMM for the impugned AY 2017-18 though the ALP determined by the Appellant by adopting identical methodology in similar kind of transactions for AY 2005-06 had been accepted by the Ld. Joint Director of Income-tax (TP – II), Bangalore in his order dated 31.10.2008 passed under section 92CA of the IT Act and hence the assessing authority’s approach is inconsistent.

9 As regards flaws in determination of ALP based on CPM:

9.1 The Hon’ble DRP is not justified in upholding the action of the Ld. TPO in selecting the CPM as the Most Appropriate Method by failing to appreciate that the CPM does not suit in the facts and circumstances of the case of the Appellant.

9.2 The Hon’ble DRP is not justified in failing to appreciate that Rule 10B(1)(c) requires adoption of normal gross profit mark-up arising from the transfer of same or similar property by the Appellant, in a comparable uncontrolled transaction on direct and indirect costs of production in an international transaction, thereby clearly mandating that comparison has to be made only when Appellant distributes its products in the domestic market at the same level at which it distributes in its international transactions, and not when the Appellant’s functions are totally different between domestic transactions and international transactions.

9.3 The Hon’ble DRP is not justified in upholding the action of the Ld. TPO in adopting 110.81% as the comparable gross profit margin on cost which is extremely high and abnormal and also failed to make any adjustments for the functional differences identified and agreed by him between the compared transaction and the tested transaction.

9.4 Without prejudice to the objection on adoption of CPM as MAM, as regards not allowing adjustments as per Rule 10B(1)(c)(iii):

Without prejudice to the objection on adoption of CPM as MAM, the Hon’ble DRP is not justified in upholding the action of the Learned TPO in determining the ALP under CPM without making adjustments, as required to be made under Rule 10B(1)(c)(iii), for the differences in respect of administrative, selling and distribution expenses, marketing functions, AMP expenditure, freight expenses, bad debt risk, market risk, financial risk, investment risk, foreign exchange fluctuation risk, debt risk and inventory risk which materially affect the gross profit mark-up in the open market.

10 As regards adjustment on account of alleged advertisement and marketing promotion (AMP) expenditure:

10.1 The Officers below erred in ignoring the Hon’ble Tribunal’s order in the Appellant’s own case of AY 2011-12; AY 2010-11; 2012-13; 2013-14; 2014-15; 2015-16 and 2016­17 wherein the identical addition made under this head has been deleted.

10.2 The Hon’ble DRP is not justified in directing adjustments towards alleged AMP expenditure though, such expenditure cannot be treated as an international transaction within the meaning of section 92B of the IT Act.

10.3 The Hon’ble DRP ought to have appreciated that the mandate in section 92 (1) is to compute only income arising from an international transaction at arm’s length and if there is no consensus ad idem among the parties that brand promotion service is rendered, the lower authorities cannot presume rendition of such services and bring notional income to tax.

10.4 The Hon’ble DRP failed to appreciate that the Learned TPO is not justified in holding that the appellant had rendered brand promotion services to its AEs merely relying on the expenditure incurred without bringing on record any evidence to prove that the Appellant has actually rendered those services and the capability of the Appellant to render those services.

10.5 The Hon’ble DRP is not justified in treating the AMP expenditure incurred by the appellant as brand promoting expense and that it is an international transaction though the Department had treated similar kind of expenditure as expenditure incurred in respect of domestic consumer products’ division of the Appellant in the AY 2005-06, thereby taking contradictory and inconsistent stand.

10.6 The Hon’ble DRP has failed to appreciate that the Appellant is in fact the economic owner of the brand with unfettered right to use the brand although Himalaya Global Holdings Ltd., may be legal owner for the purpose of international registration of products.

10.7 Without prejudice to the above, the Hon’ble DRP has failed to appreciate that as the appellant is a manufacturer as well as full-fledged distributor of its own products using its own technology and comprehensive distribution network, the profit split method is not applicable as per internationally accepted guidelines and Indian Transfer Pricing Laws.

10.8 Without prejudice to the above grounds, the Hon’ble DRP ought to have held that the manner of determination of ALP is not in accordance with section 92C read with relevant Rules.

10.9 Without prejudice to the above, the Hon’ble DRP is not justified in directing adjustment towards the alleged AMP expenditure without carrying out or causing to be carried out any transfer pricing analysis, including outlining the alleged international transaction, selection of comparable uncontrolled transactions, determination of most appropriate method, applying the Most Appropriate Method, carrying out various adjustments and determining the arm’s-length price.

10.10 Without prejudice to the above, the Hon’ble DRP is not justified in upholding the action of the learned TPO in arriving at the normal AMP expenditure by dividing the advertisement and selling expenses of the comparable enterprises by the turnover of those companies without making an FAR analysis and without making any suitable adjustment for various qualitative and quantitative differences.

10.11 Without prejudice to the above, the Hon’ble DRP is not justified in upholding the action of the Learned TPO in identifying ₹ 267,87,95,129/- as alleged AMP expenditure and applying the purported profit split method(PSM) though the said sum essentially represents all the expenses debited to profit and loss account below the gross profit level.

10.12 Without prejudice to the above, the Hon’ble DRP is not justified in upholding the action of the learned TPO in identifying ₹ 267,87,95,129/- as alleged AMP expenditure and applying the profit split method though the said sum includes commission paid to C&F agents, discounts to retailers, wholesalers, stockists, franchise / store expenses, target incentives, salaries for logistics staff and the related travelling expenses, cost of expired / damaged goods, etc. which are not in the nature of AMP expenditure.

10.13 The Hon’ble DRP and Learned TPO are not justified in taking contradictory positions between justification for royalty adjustment and justification for AMP expenditure.

10.14 Without prejudice to other grounds, the Ld. TPO has erred in changing the methodology of computation of ALP of AMP arbitrarily from Bright Line Test followed till AY 2012-13 altogether to purported Residual Profit Split Method, both of which are not notified methods and recognised methods under the Transfer Pricing Regulations, without providing the basis for the change, erred under the principles of consistency, when the facts remained same, failed to appreciate that the Profit split method can be used only for splitting the profit and not an expense. The Hon’ble DRP erred in confirming the same.

10.15 The Ld. TPO erred in allocating 25% of the profit split conferred to AE without bringing any concrete basis and cogent reasons. The Hon’ble DRP erred in confirming the same.

10.16 The Officers below have erred in working out the Operating Profit and operating cost of the compared companies without making proper analysis and proper basis.

10.17 The officers below erred in artificially bifurcating the expenses into routine AMP and Non-routine AMP expenses, especially when the methodology is not backed up by the statute.

10.18 Without prejudice to the above, the Hon’ble DRP has failed to appreciate that the Ld. TPO is not justified in considering Ador Multiproducts Ltd., Lykis Ltd., Paramount Cosmetics (India) Ltd. Shingar Ltd as comparables for arriving at normal AMP expenditure. The Officers below also erred in ignoring that the AMP expenditure incurred by these companies as a percentage of turnover is widely varied among the comparables themselves and hence, are not proper indicators for arriving at the normal AMP.

11 As regards adjustment of ₹ 3,42,39,391 /- made in respect of royalty:

11.1 The Officers below erred in ignoring the Hon’ble Tribunal’s order in the Appellant’s own case of AY 2013-14; AY 2014-15; AY 2015-16 and AY 2016-17 wherein the identical addition made under this head has been deleted.

11.2 The Hon’ble DRP is not justified in summarily upholding the action of the Ld. Assessing Officer in directing adjustment on account of alleged royalty income by completely relying on the Order of the Ld. TPO and without application of mind.

11.3 The Hon’ble DRP is not justified in upholding adjustments towards alleged royalty income in the absence of any such international transaction entered into by the Appellant.

11.4 The Lower Authorities have grossly erred in assuming that the mere initial product registrations in various countries constitute intangible properties owned by the Appellant by failing to appreciate that such registrations are obtained in compliance with the statutory preconditions for sale of the products.

11.5 The Lower Authorities have failed to appreciate that the alleged associated enterprises are acting as distributors and are paying the purchase consideration to the appellant in respect thereof leaving nothing else to be paid whether by way of royalty or otherwise.

11.6 The Hon’ble DRP and Ld. TPO are not justified in taking contradictory positions between justification for royalty adjustment and justification for AMP expenditure.

11.7 Without prejudice to the above, the Hon’ble DRP has failed to appreciate that the Ld. TPO has determined ALP of 2% on turnover in respect of alleged royalty income on an arbitrary basis and without adopting any methodology prescribed u/s 92C(1).

12 Disallowance of deduction 80G deduction of ₹ 29,61,013/-:

12.1 The Ld. AO erred in the order i.e. in the computation of income as though there was no proposition of any disallowance of section 80G deduction at stage of passing the draft order u/s 144C, yet in the final order passed u/s 143(3) r.w.s. 144C of the Act, deduction of ₹ 29,61,013/- was denied. The Ld. AO’s action of making arbitrary variation is a violation of section 144C particularly the section 144C(13) of the Act and hence the claim made in the ITR of the Appellant needs to be restored.

12.2 The Ld. AO’s action of arbitrary reduction of the deduction claimed u/s 80G of the Act also contrary to the principles of natural justice.

13 The Hon’ble DRP is not justified in upholding the levy of interest of ₹ 49,32,72,981, under section 234B of the IT Act when the conditions for levying such interest did not exist in the present case.

For the above reasons and for such other reasons which may be allowed by the Hon’ble Members to be urged at the time of hearing, it is prayed that the aforesaid appeal be allowed.

We shall adjudicate the above concise grounds as under.

5. Concise Ground No.1 and 2 are general in nature and no specific adjudication is called for, hence, the same are dismissed.

Concise Ground 3 and 4 (Corporate Tax Issues)

6. The above grounds deals with the disallowance of depreciation / additional depreciation claimed on plant and machinery amounting to Rs.8,23,073. The AO restricted the depreciation claimed on air conditioners, telephones, office equipments and canteen equipments by treating these assets as furniture and fixtures instead of plant and machinery. Depreciation was allowed on these assets at the rates applicable to ‘furniture and fixtures’ and the excess depreciation claimed amounting to Rs.8,23,073 was disallowed by the AO. The disallowance was made for the reason that these assets are eligible for depreciation at 10% as furniture and fixtures as they are used in the office premises, consumer goods showrooms etc and not used in the factory for the manufacturing/production process. It was stated by the AO that, applying the functionality test, as these assets are not directly used in the production process, depreciation is restricted to the rate allowed for furniture and fixtures only and not on the rate allowed for plant and machinery.

6.1 The DRP confirmed the AOs finding that the assets on which higher depreciation is clamed are not proved to be put to use in production process accordingly and fail the functional test.

6.2 We have considered rival contentions and perused the material on record. Similar issue was considered by the Co­ordinate Bench in assessee’s own case for assessment year 2013-2014 in ITA No.1385/Bang/2017 (order dated 14.07.2020), wherein it was held as under:-

“11. We have heard the rival contentions on this issue and perused the record. It can be noticed that the AO has listed out 46 items. According to AO, these items would fall under the category of ‘Furniture and Fixture’ and they have been classified as “Plant & Machinery” by the assessee. However, a perusal of the list of items of assets extracted above would show that there are certain items like pump sets, refrigerator, camera, telephone, pedestal fan etc., which should fall under the category of “Plant & Machinery”, even if the purpose for which they are put to use are not considered. In respect of remaining items, the contention of the assessee is that these items are used in the factory/lab for the purpose of production or manufacture as part of “Plant & Machinery”. In support of his contention, the ld. AR placed his reliance on the decision rendered by Pune Bench of the Tribunal in the case of Serum Institute of India Ltd., Vs Addl. CIT 147 TTJ 594 (Pune). In the above said case, the Tribunal considered the issue of depreciation allowable on stools, tables, stainless steel racks etc., which were used for laboratory purposes, i.e for the purpose of production or processing of chemical tests in the laboratory leading to the production. The Tribunal took the view that the functionality test of the assets has to be applied for determining its category and in this regard, Pune Bench, in turn, relied upon the decision rendered by the Hon’ble Karnataka High Court in the case of Hindustan Aeronautical Ltd.,(HAL) Vs CIT 206 ITR 338, wherein it was held that for determining what constitutes “plant”, the ‘functional test’ and not merely ‘amenities test’ has to be applied. It was also held by the Hon’ble Karnataka High Court that the bins, racks and shelves kept in workshop would constitute plant and machinery.

12. Before us, the ld. DR placed has placed reliance on the decision rendered by the Hon’ble Madras High Court in the case of Dinamalar Ltd.(supra). We have gone through the said case-law and notice that the assessee therein had claimed higher rate of depreciation applicable to computers in respect of peripherals used along with the computers. In that context, Hon’ble Madras High Court has taken the view that the peripherals cannot be classified as computers for claiming higher rate of depreciation as applicable to “Computers”. In our view, the above said decision has been rendered in a different context, i.e., within the category of ‘Plant and Machinery’, the sub-question was whether the peripherals could be classified as Computers. Since the functions performed by the peripherals are different from that of a computer, the High Court held that they cannot be classified as “Computers”. We notice that the decision rendered by the Hon’ble Karnataka High Court in the case of Hindustan Aeronautics Ltd (supra), which was followed by Pune Bench of the Tribunal in the case of Serum Institute of India Ltd.(supra) would apply to the facts of the present case.

13. We have noticed that certain items of assets are in the nature of Plant and machinery. It is the claim of the assessee that other items are also used as part of Plant and Machinery. Hence, we are of the view that this issue requires fresh examination at the end of the AO in accordance with the decision rendered by the Hon’ble Karnataka High Court in the case of Hindustan Aeronautics Ltd (supra). Accordingly, we restore this issue to the file of the AO for examining the same afresh in the light of discussions made supra by following the decision rendered by the Hon’ble Karnataka High Court in the case of Hindustan Aeronautics Limited (supra).”

6.3 In the instant case, the A.O. has listed out the assets on which depreciation was claimed as plant and machinery at pages 3 to 8 of the assessment order. From the description of assets, we find that most of the assets are air conditioners, telephones, Samsung tab, office equipments and canteen equipments. These assets are in the nature of plant and machinery. Depreciation under section 32 is allowed on assets used for the purpose of business of the assessee. It is not in dispute that these assets are used for the purpose of business of the assessee. The only grievance is these assets are not used in the factory for manufacturing/ production process. There is no condition in section 32 that depreciation on plant and machinery is allowable only if they are used in the factory for manufacturing/production process. For air conditioner used in a trading business is also a plant and machinery and eligible for depreciation at 15%. In the present case, the assessee is in the business of manufacture and sale of ayurvedic medicaments and preparations, consumer/personal care products and animal health care products. The majority of the assets on which depreciation was disallowed are used for the purpose of business, hence, the A.O. was not correct in partly disallowing the depreciation by treating them as furniture fixtures. As in the earlier year the matter needs a fresh examination by AO. Further, as regards machinery or plant installed in any office premises or residential accommodation including accommodation in the nature of guest house, the additional depreciation cannot be allowed. We accordingly remand the matter by allowing the grounds of the Assessee for statistical purposes to examine the issue afresh by considering the Tribunals order in assessee’s own case for the earlier year (supra).

