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2019 (5) TMI 1643 - AT - Income TaxAdvertising , Marketing and Promotion (AMP) Expenses - Bright Line Method - HELD THAT - The agreements entered in to by the AEs with the assessee, that in the agreements there is no condition about sharing of AMP, that the agreements talks of using best efforts to market and distribute the product or promote the products in a commercially reasonable manner. In our opinion, these terms do not give any indication that the AE and the assessee had to share AMP expenses. Secondly, if the AE was benefitted indirectly by the AMP expenditure incurred by the assessee, it cannot be held that it had entered into agreement for sharing AMP expenses. We are also of the opinion that Bright Line Method should not have been applied by the TPO. Grounds is fully covered by the decision of Co-ordinate Bench in assessee s own case in 2018 (5) TMI 507 - ITAT MUMBAI holding that and therefore the same the said issue should be decided following the order of the coordinate bench. Disallowance of depreciation on building - HELD THAT - Once the concept of block of assets was brought into effect from AY 1989- 90 onwards, then depreciation is allowable on the aggregate of WDV of all the assets in the block at beginning of the Financial year alongwith the additions made to the assets in the subject AY. The individual asset losses its identity for depreciation. Respectfully following the order of the Co-ordinate Bench of the Tribunal in assessee s own case in 2018 (5) TMI 507 - ITAT MUMBAI , we decide the issue in favour of the assessee Disallowance in respect of payment made to Doctors - free samples - MCI guidelines - HELD THAT - We are of the opinion that the MCI guidelines are applicable to the professionals i.e. Doctors only. They do not and cannot govern the other tax entities like Drug manufacturing or drug distributing Companies or individuals other than the doctors, or HUF,s., or Firms etc. MCI, as a body can formulate policy for the Doctors. The assessee is not a practicing professional. So, any guidelines issued by it cannot decide the allowability or otherwise of an expenditure under the Act. Income tax Act is a code in itself and business income an assessee has to be assessed and taxed as envisaged by the provisions of the Act. The issue at hand being similar to one as decided by the coordinate bench in assessee own case 2018 (5) TMI 507 - ITAT MUMBAI and also squarely covered by ratio laid down by the Hon ble Delhi in MAX HOSPITAL, PITAMPURA VERSUS MCI 2014 (1) TMI 1829 - DELHI HIGH COURT and Rajasthan High Courts in DR. ANIL GUPTA VERSUS ACIT 2017 (12) TMI 931 - RAJASTHAN HIGH COURT respectively , we are therefore inclined to uphold the order of CIT(A). Depreciation on non-compete fee - held to be capital in nature in A.Y. 2002-03 - HELD THAT - It was argued that while deciding the appeal for the AY. 2002-03, the Tribunal had directed the AO to allow depreciation on payment made for non compete fee treating the same as capital expenditure. Following the above order of the Tribunal, we allow the additional ground raised by the assessee.
Issues Involved:
1. Assessment of total income. 2. Transfer pricing adjustment on Advertising, Marketing, and Promotion (AMP) expenses. 3. Determination of AMP as an international transaction. 4. Promotion of Associated Enterprise's (AE) brand in India. 5. Application of Transactional Net Margin Method (TNMM) and Bright Line Test (BLT). 6. Selection of comparable companies for benchmarking AMP expenses. 7. Classification of certain expenses as AMP expenses. 8. Disallowance of depreciation on building. 9. Disallowance of payments to doctors and convention expenses. 10. Levy of interest under sections 234B, 234C, and 234D of the Income Tax Act. 11. Initiation of penalty under section 271(1)(c) of the Income Tax Act. 12. Depreciation on non-compete fee. Detailed Analysis: 1. Assessment of Total Income: The assessee challenged the assessment of total income at ?86,47,57,590 against ?36,01,57,620 as computed by the assessee. This issue was deemed general and required no adjudication. 2. Transfer Pricing Adjustment on AMP Expenses: The assessee contested the transfer pricing adjustment of ?23,58,61,099 on AMP expenses. The Tribunal referred to its previous order in the assessee’s own case for A.Y. 2011-12, which concluded that AMP expenses should not be treated as an international transaction. The Tribunal reiterated that AMP expenditure incurred by the assessee was not an international transaction and disallowed the adjustment. 3. Determination of AMP as an International Transaction: The Tribunal held that AMP expenses incurred by the assessee were not international transactions. It emphasized that there was no agreement between the assessee and its AE for sharing AMP expenses, and any incidental benefit to the AE did not constitute an international transaction. 4. Promotion of AE’s Brand in India: The Tribunal noted that the assessee was using the established Medtronic brand for its business, and any benefit to the AE was incidental. Thus, AMP expenses were not incurred for promoting the AE’s brand. 5. Application of TNMM and BLT: The Tribunal criticized the application of the Bright Line Test (BLT) by the TPO, stating it was not a prescribed method under the Act and Rules. It upheld the use of the Transactional Net Margin Method (TNMM) for determining the arm’s length price of trading transactions, including AMP expenses. 6. Selection of Comparable Companies for Benchmarking AMP Expenses: The Tribunal found fault with the TPO’s selection of comparables, noting that the same set of comparables should be used for benchmarking both import of trading goods and AMP expenses. It rejected the ad hoc selection of comparables by the TPO. 7. Classification of Certain Expenses as AMP Expenses: The Tribunal addressed the inclusion of personnel costs, travel expenses, and depreciation on equipment as part of AMP expenses. It ruled that these were routine business expenses and should not be classified as AMP expenses. It also rejected the TPO’s method of considering 80% of manpower expenses and travel costs as AMP expenses. 8. Disallowance of Depreciation on Building: The Tribunal referred to its previous orders in the assessee’s own case, which allowed depreciation on building assets even after the discontinuation of the manufacturing unit. It ruled in favor of the assessee, allowing the depreciation claim. 9. Disallowance of Payments to Doctors and Convention Expenses: The Tribunal examined the disallowance of ?27,11,48,553 on payments to doctors, citing MCI regulations and CBDT Circular No. 05/2012. It noted that MCI regulations apply only to medical practitioners, not to medical device companies like the assessee. The Tribunal cited various High Court rulings and previous Tribunal decisions to conclude that such expenses were allowable business expenditures and not prohibited by law. 10. Levy of Interest Under Sections 234B, 234C, and 234D: The Tribunal dismissed the grounds related to the levy of interest under sections 234B, 234C, and 234D as consequential and not requiring separate adjudication. 11. Initiation of Penalty Under Section 271(1)(c): The Tribunal did not specifically address the initiation of penalty under section 271(1)(c) in the detailed analysis provided. 12. Depreciation on Non-compete Fee: The Tribunal admitted the additional ground raised by the assessee regarding depreciation on non-compete fees. It directed the Assessing Officer to allow depreciation on the payment made for non-compete fees, treating it as capital expenditure, following its previous orders in the assessee’s own case. Conclusion: The Tribunal ruled in favor of the assessee on most grounds, particularly concerning the non-recognition of AMP expenses as international transactions and the allowance of depreciation on building and non-compete fees. The appeal was partly allowed, with several grounds being dismissed as general or consequential.
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