2023 (3) TMI 546 - AT - Income Tax

TP Adjustment - selection of MAM - rejection of Transactional Net Margin Method (TNMM) as the most appropriate method - rejection of comparables selected while benchmarking the transaction relating to import of finished goods from the Associated Enterprises (AE) - Assessee is a subsidiary of Medtronic USA Inc. a USA based company - HELD THAT - As in view of the decision of the Hon ble Jurisdictional High Court in Audco India Ltd. 2019 (5) TMI 694 - BOMBAY HIGH COURT the contention of the Revenue that Hon ble DRP/ TPO having accepted RPM as the most appropriate method should have undertaken a fresh benchmarking under RPM cannot be accepted. In such circumstances when no other method is applicable as a method of last resort TNMM has to be applied as most appropriate method. As further noticed in subsequent assessment years not only the Assessee has benchmarked the import of finished goods from the AE by applying TNMM but the Transfer Pricing Officer has also accepted it as the most appropriate method. For the aforesaid reasons we do not feel the necessity to restore the issue to the Assessing Officer/Transfer Pricing Officer for fresh adjudication. The Revenue has not been able to controvert the submissions of learned counsel for the Assessee nor any decision contrary to the decision of Tribunal in Appellant s own case has been furnished by the Revenue. Thus we find no reason to take a contrary view hence ground No. 4 to 7 of the appeal are allowed in similar terms TP adjustment on account of direct sales made by the AE to third parties in India - addition on account of commission on direct sales made by the AE to third customer in India was made on notional basis - HELD THAT - For the earlier year of AY 2002-03 Tribunal restored the issue back to the Assessing Officer / Transfer Pricing Officer to verify whether there was any involvement of the Assessee in the direct sales made by the AE in India. Similar view was expressed by the Tribunal while deciding the issue in assessment years 2003 04 2004 05 and 2007-08. Following the consistent view of the Tribunal cited supra we restore the issue to the Assessing Officer for fresh adjudication in terms with the directions of the tribunal in the preceding assessment years as referred to above. Grounds are allowed for statistical purposes. Depreciation on plant and machinery and building - A.O while disallowing the assessee s claim for depreciation had relied on the orders passed in earlier years - HELD THAT - We are of the considered view that pursuant to the introduction of the depreciation on the written down value of the block of asset by the Taxation Laws (amendment and miscellaneous provision) Act 1986 w.e.f. 01.04.1988 depreciation is allowable on the WDV on the block of assets and not on the individual items of the assets included in such block. In fact we find that the Tribunal had consistently in the case of the assessee for other years 2015 (12) TMI 1673 - ITAT MUMBAI directed the A.O to allow depreciation on plant and machinery and building as claimed by the assessee. Allowable business expenses - Disallowance being expenditure incurred on gift articles -claim of the assessee that the expenditure incurred towards gift items given to the customers is wholly and exclusively for the purpose of assessee s business - HELD THAT - Notably while deciding identical issue in assessment years 2003 04 2004 05 and 2007-08 in the orders referred to above the Co ordinate Bench has held that the expenditure incurred on gift items being wholly and exclusively for the purpose of assessee s business is an allowable expenditure. Disallowance of expenditure incurred in respect of foreign trip of doctors - HELD THAT - In accordance with the decision rendered in the case of Apex Laboratories Pvt. Ltd. . 