Concise Ground 5 and 6 (Corporate Tax Issues)

7. The above grounds deal with disallowance of sales promotion expenditure incurred as gifts given to ayurvedic doctors. Out of total sales promotion expenses of Rs.158,71,72,696, the AO noticed that the assessee has incurred expenditure of Rs. 18,69,31,949 towards promotional aids/product information given to ayurvedic doctors. It was claimed the total value of items given to the doctors amounting to Rs.18,69,31,949 consisted of items costing less than Rs.500 per unit. Further, out of total expenditure of Rs.18,69,31,949, items of promotional aids, product reminders etc given to doctors costing less than Rs.100 per unit amounted to Rs.13,34,39,656 and balance expenditure of Rs.5,34,92,293 pertained items costing more than Rs.100 per unit but less than Rs.500 per unit. The detailed break up of expenditure of Rs.18,69,31,949 was considered by the AO at page 15 and 16 of the assessment order. The assessee submitted that it does not advertise its ayurvedic pharma products and these products cannot be purchased unless prescribed by the doctors, As these ayurvedic pharma products can be consumed only based on doctor’s prescription, the only way to provide/educate the doctors about its ayurvedic pharma products is to continuously visit them through medical representatives and educate them about the ayurvedic pharma products so that they could recall the assessee’s products when they give prescription to a patient. In this process it was submitted that the medical representatives of the assessee give small items to ayurvedic doctors and receptionists which has the product logo of the assessee. It was submitted that the expenditure was purely sales promotional in nature and it cannot be disallowed as ayurvedic doctors are not covered by the Indian Medical Council Act, 1956 under which a notification dated 10.12.2009 was issued prohibiting the allopathic doctors from taking gift items of more than Rs.1000. It was submitted that ayurvedic doctors are governed by the Indian Medical Central Council Act, 1970 by the Department of Ayush, Government of India where no notification has been issued prohibiting their members from taking sales promotional items. The assessee submitted that these items cannot be considered as gifts as its logo is embossed on these items and in any case all the items given are less than Rs.100/Rs.500 per item which is less than the prescribed amount of Rs. 1000 per item and even allopathic doctors are permitted to take gifts upto Rs.1000. It was therefore submitted that these expenses cannot be considered as incurred for any purpose which is an offence or which is prohibited by law.

7.1 The AO held that the items given to receptionists who allow medical representatives to meet the doctors cannot be considered as promotional aid and it falls under the purview of gift. It was held that the principle underlying the MCI guidelines is that prescriptive treatment for an illness should be guided by the doctor’s intellect and efficacy of the product in treating the illness, rather than trying to push the product of a particular company. The AO held that the same principle will hold good in the case of ayurvedic doctors also. The AO disallowed 20% of the expenditure amounting to Rs.3,73,86,390 out of Rs.18,69,31,949 for the reason that the said expenditure was not substantiated by providing complete details of doctors and also not confirmed by the recipient doctors. Further, it was held by the A.O. that such practices are not ethical for promoting the sales of the firm amongst doctors / chemists.

7.2 The DRP upheld the action of the Assessing Officer.

7.3 We have heard rival submissions and perused the material on record. We find that similar issue was considered by the Co-ordinate Bench of the Tribunal in assessee’s own case for assessment year 2013-2014 in ITA No.1385/Bang/ 2017, wherein it was held as under:-

“15. We have heard the rival contentions and perused the record. Both the parties took support of various decisions to reiterate their respective claims. The ld.DR submitted that the gifts given to doctors are against the ethics and hence, the same is liable to be disallowed, whereas the ld.AR relied on various case laws to contend that these expenditure is allowable as sales promotion expenses and further the amount of each of the gifts did not exceed Rs.1000/- which is limit fixed by the MCI in the code of conduct for not taking any action against the doctors, i.e receipt of gifts having value of less than Rs.1000/- will not attract penal action by MCI. It is pertinent to note that the assessee has spent a sum of Rs.15.26 Crores on gifts given to doctors. It is stated that the nature of gift consists of prescription slips, doctor names, bags, medical testing apparatus, pen, room fresheners, visiting card holders, tissue papers etc. There is no dispute with regard to the fact that all these items carried the Himalaya logo. The Ld A.R submitted that these items are intended to promote popularity of name and products of the company only. Accordingly, he submitted that they are in the nature of advertisement only. We notice that similar claims were made before the AO also, but it was not accepted by him. It is pertinent to note that the assessing officer has inclined to accept the claim in respect of gifts, which are costing less than Rs.1000/-. The AO appears to have taken the view that the limit of Rs.l000/- fixed by the MCI should apply to the cumulative value of gifts given. Accordingly, he has expressed the view that, even if the value of each of the item was less than Rs.1000/-, there is possibility that the assessee would have given more number of items to the ayurvedic doctors and hence the cumulative value of items given to each doctor may exceed Rs.1000/-. Since exact details of number of items given to each of the doctors are not available, the AO has taken the view that part of expenses is required to be disallowed. The AO, accordingly, computed quantum of gifts given to doctors at Rs.13.47 Crores and disallowed 20% of the same on estimated basis. It can be noticed that the AO has, in fact, accepted the-claim of the assessee that these expenses are related to the business and hence he has accepted and allowed 80% of the expenditure as deduction. He has disallowed 20% on estimated basis only on the reasoning that the cumulative value of items given to each of the doctors may exceed Rs.1000/- in a year and on further reason that the same is excessive. The relevant observations made by the AO are extracted below:-

“6.4 The assessee is not able to give a value based flow chart showing how many gifts are given to each doctors nor are they able to link the number of gifts items which is given to each Doctor or produce confirmation from each recipient, due to the huge volumes of gifts dispersed and also due to the fact that the field staff are given these ‘gifts for further distribution and the logistics involved to itemize and track such gifting would be too voluminous to tabulate.

But the fact remains that the total expenditure under this head is a huge amount to be spent on sales promotion without proper tabulation of how and to whom these expenses are spent on.

6.5 The assessee firm is also not able to compute the amount and value of gifts’ given to a particular doctor/clinic for usage, as to whether the total amount spent on a particular doctor would be above or below Rs.1000/- at a particular gifting instance or during the year: Keeping all the above factors in mind and also keeping in view the quantum of expenditure incurred, I disallow 20% of the amounts incurred under the following heads:

Gifts to Doctors:

Brand Reminder

Cost less than Rs.100	9,95,53,309
Cost less than Rs.500	3,25,94,673
Cost less than Rs.1000	25,69,462
	13,47,17,444

6.6 20% of the above amount is disallowed as being excessive expenditure on gifts to Doctors which is not confirmed by the recipients and not being an ethical practice to promote the sales of the firm among Ayurvedic Doctors.

We notice that the various case laws relied upon both the parties related to complete disallowance of sales promotion expenses, whereas in the instant case; the AO has made estimated disallowance of 20% of sales promotion expenses claimed by the assessee. Normally, when the AO has accepted 80% of the expenditure as in the nature of sales promotion expenditure, in our view, there should be some valid reason to disallow 20% of the expenditure on estimated basis. In the instant case, the reasons given by the AO are that

(a) the cumulative value of gifts given to each of the doctors would have exceeded Rs.1000/-.

(b) the quantum of expenditure is huge and excessive.

We have noticed that the AO has presumed that the cumulative value of Gifts would have exceeded Rs.l000/-. First of all, the question as to whether the limit of Rs.l000 /­fixed by MCI would apply to the value of each item of gift or cumulative value in a year is debatable question. Secondly, the question as to whether the code of conduct prescribed for individual doctors should also be made applicable to pharma companies is another debatable question. Be that as it may, we have noticed earlier that the limit of Rs.1000/- has been prescribed by Medical Council of India for not taking any pernal action against the doctors who had accepted gifts having value of Rs.1000/-. Hence it has been interpreted that the gifts having value of less than Rs.1000/- could be given. In any case, it was not shown to us that the notification issued by MCI shall be applicable to ayurvedic doctors also. Hence it cannot be conclusively said that the notification issued by MCI shall apply to Ayurvedic doctors also, to whom the sales promotion items have been given by the assessee. Further we have noticed that the AO has taken the view that the cumulative value of gifts should have exceeded Rs.1000/-and hence there is violation of MCI regulations. We have observed earlier that the said view itself is debatable one. Further, the view so taken by AO is based on presumptions only. Hence the first reasoning given by the AO could not be affirmed by us. The second reasoning given is that the quantum of expenditure is excessive. It is well settled principle of law that the income tax officer cannot sit on the arms chair of a business man and could decide the quantum of expenses. So long as it is seen that the expenses have been incurred for business purposes on commercial considerations, the. same is allowable as deduction. Hence the second reasoning given by the AO also would fail. We notice that the AO has made estimated disallowance @ 20% of the expenditure claimed by the assessee on the basis of two reasoning given by him, which have been rejected by us. When the AO is accepting 80% of the expenditure, we do not find any justification for disallowing the remaining 20%.Hence, we are unable to sustain the estimated disallowance made by the AO. Accordingly, we direct the AO to delete the disallowance.”

7.3 The Hon’ble Apex Court in the case of Apex Laboratories (P) Ltd. v. DCIT reported in (2022) 442 ITR 1 considered the issue of allowability of deduction for gifting of freebies by the pharmaceutical company to medical practitioners under Explanation 1 to section 37 of the I.T.Act. The relevant finding of the Hon’ble Apex Court reads as follows:-

22. This Court is of the opinion that such a narrow interpretation of Explanation 1 to Section 37(1) defeats the purpose for which it was inserted, i.e., to disallow an assessee from claiming a tax benefit for its participation in an illegal activity. Though the memorandum to the Finance Bill, 1998 elucidated the ambit of Explanation 1 to include “protection money, extortion, hafta, bribes, etc.”, yet, ipso facto, by no means is the embargo envisaged restricted to those examples. It is but logical that when acceptance of freebies is punishable by the MCI (the range of penalties and sanction extending to ban imposed on the medical practitioner), pharmaceutical companies cannot be granted the tax benefit for providing such freebies, and thereby (actively and with full knowledge) enabling the commission of the act which attracts such opprobrium.

23. The illogicality and completely misconceived nature of such an interpretation was dealt with in a similar interpretation of the provisions of PC Act, by a Constitution Bench of this Court in P. V. Narasimha Rao v. State (CBI/SPE)21. Prior to the 2018 amendment22, the PC Act only punished the bribe-taker who was a public servant, and not the bribe-giver. Reliance was placed on this to acquit the appellant bribe-giver. Rejecting such an interpretation, this Court held:

“145. Mr Rao submitted that since, by reason of the provisions of Article 105(2), the alleged bribe-takers had committed no offence, the alleged bribe-givers had also committed no offence. Article 105(2) does not provide that what is otherwise an offence is not an offence when it is committed by a Member of Parliament and has a connection with his speech or vote therein. What is provided thereby is that a Member of Parliament shall not be answerable in a court of law for something that has a nexus to his speech or vote in Parliament. If a Member of Parliament has, by his speech or vote in Parliament, committed an offence, he enjoys, by reason of Article 105(2), immunity from prosecution therefor. Those who have conspired with the Member of Parliament in the commission of that offence have no such immunity. They can, therefore, be prosecuted for it.

***

147. Mr Rao submitted that the alleged bribe-givers had breached Parliament’s privilege and been guilty of its contempt and it should be left to Parliament to deal with them. By the same sets of acts the alleged bribe- takers and the alleged bribe-givers committed offences under the criminal law and breaches of Parliament’s privileges and its contempt. From prosecution for the former, the alleged bribe-takers, Ajit Singh excluded, enjoy immunity. The alleged bribe-givers do not. The criminal prosecution against the alleged bribe-givers must, therefore, go ahead. For breach of Parliament’s privileges and its contempt, Parliament may proceed against the alleged bribe-takers and the alleged bribe-givers.

***

150. To repeat what we have said earlier, Mr Rao is right, subject to two caveats, in saying that Parliament has the power not only to punish its Members for an offence committed by them but also to punish others who had conspired with them to have the offence committed : first, the actions that constitute the offence must also constitute a breach of Parliament’s privilege or its contempt; secondly, the action that Parliament will take and the punishment it will impose is for the breach of privilege or contempt. There is no reason to doubt that the Lok Sabha can take action for breach of privilege or contempt against the alleged bribe-givers and against the alleged bribe-takers, whether or not they were Members of Parliament, but that is not to say that the courts cannot take cognizance of the offence of the alleged bribe-givers under the criminal law.

(emphasis supplied)

24. Even if Apex’s contention were to be accepted – that it did not indulge in any illegal activity by committing an offence, as there was no corresponding penal provision in the 2002 Regulations applicable to it – there is no doubt that its actions fell within the purview of “prohibited by law” in Explanation 1 to Section 37(1).

25. Furthermore, if the statutory limitations imposed by the 2002 Regulations are kept in mind, Explanation (1) to Section 37(1) of the IT Act and the insertion of Section 20A of the Medical Council Act, 195623 (which serves as parent provision for the regulations), what is discernible is that the statutory regime requiring that a thing be done in a certain manner, also implies (even in the absence of any express terms), that the other forms of doing it are impermissible.

26. In this regard the decision of this Court in Jamal Uddin Ahmad v. Abu Saleh Najmuddin & Anr24 is of some relevance. There, the scope of Section 81 of the Representation of the People Act, 1951 was examined in the light of powers of the High Court to administer election petitions by invoking the rule of implied prohibition. The Court observed that:

“Dealing with “Statutes conferring power; implied conditions, judicial review”, Justice G.P. Singh states in the Principles of Statutory Interpretation (Eight Edition 2001, at pp. 333, 334) that a power conferred by a statute often contains express conditions for its exercise and in the absence of or in addition to the express conditions there are also implied conditions for exercise of the power. An affirmative statute introductive of a new law directing a thing to be done in a certain way mandates, even if there be no negative words, that the thing shall not be done in any other way. This rule of implied prohibition is subserved to the basic principle that the Court must, as far as possible, attach a construction which effectuates the legislative intent and purpose. Further, the rule of implied prohibition does not negative the principle that an express grant of statutory power carries with it by necessary implication the authority to use all reasonable means to make such grant effective. To illustrate, an Act of Parliament conferring jurisdiction over an offence implies a power in that jurisdiction to make out a warrant and secure production of the person charged with the offence; power conferred on Magistrate to grant maintenance under Section 125 of the Code of Criminal Procedure 1973 to prevent vagrancy implies a power to allow interim maintenance; power conferred on a local authority to issue licences for holding ‘hats’ or fairs implies incidental power to fix days therefore; power conferred to compel cane growers to supply cane to sugar factories implies an incidental power to ensure payment of price. In short, conferment of a power implies authority to do everything which could be fairly and reasonably regarded as incidental or consequential to the power conferred.

***

Herbert Broom states in the preface to his celebrated work on Legal Maxims –“In the Legal Science, perhaps more frequently than in any other, reference must be made to first principles.” The fundamentals or the first principles of law often articulated as the maxims are manifestly founded in reason, public convenience and necessity. Modern trend of introducing subtleties and distinctions, both in legal reasoning and in the application of legal principles, formerly unknown, have rendered an accurate acquaintance with the first principles more necessary rather than diminishing the values of simple fundamental rules. The fundamental rules are the basis of the law; may be either directly applied, or qualified or limited, according to the exigencies of the particular case and the novelty of the circumstances which present themselves. In Dhannalal vs. Kalawatibai and Ors.25 this court has held that:

“When the statute does not provide the path and the precedents abstain to lead, then sound logic, rational reasoning, common sense and urge for public good play as guides of those who decide”.”

27. It is also a settled principle of law that no court will lend its aid to a party that roots its cause of action in an immoral or illegal act (ex dolo malo non oritur action) meaning that none should be allowed to profit from any wrongdoing coupled with the fact that statutory regimes should be coherent and not self- defeating. Doctors and pharmacists being complementary and supplementary to each other in the medical profession, a comprehensive view must be adopted to regulate their conduct in view of the contemporary statutory regimes and regulations. Therefore, denial of the tax benefit cannot be construed as penalizing the assessee pharmaceutical company. Only its participation in what is plainly an action prohibited by law, precludes the assessee from claiming it as a deductible expenditure.

