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TMI Blog2018 (1) TMI 1033X X X X Extracts X X X X X X X X Extracts X X X X ..... egal in nature, hence, we admit the same. 3. First effective Ground of appeal (GOA 2-16) is about Transfer Pricing (TP) adjustment made on account of advertisement, marketing, promotion(AMP)expenses amounting to Rs. 30. 66 crores. During the assessment proceedings, the AO found that the assessee had entered into international transactions (IT. s)with its Associate Enterprise (AE). He made reference to TPO to determine the arm's length price (ALP) in relation to the IT. s. 3. 1. During the TP proceedings, the TPO observed that the assessee was a part of Medtronic's Inc. , a USA based global leader in medical technology, that the parent company was engaged in developing a wide range of products and therapies mostly patented or IP protected items, that the assessee was a subsidiary of Medtronic's International Hong Kong, that in the tax audit report it had mentioned the nature of business as 'trading of life saving devices', that the assertion made by it was not correct, that the items dealt with by the assessee were specialised products and technologies which required specialised workforce, infrastructure and system for marketing and distribution. He further observed that the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rangement with the AE for incurring expenses there must be an understanding/agreement with AE for spending 'excessively' towards marketing expenses for promoting the brand in India, that the TPO had applied the brightline method to compute adjustment on account of AMP expenses, that no such method was prescribed under the Act and the Rules, that in absence of a machinery provision to benchmark the AMP expenses no adjustment could be made, that based on the principles of 'bundled approach', as emanated by the Delhi High Court in case of Sony India Limited (374 ITR 118)no addition should have been made. He further argued that the assessee had earned an operating margin of 5. 39% which was higher than the margins earned by comparables, that it was only carrying out its own business and any benefits derived by the AEs were purely incidental in nature, the DRP had passed a non speaking order, that the TPO had not rejected the method applied by the assessee, that it was not incurring AMP expenditure on behalf of the AE, that the selling and distribution expenses were not even 1% of the total expenses, that the DRP had followed order of the then DRP for 2009-10 and had adopted Bri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at we would like to deal with the issue of AMP expenses for both the years at one place, as there is no change in the facts except for the amounts involved and the non adjudication of the issue in the earlier year. The arguments of the assessee for both the years are identical. We find that assessee had incurred an expenditure of Rs. 12, 25, 71, 652/-and Rs. 10, 01, 37, 032/-respectively for the earlier and current AY. under the head AMP, that it was paying name and licence fee to TCUK, that the TPO held that the assessee was spending much more than Industry average in promoting and building brand of TCUK, that he made an adjustment of Rs. 8. 09 crores and Rs. 8. 31 crores for the AY. s. 2009-10 and AY. 2010-11 towards AMP expenditure, that the assessee had filed additional evidences before the FAA, that the FAA did not admit the evidences referring to the provisions of Rule 46A of the Rules, that he upheld the order of the TPO, that for the AY. 2010-11 the assessee had filed objections before the DRP, that the adjustment made by the TPO were confirmed the DRP, that the adjustment was made/confirmed by the TPO/DRP because both of them were of the opinion that by incurring expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e computed having regard to the ALP and Section 92C (1) which sets out the different methods of determining the ALP, makes it clear that the transfer pricing adjustment is made by substituting the ALP for the price of the transaction. To begin with there has to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the ALP. 54. Under Sections 92B to 92F, the pre-requisite for commencing the TP exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transaction that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price. 55. Section 928 defines 'international transaction' as under: "Meaning of international transaction. 928. (1) For the purposes of this section and sections 92, 92C, 92D and 92E , "international transaction" means a transaction between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... USA whereby BLI is obliged to spend excessively on AMP in order to promote the brand of B&L, USA. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i) (a) to (e) to Section 92B are described as an 'International transaction'. This might be only an illustrative list, but significantly' it does not list AMP spending as one such transaction. 