2022 (2) TMI 1114 - SUPREME COURT wherein disallowance was made for the expenditure and freebies incurred on or after 14 December 2009 the expenditure incurred on foreign trip of doctors for AY 2006-07 is allowable being incurred prior to 14 December 2009. Consequently ground of the appeal is allowed. Disallowance of depreciation on goodwill - assessee claimed depreciation @ 25% on the written down value (WDV) of goodwill by treating it as an intangible asset - HELD THAT - The issue relating to depreciation on goodwill by treating it as an intangible asset under section 32(1)(ii) of the Act is no more res integra in view of the decision of the Hon ble Supreme Court in CIT v/s Smifs Securities Ltd. 2012 (8) TMI 713 - SUPREME COURT as held that goodwill is in the nature of any other business or commercial right or similar in nature hence is to be treated as intangible asset. Thus we allow assessee s claim of depreciation on goodwill. Ground raised is allowed. Disallowance of expenditure in respect of provision of expenses written back - HELD THAT - Hon ble Mumbai ITAT in the Assessee s own case for AY 2003-04 2017 (6) TMI 334 - ITAT AHMEDABAD has directed not to treat the reversal of provision as income in AY 2006-07. Notably as Tribunal has directed to not the treat the same as income in AY 2006-07 we direct the AO to delete the addition made accordingly. This ground is allowed. Allowance of depreciation on non compete fee - additional ground raised - HELD THAT - Undisputedly in the year of payment of non compete fee i.e. A.Y. 2002 03 the assessee had claimed it as revenue expenditure. However the Departmental Authorities as well as the Tribunal held that the expenditure incurred by the assessee is capital in nature. Of course the Tribunal allowed depreciation on non compete fee by treating it as an intangible asset. Notably in subsequent assessment years i.e. 2003 04 2004 05 2008 09 2011 12 2012 13 2013 14 and 2014-15 the Tribunal has allowed assessee s claim of depreciation on non compete fee while entertaining additional ground raised by the assessee. Therefore following the consistent view of the Tribunal AY 2008-09 2018 (5) TMI 587 - ITAT MUMBAI we direct the Assessing Officer to allow depreciation on the opening WDV of the non compete fee. This ground is allowed. TP Adjustment - MAM selection - difference in price Transfer Pricing Officer charged by AEs to the assessee and third party distributors - whether TPO has accepted TNMM as the most appropriate method for majority of export of AE erred in applying CUP method for some of the transactions as two methods cannot be applied for one class of transactions? - HELD THAT - As it is a well settled principle of law by decisions of various Courts Tribunal that most appropriate method should be selected to benchmark international transactions of the assessee with its AE based on nature of transaction. However it is incorrect to adopt two methods for one class of transaction and benchmarking such transaction by cherry picking a portion of the transaction undertaken by the assessee with its AEs and this principle is supported by the decision of ITAT Pune bench of Amphenol Interconnect India Pvt Ltd 2018 (3) TMI 536 - BOMBAY HIGH COURT upheld by the Hon ble Bombay High Court. Accordingly we agree with the Appellants contentions and the said ground is allowed in favour of the Appellant. Expenditure incurred on purchase of catalogues and brochures - Assessee had imported and purchased catalogues and brochures separately because the catalogues and brochures - HELD THAT - The issue is covered by Tribunal s order for AY 2004-05 2017 (6) TMI 334 - ITAT AHMEDABAD as find no merit for disallowance of expenditure incurred on purchase of catalogues and broachers which were wholly and exclusively for the purpose of business. Accordingly AO is directed to delete the same. Disallowance of expenditure incurred on software - HELD THAT - Relying on the submissions made by the assessee and the decisions of ACIT vs Asahi India Safety glass 2005 (12) TMI 454 - ITAT DELHI Empire Jute Co Ltd v CIT 1980 (5) TMI 1 - SUPREME COURT and Alembic Chemical Works Co. Ltd. 1989 (3) TMI 5 - SUPREME COURT we do not find any merit in disallowance of expenditure incurred on software which is lower in amount and for the business purpose of the assessee. Accordingly AO is directed to delete the same. Disallowance of expenditure in respect of Earnest Money Deposit ( EMD ) written off - HELD THAT - Relying on the details submitted arguments put forth by the Ld. AR for the assessee and the decisions relied upon by the assessee we are of the considered view that the Earnest Money Deposit written off is revenue in nature and allowable as expenditure in the event of forfeiture. Accordingly AO is directed to delete the addition made. Payment non-compete fee - HELD THAT - As ITAT has alreadyallowed depreciation holding that IMPL has acquired intangible assets innature of any other business of commercial rights. We accordingly directthe AO to allow depreciation on the non-compete fee so incurred by the assessee.

