Uday S. Jagtap 726-17-ITXA-chamber.doc IN HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO. 726 OF 2017 Pr. Commissioner of Income Tax-7 .. Appellant v/s. M/s. Merck Ltd. .. Respondent Mr. Suresh Kumar for appellant Mrs. A. Vissanji a/w Mr. S.J. Mehta for respondent CORAM : M.S. SANKLECHA & NITIN JAMDAR, J.J. DATED : 16 th SEPTEMBER, 2019 P.C. 1. This appeal under Section 260A of Income Tax Act, 1961 (the Act) challenges order dated 31st March, 2016 passed by Income Tax Appellate Tribunal (Tribunal). This appeal relates to Assessment Year 2010-11. 2. Revenue urges only following re-framed questions of law for our consideration :- (a) Whether on facts and in circumstances of case and in law, Tribunal was justified in granting adjustment of 10% on account of quality difference and deleting addition made by TPO / AO by applying CUP to 1 of 10 ::: Uploaded on - 17/10/2019 ::: Downloaded on - 23/10/2019 11:29:00 ::: Uday S. Jagtap 726-17-ITXA-chamber.doc arrive at ALP in respect of Bisoprolol Fumerate without giving adjustment for quality as claimed by assessee ? (b) Whether on facts and in circumstances of case and in law, Tribunal was justified in deleting adjustments in respect of technical consultancy fees ? (c) Whether on facts and in circumstances of case and in law, Tribunal was right in deleting disallowance on share buyback expenditure without appreciating that it is capital expenditure and not allowable u/s. 37 of Income Tax Act, 1961? (d) Whether on facts and in circumstances of case and in law, Tribunal was right in confirming deletion of disallowance in respect of sales promotion and conference expenses incurred without appreciating that these expenses does not render any benefit to assessee company and are against ethics? (e) Whether on facts and in circumstances of case and in law, Tribunal was right in confirming deletion of disallowance in respect of sales promotion and conference expenses incurred prior to date of amendment in Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 i.e. 10-12-2009 without adjudicating issue ? 3. Regarding Question (a) :- (a) respondent is in business of manufacturing, trading and marketing of drugs and pharmaceuticals. During previous year relevant to subject assessment year, respondent imported 2 of 10 ::: Uploaded on - 17/10/2019 ::: Downloaded on - 23/10/2019 11:29:00 ::: Uday S. Jagtap 726-17-ITXA-chamber.doc Bisoprolol Fumarate active pharmaceutical ingredient (API) used to manufacture pharmaceuticals formulations. These imports were made by respondent from Associate Enterprise (AE) in Switzerland. respondent sought to arrive at Arms Length Price (ALP) of import of Bisoprolol Fumarate on basis of Transactional Net Margin Method (TNMM) and contended that imports of Bisoprolol Fumarate from its AEs at Rs.66,702/- per kg is ALP and no adjustment is called for. This Transfer Pricing Officer (TPO) did not accept TNMM method as most appropriate method. TPO adopted Comparable Uncontrolled Price (CUP) method as most appropriate method to determine ALP of imported API. On application of CUP, TPO determined ALP at Rs.36,831/- per kg and ALP for purchase of 345 kgs was adjusted at Rs. 1.27 crores and transfer pricing adjustment of Rs.1.03 crores was made being excess amount paid. (b) Being aggrieved, respondent carried issue in appeal to Tribunal. impugned order of Tribunal held that application of CUP method to facts of this case is most appropriate method to determine ALP. In fact, this was so conceded by respondent in view of binding decision of co-ordinate bench of Tribunal in case of Serdia Pharmaceuticals India Pvt. Ltd. Vs. ACIT, (2011) 3 of 10 ::: Uploaded on - 17/10/2019 ::: Downloaded on - 23/10/2019 11:29:00 ::: Uday S. Jagtap 726-17-ITXA-chamber.doc 44 SOT 391. However, it was contention of respondent that even if CUP method is applied to determine ALP, there has to be adjustment given on account of quality of API imported from its AE which would affect in determination of ALP. In fact, Tribunal found that in Assessment Year 2011-12, TPO had himself has allowed quality adjustment of 10% in respect of API imported by respondent from its AE in Switzerland. impugned order has placed reliance upon Rule 10B(1)(a)(ii) which inter alia provides that price of comparable uncontrolled transaction is adjusted to account for difference, if any .. which could materially affect price in open market . It was on above basis that impugned order held that while determining ALP of imports done from its AE in Switzerland, there shall be adjustment of ALP on account of better quality of imported API to extent of 10%. (c) We are unable to understand Revenue s grievance with regard to finding of Tribunal. application of CUP method was what was canvassed by Revenue and accepted by Tribunal. Thus, there could be no grievance with regard to application of CUP method. Similarly, adjustment on account of quality as claimed by assessee was allowed. This adjustment was in terms of Rule 10B(1) (a)(ii) of Income Tax Rules. It is fact of which judicial note can 4 of 10 ::: Uploaded on - 17/10/2019 ::: Downloaded on - 23/10/2019 11:29:00 ::: Uday S. Jagtap 726-17-ITXA-chamber.doc be taken that wherever even two products are identical, yet on account of perception there could be difference of price in open market. This has to be factored in while determining ALP as has been recognized in aforementioned rule 10B(1)(a)(ii) of Income Tax Rules. Moreover, TPO himself has accepted this price adjustment on account of perception of quality by allowing adjustment at 10% in Assessment Year 2010-11. (d) In above view, question (a) as proposed does not give rise to any substantial question of law. Thus, not entertained. 