28. This Court also notices that medical practitioners have a quasi-fiduciary relationship with their patients. A doctor’s prescription is considered the final word on the medication to be availed by the patient, even if the cost of such medication is unaffordable or barely within the economic reach of the patient – such is the level of trust reposed in doctors. Therefore, it is a matter of great public importance and concern, when it is demonstrated that a doctor’s prescription can be manipulated, and driven by the motive to avail the freebies offered to them by pharmaceutical companies, ranging from gifts such as gold coins, fridges and LCD TVs to funding international trips for vacations or to attend medical conferences. These freebies are technically not ‘free’ – the cost of supplying such freebies is usually factored into the drug, driving prices up, thus creating a perpetual publicly injurious cycle. The threat of prescribing medication that is significantly marked up, over effective generic counterparts in lieu of such a quid pro quo exchange was taken cognizance of by the Parliamentary Standing Committee on Health and Family Welfare26 which made the following observations:

“The Committee also notes that despite there being a code of ethics in the Indian Medical Council Rules introduced in December 2009 forbidding doctors from accepting any gift, hospitality, trips to foreign and domestic destinations etc from healthcare industry, there is no let­up in this evil practice and the pharma companies continue to sponsor foreign trips of many doctors and shower with high value gifts like air conditioners, cars, music systems, gold chains etc. to obliging prescribers who then prescribe costlier drugs as quid pro quo. Ultimately all these expenses get added up to the cost of drugs. The Committee’s attention was drawn to a news item in Times of India dated July 1, 2010 by Reema Nagarajan giving specific instances of violations of MCI code. The Committee calls upon the Government to take strict and speedy action on such violations. Since MCI has no jurisdiction over drug companies, the Government should take parallel action through DCGI and the Income Tax Department to penalize those companies that violate MCI rules by cancelling drug manufacturing licences and/or disallowing expenses on unethical activities.”

(emphasis supplied)

Interestingly, a similar conclusion was arrived at by the US Department of Health and Human Services Office of the Assistant Secretary for Planning and Evaluation, in a report called Savings Available Under Full Generic Substitution of Multiple Source Brand Drugs in Medicare Part D (dated 23.07.2018). The report noticed inter alia, that an empirical study conducted in respect of 20 odd (out of the 600 drugs which were the subject matter of the research paper) brand medications dispensed for a particular period, were capable of generic substitution and would have resulted in substantial benefit to the patients:

“Beneficiaries could have saved over $600 million in out of pocket payments had they been dispensed generic equivalent drugs. A significant amount of this spending occurred among the top 20 multiple source brands. Substituting these drugs for generic competitors at their median prices would have saved the program and beneficiaries $1.8 billion.”

Likewise, in a previous study by ProPublica (an independent, non­profit newsroom that does investigative journalism) titled “Dollars for Doctors: Now There’s Proof: Docs who Get Company Cash Tend to Prescribe More Brand- Name Meds” (dated 17.03.2016)28 stated that:

“…doctors who receive payments from the medical industry do indeed tend to prescribe drugs differently than their colleagues who don’t. And the more money they receive, on average, the more brand-name medications they prescribe.”

Data is now available publicly, in the United States, by reason of the Physician Payment Sunshine Act, 2010 i.e., Section 6002 of the Affordable Care Act, 2010. This law compels manufacturers of drugs, devices, biologics, and medical supplies covered by Medicare, Medicaid, or the Children’s Health Insurance Program to report to the Centers for Medicare & Medicaid Services on three broad categories of payments or “transfers of value”. These categories cover general payments or transfers of value such as meals, travel reimbursement, and consulting fees. These include expenses borne by manufacturers, such as speaker fees, travel, gifts, honoraria, entertainment, charitable contribution, education, grants and research grants, etc.

29. The impugned judgment, along with the judgments of Punjab & Haryana High Court (Kap Scan) and Himachal Pradesh High Court (Confederation) (supra) have correctly addressed the important public policy issue on the subject of allowance of benefit for supply of freebies. The impugned judgment’s reasoning is quoted as follows:

“A perusal of the decision of Co-ordinate Bench of this Tribunal in the assessee’s own case as also the decision of the Hon’ble Himachal Pradesh High Court clearly shows that the basic intention of the decision was that the receiving of the gifts/freebies by Professionals is against public policy as also against the law in so far as the amendment by the Medical Council Act, 1956 to the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, once receiving of such gifts have been held to be unethical obviously the corollary to this would also be unethical, being giving of such gifts or doing such acts to induce such Doctors and Medical Professionals to violate the Medical Council Act, 1956.”

(emphasis supplied)

30. Thus, one arm of the law cannot be utilised to defeat the other arm of law – doing so would be opposed to public policy and bring the law into ridicule.29 In Maddi Venkataraman & Co. (P) Ltd. v. CIT30, a fine imposed on the assessee under the Foreign Exchange Regulation Act, 1947 was sought to be deducted as a business expenditure. This Court held:

“Moreover, it will be against public policy to allow the benefit of deduction under one statute, of any expenditure incurred in violation of the provisions of another statute or any penalty imposed under another statute. In the instant case, if the deductions claimed are allowed, the penal provisions of FERA will become meaningless”.

(emphasis supplied)

31. It is crucial to note that the agreement between the pharmaceutical companies and the medical practitioners in gifting freebies for boosting sales of prescription drugs is also violative of Section 23 of the Contract Act, 1872 (as also noted by the Punjab and Haryana High Court in Kap Scan (supra)). The provision is as follows:

“23. What considerations and objects are lawful, and what not.—The consideration or object of an agreement is lawful, unless— it is forbidden by law; or is of such a nature that, if permitted, it would defeat the provisions of any law; or is fraudulent; or involves or implies injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful, is void.

(emphasis supplied)

32. Before us, Apex has continually stressed on the need to divorce interpretation of tax provisions from a perceived immorality / violation of public policy. Apex repeatedly relied on T.A. Quereshi (supra), M/s K.M. Jain (supra) and CIT v. Pt. Vishwanath Sharma (2009) 182 Taxman 63/316 ITR 419 (All.). We find that none of these judgments find much favour with the case of the appellant. T.A. Quereshi addressed a business ‘loss’, not a business ‘expenditure’ as envisioned under Section 37(1). In M/s K.M. Jain, the ransom money paid to kidnappers of the employee of the assessee company was allowed deduction primarily based on the fact that the assessee was helpless and coerced to pay the amount in order to save its employee’s life. Thus, the assessee was not a wilful participant in commission of an offence or activity prohibited by law. The same is not applicable to the present facts. Pharmaceutical companies have misused a legislative gap to actively perpetuate the commission of an offence. In Pt. Vishwanath Sharma, a Division Bench of the Allahabad High Court was faced with the question of whether payment of commission to government doctors could be exempted under Section 37(1). At the time, there was no statutory provision prohibiting doctors engaged in private practice from accepting such commission. Hence, the High Court held that while the Assessing Officer had correctly allowed such deduction for private doctors, the same could not be allowed for Government doctors:

“In the present case, payment of commission to Government Doctors cannot be placed on the same pedestal. A distinction has already been made by the authorities while allowing deduction to the assessee in respect to commission which the assessee has paid to private doctors since in their case, payment of commission cannot be said to be an offence under any statute but in respect to Government doctors such payment could not have been allowed as it is an offence under the Statutes as stated above.”

***

“We are, therefore, clearly of the opinion that payment as commission to Government doctors for obtaining a favour therefrom by prescribing medicines in which the assessee was dealing cannot be said to be a “business expenditure” and no deduction can be allowed thereof under the Act.” (emphasis supplied)

The 2002 Regulations, applicable to all medical practitioners (including doctors in private practice), was introduced w.e.f. 14.12.2009.

33.Thus, pharmaceutical companies’ gifting freebies to doctors, etc. is clearly “prohibited by law”, and not allowed to be claimed as a deduction under Section 37(1). Doing so would wholly undermine public policy. The well-established principle of interpretation of taxing statutes – that they need to be interpreted strictly – cannot sustain when it results in an absurdity contrary to the intentions of the Parliament. A Bench of this Court in C. W.S. (India) Ltd. v. CIT32 held as follows:

“While a literary construction may be the general rule in construing taxing enactments, it does not mean that it should be adopted even if it leads to a discriminatory or incongruous result. Interpretation of statutes cannot be a mechanical exercise. Object of all the rules of interpretation is to give effect to the object of the enactment having regard to the language used”.

Justice Oliver Wendell Holmes had once said:

“A word is not a crystal, transparent and unchanged; it is the skin of a living thought and may vary greatly in colour and content according to the circumstances and the time in which it is used.” 33

Holmes thus summed up the elusive nature of words, which lies at the heart of the many issues concerning interpretation of statutes.

34.Interpretation of law has two essential purposes: one is to clarify to the people governed by it, the meaning of the letter of the law; the other is to shed light and give shape to the intent of the law maker. And, in this process the courts’ responsibility lies in discerning the social purpose which the specific provision subserves. Thus, the cold letter of the law is not an abstract exercise in semantics which practitioners are wont to indulge in. So viewed the law has birthed various ideas such as implied conditions, unspelt but entirely logical and reasonable obligations, implied limitations etc. The process of continuing evolution, refinement and assimilation of these concepts into binding norms (within the body of law as is understood and enforced) injects vitality and dynamism to statutory provisions. Without this dynamism and contextualisation, laws become irrelevant and stale.

35. In Bihari Lal Jaiswal & Ors. v. Commissioner of Income Tax & Ors34, the issue of what is “prohibited by law” was considered by this Court, in the context of interpretation of a condition in a statutory license (for vending liquor) which prohibited transfer of the license by way of sub-letting or entering into a partnership agreement. While dealing with the recognition of such a partnership under the IT Act, this Court held that allowing the same would attract the very mischief sought to be avoided:

“This object will be defeated if the licencee is permitted to bring in strangers into the business, which would mean that instead of the licencee carrying on the business, it would be carried on by others – a situation not conducive to effective implementation of the excise law and consequently deleterious to public interest. It is for this very reason that transfer or sub- letting of licence is uniformly prohibited by several State Excise enactments. It, therefore, follows that any agreement whereunder the licence is transferred, sub-let or a partnership is entered into with respect to the privilege/business under the said licence, contrary to the prohibition contained in the relevant excise enactment, is an agreement prohibited by law. The object of such an agreement must be held to be of such a nature that if permitted it would defeat the provisions of the excise law within the meaning of Section 23 of the Contract Act. Such an agreement is declared by Section 23 to be unlawful and void. The question is whether such an unlawful or void partnership can be treated as a genuine partnership within the meaning of Section 185(1) and whether registration can be granted to such a partnership under the provisions of the Income Tax Act and the Rules made thereunder. We think not. When the law prohibits the entering into a particular partnership agreement, there can be in law no partnership agreement of that nature. The question of such an agreement being genuine cannot, therefore, arise.

It is also a known principle that what cannot be done directly, cannot be achieved indirectly. As was said in Fox v. Bishop of Chester35 that it is a:

“Well-known principle of law that the provisions of an Act of Parliament shall not be evaded by shift or contrivance”

And that:

“To carry out effectually the object of a Statute, it must be construed as to defeat all attempts to do, or avoid doing, in an indirect or circuitous manner that which it has prohibited or enjoined”

This Court, in an appeal arising from an action for specific performance, in G.T. Girish v. Y. Subba Raju (D) by L. Rs & Ors36, held that giving the relief would imply doing something prohibited by law (bar against conveyance, for a specific period) – it had the effect of defeating the provisions of the law. It was held that:

“Taking the agreement as it is, it necessarily would be in the teeth of the obligation in law of the first Respondent to put up the construction. The agreement to sell involved clearly terms which are impliedly prohibited by law in that the first Defendant was thereunder to deliver title to the site and prevented from acting upon the clear obligation under law. This is a clear case at any rate wherein enforcing the agreement unambiguously results in defeating the dictate of the law. The ‘sublime’ object of the law, the very soul of it stood sacrificed at the altar of the bargain which appears to be a real estate transaction. It would, in other words, in allowing the agreement to fructify, even at the end of ten-year period of non-alienation, be a case of an agreement, which completely defeats the law for the reasons already mentioned.

78. Going by the recital in the agreement entered into between the Plaintiff and the first Defendant, possession is handed over by the first Defendant to the Plaintiff. The original Possession Certificate is also said to be handed over to the Plaintiff. The agreement, even according to the Plaintiff, contemplated that within three months of conveyance of the site in favour of the first Defendant, the first Defendant was to convey her rights in the site to the Plaintiff. It is quite clear that the parties contemplated a state of affairs which is completely inconsistent with and in clear collision with the mandate of the law. On its term, it stands out as an affront to the mandate of the law.

79. The illegality goes to the root of the matter. It is quite clear that the Plaintiff must rely upon the illegal transaction and indeed relied upon the same in filing the suit for specific performance. The illegality is not trivial or venial. The illegality cannot be skirted nor got around. The Plaintiff is confronted with it and he must face its consequences. The matter is clear. We do not require to rely upon any parliamentary debate or search for the purpose beyond the plain meaning of the law. The object of the law is set out in unambiguous term. If every allottee chosen after a process of selection under the Rules with reference to certain objective criteria were to enter into bargains of this nature, it will undoubtedly make the law a hanging (sic laughing) stock.” 2022 SCC Online SC 60.

36. In the present case too, the incentives (or “freebies”) given by Apex, to the doctors, had a direct result of exposing the recipients to the odium of sanctions, leading to a ban on their practice of medicine. Those sanctions are mandated by law, as they are embodied in the code of conduct and ethics, which are normative, and have legally binding effect. The conceded participation of the assessee- i.e., the provider or donor- was plainly prohibited, as far as their receipt by the medical practitioners was concerned. That medical practitioners were forbidden from accepting such gifts, or “freebies” was no less a prohibition on the part of their giver, or donor, i.e., Apex.

37. In view of the foregoing discussion, the impugned judgment cannot be faulted with. The appeal is dismissed without order on costs. Pending application(s), if any, also stand disposed of.”

7.4 The above judgment of the Hon’ble Apex Court was rendered in the context of pharmaceutical companies giving freebies such as hospitality, conference fees, gold coins, LCD TVs, fridges, laptops, etc. to medical practitioners for creating awareness about the health supplement ‘Zincovit’. [Para 3 of the SC judgment]. The Hon’ble Supreme court was considering the MCI regulation prohibiting the allopathic doctors from taking freebies or gifts of more than Rs.1000. In the present case, the co-ordinate bench for the AY 2013-14 has held that it cannot be conclusively said that the notification issued by MCI shall apply to Ayurvedic doctors also, to whom the sales promotion items have been given by the assessee. It was held that MCI regulations prohibit giving gifts of more than Rs.1000 thereby it was interpreted that the gifts having value of less than Rs.1000/- could be given. The AOs view of considering cumulative value of gifts should have exceeded Rs. 1000/- and hence there is violation of MCI regulations was held to be a debatable one based on presumptions only. The expenditure incurred by the assessee was held to be for business purposes on commercial considerations and hence allowable as deduction. The action of the AO in disallowing only 20% accepting the balance 80% of expenditure as allowable deduction was not sustained.

Further, the AO also does not dispute the fact that these items bear the logo of the assessee and hence they are promotional in nature. In view of the above, since the issue largely revolves around the threshold that has been set under MCA regulations, we deem it fit to remand the matter back to the file of the AO to examine if the promotional items given to doctors were less than Rs.100/ Rs.500 per item which being less than the limit of Rs. 1000 as per the MCI regulations. Accordingly, the concise Ground No 5 and 6 are allowed for statistical purposes.

Ground 7 (TP Adjustment)

8. The above ground deals with the contention that the A.O. erred in making the above two addition twice, viz., under corporate addition and as AMP expenses in TP provision. As we have restored the above two additions, this ground is only consequential and same is also restored to the files of the A.O.

Concise Grounds 8 and 9 (TP Adjustment).

9. The above grounds deal with the Transfer pricing addition on sale of finished goods amounting to Rs.62,76,71,500. We find that on identical facts and circumstances, the co-ordinate bench in assessee’s own case consistently for the A.Y. 2010-2011 to A.Y. 2016-2017 deleted the above addition. The relevant discussion from the ITAT order passed for A.Y. 2013-2014 in ITA No.1385/Bang/2017 is as under:-

“20. In the grounds urged by the assessee on this issue, the assessee has raised two preliminary issues, viz.,

(a) It has questioned the validity of reference made to TPO u/s 92CA and

(b) It has also questioned the action of TPO in treating the foreign companies as Associated Enterprises of the assessee.

