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2019 (10) TMI 122 - AT - Income TaxTP Adjustment - AMP expenses - International transaction - HELD THAT - The terms of the distribution agreement had not changed/modified. Also, we find that a similarly placed distribution Agreement was relied upon by the Tribunal while disposing off the appeal of the assessee for A.Y. 2008-09. A perusal of the order of the Tribunal in the assesses own case for A.Y. 2010-11, viz. India Medtronic Vs. DCIT-10(1)(1), Mumbai 2019 (7) TMI 1516 - ITAT MUMBAI reveals that the Tribunal had observed viz. (i) that, in the agreements between the assessee and its AE there was no condition of sharing of AMP; (ii) that, the agreements only referred to using best efforts to distribute the products or promote products in a commercially reasonable manner; and (iii) that, the terms of the agreement did not provide that the assessee had to share AMP expenses; (iv) that, even if the AE was benefitted indirectly by the AMP expenditure incurred by the assessee, it could not be inferred that it had entered into an agreement for sharing AMP expenses; and (v) that, the Bright Line Test should not have been applied by the TPO. We find that the Tribunal after relying on its earlier order in the case of Thomas Cook India Ltd. 2016 (7) TMI 318 - ITAT MUMBAI , had therein decided the issue in favour of the assessee Adjustment in respect of such reimbursement of expenses - admission of admission evidence - HELD THAT - Neither of the lower authorities had at any stage directed the assessee to place on record the complete supporting documentary evidence as regards the reimbursement of expenses therefore, there is a justifiable reason for the assessee for not submitting the supporting documentary evidence in respect of the balance reimbursement of expenses before them. Accordingly, in our considered view the additional evidence i.e the copies of invoices along with backup documents supporting reimbursement of expenses that has been filed by the assessee before us, merits admission on our part. However, we also cannot remain oblivious of the fact that as the said additional evidence which as claimed by the assessee substantiates the cost to cost nature of reimbursement of expenses to its AEs cannot be summarily accepted on the very face of it, and having been filed for the very first time,would thus require verification on the part of the revenue authorities. Matter restored. Transfer pricing adjustment on account of import of finished goods by the assessee company from its AEs - HELD THAT - As the assessee has assailed the TP adjustment in respect of the aforesaid import transactions on multiple grounds, therefore, we shall advert to and adjudicate the same in a chronological manner. TPO has erred in not following the binding directions of the DRP that as the import of finished goods was a secondary adjustment, therefore, the same would be subsumed in the primary adjustment made on account of AMP, and hence, no separate addition to the total income of the assessee would be called for - We have given a thoughtful consideration and are of the considered view that as the adjustment of AMP expenses had been vacated by us, therefore, the said claim of the assessee is rendered as academic in nature and would not survive any more. Accordingly, the aforesaid claim of the assessee is rejected Claim of the assessee that the TPO/DRP had erred in rejecting the use of multiple year data by the assessee for computing the ALP of its transactions of import of goods from the AEs - As is discernible from the records, the assessee in the case before us had failed to establish as to how the financial data for the earlier two years of its comparables, which had been used by it for carrying out the transfer pricing analysis had in any way influenced the determination of the transfer prices in relation to the transactions of import of goods by the assessee from its AEs during the year under consideration. Our aforesaid observations are fortified by the judgment of PTC Software (I) Pvt. Ltd., . 2016 (9) TMI 1282 - BOMBAY HIGH COURT . Accordingly, finding no infirmity in the order of the DRP which had rightly concurred with the TPO as regards rejection of the multiple year data used by the assessee for computing the ALP of its transactions of import of goods from the AEs, we uphold the same. Foreign exchange gain was not to be allowed as a part of the operating income for the purpose of computing the margin of the assessee and its comparables - TPO/DRP had erred in concluding that the foreign exchange gain was to be treated as non-operating in nature while computing the margins of the assessee for the year under consideration. Accordingly, the TPO is directed to consider the foreign exchangegain/loss as operating in nature while computing the margin of the assessee for the year under consideration. Selection of comparable - we find no infirmity in the view therein taken and accordingly uphold the same. As regards the claim of the assessee that the TPO/DRP had erred in adopting the annual report of Confident Sales India Pvt. Ltd. for financial year 2014-15, for determining the PLI of the said comparable