Summary

Issues Involved:
1. Rejection of Transactional Net Margin Method (TNMM) and selection of Resale Price Method (RPM) for benchmarking international transactions.
2. Selection of comparables for transfer pricing analysis.
3. Addition on account of adjustment in the arm's length price of international transactions.
4. Addition of notional income from direct sales by Associated Enterprises (AEs) in India.
5. Disallowance of depreciation on plant and machinery and building.
6. Disallowance of provision for commission payable to distributors.
7. Disallowance of expenses incurred on gifts.
8. Disallowance of expenses incurred for sponsoring foreign trips of doctors.
9. Disallowance of depreciation on goodwill.
10. Disallowance of reversal of professional fees.
11. Charging of interest under sections 234B and 234C of the Income Tax Act.
12. Initiation of penalty proceedings under section 274 read with section 271 of the Income Tax Act.
13. Non-granting of consequential depreciation on non-compete fees.
14. Deduction of education cess on income tax.

Detailed Analysis:

1. Rejection of TNMM and Selection of RPM:
The Assessee challenged the rejection of TNMM and the selection of RPM by the Transfer Pricing Officer (TPO) for benchmarking the transaction of import of finished goods from AEs. The TPO applied RPM by considering Medtronic Malaysia as a comparable, leading to an adjustment of Rs. 16,79,78,272. The tribunal noted that the TPO erred in considering Medtronic Malaysia as comparable due to significant differences in activities, economic factors, and market conditions. The tribunal upheld TNMM as the most appropriate method, as accepted in subsequent years, and allowed the grounds related to this issue.

2. Selection of Comparables:
The tribunal found that the TPO's selection of Medtronic Malaysia as a comparable was flawed. The tribunal emphasized that only the gross margin derived from an uncontrolled transaction can be considered for comparability analysis. The tribunal referred to the decision in the case of Audco India Ltd., which supported the Assessee's position. Consequently, the tribunal allowed the grounds challenging the selection of comparables.

3. Addition on Account of Adjustment in Arm's Length Price:
The TPO's adjustment based on the gross profit margin of Medtronic Malaysia was rejected by the tribunal. The tribunal held that the TPO should not have considered the margin earned by Medtronic Malaysia, as it was a controlled transaction and situated in a different geographical location. The tribunal upheld the Assessee's use of TNMM and deleted the addition.

4. Addition of Notional Income from Direct Sales by AEs:
The Assessee contested the addition of notional income from direct sales made by AEs to third parties in India. The tribunal noted that the TPO did not use any prescribed method to determine the notional commission income. The tribunal referred to its earlier decisions in the Assessee's own case, where similar additions were deleted. The tribunal restored the issue to the Assessing Officer (AO) for fresh adjudication, following the directions given in previous years.

5. Disallowance of Depreciation on Plant and Machinery and Building:
The Assessee claimed depreciation on plant and machinery and building, which was disallowed by the AO on the ground that the assets were not utilized during the year. The tribunal held that once an asset forms part of the block of assets, depreciation is allowable on the written down value of the block, irrespective of its actual use. The tribunal directed the AO to allow the depreciation as claimed by the Assessee.

6. Disallowance of Provision for Commission Payable to Distributors:
The Assessee did not press this ground, and the tribunal dismissed it as not pressed.

7. Disallowance of Expenses Incurred on Gifts:
The AO disallowed the expenditure on gift articles, holding that it was not for the purpose of the Assessee's business. The tribunal, following its earlier decisions in the Assessee's own case, held that the expenditure was incurred wholly and exclusively for the purpose of business and allowed the claim.

8. Disallowance of Expenses Incurred for Sponsoring Foreign Trips of Doctors:
The AO disallowed the expenditure on foreign trips of doctors, relying on the Medical Council of India (MCI) regulations. The tribunal noted that the MCI regulations were effective from 14 December 2009 and applied to expenses incurred thereafter. Since the expenses in question were incurred before this date, the tribunal allowed the claim.

9. Disallowance of Depreciation on Goodwill:
The AO disallowed the claim of depreciation on goodwill, which was contested by the Assessee. The tribunal, following the decision of the Supreme Court in CIT v. Smifs Securities Ltd., held that goodwill is an intangible asset eligible for depreciation. The tribunal allowed the claim of depreciation on goodwill.

10. Disallowance of Reversal of Professional Fees:
The Assessee claimed that the reversal of professional fees, which was disallowed in an earlier year, should not be taxed again. The tribunal directed the AO to delete the addition, following its earlier decision in the Assessee's own case.

11. Charging of Interest under Sections 234B and 234C:
The tribunal held that charging of interest under sections 234B and 234C is mandatory and consequential, and dismissed the ground.

12. Initiation of Penalty Proceedings:
The tribunal found the ground premature and dismissed it.

13. Non-Granting of Consequential Depreciation on Non-Compete Fees:
The Assessee claimed depreciation on non-compete fees, which was allowed by the tribunal in earlier years. The tribunal directed the AO to allow the depreciation on the opening written down value of the non-compete fee.

14. Deduction of Education Cess:
The Assessee withdrew this ground, and the tribunal dismissed it accordingly.

Conclusion:
The tribunal allowed the Assessee's appeal partly, providing relief on several grounds related to transfer pricing adjustments, disallowances, and depreciation claims. The tribunal's decisions were based on consistent views taken in the Assessee's own cases in earlier years and relevant judicial precedents.