These issues have been urged in ground Nos. 7.1 to 7.6. Both the parties agreed that the issue relating to validity of reference made to TPO has been decided against the assessee by the co-ordinate bench in assessee’s own case in Himalaya Durg Co. v. Dy. CIT [2018] 96 taxmann.com 335 (Bang – Trib) relating to AY 2011-12. The issue relating to AE relationship was declined to be examined by the co-ordinate bench in the above said year and it appears that the assessee has not objected to the same. Following the decision rendered by the co-ordinate bench referred above, we reject these grounds.

21. The ground numbers 7.7 to 8.4 relates to the adoption of “Cost Plus Method” as most appropriate method by the TPO and consequent transfer pricing adjustment made by him, which were confirmed by Ld. DRP. Identical issues were considered by the co-ordinate bench in assessee’s own case in IT relating to AY 2011-12 reported in Himalaya Durg Co. (supra). We extract below the relevant discussions made by the co-ordinate bench:—

“8.1 Ground VIII (supra) is raised in respect of the rejection of the assessee’s TP Study/documentation done adopting TNMM as the Most Appropriate Method (MAM) and the TPO’s adoption of CPM as the MAM in place of TNMM. Ground IX (supra) is in respect of the alleged flaws in determination of ALP based on CPM, without admitting CPM as the MAM. In Ground No. X, the assessee is aggrieved with the TPO/DRP action is not allowing adjustments as per rule 10B(1)(c)(iii) of the IT Rules, 1962 (‘the Rules’), without prejudice to the assessee’s objection on adoption of CPM as MAM. As these grounds (supra) are inter-related and deal with the merits of the case, we deem it appropriate to consider these grounds together.

8.2 Briefly stated, the facts relevant for adjudication of these grounds are as under: –

8.2.1 The assessee firm is engaged in the business of manufacture and sale of (a) herbal pharmaceutical products (ayurvedic medicaments and preparations); (b) consumer/personal care products and (c) animal health care products. The manufactured products are sold in India (domestic sales) and are also exported to AEs/related entities outside India. The exports to related entities are from all these ranges of products, i.e. pharmaceutical products, consumer/personal care products and animal health care products. The assessee also sells these products to unrelated parties in CIS countries. In India, pharmaceutical products are driven by the prescription of Doctors. In CIS countries, Ayurveda is widely recognized and therefore largely the practice is akin to India. However, in the other countries, the international business for these products is largely, driven by marketing and advertisement and not by prescription; as is the case with the personal care range of products in India. The personal care division in the domestic market undertakes full fledged marketing activities; including advertisement, sales promotion, etc. However, in respect of exports to AEs/related parties outside India, the entire marketing activities is done by the AEs as the assessee only manufactures the goods as per requirement of the AEs and dispatches the same to them.

8.2.2 In the year under consideration, the assessee exported products amounting to Rs. 74,26,02,810 to AEs. In its TP Study, the assessee selected TNMM as the MAM for determination of the ALP of the international transactions with its AEs. As per its TP Study, the net margin earned by the assessee in respect of personal care division in the domestic segment at 11.30% was compared to the net margin of 15.80% from exports to its AEs. This was stated to be done as the pharmaceutical range of products are on par with the personal care range of products exported outside India and further the margin of domestic pharma division was not comparable as the parameters of marketing, manufacturing, competition, exposure and acceptance of ayurvedic products by customers, government control, etc. are entirely different in India for pharma division.

8.2.3 On the other hand, the personal care division products are sold through distributors and the same is market driven and therefore the ranges of personal care division in India was considered with export to AEs. Since the net margin from exports to AEs was higher than the net margin from domestic sales to unrelated parties, the assessee concluded that its exports to AEs were at arm’s length.

8.2.4 The TPO after examining the assessee’s TP Study issued show cause notice to the assessee proposing to substitute CPM as the MAM in place of TNMM adopted by the assessee. In this regard, the TPO compared the gross margin earned on exports at 23.32% as against gross profit of 50.65% earned by the domestic consumer product division and proposed Transfer Pricing Adjustment. The assessee filed its objections thereto challenging the adoption of CPM as the MAM, inter alia, that the GP ratio differed mainly in respect of the marketing, distribution, selling and other similar expenses incurred by the assessee in the domestic market, whereas no such expenditure was incurred by it in respect of exports to AEs, as such expenses were incurred by the AEs in their respective territories and not by the assessee. It was also submitted that there were inherent difficulties in applying CPM and contended that, without admitting that CPM is the MAM, the TPO ought to reduce the gross profit margin earned in the domestic market on account of various difference between domestic sales such as marketing and selling costs, discounts, administrative costs, etc. whereas export sales to AEs are at a price ex-factory. Therefore, since the gross profits would be different in both these segments, they cannot be compared by applying CPM. It was also contended that since the net margin in both segments are less effected by transactional differences at net profit level, therefore TNMM is the MAM.

8.2.5 The TPO, however, rejected the assessee’s contention and passed order under Section 92CA of the Act wherein he considered CPM as the MAM and considered the Gross Profit margin earned in the consumer product division for bench marking. The TPO also held that the assessee acted as a contract manufacturer in respect of products manufactured and exported to AEs as it did not undertake distribution, advertisement, marketing and selling expenditure and alleged that the goods are sold at a mark up of 15% on cost. The TPO computed the Gross Profit margin on cost of goods sold in the domestic consumer product division at 102.63% and the cost of goods sold to AEs amounting to Rs. 56,94,29,812 was accordingly increased by the above rate to Rs. 115,38,35,749. From this, the exports to AEs amounting to Rs, 74,26,02,810 was reduced and the Transfer Pricing Adjustment in respect of exports to AEs was determined at Rs. 41,12,32,939. The DRP upheld these views/actions of the TPO.

8.3.1 Before us, the learned Authorised Representative of the assessee sought to explain the transactional and functional differences between the domestic sales to unrelated parties and export sales to AEs to justify the GP margin under the segments. The learned Authorised Representative, referring to the TPO’s order under Section 92CA of the Act, argued that the TPO accepted that various expenditure like distribution, marketing, advertisement, selling, administrative costs, etc. were incurred in the domestic market segment and that the same was not incurred in connection with exports to AEs. It was submitted that in the domestic market, since the assessee had to incur huge expenditure on distribution, marketing, advertisement, selling, etc. in the domestic market, the selling price and gross profit of products for sale in domestic market was fixed at a high price. On the other hand, as the AEs themselves incur similar expenses in the foreign markets, the selling price of products exported to AEs does not factor in similar expenditure and hence the selling price and gross profit of these products are lower when compared to that of products sold in the domestic market.

8.3.2 The learned Authorised Representative referred to and placed reliance on OECD Guidelines for transfer pricing, illustration given thereunder and various judicial pronouncements in order to explain why TNMM and not CPM be regarded as the MAM. It was submitted that CPM cannot be considered as MAM due to transactional and functional differences between domestic and export sales and that TNMM be taken as the MAM as it was less affected by the transactional and functional differences as comparison is made at the net profit level. The learned Authorised Representative submitted that, without prejudice to the assessee’s above contentions, if CPM is to be considered as the MAM, there being various differences between domestic sales and exports sales, adjustments should be allowed for all these differences. Arguments were also put forth that the assessee was a full fledged manufacturer and not a contract manufacturer as held by the TPO for the purpose of applying CPM.

8.4 Per contra, the learned Departmental Representative for Revenue argued justifying the action of the TPO in adopting CPM as the MAM due to the difference in GP Margin in domestic and export sales. The learned Departmental Representative filed a chart showing the percentage of GP to cost of goods sold, in both consumer products in domestic market and exports to AEs for Assessment Years 2009-10 to 2013-14 and submitted that due to huge difference in GP rate in both the above segments, the Transfer Pricing Adjustment made by the TPO is fully justified. The learned Departmental Representative contended that TNMM cannot be considered as the MAM since distribution, marketing, selling expense are incurred only in the domestic market and not in connection with the products exported to AEs. The learned Departmental Representative relied on various judicial pronouncements to contend that CPM was the MAM to be adopted in the case on hand.

8.5.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. The first issue for consideration is that of what would be the MAM in the facts and circumstances in the case on hand.

As per sec. 92C(1) of the Act, the ALP in relation to an International transaction hall be determined by any of the following methods, being the MAM, having regard to the nature of transaction or class of transaction OR class of associated persons OR functions performed by such persons OR such other relevant factors as the Board may prescribe, viz.,

(i) Comparable Uncontrolled Price Method;

(ii) Resale Price Method;

(iii) Cost Plus Method;

(iv) Profit Split Method;

(v) Transactional Net Margin Method;

(vi) Such other method as may be prescribed by the Board.

Sub-section (2) of section 92C of the Act provides that the MAM referred to in sub-section (1) shall be applied, for determination of the ALP, in the manner as may be prescribed.

Rule 10B of the IT Rules, 1962 provides for the determination of ALP under section 92C of the Act. The TPO in the case on hand has applied CPM as the MAM. Rule 10B(1)(c) deals with the determination of ALP as per CPM and the same is extracted hereunder:—

(c) cost plus method, by which,—

(i) the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined;

(ii) the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising, from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined;

(iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market;

(iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii);

(v) the sum so arrived at is taken to be an arm’s length price in relation to the supply of the property or provision of services by the enterprise.”

8.5.2 As per CPM, the direct and indirect costs of production incurred by the enterprise in respect of property transferred to an AE is increased by the ‘adjusted profit mark-up’ to determine the ALP. The ‘adjusted profit mark-up’ is determined by making adjustments to ‘normal gross profit mark-up’ to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market. The ‘normal gross profit mark-up’ means the gross profit mark-up on direct and indirect costs of production arising from the transfer of the same OR similar property by the enterprise or by an unrelated enterprise, in a comparable uncontrolled transaction or a number of such transactions.

8.5.4 In the case on hand, the assessee compared the net profit margin from domestic consumer product division with the net profit margin for exports to AEs. At page 46 of his order, the TPO has held that the exports to AEs is comparable in terms of nature of goods to the domestic consumer product division and therefore this section is considered as comparable to exports to AEs. Thus, there is no dispute on the domestic consumer product division being compared with exports to AEs. The TPO, however, compared the gross margin of domestic consumer product division with the gross margin of exports to the AEs. In doing so, we find the TPO disregarded the mandate of Rule 10B(1)(c) of the Rules which require determination of ‘adjusted profit mark-up’ by making adjustments to the ‘normal gross profit mark-up’ by taking into account the functional and other differences between the international transactions and the comparable uncontrolled transactions. (Mistake in numbering)

8.5.5 It is an undisputed fact on record that, in respect of finished goods exported to AEs, the entire marketing, adjustment, distribution and sales activities are performed by the AEs and not by the assessee. The TPO has acknowledged/accepted this fact at various places in his order under section 92CA of the Act; viz. at the 1st para on pages 3 and 6, last para of page 4, 2nd para on page 5, etc. The TPO, however, rejected TNMM as the MAM and adopted CPM for determination of ALP of sale of finished goods to the assessee for the reason that, even though the products sold in the domestic consumer product division are comparable to the products sold to AEs, the functions performed, assets employed and risks undertaken in both the segments are not the same. The selling price and gross profit of products sold in the domestic consumer division is higher than that of the products exported to AEs for the reason that the assessee in the domestic consumer product division undertakes all function and incurs expenditure on distribution, marketing, advertisement, transportation, sales promotion, commission, travel, salary, travelling, administrative costs and also undertakes risks such as market risk, debt risk, etc. Therefore the selling price and gross profit of products sold in the domestic consumer products are fixed at a higher level than in the case of export of finished goods to AEs where the selling price is the ex-factory price; the freight at actual is collected by the assessee and also as all other expenditure mentioned above like distribution, marketing, advertisement, transportation, sales promotion, etc. are entirely incurred by the AEs and not by the assessee. Therefore, since the assessee does not undertake the above functions and risks, the selling price of products sold to Assessing Officer are fixed considering a net margin of 15% on the estimated costs.

8.5.6 In our considered view, the TPO has completely disregarded the above important differences in functions performed, assets employed and risks undertaken by the domestic consumer product division and export to AEs; the pricing policy followed by the assessee due to these differences in both segments. In this view of the matter, we are of the considered opinion that the TPO’s approach, in applying the gross profit margin of the domestic consumer product division to the cost of goods sold in exports to AEs to determine the ALP, is factually erroneous and contrary to the mandate of Rule 10B(1)(c) of the Rules.

8.5.7 As per Rule 10B(2), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following namely :—

(a) the specific characteristics of the property transferred or services provided in either transaction;

(b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions;

(c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions;

(d) conditions prevailing in the markets in which the respective parties to the transactions operate, including die geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail.”

As per Rule 10B(3), an uncontrolled transaction shall be comparable to an international transaction if:—

“B (3) An uncontrolled transaction shall be comparable to an international transaction if—

(i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or

(ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences.”

The effect of Rule 103(2) and (3) is to compare an international transaction with an uncontrolled transaction with reference to the parameters as explained at (a) to (d) above and to make reasonably accurate adjustments to eliminate the material effects of differences between the international transactions and uncontrolled transactions.

8.5.8 In the case on hand, as discussed above, the assessee mentions a higher gross margin in the domestic market because it incurs significant administration, selling and distribution expenses, etc. In case of group concerns (AEs) since the administration, selling, distribution and other expenses are incurred by the group concerns themselves, necessitating the levying of higher margins for the group concerns/AEs and consequently, keeping correspondingly lower margin for the assessee. Before the TPO, the assessee put forth the above discussed explanations in respect of functional differences between exports to AEs and the domestic consumer product division (extracted at pages 16 to 21, pages 31 to 33 of TPO’s order). Several other differences like public awareness of ayurvedic products in India and outside India, popularity of Brand ‘Himalaya’ in India and abroad, support of doctors and Govt. of India and abroad, etc. were explained before the TPO. The assessee also submitted that if CPM is considered as the MAM, then the gross profit margin earned in the domestic market should be reduced on account of the many/various differences like, freight to move goods to the sales depots and subsequently to the stockists, commission to C&F Agents through whom the sales are achieved, filed staff salaries, sales commission to employees, travelling cost to promote and achieve sales all over India, communication charges, brand premium, allowances for negative publicity in the international market, etc.

8.5.9 Rule 10B(1)(c) r.w. rule 10B(3) provides for making reasonably accurate adjustments to eliminate the material effects of differences between transactions being compared. In the case on hand, from the details on record, the differences between domestic sales and export sales are large in number and some being qualitative, unless reasonably accurate adjustments are made to normal gross profit mark up to eliminate the material effects of the many differences between domestic sales and export sales, the two margins cannot be compared. In our view, to give a mathematical number to all these differences would mean indulging in the exercise within a realm of subjectivity which is to be avoided. We are conscious of the principle that CPM can be applied in the case of a manufacturer selling goods to both AEs and non-AEs. However, in our considered view, in the peculiar factual matrix of the case on hand, as discussed and laid out above, we are of the view that CPM cannot be considered as the MAM. In coming to this view, we are fortified by the decision of the Pune Bench of the ITAT in the case of Drilbits International (P.) Ltd. v. Dy. CIT [2011] 142 TTJ 86, wherein on similar facts and circumstances, it was held that gross profit mark up on domestic sales cannot be compared with gross profit on export sales to AE, reasonably accurate adjustments cannot be made to eliminate the differences between the domestic sale; export sales and consequently CPM cannot be considered as the MAM; and in this regard at para 50 thereof held as under:—

“50. Considering the above submissions, vis-a-vis the method i.e. CPM (cost plus method) adopted by the learned TPO to determine the ALP, which has been relied upon by the learned Departmental Representative, we find that the learned TPO while adopting CPM has failed to appreciate several material aspects of the issue as discussed above. In our view, the learned TPO was not justified in comparing the gross margin in export segment vis-a-vis gross margins in domestic segment. There are various differences in the functions performed and the risk assumed in these two segments and therefore, the same cannot be considered as comparable cases for determining the ALP. There is no marketing risk in the export segment, no risk of bad debts, no product liability risk in export segments whereas the assessee has to bear all these risks in the domestic segment. The contractual statements also defer in the domestic segment vis-a-vis export segments. There are different characteristics and contractual terms in the two segments and further geographical and marked differences are also present. Thus, we are of the view that it is very difficult to make suitable adjustments for these differences, hence the CMA method is not appropriate method for determining the ALP. The learned TPO, in our view, has thus erred in adopting the CMA method as appropriate method.”