for the year under consideration i.e financial year 2013- 14, we are unable to accept the claim of the assessee that the lower authorities had erred in adopting the said approach. As observed by the lower authorities, as sufficient data for financial year 2013-14 was available in the annual report of the assessee for financial year 2014- 15, therefore, in our considered view the said company on account of of availability of the relevant data was rightly selected as a comparable by the TPO/DRP. We thus in terms of our aforesaid observations uphold the view taken by the DRP as regards the inclusion/exclusion of the aforementioned two companies from the final list of comparables of the purpose of computing the ALP of the international transactions of import of goods by the assessee during the year under consideration Working capital adjustment - As is discernible from a perusal of the Form 3CEB and the records available before us, the assessee had worked out the adjustment resulting from the different levels of working capital i.e accounts receivable, inventory and accounts payable between the assessee i.e the tested party and the comparable companies. Also, the assessee had in the course of the proceedings before the lower authorities submitted that as working capital yields a return resulting from viz. (i). higher sales price; or (ii). lower cost of goods sold, therefore, the same would have an impact on the operational result. Accordingly, we are unable to accept the observation of the TPO/DRP that the assessee had failed to make out a case as to how the working capital adjustment would affect the net profit margin in the open market. Apart there from, the assessee has also assailed the correctness of the observation of the DRP that ther was a cessation of the agency business of the assessee in December, 2012. We thus are of the considered view that the matter in all fairness requires to be revisited by the DRP for afresh adjudication on the issue pertaining to working capital adjustment in the hands of the assessee. Not allowing the benefit of variation of /- 3% n determining of the ALP - As per the second proviso to Sec 92C(2) of the Act, if the variation between the ALP so determined and the price at which the international transaction has actually been undertaken does not exceed /- 3% of the price of such international transaction, then the price at which the international transaction has actually been undertaken shall be deemed to be arm s length price. Accordingly, we direct the TPO that if the ALP of the transactions of import of goods by the assessee from its AEs as determined by him in the course of the set aside proceedings does not exceed /- 3% of the price of such international transactions, then the same shall be deemed to be at arms length. Disallowing depreciation on building - part of sale/distribution of the asset from block of asset - HELD THAT - Admittedly, the concept of block of assets was made available on the statute w.e.f 01.04.1988. As such, once the asset entered into the block of asset and the same was accepted by the A.O, thereafter, in the subsequent years the claim of consequential depreciation on the said block of asset could not be disturbed, despite the fact that some of the assets forming part of such block of asset were no more used for the purpose of business. See M/S. SONIC BIOCHEM EXTRACTIONS PVT. LTD. 2015 (12) TMI 112 - BOMBAY HIGH COURT - Depreciation would be allowable even in case of sale/distribution of the asset, as long as the block of asset remains in existence. In sum and substance, it was observed by the Hon ble High Court that the test of user has to be applied on the block of assets as a whole and not on the individual assets. Payment of convention expenses - expenses incurred by the assessee in the normal course of its business for creating a market for its products across the country - HELD THAT - In the absence of any sanction or authority of law on the basis of which it could safely be concluded that the expenditure incurred by the assessee company on sales promotion expenses by way of distribution of articles to the stockists, distributors, dealers, customers and doctors, is in the nature of an expenditure which had been incurred for any purpose which is either an offence or prohibited by law, thus conclude that the same would not be hit by the Explanation to Sec. 37(1) Non granting consequential depreciation on non-compete fee which was held by the Tribunal as a capital expenditure - HELD THAT - As relying on assessee's own case we herein direct the AO to allow the consequential depreciation on the non-compete fees to the assessee company. Levy of interest under Sec. 234B - HELD THAT - The levy of interest under Sec. 234B is mandatory in nature. Our aforesaid view is fortified by the judgment of the Hon ble Supreme Court in the case of CIT Vs. Anjum M.H. Ghasawala 2001 (10) TMI 4 - SUPREME COURT . However, as the aforesaid levy of interest under Sec.234B would be consequential to the adjudication of the merits of the issue under consideration, therefore, the A.O is directed to work out the same on the basis of the tax liability worked out in the hands of the assessee.
