Uday S. Jagtap v. Acit, (2011

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO. 726 OF 2017 The Pr. Commissioner of Income Tax-7 .. Appellant v/s. M/s. Merck Ltd. .. Respondent Mr. Suresh Kumar for the appellant Mrs. A. Vissanji a/w Mr. S.J. Mehta for the respondent CORAM : M.S. SANKLECHA & NITIN JAMDAR, J.J. DATED : 16[th] SEPTEMBER, 2019 P.C. 1.This appeal under Section 260A of the Income Tax Act, 1961(the Act) challenges the order dated 31[st] March, 2016 passed by theIncome Tax Appellate Tribunal (Tribunal). This appeal relates toAssessment Year 2010-11. 2.The Revenue urges only the following re-framed questions oflaw for our consideration :- “(a) Whether on the facts and in the circumstances of thecase and in law, the Tribunal was justified in grantingadjustment of 10% on account of quality difference anddeleting the addition made by TPO / AO by applying CUP to arrive at ALP in respect of Bisoprolol Fumerate without givingadjustment for quality as claimed by the assessee ? (b)Whether on the facts and in the circumstances of thecase and in law, the Tribunal was justified in deletingadjustments in respect of technical consultancy fees ? (c)Whether on the facts and in the circumstances of thecase and in law, the Tribunal was right in deletingdisallowance on share buyback expenditure withoutappreciating that it is a capital expenditure and not allowableu/s. 37 of the Income Tax Act, 1961? (d)Whether on the facts and in the circumstances of thecase and in law, the Tribunal was right in confirming deletionof disallowance in respect of sales promotion and conferenceexpenses incurred without appreciating that these expensesdoes not render any benefit to the assessee company and areagainst ethics? (e)Whether on the facts and in the circumstances of thecase and in law, the Tribunal was right in confirming deletionof disallowance in respect of sales promotion and conferenceexpenses incurred prior to date of amendment in the IndianMedical Council (Professional Conduct, Etiquette and Ethics)Regulations, 2002 i.e. 10-12-2009 without adjudicating theissue ? 3.Regarding Question (a) :- (a)The respondent is in the business of manufacturing, trading andmarketing of drugs and pharmaceuticals. During the previous yearrelevant to the subject assessment year, the respondent imported Bisoprolol Fumarate an active pharmaceutical ingredient (API) used tomanufacture pharmaceuticals formulations. These imports were madeby the respondent from an Associate Enterprise (AE) in Switzerland.The respondent sought to arrive at the Arms Length Price (ALP) of theimport of Bisoprolol Fumarate on the basis of Transactional Net MarginMethod (TNMM) and contended that the imports of BisoprololFumarate from its AEs at Rs.66,702/- per kg is the ALP and noadjustment is called for. This the Transfer Pricing Officer (TPO) didnot accept TNMM method as the most appropriate method. The TPOadopted Comparable Uncontrolled Price (CUP) method as the mostappropriate method to determine the ALP of the imported API. Onapplication of CUP, the TPO determined the ALP at Rs.36,831/- per kgand ALP for purchase of 345 kgs was adjusted at Rs. 1.27 crores and thetransfer pricing adjustment of Rs.1.03 crores was made being the excessamount paid. (b)Being aggrieved, the respondent carried the issue in appeal to theTribunal. The impugned order of the Tribunal held that the applicationof CUP method to the facts of this case is the most appropriate methodto determine the ALP. In fact, this was so conceded by the respondentin view of the binding decision of the co-ordinate bench of the Tribunalin the case of Serdia Pharmaceuticals India Pvt. Ltd. Vs. ACIT, (2011) (b)Being aggrieved, the respondent carried the issue in appeal to theTribunal. The impugned order of the Tribunal held that the applicationof CUP method to the facts of this case is the most appropriate methodto determine the ALP. In fact, this was so conceded by the respondentin view of the binding decision of the co-ordinate bench of the Tribunalin the case of Serdia Pharmaceuticals India Pvt. Ltd. Vs. ACIT, (2011) 44 SOT 391. However, it was the contention of the respondent thateven if CUP method is applied to determine the ALP, there has to be anadjustment given on account of the quality