8.5.10 Similarly, the ITAT, Pune Bench in the case of Alfa Lavel (I) Ltd. v. Dy. CIT [2014] 46 taxmann.com 394/149 ITD 285 (Pune – Trib.), rejected CPM as the MAM. In its decision in that case, where the assessee was engaged in the business of manufacture and sale of various industrial products such as decanters, separators, etc. to its AE located abroad as well as in the domestic sector, in view of the fact that there were various differences in export segment and domestic segment, such as market fluctuations, geographic differences, volume difference, credit risk, RPT, etc., the Bench held that the TPO was not justified in adopting CPM as the MAM as suitable adjustments are not possible.

8.5.11 The learned Departmental Representative for Revenue placed reliance on the decision of the Delhi Bench of ITAT in the case of Wrigley India (P.) Ltd. v. Addl. CIT [2011] 14 taxmann.com 91/48 SOT 53 (URO) (Delhi) to put forward the proposition that CPM should be considered as the MAM for manufacture and sale of finished goods in the domestic markets and exports to AEs. In fact, in this decision (supra), the Tribunal held that ‘since the marketing and advertisement expenditure has to be also incurred by the AEs to market the product in their respective territories, therefore this aspect for making adjustments as provided in rule 10B(1)(c)(iii) has to be considered. It is thus seen that the above decision relied on by the learned Departmental Representative also recognizes that adjustments have to be made as per rule 10B(1)(c)(iii) under CPM also. No doubt, as a proposition, the above principle holds good, however, as we have held that, in the case on hand reasonably accurate adjustments cannot be made to determine the adjusted profit mark up as per rule 10B(1)(c), CPM cannot be considered as the MAM.

8.5.12 The learned Departmental Representative also placed reliance on the decision in the case of Diamond Dye Chem Ltd. v. Dy. CIT in ITA No.3073/Mum/2006 dated 14-5-2010, wherein the Tribunal accepted CPM as MAM for the following reasons as held at para 35 thereof, which is extracted hereunder:-

“35. We find the assessee is manufacturing Optical Brightening Agents (OBAs) which are being used in textile and paper industries and which are exported by the assessee to the AEs as well as Non-ABs, Therefore, we do not find any merit in the contention of the assessee that there is product dissimilarity between goods exported to AEs and unrelated parties and, therefore, the Cost Plus Method is not applicable. Further the learned counsel for the assessee also could not satisfactorily explain as to what are the substantial differences in the functional and risk profiles of the activities undertaking by the assessee in respect of the exports made to the AEs and Non-AEs. Therefore, we do not find merit in the submission of the learned counsel for the assessee that in cases where the differences in functional profile are so material that the same cannot be reasonably adjusted while carrying out a gross profit analysis, it may be appropriate to consider a net level analysis using operating margin in view of Rule 10B(1)(c)(iii). Therefore, the submission of the learned counsel for the assessee that if at all an internal comparison has to be carried out in the instant case then it should be carried out at the operating level i.e., using the net/operating margin. Further we find force in the submission of the learned DR that since the cost data for the manufacture of products are available as per cost audit report, the reliability there of is assured and therefore Cost Plus Method is the most appropriate method. In this view of the matter and in view of the detailed discussion by the learned CIT(A), we hold that the Cost Plus Method (CPM) is the most suitable method for the international transactions with AEs in the instant case.”

In this decision (supra), the Tribunal accepted CPM as the MAM considering the fact that the assessee was not able to satisfactorily explain the substantial difference in the FAR analysis in respect to exports to AEs and non-AEs and therefore did not accept that comparison should be made at the operating level using the net operating margin. In the case on hand, however, the assessee has brought on record many functional, quantitative and qualitative differences between the domestic consumer product division and the exports to AEs. As discussed earlier, reasonably accurate adjustments cannot be made in the case on hand to determine the adjusted profit mark up as per rule 10B(1)(c) and therefore CPM cannot be considered as the MAM. Consequently, the aforesaid decision relied on by the learned Departmental Representative is not applicable to the facts of the case on hand.

8.5.13 The OECD, TP Guidelines, 2010 relied on by the assessee provides that CPM may become less reliable when there are differences between the controlled and uncontrolled transactions and those differences have a material effect on the attribute being used to measure arm’s length conditions. It further states that when there are material differences that affect the gross margins earned in controlled and uncontrolled transactions, adjustments should be made to account for such differences. The extent and reliability of those adjustments will affect the relative reliability of the analysis.

8.5.14 On the other hand, the OECD, TP Guidelines, 2010, provides that TNMM is less affected by the transactional and functional differences as seen form Part III, B.2 at 2.68 thereof :—

“2.68 One strength of the transactional net margin method is that net profit indicators (e.g. return on assets, operating income to sales, and possibly other measures of net profit) are less affected by transactional differences than is the case with price, as used in the CUP method. Net profit indicators also may be more tolerant to some functional differences between the controlled and uncontrolled transactions than gross profit margins. Differences in the functions performed between enterprises are often reflected in variations in operating expenses. Consequently, this may lead to a wide range of gross profit margins but still broadly similar levels of net operating profit indicators. In addition, in some countries the lack of clarity in the public data with respect to the classification of expenses in the gross or operating profits may make it difficult to evaluate the comparability of gross margins, while the use of net profit indicators may avoid the problem.”

8.5.15 Rule 10B(1)(c) deals with the determination of ALP a per TNMM. As per this Rule, the net profit margin from a comparable uncontrolled transaction is adjusted to take into account the differences between the international transactions and comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. This is compared with the net profit margin from the international transactions entered into with an AE. TNMM requires establishing comparability at a broad functional level, requiring comparison between net margins derived from the operation of the uncontrolled transactions and net margin derived in similar international transactions. Thus, TNMM removes the limitations of other methods and since the comparison is made at the net profit level, it is the only method where comparison is possible when there are differences in the transactions and further making reasonable adjustments to the comparable transaction is impossible. The Hon’ble Delhi High Court in the case of Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT [2015] 55 taxmann.com 240/231 Taxman 113/374 ITR 118 held that the TNMM is a preferred TP Method, for determination of ALP of international transactions for its proficiency, convenience and reliability and in TNMM preference should be given to internal or in-house comparables; as held in paras 89 and 90 thereof :—

“89. The TNM Method has seen a transition from a disfavoured comparable method, to possibly the most appropriate Transfer Pricing method due to ease and flexibility of applying the compatibility criteria and enhanced availability of comparables. Net profit record/data is assessable and within reach. It is readily and easily available, entity-wise in the form of audited accounts. The TNM Method is a preferred transfer pricing arm’s length principle for its proficiency, convenience and reliability, ideally, in TNM Method preference should be given to internal or in-house comparables. In absence of internal comparables, the taxpayer can and would need to rely upon external comparables, i.e. comparable transactions by independent enterprises. For several reasons, database providers, it is apparent, have the requisite information and data of external comparables to enable comparability analysis of the controlled and uncontrolled transactions with necessary adjustment to obtain reliable results under TNM Method. This method also works to the benefit and advantage of the tax authorities in view of convenience and easier availability of data not only from third party providers, but on then own level, i.e. assessment records of other parties.

90. The strength of the TNM Method is that net profit indicators are less affected by transactional differences in comparison with some other methods. This method is more tolerant to functional differences between controlled and uncontrolled transactions in comparison with resort to gross profit margins…….. “

8.5.16 In the case on hand, the net margin earned by the assessee in respect of personal care division in the domestic segment at 11.30% was compared to the net margin from exports to AEs at 15.80%. Since the net margin from exports to AEs was higher than the net margin from domestic sales to unrelated parties, the assessee concluded that its exports to AEs were at arm’s length. The TPO has taken AE sales comprising of both pharma and personal care products and compared the same with the personal care products of the domestic segment. Since the products compared are different, consequently the gross profits are also different. Further, the number of differences and adjustments to be carried out for comparison purposes as detailed from page 19 of the TPO’s order are large in number and therefore where differences are many, CPM cannot be considered as MAM. Consequently, in our considered view, TNMM is the MAM in the peculiar facts and circumstances of the case on hand.”

22. As regards the view of the TPO that the assessee is a contract manufacturer, the co-ordinate bench in the assessee’s own case for assessment year 2011-12 (supra) has held as under:—

“9.1 The TPO held that the assessee acted as a contract manufacturer in respect of products exported to AEs since the products are sold to AEs at cost plus 15% and the assessee does not undertake any other functions. The OECD, TP Guidelines, 2010 explain the meaning of contract manufacturing with an example wherein a 100% subsidiary company assembles products (a) at the expense/risk of the holding company; (b) based on all necessary component, know-how provided by the holding company (c) based on guarantee provided by the holding company for purchase of products. The OECD, TP Guidelines further states that in contract manufacturing, the producer may get extensive instructions about what to produce, in what quantity and of what quality and therefore in such circumstances, the producing company bears low risk. The Guidelines also provide that a contract manufacturer under control of principal, manufactures the product on behalf of the principal, using technology that belongs to the principal, where purchase of the products manufactured and remuneration are guaranteed by the principal, irrespective of whether and if so at what price the principle is able to resell the product.

9.2 In the case on hand, the products involved are standard goods manufactured by the assessee and selling them in the ordinary course of its business, both in the domestic and overseas markets. The assessee does not depend on the technology of the AEs for manufacture of products; whose specifications whether technical or otherwise are decided by the assessee itself. At para 1.2 on page 3 of his order under Section 92CA of the Act, the TPO has accepted that the assessee has its own range of products and the AEs only choose from the standard products which are manufactured by the assessee for the Indian Market. In our view, the TPO’s understanding of a contract manufacturer will make every manufacturer of goods in India who would not only make domestic sales but also effect sales to an overseas distributor as a contract manufacturer. A co-ordinate bench of this Tribunal in the case of Essilor Mfg. India (P.) Ltd. v. Dy. CIT [2016] 67 taxmann.com 377 held that an assessee carrying out its independent activity of manufacturing cannot be treated as a contract manufacturer. It was held that in such circumstances CPM cannot be applied and TNMM will be the MAM. In view of the overall consideration of the peculiar facts and circumstances of the case, as discussed above, we hold that CPM adopted by the TPO is incorrect and contrary to the facts of the instant case and that the assessee is justified in adopting TNMM for determining the ALP in respect of finished goods exported to AEs. In this view of the matter, the Transfer Pricing Adjustment of Rs. 41,12,32,939 made by the TPO by adopting CPM is accordingly deleted, Consequently, ground Nos. VIII & IX raised by the assessee are allowed.”

23. We notice that the co-ordinate bench has held in AY 2011-12 that the assessee is justified in adopting TNMM as most appropriate method for determining the Arm’s Length Price of the international transactions of export of finished goods to its Associated Enterprises. It has also held that the assessee cannot be considered to be a contract manufacturer, Accordingly, the co­ordinate bench has deleted the Transfer pricing adjustment made on this point in AY 2011-12. The Ld. A.R. submitted that the decision rendered in AY 2011-12 was also followed in the assessee’s own case in AY 2010-11 in Himalaya Durg Co. v. Dy. CIT [2019] 107 taxmann.com 296 (Bang – Trib). He invited our attention to the following observations made by the Tribunal in AY 2010-11 with regard to the ALP of exports made to AEs:—

“6.6 For the year under consideration also, the TPO has accepted the fact that in respect of sale of products in India, the assessee has undertaken marketing, selling and administrative functions and the assessee has not performed any such functions in respect of sales to AEs. The number of differences and adjustments to be carried out for comparability purposes as laid out at page 17 of the TPO’s order are many in number and therefore, where differences are many, CPM cannot be considered as the MAM. In this view of the matter and following the decision of the Co­ordinate Bench of this Tribunal in the assessee’s own case for Assessment Year 2011-12 (supra), we hold that TNMM is the MAM. Under the said method, the assessee has earned net margin of 13.39% from exports to its AEs whereas the net loss suffered by the assessee in respect of the personal care division in the domestic segment is (-) 10.16%. As the net margins from the assessee’s exports to its AEs is higher when compared to the result of its margins in respect of transactions in the personal care division in the domestic segment, the price of the sale of finished goods are at aims length. In this factual view of the matter, the TP Adjustment of Rs. 38,84,32,314/- made by the TPO by adopting CPM as the MAM is accordingly deleted. Consequently, grounds 5 to 7 are disposed-off as above.”

24. In assessment year 2010-11, the co-ordinate bench has also examined the Arms length price of export to AEs under TNM method. It has compared Net margin rate declared by the assessee in respect of “Domestic – Personal Care Division” with the net margin rate declared in Exports to AE. After comparison, the co-ordinate bench has held that the net margin rate from assessee’s exports to AE is higher when compared to the result of its margins in respect of transactions in the personal care division in the domestic segment and accordingly held that the price of sale of finished goods to its AE is at arm’s length. Accordingly, the co-ordinate bench has deleted the T.P adjustment made in respect of Exports made to AEs. Before us, the Ld. A.R submitted that the Net profit margin declared during the year under consideration was 12.60% in Export to AE and the net profit margin declared in the domestic personal care division was 1.19%. Accordingly, he submitted that the international transaction of Export to AEs is at arms length and hence the impugned T.P adjustment should be deleted.

25. We heard the parties on this issue and perused the record. We have noticed that the CPM method adopted by the TPO for bench marking the international transaction of Export to AEs has been rejected by the Co-ordinate bench in A.Yrs 2010-11 and 2011-12 in the assessee’s own case. Accordingly, consistent with the view taken by the co-ordinate bench in the assessee’s own case in the above said years and for the detailed reasons discussed in the order of the Tribunal, we also hold that the assessee was justified in adopting TNMM as most appropriate method for determining the Arm’s Length Price of the international transactions of export of finished goods to its Associated Enterprises.

26. While bench marking the international transaction of Export to AEs under Cost Plus method, the TPO has taken “Domestic Personal Care division” as ‘uncontrolled internal comparable’. The reasoning given by TPO is available at pages 14 & 15 of his order. The co-ordinate bench has also taken “Domestic – Personal Care Division” as uncontrolled comparable in A.Y. 2010-11. Accordingly, we are of the view that “Domestic Personal Care division” can be taken as uncontrolled comparable under TNM method in this year also.

27. We notice that the TPO has adopted “Gross Profit Margin rate” as PLI under Cost Plus Method, while the contention of the assessee is that “net profit margin rate” should be taken as PLI. In this regard, the Ld. A.R submitted that the “Net Profit Margin rate” shall be the appropriate PLI in the facts and circumstances of the case. He submitted that the co-ordinate bench has taken the net profit margin rate as PLI under TNM method in A.Y. 2010-11. He further submitted that the TPO himself has accepted that

(a) AEs perform marketing function and the assets required to perform the function of marketing are owned by the AEs.

(b) In A.Y. 2012-13, the TPO has expressed the view that the Corporate expenses should not be debited to “Exports to AE section”.

(c) The TPO has also observed in A.Y. 2012-13 that the administrative and selling expenses are not incurred on export to AEs.