Issues Involved:
1. Transfer pricing adjustment on Advertising, Marketing, and Promotion (AMP) expenses. 2. AMP as an international transaction. 3. Promotion of AE's brand in India. 4. Transactional Net Margin Method (TNMM): Bundled Approach. 5. Application of Bright Line Method (BLT). 6. Selection of comparable companies for the bright line test. 7. Mark-up on AMP expenses. 8. Classification of certain expenses as AMP expenses. 9. Secondary transfer pricing adjustment on convention expenses. 10. Transfer Pricing Adjustment on account of recovery of expenses. 11. Transfer Pricing Adjustment on account of reimbursement of expenses. 12. Alternate Transfer Pricing Adjustment on account of import of finished goods. 13. Disallowance of depreciation on building. 14. Disallowance of payment to doctors. 15. Grants to medical associations. 16. Printing and equipment hire charges. 17. Accommodation expenses. 18. Continuing Medical Education Meetings (CME Meetings). 19. Meals. 20. Gifts. 21. Expenses for travel facilities. 22. Registration charges. 23. Car hire charges. 24. Double disallowance of convention expenses. 25. Consequential depreciation on non-compete fee. 26. Non-grant of credit of TDS. 27. Levy of interest under section 234B. 28. Levy of penalty under section 271(1)(c). Detailed Analysis: 1. Transfer Pricing Adjustment on AMP Expenses: The TPO considered the AMP expenses incurred by the assessee as excessive and beneficial to its Associate Enterprises (AEs) for building the 'Medtronic' brand, thus requiring compensation from AEs. The AMP expenses to sales ratio was computed at 19.89%, and the Bright Line Test (BLT) was applied to determine the arm’s length price (ALP). The TPO concluded an adjustment of ?101,26,73,186/-. 2. AMP as an International Transaction: The Tribunal referenced its earlier decision in the assessee’s case for AY 2010-11, concluding that there was no agreement for sharing AMP expenses between the assessee and its AE. The AMP expenses were not considered an international transaction, and the Bright Line Test was deemed inappropriate. 3. Promotion of AE's Brand in India: The Tribunal found that the AMP expenses incurred by the assessee were not for promoting the AE’s brand but were part of the assessee’s business operations. The benefit to the AE was incidental. 4. Transactional Net Margin Method (TNMM): Bundled Approach: The Tribunal upheld the assessee’s approach of treating AMP expenses as part of the bundled transaction for determining the ALP of trading transactions, rejecting the separation of AMP expenses as a distinct international transaction. 5. Application of Bright Line Method (BLT): The Tribunal rejected the application of BLT by the TPO, citing previous decisions that BLT is not an appropriate method for benchmarking AMP expenses. 6. Selection of Comparable Companies for Bright Line Test: The Tribunal found fault with the TPO’s selection of comparable companies without a fresh search and cherry-picking from preceding years, violating natural justice principles. 7. Mark-up on AMP Expenses: The Tribunal disagreed with the TPO’s conclusion that the assessee should earn a mark-up of 23.71% on excessive AMP expenses, noting the absence of a service element. 8. Classification of Certain Expenses as AMP Expenses: The Tribunal found that the TPO erred in including personnel costs, travel, conveyance expenses, and depreciation on equipment as part of AMP expenses without proper justification. 9. Secondary Transfer Pricing Adjustment on Convention Expenses: The Tribunal vacated the alternative adjustment made by the TPO/DRP for convention expenses, which were wrongly classified as AMP expenses. 10. Transfer Pricing Adjustment on Account of Recovery of Expenses: The Tribunal noted that the issue no longer survived due to rectification by the AO, dismissing the ground as withdrawn. 11. Transfer Pricing Adjustment on Account of Reimbursement of Expenses: The Tribunal remanded the issue to the TPO for verification of the claim that reimbursements were on a cost-to-cost basis for administrative convenience. 12. Alternate Transfer Pricing Adjustment on Account of Import of Finished Goods: The Tribunal noted that the adjustment of AMP expenses was vacated, rendering the claim academic. The Tribunal upheld the use of single-year data and inclusion of Confident Sales India Pvt. Ltd. as a comparable. 13. Disallowance of Depreciation on Building: The Tribunal allowed the depreciation claim, noting that once an asset enters the block of assets, the claim for depreciation cannot be disturbed, even if the asset is not used. 14. Disallowance of Payment to Doctors: The Tribunal deleted the disallowance, holding that the MCI regulations apply only to medical practitioners and not to the assessee, a medical device company. 15. Grants to Medical Associations: The Tribunal found that grants to medical associations were outside the purview of MCI regulations and CBDT circular. 16. Printing and Equipment Hire Charges: The Tribunal noted that these charges were paid to independent third parties and should not be disallowed. 17. Accommodation Expenses: The Tribunal held that accommodation expenses for medical practitioners attending conferences as instructors/consultants were outside the purview of the MCI regulations and CBDT circular. 18. Continuing Medical Education Meetings (CME Meetings): The Tribunal allowed expenses for organizing CME meetings, noting they were paid to third-party agencies for educational purposes. 19. Meals: The Tribunal allowed meal expenses, noting their low value and courtesy nature. 20. Gifts: The Tribunal allowed nominal value gifts for brand recall and goodwill creation. 21. Expenses for Travel Facilities: The Tribunal allowed travel expenses incurred for business purposes, paid to travel agents, and independent third-party service providers. 22. Registration Charges: The Tribunal allowed registration charges incurred for business purposes. 23. Car Hire Charges: The Tribunal allowed car hire charges for the smooth conduct of medical conferences. 24. Double Disallowance of Convention Expenses: The Tribunal vacated the double disallowance of convention expenses. 25. Consequential Depreciation on Non-Compete Fee: The Tribunal directed the AO to allow consequential depreciation on non-compete fees, following its earlier decisions. 26. Non-Grant of Credit of TDS: The Tribunal restored the issue to the AO for verification and allowance of the correct TDS credit. 27. Levy of Interest Under Section 234B: The Tribunal held that the levy of interest under Section 234B is mandatory and directed the AO to compute it based on the final tax liability. 28. Levy of Penalty Under Section 271(1)(c): The Tribunal dismissed the ground as premature. Order: The appeal was partly allowed.
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