58. In Maruti Suzuki India Ltd. (supra), one of the submissions of the Revenue was: "The mere fact that the service or benefit has been provided by one party to the other would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit. "This was negatived by the Court by pointing out; "Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v), which defines 'transaction' to include 'arrangement', 'understanding' or 'action in con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the persons acting in concert may cooperate in actual acquisition of shares etc. or they may agree to, cooperate in such acquisition. Nonetheless, the element of the shared common objective or purpose is the sine qua non for the relationship of "persons acting in concert"to come into being. " 60. The transfer pricing adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceeding to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred , for the AE. In any event, after the decision in Sony Ericsson (supre), -- the question of applying the BLT to determine the existence-of an-international transaction involving AMP expenditure does not arise. 61. There is merit in the contention of the Assessee that a distinction is required to be drawn between a 'function' and a 'transaction' and that every expenditure forming part of the function, cannot be construed as a 'transaction'. Further, the- Revenue's attempt at re-character ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an adjustment had to be made. The -burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed 'price' of such transaction and thereafter ask whether it is an ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment. " 71- Since a quantitative adjustment is not permissible for the purposes of a TP adjust - ment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbetore, what the Revenue has sought to do in the present. case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on- application of the BLT, is excessive, thereby evidenc - ing the existence of an international transaction involving the AE. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ones contemplated by Section 92C may not only be legally impermissible but will lend itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which provides the necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance. " 64. In the absence of any machinery provision, bringing an imagined transaction to tax is not possible. The decisions in CIT v. B. C. Srinivasa Setty (1981) 128 ITR 294 (SC) and PNB Finance Ltd. v, CIT (2008) 307 ITR 75 (SC) make this position explicit. Therefore, where the existence of an international transaction involving AMP expense with an ascertainable price is- unable to be shown to exist, even if such price is nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise. 1261 & 1238/M/15 Thomas Cook 33 65. As already mentioned, merely because there is an incidental benefit to the foreign AE, it cannot be said that the AMP expenses incurred by the Indian entity was for promoting the brand of the foreign AE. As mentioned-in- Sassoon -J David-(supra)- "the--fact that- somebody other than the Assessee is also benefitted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exactly the similar issue was considered by the Tribunal in assessee's own case for the A. Y. 2002- 03 vide order dated 23/11/2007 also in the A. Y. 2007-08 vide order dated 30/03/2012 and for A. Y. 2009-10 vide order dated 31/12/2015. 12. Learned DR fairly conceded that issue is covered in favour of the assessee by the order of the Tribunal in assessee's own case. We also found that assessee was engaged in the business of manufacturing and trading. However, the manufacturing processes were discontinued with effect from 25 January 2002. During the year under consideration, the assessee had claimed depreciation on plant and machinery, building, furniture and fixtures and office equipment. 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. From the record, we also found that in AY 2007-08, the Hon'ble CIT(A) has allowed the assessee's ground by placing reliance on the decisions in case of CIT v Oswal Agro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tic Centre(344 ITR 476). After considering the available material, it held that expenditure of Rs. 5. 93 crores was related to education grants to medical association for organising conference and seminars(Rs. 2. 69 crores), printing and equipment hire charges (Rs. 16. 59lakhs)accomodation expenses(Rs. 1crores), expenses incurred for organizing medical-education meeting(Rs. 1. 75 crores)and distribution of free product samples(9. 03 lakhs). The DRP further held that a regulatory body like MCA would regulate only the conduct of individuals or organisations only, that the payment made by the assessee were prohibited by MCI regulation, that the expenses were incurred by benefit of doctors and not associations, that the associations were not at liberty to spend money received by assessee, that association had to spend as per the desire and guidance of the assessee company, that the expenditure was incurred against public policy, that expenditure incurred on hospitality, travel facilities provided to medical practitioners for participation in workshop were not allowable, that MCI guidelines had prohibited giving free samples. Finally, it upheld the order of the TPO/AO. 5. 2. Before us, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pass any direction or judgment on the infrastructure of any hospital which power rests solely with the concerned State Govt. The case of the Petitioner is that the Petitioner hospital is governed by the Delhi Nursing Homes Registration Act, 1953. It is urged that in fact, an inspection was also carried out on 22. 07. 2011 by Dr. R. N. Dass, Medical Superintendent (Nursing Home) under the Directorate of Health Services, Govt. of NCT of Delhi and the necessary equipments and facilities were found to be in order which negates the observations dated 27. 