The Ld A.R submitted that the division wise profit and loss account prepared by the assessee for the year under consideration adheres to the view taken by the TPO. He submitted that the TPO has, in principle, has accepted the division wise profit and loss account except with regard to discounts, i.e., The assessee had deducted discounts and discounts for damaged goods from Sales figure, while the TPO has taken it as a Profit and Loss item. He submitted that this adjustment made by TPO will not have any impact when the net profit margin rate is taken as PLI. He submitted that the assessee had to incur Corporate expenses, Administrative expenses and Marketing expenses for “domestic personal care division”, while these expenses are not required to be incurred/allocated for “Exports to AE segment”. The Marketing expenses is, in fact, huge expenditure incurred by the assessee. Since the assessee has to factor in huge marketing expenses and other expenses that are required to be incurred for domestic segment in the selling price, the G.P margin rate is bound to be higher in respect of “Domestic – Personal care division”. Hence comparison of G.P margin rate of both divisions would give distorted picture, as Sales pricing methodology is totally different between both segments. Accordingly, he submitted that the comparison of net profit margin rate is ideal one in the facts and circumstances of the case, as “net margin rate” is more tolerant to some functional differences between the controlled and uncontrolled transactions than gross profit margin rate. We find merit in the said contentions

28. During the year under consideration, the assessee has declared net profit margin rate @ 1.19% for “Domestic – Personal care division” and @ 12.60% for “Exports to AE division”. Admittedly, the net profit margin rate of “Exports to AEs division” is more than the uncontrolled comparable selected by the assessee/TPO, Hence price charged for export of finished goods to AEs is at arms length. In A.Y. 2010-11 also, the co-ordinate bench has given a finding that the price charged for export of finished goods to AEs is at arms length, since the net profit margin rate was higher in that division vis-a-vis the Domestic – Personal care division. Accordingly, the co-ordinate bench held that the TP adjustment made in this regard is liable to be deleted. The facts available in this year also are identical and accordingly we hold that the T.P adjustment made by the A.O. in respect of international transaction of Export to AEs is liable to be deleted. Accordingly we direct the A.O. to delete the same.”

Following the above order of the Tribunal in assessee’s own case, we delete the TP addition of Rs.62,76,71,500. Concise grounds 8 and 9 are partly allowed.

Concise ground 10 (TP Adjustment)

10. The above ground deals with the TP adjustment on account of advertisement, marketing and promotion expenses amounting to Rs.165,20,68,381. We find that on identical facts and circumstances, the co-ordinate bench in assessee’s own case consistently for the assessment year 2010-2011 to 2016-2017 deleted the above addition. The relevant discussion from the ITAT order passed for A.Y. 2013-2014 in ITA No.1385/Bang/2017 is as under:-

“29. The next issue urged by the assessee relates to the transfer pricing adjustment made in respect of Advertisement and Marketing Promotion (AMP) expenses. The facts relating to the same are discussed in brief. The TPO noticed that the assessee firm came into existence in 1930. The logo and brand name were developed by the Firm over the years. Initially, the firm did not spend much on advertisement and marketing, since its business, at that point of time, was by way of canvassing its products through the doctors. In 1995, the Hon’ble Supreme Court banned cross prescriptions, i.e., doctors other than ayurvedic discipline cannot prescribe ayurvedic products. Hence, in 1998, the assessee firm started consumer products division and started advertising of its products. At the same time, the assessee firm underwent change in its constitution by introduction of new partner named partner named MMI Corporation (which was later renamed as Himalaya Global holdings Ltd.), which was a foreign company registered in Cayman islands. Consequently, the profit sharing ratio between the partners also underwent change from time-to-time. Finally, following two persons remained as partners with the following profit sharing ratio:-

M/s. Himalaya Global Holdings Ltd.	– 88%
M/s. Himalaya Drug Company Pvt Ltd.	– 12%

New partnership deed was executed whenever, there was change. In the partnership deed executed in 2003, it was stated that the “brand name of Himalaya” and “logo” shall be owned by the major partner, viz., M/s. Himalaya Global Holdings Ltd.

30. Under the above discussed back ground, the A.O. examined the AMP expenses incurred by the assessee and noticed that the assessee has incurred a sum of Rs. 152.27 crores during the year under consideration. The TPO sought to segregate this expense into “routine” and “Non-routine” expenses. Based on T.P study of the assessee, the TPO identified seven companies in order to find out the limit of “routine AMP expenses”, i.e., AMP expenses normally incurred by other companies. The same worked out to 3.16% of the turnover. The TPO took the view that the expenses incurred towards AMP over and above 3.16% of the turnover should be considered as “non-routine AMP expenses”. Accordingly, the expenses incurred over and above the said limit of 3.16% was computed by TPO at Rs. 144,52 crores and it was termed as “non-routine AMP expenses”. The TPO took the view that the non-routine expenses have been incurred to promote “brand and logo”, which are legally owned by M/s. Himalaya global holdings Ltd. Cayman Islands now. Accordingly, he took the view that part of AMP expenses should have been borne by M/s. Himalaya Global Holdings Ltd. The TPO adopted Profit split method in order to ascertain the amount attributable to the above said AE. Accordingly, he proposed an adjustment of Rs. 91.24 crores as Transfer pricing adjustment in respect of AMP expenses. The Ld. DRP also confirmed the same.

31. The Ld A.R submitted that an identical issue was examined by the co-ordinate bench in the assessee’s own case relating to A.Y. 2011-12 (referred supra) and it was held that the AMP transaction is not an international transaction in the absence of specific agreement between assessee and its AE on the matter of incurring of AMP expenses and hence there was no requirement for determining the ALP of the said expenses. He submitted that the co-ordinate bench has relied upon various case laws. He submitted that the same view was also taken in the assessee’s own case in A.Y. 2010-11. The Ld. D.R, however, relied on the order passed by the tax authorities on this issue.

32. We heard rival contentions on this issue and perused the record. We notice that the assessee herein is producing the products by using logo and brand name of “Himalaya”. Though the said logo and brand name was developed by the assessee herein, yet, at some point of time, the ownership of the same was transferred to one of the partners named M/s. Himalaya Global holdings Ltd. located in Caymen islands. However, the assessee herein has continued to use the said logo and brand name for manufacturing the products. It is an admitted fact that the assessee does not pay any royalty to M/s. Himalaya Global Holdings Ltd. for using the brand name and logo. It is also an admitted fact that there is no agreement between the assessee and M/s. Himalaya Global Holdings Ltd. with regard to incurring of advertisement expenses. The assessee has incurred following expenses towards advertisement and market promotion: —

Advertisement and Publicity	Rs.69,23,19,080
Sales Promotion	Rs.32,46,93,420
Promotional discounts	Rs.50,57,77,473
Total	Rs.152,27,89,973

It is the submission of Ld. A.R that the expenditure incurred on Sales promotion and promotional discounts are directly related to actual sales realised and hence the same cannot be said to be related to alleged brand building. He submitted that the actual amount spent on advertisement and publicity was only Rs. 69.23 crores, while the domestic turnover of the assessee is around Rs. 1000 crores. Hence the advertisement expenses account for only about 7% of the turnover, while the average advertisement spent of comparable companies was 3.19%, He also submitted that the advertisement expenses should not be taken as an international transaction, since they are incurred in the routine course. The Ld. A.R also contended that, when TNM method is adopted to bench mark the international transactions all related items get subsumed in the net profit. Accordingly, he submitted that no separate adjustment is called for AMP expenses alone when TNM method is adopted. The Ld. D.R, on the contrary, supported the order passed by the A.O. on this issue.

33. We notice that an identical issue was examined by the co-ordinate bench in the assessee’s own case in A.Y. 2011-12. The relevant discussions made by the co-ordinate bench in assessment year 2011-12 are extracted below:-

“11. Ground No. XI – Advertisement, Marketing & Sales Promotion (AMP) Expenses – Transfer Pricing Adjustment: Rs. 31,69,02,034.

11. 1 In the course of proceedings, the TPO noted that the assessee had incurred huge advertisement and selling expenditure in marketing its products. Taking into account the fact that the brand name and logo ‘Himalaya’ is owned by M/s. Himalaya Global Holding Ltd; Cayman Islands, the TPO held that the legal owner, namely, M/s. Himalaya Global Holding Ltd., Cayman Islands (viz. holding 88% share in the assessee firm) should meet the expenditure on promotion of the brand name or it should compensate the assessee for performing the function of developing the brand name and logo in India. The TPO was of the view that the AMP expenditure incurred by the assessee is in excess of the gross profit itself, it cannot be said that the entire AMP expenditure is incurred for the purpose of the assessee’s business. In this view of the matter, the TPO applied the ‘Bright Line Test’ to identify the expenditure on AMP which is routine in nature and which an entity working at arm’s length is expected to incur and held the balance expenditure to be non-routine and for the purpose of development of the brand and Logo. The TPO worked out the non-routine AMP identifying the percentage of AMP expenditure (i.e. selling and marketing expenditure/sales) incurred by uncontrolled companies and in this context selected five companies as comparables and determined the average percentage of selling and marketing expenditure to sales @ 24.05%, The TPO applied this rate to sales of Rs. 197,25,42,327 and the routine expenses were determined at Rs. 47,43,96,429. Reducing this amount from the actual selling and marketing expenditure of Rs. 77,62,07,890, the non-routine expenditure was computed at Rs. 30,18,11,461 and after adding a mark up of 5% on this, the TPO determined the adjustment at Rs. 31,69,02,034. The DRP upheld and confirmed the above views/contentions of the TPO.

11.2.1 Before us, the learned Authorised Representative for the; assessee placed reliance on the decisions of the co-ordinate bench of this Tribunal in the case of Essilor India (P.) Ltd. v. Dy. CIT [2016] 68 taxmann.com 311 (Bang – Trib); Dy. CIT v. Niks India (P.) Ltd. IT (TP) Appeal No.232/Bang/2014 and other judicial pronouncements to contend that in the absence of any agreement or arrangement with M/s. Himalaya Global Holdings Ltd., Cayman Islands to incur AMP expenses on its behalf to promote the brand value of the products, the AMP expenses cannot be treated as an international transaction.

11.2.2 Reliance was placed by the learned Authorised Representative on the Affidavit of Sri Meeraj Alim Manal dated 27-8-2012 (pages 452 to 454 of Paper Book 2), the major shareholder of M/s. Himalaya Global Holdings Ltd., Cayman Islands (‘HGH’), to contend that it is the assessee firm which has developed all its assets including the trademarks of the products in India and the assessee is exclusively and beneficially entitled to explore and use the same in India. It was submitted that as per the above Affidavit, the legal ownership of the brand with ‘HGH’ was necessitated by the fact that the assessee, being a firm was not recognized as a legal entity outside India and therefore ‘HGH’ being a partner and a legal entity was recognized as the owner of the brand. It was contended that sec. 92 of the Act is a machinery provision and not a charging section and therefore notional income cannot be charged to tax. According to the learned Authorised Representative, the advertisements aired or printed do not carry the name of ‘HGH’ and in this regard, relying on the certificate issued by M/s. Star.com Worldwide (page 471 of Paper Book – 2) submitted that the advertisement expenses are for the Indian Market only as these advertisements are not aired in the international market. The learned Authorised Representative further contended that the ‘Bright Line Test’ adopted by the TPO for making the Transfer Pricing Adjustment has no legal sanctity and hence entire Transfer Pricing Adjustment should be deleted.

11.2.3 Without prejudice, it was contended by the learned Authorised Representative that selling expenses do not form part of AMP and consequently if the correct amount of advertisement expenses is considered, it would be seen that it is well within the routine AMP limit determined by the TPO. In this context, the learned Authorised Representative prayed for the deletion of the Transfer Pricing Adjustment on AMP expenditure.

11.3 Per contra, the learned Departmental Representative placed strong reliance on the order of the TPO. It was contended that as the assessee is not the legal owner of the brand ‘Himalaya’, any AMP expenses incurred by the assessee will directly or indirectly result in promotion of the brand ‘Himalaya’ owned by ‘HGH’ Cayman Islands. It was therefore argued that the TPO rightly made the Transfer Pricing Adjustment on AMP.

11.4.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. The question of whether incurring AMP expenditure result in an International transaction was considered at length by a co-ordinate bench of this Tribunal in the case of Essilor India (P.) Ltd. (supra) which decision was followed by another co-ordinate bench of this Tribunal in the case of Nike India (P.) Ltd. (supra). In the case of Nike India (P.) Ltd. (supra), after considering various judicial pronouncements on the subject, the co-ordinate bench held that in the absence of any arrangement between the assessee and the foreign AE for incurring AMP expenditure, no Transfer Pricing Adjustment can be made in respect of AMP expenditure. In this regard, we find that at paras 19 to 22 of its order in the case of Essilor India (P.) Ltd. (supra), it was held as under :—

’19. In the present case, the assessee-company imports the lens from its foreign AE and after some processing, sells the products on its own. However, the amount of value addition on account of processing in terms of total revenue is not clear from the material on record. That apart, the assessee-company has been throughout contesting before all the authorities the very existence of international transaction on account of incurring AMP expenditure between assessee-company and its AE and therefore, the contentions that the law laid down by the Hon’ble Delhi High Court in Sony Ericsson Mobile Communication India (P.) Ltd. (supra) should be applied to the case on hand, is not correct. Therefore, the submission of the learned Departmental Representative that the matter be remanded to the file of TPO for fresh decision in the light of law laid down by the Hon’ble Delhi High Court in Sony Ericsson Mobile Communication India. (P.) Ltd. (supra), cannot be acceded to.

20. Subsequest to the decision in the case of Sony Ericsson Mobile Communication India (P.) Ltd. (supra) the Hon’ble Delhi High Court had rendered five decisions on the same issue. Those decisions are:

(i) Maruti Suzuki India Ltd. v. CIT (282 CTR 1),

(ii) CIT v. Whirlpool of India Ltd. (129 DTR 169),

(iii) Baush & Lomb Eyecare (India) (P.) Ltd. v. Addl. CIT (129 DTR 201) and

(iv) Yum Restaurant (India) Pvt. Ltd. v. ITO (ITA No. 349/2015 dated 13-1-2016) and

(v) Honda Sel Products

In the above-mentioned decisions, the issue of the very existence of international transaction on incurring AMP expenditure and the method of determination of ALP was the subject matter of appeal before the Hon’ble Delhi High Court. The Hon’ble Delhi High Court had categorically held that in the absence of agreement between Indian entity and foreign AE whereby the Indian entity was obliged to incur AMP expenditure of a certain level for foreign entity for the purpose of promoting the brand value of the products of the foreign entity, no international transaction can be presumed. It was further held that the fact that there was an incidental benefit to the foreign AE, it cannot be said that AMP expenditure incurred by an Indian entity was for promoting brand of foreign AE. One more aspect highlighted by the Hon’ble High Court is that in the absence of machinery provisions, bringing an imagined transaction to tax was not possible. While coming to this conclusion, the Hon’ble High Court had placed reliance on the decisions of the Hon’ble Apex Court in the cases of CIT v. B.C. Srinivasa Setty (128 ITR 294) and PNB Finance Ltd. v. CIT (301 ITR 75). The Hon’ble Delhi High Court after referring to its earlier decision in the case of Maruti Suzuki India Ltd. (supra) and Whirlpool of India (P.) Ltd. (supra) had considered the question of existence of the international transaction and computation of ALP thereon in the case of Bausch & Lomb Eyecare (India) (P.) Ltd. (supra) vide paras 51 to 65 as under:

51. The central issue concerning the existence of an international transaction regarding AMP expenses requires the interpretation of provisions of Chapter X of the Act, and to determine whether the Revenue has been able to show prima facie the existence of international transaction involving AMP between the Assessee and its AE.

52. At the outset, it must be pointed out that these cases were heard together with another batch of cases, two of which have already been decided by this Court. The two decisions are the judgment dated 11th December 2015 in ITA No. 110/2014 (Maruti Suzuki India Ltd. v. Commissioner of Income Tax) and the judgment dated 22nd December 2015 in ITA No. 610 of 2014 (The Commissioner of Income Tax-LTU v. Whirlpool of India Ltd.) and many of the point urged by the counsel in these appeals have been considered in these two judgments.

53. A reading of the heading of Chapter X [“Computation of income from international transactions having regard to arm’s length price”] and section 92 (1) which states that any income arising from an international transaction shall be computed having regard to the ALP and section 92C (1) which sets out the different methods of determining the ALP, makes it clear that the transfer pricing adjustment is made by substituting the ALP for the price of the transaction. To begin with there has to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the ALP.