of the API imported from itsAE which would affect in determination of ALP. In fact, the Tribunalfound that in the Assessment Year 2011-12, the TPO had himself hasallowed a quality adjustment of 10% in respect of the API imported bythe respondent from its AE in Switzerland. The impugned order hasplaced reliance upon Rule 10B(1)(a)(ii) which inter alia provides thatthe price of the comparable uncontrolled transaction “is adjusted toaccount for difference, if any ….. which could materially affect theprice in the open market”. It was on the above basis that the impugnedorder held that while determining the ALP of the imports done from itsAE in Switzerland, there shall be an adjustment of the ALP on accountof better quality of imported API to the extent of 10%. (c)We are unable to understand the Revenue’s grievance with regardto the finding of the Tribunal. The application of CUP method was whatwas canvassed by the Revenue and accepted by the Tribunal. Thus,there could be no grievance with regard to the application of CUPmethod. Similarly, the adjustment on account of quality as claimed bythe assessee was allowed. This adjustment was in terms of Rule 10B(1)(a)(ii) of the Income Tax Rules. It is a fact of which judicial note can be taken that wherever even two products are identical, yet on accountof perception there could be difference of the price in the open market.This has to be factored in while determining the ALP as has beenrecognized in the aforementioned rule 10B(1)(a)(ii) of the Income TaxRules. Moreover, the TPO himself has accepted this price adjustmenton account of perception of quality by allowing the adjustment at 10%in the Assessment Year 2010-11. (d)In the above view, the question (a) as proposed does not give riseto any substantial question of law. Thus, not entertained. 4.Regarding question (b) : (a)The respondent had made a payment of Rs. 3 crores to its oneAE viz. M/s. Merck KGaA in terms of consultancy agreement betweenthe above AE and itself. The agreement provided that the AE will givetechnical consultancy in various areas to the respondents for the aboveconsideration. The TPO on facts found that the respondent did notavail of any services under the above agreement and thus determinedthe ALP at Nil. (b)The impugned order of the Tribunal holds that under theconsultancy agreement, the respondent was entitled to receive apackage of services on as and when required basis. Thus, even if the assessee may not have received all the services, yet the respondent hasa right to receive these services. Thus, relying upon a decision of its co-ordinate bench in AWB India Ltd. Vs. DCI (2015) 152 ITD 570 it heldthat if a package of services is made available on requirement basis, thevalue of services cannot be taken as Nil, so long as the agreement is nota sham. (c)It is an agreed position between the parties that in therespondent’s own case for Assessment Year 2003-04, a similar issue hadarisen viz. package of services being available under the agreement onas and when required basis. This Court by an order dated 2[nd] August,2016 (CIT Vs. Merck Ltd. Writ Petition No.272 of 2014) held the feespaid for on bouquet of services as and when required, would be similarto retainer agreement. It is agreed by the Revenue that the aboveorder dated 8[th] August, 2016 of this Court in the respondent’s own casewill equally apply to the present facts. (c)It is an agreed position between the parties that in therespondent’s own case for Assessment Year 2003-04, a similar issue hadarisen viz. package of services being available under the agreement onas and when required basis. This Court by an order dated 2[nd] August,2016 (CIT Vs. Merck Ltd. Writ Petition No.272 of 2014) held the feespaid for on bouquet of services as and when required, would be similarto retainer agreement. It is agreed by the Revenue that the aboveorder dated 8[th] August, 2016 of this Court in the respondent’s own casewill equally apply to the present facts. (d)In the above view, the question as proposed does not give rise toany substantial question of law. Thus, not entertained. 