4. Regarding question (b) : (a) respondent had made payment of Rs. 3 crores to its one AE viz. M/s. Merck KGaA in terms of consultancy agreement between above AE and itself. agreement provided that AE will give technical consultancy in various areas to respondents for above consideration. TPO on facts found that respondent did not avail of any services under above agreement and thus determined ALP at Nil. (b) impugned order of Tribunal holds that under consultancy agreement, respondent was entitled to receive package of services on as and when required basis. Thus, even if 5 of 10 ::: Uploaded on - 17/10/2019 ::: Downloaded on - 23/10/2019 11:29:00 ::: Uday S. Jagtap 726-17-ITXA-chamber.doc assessee may not have received all services, yet respondent has right to receive these services. Thus, relying upon decision of its co- ordinate bench in AWB India Ltd. Vs. DCI (2015) 152 ITD 570 it held that if package of services is made available on requirement basis, value of services cannot be taken as Nil, so long as agreement is not sham. (c) It is agreed position between parties that in respondent s own case for Assessment Year 2003-04, similar issue had arisen viz. package of services being available under agreement on as and when required basis. This Court by order dated 2 nd August, 2016 (CIT Vs. Merck Ltd. Writ Petition No.272 of 2014) held fees paid for on bouquet of services as and when required, would be similar to retainer agreement. It is agreed by Revenue that above order dated 8th August, 2016 of this Court in respondent s own case will equally apply to present facts. (d) In above view, question as proposed does not give rise to any substantial question of law. Thus, not entertained. 5. Regarding question (c) :- (a) impugned order of Tribunal deleted dis-allowance of expenses incurred in share buyback. This by following decision of 6 of 10 ::: Uploaded on - 17/10/2019 ::: Downloaded on - 23/10/2019 11:29:00 ::: Uday S. Jagtap 726-17-ITXA-chamber.doc Delhi High court in CIT Vs. Selan Exploration Technology Ltd. (2010) 188 Taxmann 1. In above case, it was held that share buyback expenditure incurred by respondent did not result in benefit of enduring nature as after buyback capital employed had gone down. Thus, expenditure incurred has not resulted in bringing into existence any new asset, thus was not in nature of capital expenditure. On aforesaid basis, Delhi High Court held that once it is held that expenditure is not capital in nature, then, expenditure is allowable under Section 37 of Act as revenue expenditure as it was incurred for benefit of existing shareholders in ordinary course of business. (b) learned Counsel appearing for parties are agreed that issue stands concluded by decision of this Court in Commissioner of Income Tax Vs. Aditya Birla Novo Ltd. 79 Taxmann.com 210 , and Commissioner of Income Tax Vs. Hindalco Industries Ltd. (Income Tax Appeal No.1846 of 2010) decided on 7th August, 2012 against Revenue and in favour of respondent. (c) In above view, this question as proposed does not give rise to any substantial question of law. Thus, not entertained. 6. Regarding question (d) :- 7 of 10 ::: Uploaded on - 17/10/2019 ::: Downloaded on - 23/10/2019 11:29:00 ::: Uday S. Jagtap 726-17-ITXA-chamber.doc (a) expenditure on account of sales promotion and conference expenditure was disallowed by Assessing Officer on ground that there was no evidence of benefit to respondent assessee from these activities. (b) On appeal, Tribunal held that so long as expenses have been incurred wholly and exclusively for purpose of business, whether necessary or not are to be allowed as expenditure. In support, it placed reliance upon decision of Supreme Court in case of CIT Vs. Chandulal Keshavlal & Co. 38 ITR 601 and Sasoon J. David & Co. Vs. Commissioner of Income Tax, 180 ITR 261 wherein it has been held that expenditure incurred voluntary on account of commercial expediency and wholly and exclusively for purpose of trade, then it is allowable expenditure. Court in above case observed that it is pertinent to note that words wholly and exclusively used in Section 37 of Act does not mean necessarily . Thus, it is for assessee to decide whether expenditure should be incurred in course of his business and once it is found that it is incurred wholly and exclusively for purposes of business, then it is deductible under Section 37 of Act. It further records that it is relevant to note that attempt was made to introduce word necessity in Section 37 of Income Tax Bill of 1961. However, this had led to public protest 8 of 10 ::: Uploaded on - 17/10/2019 ::: Downloaded on - 23/10/2019 11:29:00 ::: Uday S. Jagtap 726-17-ITXA-chamber.doc and resulted in dropping word necessity when Income Tax bill of 1961 was passed into Income Tax Act, 1961. Thus, view of Tribunal on this issue cannot be faulted as it is in accord with Supreme Court decisions referred to hereinabove. (c) In above view, this question as proposed does not give rise to any substantial question of law. Thus, not entertained. 7. Regarding question (e) :- (a) impugned order of Tribunal looking at smallness of amount, did not think it fit to adjudicate issue. In fact, impugned order of Tribunal records that Revenue has not contested issue before it. (b) In view of above, as Revenue has not urged this issue of disallowance of expenses before Tribunal, it cannot now be urged by Revenue before us. This Court in Commissioner of Income Tax Vs. Mahalaxmi Glass Works Co. 318 ITR 116 held that if concession is made before Tribunal, then on that issue no substantial question of law arises. (c) In above view, this question does not give rise to any substantial question of law. Thus, not entertained. 9 of 10 ::: Uploaded on - 17/10/2019 ::: Downloaded on - 23/10/2019 11:29:00 ::: Uday S. Jagtap 726-17-ITXA-chamber.doc 8. In above facts and circumstances, appeal is dismissed. (NITIN JAMDAR, J.) (M.S. SANKLECHA, J.) 10 of 10 ::: Uploaded on - 17/10/2019 ::: Downloaded on - 23/10/2019 11:29:00 ::: Pr. Commissioner of Income-tax-7 v. Merck Ltd