54. Under sections 92B to 92F, the pre-requisite for commencing the TP exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in section 92C. The fourth step would be to compare the price of the transaction that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price.

55. Section 92B defines ‘international transaction’ as under:

“Meaning of international transaction. 92B.(1) For the purposes of this section and sections 92, 92C, 92D and 92E, “international transaction” means a transaction between two or more associated enterprises, either or 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 apportionment 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 one or more of such enterprises, (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub­section (1), be deemed to be a 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.”

56. Thus, under section 92B(1) an ‘international transaction’ means- (a) a transaction between two or more AEs, either or both of whom are non-resident (b) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision of service or lending or borrowing money or any other transaction having a bearing on the profits, incomes or losses of such enterprises, and (c) shall include a mutual agreements or arrangement between two or more AEs for allocation or apportionment or contribution to the any cost or expenses incurred or to be incurred in connection with the benefit, service or facility provided or to be provided to one or more of such enterprises.

57. Clauses (b) and (c) above cannot be read disjunctively, Even if resort is had to the residuary part of clause (b) to contend that the AMP spend of BLI is “any other transaction having a bearing” on its “profits, incomes or losses”, for a ‘transaction’ there has to be two parties. Therefore for the purposes of the ‘means’ part of clause (b) and the includes’ part of clause (c), the Revenue has to show that there exists an ‘agreement’ or ‘arrangement’ or ‘understanding’ between BLI and B&L, USA whereby BLI is obliged to spend excessively on AMP in order to promote the brand of B&L, USA. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i) (a) to (e) to section 92B are described as an ‘international transaction’. This might be only an illustrative list, but significantly it does not list AMP spending as one such, transaction.

58. In Maruti Suzuki India Ltd. (supra) one of the submissions of the Revenue was: “The mere fact that the service or benefit has been provided by one party to the other would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit.” This was negatived by the Court by pointing out: “Even if the word ‘transaction’ is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to section 92F (v) which defines ‘transaction’ to include ‘arrangement’, ‘understanding’ or ‘action in concert’, ‘whether formal or in writing, it is still incumbent on the Revenue to show the existence of an ‘understanding’ or an ‘arrangement’ or ‘action in concert’ between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the ‘means’ part and the ‘includes’ part of section 92B (1) what has to be definitely shown is the existence of transaction whereby MSIL has been obliged to incur AMP of a certain level for SMC for the purposes of promoting the brand of SMC.”

59. In Whirlpool of India Ltd. (supra), the Court interpreted the expression “acted in concert” and in that context referred to file decision of 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 Appellant, 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 purpose of acquisition of substantial acquisition of shares etc. of the target company. It is another matter that the common objective or purpose maybe in pursuance of an agreement or an understanding, formal or informal; the acquisition of shares etc. maybe direct or indirect or the persons acting in concert may co-operate in actual acquisition of shares etc, or they may agree to co-operate 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.”

60.The transfer pricing adjustment is not expected to be made by deducing from the difference between the ‘excessive’ AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceeding to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. In any event, after the decision in Sony Ericsson (supra), the question of applying the BLT to determine the existence of an international transaction involving AMP expenditure does not arise.

61.There is merit in the contention of the Assessee that a distinction is required to be drawn between a ‘function’ and a ‘transaction’ and that every expenditure forming part of the function cannot be construed as a ‘transaction’. Further, the Revenue’s attempt at re-characterising the AMP expenditure incurred as a transaction by itself when it has neither been identified as such by the Assessee or legislatively recognised in the Explanation to section 92B runs counter to legal position explained in CIT v. EKL Appliances Ltd. (supra) which required a TPO “to examine the ‘international transaction’ as he actually finds the same.”

62.In the present case, the mere fact that B&L, USA through B&L, South Asia, Inc. holds 99.9% of the Assessee will not ipso facto lead to the conclusion that the mere increasing of AMP expenditure by the Assessee involves an international transaction in that regard, with B&L, USA. A similar contention by the Revenue, namely, that even if there is no explicit arrangement, the fact that the benefit of such AMP expenses would also enure to the AE is itself sufficient to infer the existence of an international transaction has been negatived by the Court in Maruti Suzuki India Ltd. (supra) as under:

“68. The above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wild-goose chase of what can at best be described as a ‘mirage’. First of all, there has to be a clear statutory mandate for such an exercise. The Court is unable to find one. To the question whether there is any ‘machinery’ provision for determining the existence of an international transaction involving AMP expenses, Mr. Srivastava only referred to Section 92F(ii) which defines ALP to mean a price “which is applied or proposed to be applied in a transaction between persons other than AEs in uncontrolled conditions”. Since the reference is to ‘price’ and to ‘uncontrolled conditions’ it implicitly brings into play the BLT. In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the ALP. The Court does not see this as a machinery provision particularly in light of the fact that the BLT has been expressly negatived by the Court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established de hors the BLT.

** ** **

70. What is clear is that it is the ‘price’ of an international transaction which is required to be adjusted. The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an ‘adjustment’ has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed ‘price’ of such transaction and thereafter ask whether it is an ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An ‘assumed’ price cannot form the reason for making an ALP adjustment.”

71. Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, what the Revenue has sought to do in the present case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on application of the BLT, is excessive, thereby evidencing the existence of an international transaction involving the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case.

** ** **

74. The problem with the Revenue’s approach is that it wants every instance of an AMP spend by an Indian entity which happens to use the brand of a foreign AE to be presumed to involve an international transaction; And this, notwithstanding that this is not one of the deemed international transactions listed under the Explanation to Section 92B of the Act. The problem does not stop here. Even if a transaction involving an AMP spend for a foreign AE is able to be located in some agreement, written (for e.g., the sample agreements produced before the Court by the Revenue) or otherwise, how should a TPO proceed to benchmark the portion of such AMP spend that the Indian entity should be compensated for?

63. Further, in Maruti Suzuki India Ltd. (supra) the Court further explained the absence of a ‘machinery’ provision qua AMP expenses by the following analogy:

“75. As an analogy, and for no other purpose, in the context of a domestic transaction involving two or more related parties, reference may be made to section 40A(2)(a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the AO “is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods.” In such event, “so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction.” The AO in such an instance deploys the ‘best judgment’ assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding ‘machinery’ provision in Chapter X which enables an AO to determine what should be the fair ‘compensation’ an Indian entity would be entitled to if it is found that there is an international transaction in that regard. In practical terms, absent a clear statutory guidance, this may encounter further difficulties. The strength of a brand, which could be product specific, may be impacted by numerous other imponderables not limited to the nature of the industry, the geographical peculiarities, economic trends both international and domestic, the consumption patterns, market behaviour and so on. A simplistic approach using one of the modes similar to the ones contemplated by Section 92C may not only be legally impermissible but will lend itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which provides the necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance.”

64. In the absence of any machinery provision, bringing an imagined transaction to tax is not possible. The decisions in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 (SC) and PNB Finance Ltd. v. CIT [2008] 307 ITR 75 (SC) make this position explicit. Therefore, where the existence of an international transaction involving AMP expense with an ascertainable price is unable to be shown lo exist, even if such price is nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise.

65. As already mentioned, merely because there is an incidental benefit to the foreign AE, it cannot be said that the AMP expenses incurred by the Indian entity was for promoting the brand of the foreign AE. As mentioned Sassoon J. David (supra) “the fact that somebody other than the Assessee is also benefitted by the expenditure should not come in the way of an expenditure being allowed by way of a deduction under section 10(2)(xv) of the Act (Indian Income-tax Act, 1922) if it satisfies otherwise the tests laid down by the law”.

21. Respectfully following the ratio of the decision of the Hon’ble Delhi High Court in the above cases, we hold that no TP adjustment can be made by deducing from the difference between AMP expenditure incurred by assessee-company and AMP expenditure of comparable entity, if there is no explicit arrangement between the assessee-company and its foreign AE for incurring such expenditure. The fact that the benefit of such AMP expenditure would also ensure to its foreign AE is not sufficient to infer existence of international transaction. The onus lies on the revenue to prove the existence of international transaction involving AMP expenditure between the assessee-company and its foreign AE. We also hold that that in the absence of machinery provisions to ascertain the price incurred by the assessee-company to promote the brand values of the products of the foreign entity, no TP adjustment can be made by invoking the provisions of Chapter X of the Act.

22. Applying the above legal position to the facts of the present case, it is not a case of revenue that there existed an arrangement and agreement between the assessee-company and its foreign AE to incur AMP expenditure to promote brand value of its products on behalf of the foreign AE, merely because the assessee-company incurred more expenditure on AMP compared to the expenditure incurred by comparable companies, it cannot be inferred that there existed international transaction between assessee-company and its foreign AE. Therefore, the question of determination of ALP on such transaction does not arise. However, the transaction of expenditure on AMP should be treated as a part of aggregate of bundle of transactions on which TNMM should be applied in order to determine the ALP of its transactions with its AE. In other words, the transaction of expenditure on AMP cannot be treated as a separate transaction. In the present case we find from the TP study that the operating profit cost to the total operating cost was adopted as Profit Level Indicator which means that the AMP expenditure was not considered as a part of the operating cost. This goes to show that the AMP expenditure was not subsumed in the operating profitability of the assessee-company. Therefore, in order to determine the ALP of international transaction with its AE, it is sine qua non that the AMP expenditure should be considered as a part of the operating cost. Therefore, we restore the issue of determination of ALP, on the above lines, to the file of the AO/TPO. The grounds of appeal raised by the assessee-company on this issue are partly allowed.’

11.4.2 In the case on hand, the TPO has made the Transfer Pricing Adjustment in respect of AMP expenses on the ground that the said expenditure has resulted in promotion of the brand ‘Himalaya’ owned by M/s. Himalaya Global Holdings Ltd., Cayman Islands and has applied the ‘Bright Line Test’ for this purpose. However, neither the TPO nor the Assessing Officer has brought on record any material evidence to substantiate the existence of any agreement or arrangement, either express or implied between the assessee and ‘HGHç Cayman Islands for promotion of its brand. The Hon’ble High Court of Delhi in a series of decisions, inter alia, including the case of Maruti Suzuki India Ltd. v. CIT [2015] 64 taxmann.com 150/[2016] 237 Taxman 256/381 ITR 117 (Delhi) emphasized the importance of Revenue having to first discharge the initial burden upon it with regard to showing the existence of an international transaction between the assessee and the AE. In the case of Maruti Suzuki India Ltd. (supra), at para 64 it was held as under :—

“64. The transfer pricing adjustment is not expected to be made by deducing from the difference between the ‘excessive’ AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceed to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. And, yet, that is what appears to have been done by the Revenue in the present case. It first arrived at the ‘bright line’ by comparing the AMP expenses incurred by MSIL with the average percentage of the AMP expenses incurred by the comparable entities. Since on applying the BLT, the AMP spend of MSIL was found ‘excessive’ the Revenue deduced the existence of an international transaction. It then added back the excess expenditure as the transfer pricing ‘adjustment’. This runs counter to legal position explained in CIT v. EKL Appliances Ltd. [2012] 345 ITR 241 (Del), which required a TPO “to examine the ‘international transaction’ as he actually finds the same.”In other words the very existence of an International transaction cannot be a matter for inference or surmise.”

At para 76 of its order, the Hon’ble High Court has held as under :-

“76. As explained by the Supreme Court in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 (SC) and PNB Finance Ltd. v. CIT [2008] 307 ITR 75 (SC) in the absence of any machinery provision, bringing an imagined international transaction to lax is fraught with the danger of invalidation. In the present case, in the absence of there being an international transaction involving AMP spend with an ascertainable price, neither the substantive nor the machinery provision of Chapter X are applicable to the transfer pricing adjustment exercise.”

11.43 In our considered view, the requirement of there being an international transaction has not been satisfied in the case on hand. In fact, it is not the case of the TPO that there exists an arrangement between the assessee and ‘HGH’ to promote the brand by incurring AMP expenses. The case of the TPO is that the AMP expenditure incurred by the assessee has resulted in a benefit to the legal owner of the brand and the logo, i.e. M/s. Himalaya Global Holdings, Cayman Islands. The contentions of the TPO that the foreign AE has benefitted on account of the AMP expenditure incurred and therefore the AMP expenditure cannot be said to have been incurred by the assessee for its own business, etc. have been rejected by the Hon’ble Delhi High Court. In the case of Sony Ericsson Mobile Communications India (P.) Ltd. (supra), the Hon’ble Delhi High Court at para 121 of its order observed that there is nothing in the Act on Rules to hold that it is obligatory that AMP expenses must be necessarily be subjected to the ‘Bright Line Test’ as this would amount to adding words in the statute and Rules and introducing a new concept which has not been recognized and accepted as per the general principles of international taxation accepted and applied universally. In the case of Maruti Suzuki India Ltd. (supra), the Hon’ble Delhi High Court at paras 84 to 86 thereof have held as under :—

‘”84. The Court next deals with the submission of the Revenue that the benefit to SMC as a result of the MSIL selling its products with the co-brand ‘Maruti-Suzuki’ is not merely incidental. The decision in Sony Ericsson acknowledges that an expenditure cannot be disallowed wholly or partly because its incidentally benefits the third party. This was in context on Section 57(1) of the Act. Reference was made to the decision in Sassoon J. David & Co (P.) Ltd. v. CIT [1979] 118 ITR 261 (SC). The Supreme Court in the said decision emphasised that the expression ‘wholly and exclusively’ used in section 10(2)(xv) of the Act did not mean ‘necessarily’. It said: “The fact that somebody other than the Assessee is also benefitted by the expenditure should not come in the way of an expenditure being allowed by way of a deduction under Section 10(2)(xv) of the Act if it satisfies otherwise the tests laid down by the law.”

85. The OECD Transfer Pricing Guidelines, para 7.13 emphasises that there should not be any automatic inference about an AE receiving an entity group service only because it gets an incidental benefit for being part of a larger concern and not to any specific activity performed. Even paras 133 and 134 of the Sony Ericsson judgment makes it clear that AMP adjustment cannot be made in respect of a full-risk manufacturer.

MSIL’s higher operating margins

86. In Sony Ericsson it was held that if an Indian entity has satisfied the TNMM i.e. the operating margins of the Indian enterprise are much higher than the operating margins of the comparable companies, no further separate adjustment for AMP expenditure was warranted. This is also in consonance with Rule 10B which mandates only arriving at the net profit by comparing the profit and loss account of the tested party with the comparable. As far as MSIL is concerned, its operating profit margin is 11.19% which is higher than that of the comparable companies whose profit margin is 4.04%. Therefore, applying the TNMM method it must be stated that there is no question of TP adjustment on account of AMP expenditure.’

11.4.4 In the case on hand, the net margin from exports to AEs at 15.80% is more than the net margin earned by the assessees in respect of personal care product division in the domestic argument at 11.30%. In the factual matrix of the case, as discussed above, the ALP of the assessee’s international transactions with its AEs were at Arm’s Length and therefore no separate adjustment for AMP expenditure is called for. We, consequently hold that the Transfer Pricing Adjustment of Rs. 31,69,02,034 made by the TPO in respect of AMP expenditure is to be deleted. Ground No. XI is accordingly allowed.”

34. We notice that the co-ordinate bench has, following various decisions, held that the revenue has to first show that the AMP expenses would fall under the category of “international transactions”. For that purpose, the revenue has to show that there existed an agreement between the assessee and its AE in the matter of incurring of AMP expenses. Admittedly, it is not shown in the instant case that there existed any agreement relating to incurring of AMP expenses. Thus, we notice that there is no change in facts relating to this issue between the current year and the AY 2010-11/2011-12. It was also held that when TNMM method is applied to benchmark the entire international transactions, then there is no requirement of making separate TP adjustment on account of AMP expenditure. In the earlier paragraphs, we have also held that TNMM as most appropriate method and has also held that the international transaction of Exports to AEs is at arms length. Hence, no separate adjustment is required to be made in respect of AMP expenses on this account also.