5.Regarding question (c) :- (a)The impugned order of the Tribunal deleted the dis-allowance ofexpenses incurred in share buyback. This by following the decision of Delhi High court in CIT Vs. Selan Exploration Technology Ltd. (2010)188 Taxmann 1. In the above case, it was held that share buybackexpenditure incurred by the respondent did not result in a benefit of anenduring nature as after the buyback the capital employed had gonedown. Thus, the expenditure incurred has not resulted in bringing intoexistence any new asset, thus was not in the nature of the capitalexpenditure. On the aforesaid basis, the Delhi High Court held thatonce it is held that the expenditure is not capital in nature, then, theexpenditure is allowable under Section 37 of the Act as a revenueexpenditure as it was incurred for the benefit of existing shareholders inthe ordinary course of business. (b)The learned Counsel appearing for the parties are agreed that theissue stands concluded by the decision of this Court in Commissioner ofIncome Tax Vs. Aditya Birla Novo Ltd. 79 Taxmann.com 210, andCommissioner of Income Tax Vs. Hindalco Industries Ltd. (Income TaxAppeal No.1846 of 2010) decided on 7[th] August, 2012 against theRevenue and in favour of the respondent. (c)In the above view, this question as proposed does not give rise toany substantial question of law. Thus, not entertained. 6.Regarding question (d) :- (a)The expenditure on account of sales promotion and conferenceexpenditure was disallowed by the Assessing Officer on the ground thatthere was no evidence of benefit to the respondent assessee from theseactivities. (b)On appeal, the Tribunal held that so long as the expenses havebeen incurred wholly and exclusively for the purpose of business,whether necessary or not are to be allowed as expenditure. In support,it placed reliance upon the decision of the Supreme Court in the case ofCIT Vs. Chandulal Keshavlal & Co. 38 ITR 601 and Sasoon J. David &Co. Vs. Commissioner of Income Tax, 180 ITR 261 wherein it has beenheld that the expenditure incurred voluntary on account of commercialexpediency and wholly and exclusively for the purpose of trade, then itis allowable expenditure. The Court in the above case observed that it ispertinent to note that the words “wholly and exclusively” used inSection 37 of the Act does not mean “necessarily”. Thus, it is for theassessee to decide whether the expenditure should be incurred in thecourse of his business and once it is found that it is incurred wholly andexclusively for the purposes of business, then it is deductible underSection 37 of the Act. It further records that it is relevant to note thatan attempt was made to introduce the word “necessity” in Section 37of the Income Tax Bill of 1961. However, this had led to public protest and resulted in dropping the word “necessity” when the Income Tax billof 1961 was passed into the Income Tax Act, 1961. Thus, the view ofthe Tribunal on this issue cannot be faulted as it is in accord with theSupreme Court decisions referred to hereinabove. (c)In the above view, this question as proposed does not give rise to any substantial question of law. Thus, not entertained. 7.Regarding question (e) :- and resulted in dropping the word “necessity” when the Income Tax billof 1961 was passed into the Income Tax Act, 1961. Thus, the view ofthe Tribunal on this issue cannot be faulted as it is in accord with theSupreme Court decisions referred to hereinabove. (c)In the above view, this question as proposed does not give rise to any substantial question of law. Thus, not entertained. 7.Regarding question (e) :- (a)The impugned order of the Tribunal looking at the smallness ofthe amount, did not think it fit to adjudicate the issue. In fact, theimpugned order of the Tribunal records that the Revenue has notcontested the issue before it. (b)In view of the above, as the Revenue has not urged this issue ofdisallowance of expenses before the Tribunal, it cannot now be urgedby the Revenue before us. This Court in Commissioner of Income Tax Vs. Mahalaxmi Glass Works Co. 318 ITR 116 held that if a concession ismade before the Tribunal, then on that issue no substantial question oflaw arises. (c)In the above view, this question does not give rise to anysubstantial question of law. Thus, not entertained. 8.In the above facts and circumstances, the appeal is dismissed. (NITIN JAMDAR, J.) (M.S. SANKLECHA, J.)