35. We notice that, in this case, there is one more reason to state that the TP adjustment for AMP expenses is not required. We noticed earlier that the “legal owner” of the “brand and logo” is neither the assessee nor the AEs to which the exports were made. The legal ownership rests with M/s. Himalaya Global Holdings Ltd. which is one of the partners of the assessee firm. While hearing the appeal of the assessee for AY 2011-12 by the co-ordinate bench, the Tribunal took note of an affidavit dated 27-8-2012 filed by Mr. Meeraj Alim Manal with regard to the ownership of the brand name. At the cost of repetition, we extract below the observations made by the co-ordinate bench in AY 2011-12 on the said affidavit:-

“11.2.2 Reliance was placed by the learned Authorised Representative on the Affidavit of Sri Meeraj Alim Manal dated 27-8-2012 (pages 452 to 454 of Paper Book 2), the major shareholder of M/s. Himalaya Global Holdings Ltd., Cayman Islands (‘HGH’), to contend that it is the assessee firm which has developed all its assets including the trademarks of the products in India and the assessee is exclusively and beneficially entitled to explore and use the same in India. It was submitted that as per the above Affidavit, the legal ownership of the brand with ‘HGH’ was necessitated by the fact that the assessee, being a firm was not recognized as a legal entity outside India and therefore ‘HGH’, being a partner and a legal entity was recognized as the owner of the brand.”

The submissions of the assessee would show that though M/s. Himalaya Global Holdings Ltd. (HGH) is the legal owner, yet it was admitted that the assessee firm only has developed all its assets including trademarks. Hence the brand name has actually been developed by the assessee. It is also stated that the assessee is exclusively and beneficially entitled to explore and use the same in India. Hence, it is admitted that the legal ownership was transferred to HGH due to business necessity/compulsion. Hence the transfer of legal ownership is an internal arrangement between related parties, which was made on account of business necessities. However, it is made to clear that the right to exploit the brand name, logo, trademarks etc., continue with the assessee only. Hence, the assessee is also beneficiary of AMP expenses or the promotion of brand. In this view of the matter also, the question of making TP adjustment in respect of AMP expenses on account of “brand promotion” does not arise. Hence, on this reasoning also, the impugned TP adjustment on AMP expenses is liable to be quashed.

36. Accordingly, following the decision rendered by the co-ordinate bench in the assessee’s own case in AY 2011-12 (referred above) and also for the reasons discussed in the preceding paragraph, we direct the AO to delete the TP adjustment made in respect of AMP expenditure.

Following the above order of the ITAT, in assessee’s own case, we delete the impugned TP Adjustment made on account of advertisement, marketing and sales promotion activity (AMP) amounting to Rs.165,20,68,381. Hence, concise ground 10 is allowed.

Concise Ground 11 (TP Adjustment)

11. The above ground deals with the TP adjustment on account of royalty amounting to Rs.3,42,39,391. We find that on identical facts and circumstances, the co-ordinate bench in assessee’s own case consistently for the assessment year 2013-2014 to 2016-2017 deleted the above addition. The relevant discussion from the ITAT order passed for A.Y. 2013­2014 in ITA No.1385/Bang/2017 is as under:-

37. The next issue urged by the assessee relates to the Transfer Pricing adjustment relating to “royalty”. The facts relating thereto are discussed in brief. The TPO noticed that the assessee is having a “Research & Development” unit in India and accordingly developing all its products. He also noticed that, if any company wants to market any of its food/medical products in any country, then it has to obtain approval from local authorities of that Country. The drug controller in any Country will need valid test data and clinical reports on the efficacy and genuineness of the drug in order to give approval for marketing the products. The TPO noticed that it is the assessee, which has obtained approval for its products in various Countries. However, it did not directly market any of its products in those Countries directly, i.e., it has exported the products to its AEs located in that Country, which in turn has marketed the products.

38. The TPO called for sample application forms submitted to Drug control authorities of various Countries like Nigeria, Romania, Ghana, Latvia etc. He noticed that the assessee has furnished Clinical study report, technical specifications etc., and applied for registration. He also noticed that one of the conditions put by the concerned authorities is that they can visit to India in order to audit the manufacturing facilities of the assessee in India. The TPO noticed that the assessee possesses 597 products registrations in various Countries. The TPO took the view that the “Product registrations/license” is an intangible asset. The TPO noticed that the assessee did not market its products directly by using the “Product registration/license” obtained from various Countries. However, it has indirectly marketed the products through its AEs and has also allowed its AEs to use the Product registration/license. Accordingly, he took the view that the assessee should have collected royalty from its AEs. Accordingly, he took the view that the AEs have exploited the benefits of the product licences obtained by the assessee without paying royalty or usage charges to the assessee. Following observations made by the TPO are relevant here:—

“3.6 It is also observed that an AE which is resident in UAE is marketing products in African Countries using taxpayer’s product registration. Had taxpayer itself marketed the products in Africa, it would have gained the entire profits. The AE based in UAE/Dubai is getting the profits because it performs the critical functions-assets-risks. But the taxpayer is performing the critical function of providing license to AE to trade in the African Country; the taxpayer is owner of the critical and intangible assets underlying the license; and taxpayer is taking all the risk of research and clinical trials. Hence, the taxpayer has a critical FAR role in the business of UAE-based AE in African Countries.”

Since the TPO took the view that the “Product registration/licenses” constitute an intangible asset, he also took the view that the assessee would have charged royalty from third parties for using such intangibles.

39. Accordingly, the TPO issued a show cause notice to the assessee asking it to show as to why ALP of royalty should not be determined on use of intangible assets, referred above. The assessee submitted that the selling price charged to its AEs is inclusive of everything. It was also submitted that nowhere in the world, a manufacturer would sell the goods for a price and also charge separate amount for royalty. The assessee also submitted that the TPO has made TP adjustments in respect of sale of goods to the AEs and hence no further adjustment is required on account of royalty.

40. The TPO, however, took the view that the royalty payable on usage of a license/product registration is an independent transaction, i.e., independent of export. Hence it is a separate intangible and the assessee would have charged royalty from non-related parties. Accordingly the TPO held that the ALP of the royalty should be determined. He noticed that the royalty rates reported by Association of University Technology Managers (AUTM) and the Licensing Executive Society (LES) range from 0.1% to 25%. The TPO noticed that the products manufactured by taxpayer are both pharma and beauty care products, whose product registrations vary in complexity. According, the TPO held that the ALP of royalty maybe determined at 2% of the export value of export value of product exported to the AEs of the assessee. Accordingly he proposed T.P adjustment, towards royalty on usage of product registration/licenses, of Rs. 2,52,10,867/-. The Ld. DRP also confirmed the same.

41. The Ld. A.R submitted that the price charged by the assessee on exports would include all the costs incurred by it for sale of its products in foreign countries. He submitted that the view taken by the TPO is against trade practice, i.e., no manufacturer would charge separate amount as royalty over and above the selling price. He submitted that the product license/registration could be obtained only by the manufacturer of the drugs, since the manufacturer alone would hold the details of clinical trials, technical details of products etc. He submitted that it is primary condition prescribed by any Country to obtain product registration/licences before marketing the drugs/beauty products and the same has to be obtained only by the manufacturer, before marketing the products in a Country. Hence it is only a matter of compliance with concerned Government regulations. He submitted that the decision as to direct marketing of products by itself or marketing the products through distributors appointed, is a commercial decision/business strategy of any business concern. The compliance of Government regulations actually help or enable the assessee to market its products in those Countries and hence the real beneficiary is the assessee only. He submitted that the AEs are marketing the products as mere traders and they are not concerned with the registration formalities. In fact, the dealers should have obtained necessary license to deal with pharma products at their individual level, Accordingly, the Ld. A.R. submitted that the view taken by the tax authorities in this regard is contrary to trade practice. He submitted that the TPO did not make similar kinds of adjustments in A.Y. 2011-12 or earlier years. Accordingly, he contended that impugned TP adjustment should be deleted.

42. The Ld. D.R. however, reiterated the views expressed by TPO. She submitted that the “principle of res-judicata” will not apply to income tax proceedings, as held by the co-ordinate bench in the case of Nike India (P) Ltd v. DCIT [2013] 34 taxmann.com 282 (Bang. – Trib.). Hence the fact that no TP adjustment was made in A.Y. 2011-12 and earlier years would not debar the A.O./TPO to make adjustments in this year. She submitted that the product registration/license is a separate intangible asset, which has been used by the AEs without adequately compensating the assessee. The Ld. D.R. submitted that the AEs could not have conducted the business in their respective countries without these licenses. The Ld. D.R. submitted that, had the assessee has not obtained the product license, the AEs would have obtained it themselves. She submitted that the assessee would have collected royalty from third parties for use of these licenses. The Ld. D.R. further submitted that there is no requirement of existence of any agreement for payment of royalties for use of intangibles.

43. The Ld. D.R. placed her reliance on the decision rendered by Delhi bench of Tribunal in the case of Dabur India Ltd. v. Asstt. CIT [2017] 83 taxmann.com 305, which has since been affirmed by Hon’ble Delhi High Court in the same case reported in Dabur India Ltd. v. Pr. CIT [2018] 89 taxmann.com 78/253 Taxman 129 (Delhi). She submitted that, in the above cited case, the Tribunal and High Court has upheld the ALP adjustment made in respect of royalty payable by foreign AE of the assessee for using the brand name “Dabur” in its products, even though there was no agreement for charging royalty.

44. The Ld. A.R, in the rejoinder, submitted that the selling price charged to the AE subsumes all expenses including the alleged royalty. He submitted that the assessee has also exported to non-AEs and did not charge royalty separately. He further submitted that the AEs did not carry on any manufacturing activity and assessee has not given any license to the AEs. It has simply exported the finished goods for resale only.

45. He submitted that the decision rendered in the case of Dabur India Ltd. (supra) is not applicable to the facts of the present case. He submitted that, in the case of Dabur India Ltd. (supra), the foreign AE was carrying on manufacturing activity and the assessees therein gave license to the said AE to use its brand name on the products manufactured by the foreign AE. It was also noted that the said products were manufactured earlier by another company (unrelated to the assessee), from whom the assessee had collected royalty for use of its brand name. The said company was acquired by the assessee and hence it became its AE. After becoming AE, it stopped collecting royalty contending that there is no agreement to pay royalty. Under the above set of facts, it was held that the TPO was justified in making T.P adjustment. He submitted that the assessee herein is simply exporting the Finished goods, to its AEs, which in turn, sell those products as mere traders. The AEs do not carry on any manufacturing activity and there was no necessity to give license to them. The product registration/license is only a basic formality to be complied with in order to market finished products and hence it cannot be said that the same has resulted in any intangible asset.

46. We heard rival contentions on this issue and perused the record. We noticed that the assessee has exported finished goods to its AEs located in various Countries and the AEs have only marketed the goods. Since the finished goods exported by the assessee are drugs and beauty care items, the assessee was required to comply with the requirement of local laws of the concerned Country with regard to marketing of the said products. There should not be any dispute that the technical details; the details of clinical trials etc., are available with the assessee only, since it has actually developed the products. Hence the assessee could submit those details to the concerned Government authorities for getting product registration/license. The TPO has expressed the view that the concerned AEs would have obtained the product registration/license, if the assessee had not obtained the same. However, it is the undisputed fact that, if at all the AEs wanted to obtain product registration/license, they have to get relevant details from the assessee only.

47. The assessee has submitted that such kind of approvals are required to market pharma products in any country. Hence these licenses enable the assessee to market its products. The AEs, in the capacity of distributors, should have also obtained separate license for trading in pharma products. There is also no dispute that the AEs have marketed products as re-sellers only. It is also submitted that it is not the commercial practice to charge any amount as royalty over and above the selling rate. In our view, this submission of the assessee is a reasonable one and also makes sense.

48. We have gone through the decision rendered in the case of Dabur India Ltd. (supra) The facts prevailing in the case of M/s. Dabur India Ltd. are discussed in brief. M/s. Dabur India Ltd. used to provide its expertise and also permit use of its name “Dabur” to a UAE based entity named M/s. Redrock. There was an agreement between both the parties, as per which M/s. Redrock has to pay royalty @ 1% to M/s. Dabur India Ltd. Subsequently M/s. Dabur India Ltd. acquired 100% shareholding in M/s. Redrock. Consequently M/s. Redrock was renamed as M/s. Dabur International Ltd. It is pertinent to note that M/s. Dabur International Ltd. was manufacturing certain items with the support of M/s. Dabur India Ltd. and it was also manufacturing certain other items without such support However, it used the brand name of “Dabur” for all its products, i.e., whether the products were produced with or without the support of M/s. Dabur India Ltd. However, during the year under consideration, it did not pay the royalty of 1% on the products manufactured without the support of M/s. Dabur India Ltd. The TPO determined ALP of royalty @ 1%, as the same rate was paid by erstwhile M/s. Redrock. The action of the TPO was upheld by the Tribunal and the Hon’ble Delhi High Court.

49. We notice that the facts prevailing in the case of M/s. Dabur India Ltd. is totally different from the facts prevailing in the instant case. We have noticed that M/s. Dabur International Ltd. was manufacturing certain goods without the support of M/s. Dabur India Ltd. but used the Dabur brand name for those items also. Hence it was a clear case of exploitation of Brand name belonging to M/s. Dabur India Ltd. Non-charging of Royalty was sought to be defended by submitting that there was no agreement for collecting royalty. The said contention was rejected by the Tribunal and High Court On the contrary, in the instant case, the foreign AEs do not manufacture any product, i.e., they only market the finished products exported by the assessee.

50. The product registration/licensing are requirement of statute, without which the said products could not be marketed in those countries. As noticed earlier, such kinds of product registration/license could be obtained by the manufacturer only, in normal circumstances. The traders should have obtained separate license for trading in the drugs/beauty items. Hence, it cannot be said that the traders have exploited the registration/license obtained by the suppliers under the various statutes. Further, the manufacturers and other suppliers of the products sell them at profit and the practice or presumption is that the supplier has determined the selling price by taking into account all relevant costs. The Ld. A.R. also submitted that the obtaining product registration/license is usually the responsibility of the manufacturer and it is not the trade practice to levy separate charges as royalty over and above the selling price. He also submitted that the assessee has not collected any amount over and above the selling price from export made to non-AEs. We have noticed that the tax authorities have taken the view that the assessee would have collected royalty amount for finished goods exported to unrelated parties. However the Ld. A.R. pointed out that the assessee has not collected any amount over and above the selling price either from domestic customers or from non-AEs, Hence, the basic premise of the TPO, which formed the basis for determining ALP of alleged royalty fails here. Accordingly, we are of the view that, in the facts and circumstances of the case, it cannot be taken that the AEs have exploited the product registration/license obtained by the assessee from various Governments. Hence the question of payment of royalty does not arise. Accordingly, we set aside the order passed by A.O./TPO on this issue and direct the A.O. to delete this T.P. adjustment.

Following the above order of the ITAT in assessee’s own case, we delete the impugned TP adjustment on account of royalty amounting to Rs.3,42,39,391.

Concise Ground 12 (Corporate Tax Issues)

11. The above ground deals with disallowance of deduction under section 80G of the I.T.Act amounting to Rs.29,61,013 directly in the computation sheet issued along with the final assessment order without making such disallowance in the draft assessment order. We find that the draft assessment order and final assessment order does not contain any discussion on the above disallowance. The assessee had no opportunity to contest this addition both before the AO and DRP. In the interest of justice and equity, we consider it appropriate to remit the matter back to the file of the AO to passes a speaking order with respect to the disallowance made directly in the computation sheet. It goes without saying that the assessee may be afforded a reasonable opportunity of being heard. We accordingly allow concise ground 12 for statistical purposes. It is ordered accordingly.

12. In the result, the appeal filed by the assessee is partly allowed for statistical purpose.

Order pronounced on this 14th day of June, 2022.