10. 2012 of the Ethics Committee of the MCI. It is also the plea of the Petitioner hospital that the Petitioner was not provided an opportunity of being heard and thus the principles of natural justice were violated. 7. In the counter affidavit filed by the Respondents, it is not disputed that the MCI under the 2002 Regulations has jurisdiction limited to taking action only against the registered medical practitioners. It's plea however, is that it has not passed any order against the Petitioner hospital therefore; the Petitioner cannot have any grievance against the impugned order. At the same time, it is stated that only simple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the order which reads as under: 2. The brief facts of the case qua the issue raised in the grounds of appeal are that, the assessee is a pharmaceutical company engaged in the business of providing Pharma marketing consultancy and detailing services to develop mass market for Pharma products. ............. On further perusal of the details appearing in the ledger account furnished by the assessee, he further noted that there are certain expenses which has been debited by the assessee like, 'Customer Relationship & Management expenses' (CRM) of Rs. 7, 61, 96, 260/-; 'Key Account Management expenses' (KAM)of Rs. 2, 56, 68, 509/-; gift articles of Rs. 9, 20, 22, 518/-; and cost of samples of Rs. 3, 60, 85, 320/-, which according to him are in the nature of freebies given to medical practitioners/doctors which are disallowable in terms of Explanation to section 37(1) as clarified by CBDT vide its Circular No. 5/2012 dated 1. 8. 2012. In response to the show cause notice by the AO, firstly, as regard CRM expenses, assessee submitted that expenditure under this category includes activities like holding national level seminars on new medical researches and drugs for discussion pane ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircular cannot have retrospective effect so as to be made applicable in the assessment year 2010-11 as the Circular is dated 01. 08. 2012. As required by the AO, the assessee also segregated expenses incurred after 10. 12. 2009, i. e. , the date of amendment brought in the Indian Medical Council Guidelines. After segregating the expenses, AO disallowed the expenditure aggregating to Rs. 22, 99, 72, 607/- (post 10. 12. 2009) on the ground that, firstly, the guidelines issued by the Medical Council of India is binding because it is a statutory body having been set up under the Act of the Parliament; secondly, the amended notification dated 10. 12. 2009, which has been reproduced by him in the order, clearly forbids medical practitioners to receive any kind of gift, travel facilities, hospitality and any kind of cash or monetary grants from any pharmaceutical or health care industries. Thus, such an expenses, he held that, is disallowable in terms of Explanation to section 37(1). 5. We have considered the rival contentions made by ld. CIT DR as well as ld. Sr. Counsel, Mr J. D. Mistry, perused the relevant finding given in the impugned orders and material referred to before us. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lines to the medical practitioners of their ethical codes and moral conduct. Nowhere the regulation or the notification mentions that such a regulation or code of conduct will cover pharmaceutical companies or health care sector in any manner. The department has not brought anything on record to show that the aforesaid regulation issued by Medical Council of India is meant for pharmaceutical companies in any manner. On the contrary, before us the learned senior counsel, Shri Mistry brought to our notice the judgment of Hon'ble Delhi High Court in the case of Max Hospital vs. MCI in WPC 1334/2013 judgment dated 10. 01. 2014, wherein the Medical Council of India admitted that the Indian Medical Council Regulation of 2002 has jurisdiction to take action only against the medical practitioners and not to health sector industry. Relevant portion of the said judgment reads as under: xxxxx From the aforesaid decision, it is ostensibly clear that the Medical Council of India has no jurisdiction to pass any order or regulation against any hospital or any health care sector under its 2002 regulation. So once the Indian Medical Council Regulation does not have any jurisdiction nor has any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity of Explanation 1 to section 37(1) on medical practitioners and pharmaceutical companies have interpreted that Indian Medical Council Regulation is applicable for pharmaceutical companies also. He also brought to our notice that another notification was issued by Indian Medical Council which was published on 01. 12. 2016 which further prohibits such kind of embargo on medical practitioners and have added para 6. 8. 1 and also given instances of action which shall be taken upon medical practitioners. The relevant clause of the said notification as relied upon by him is reproduced hereunder: xxxxx From the aforesaid notification, ld. CIT DR submitted that so many violations and censures have been prescribed for any expenditures/ or benefit given to doctors, thus, violation of such guidelines for incurring such kind of expenditures cannot be held to be allowable expenditure. CBDT is well within its power to clarify and interpret the law and prohibit allowance of any expenditure which violates any statute or is in nature of offence. 8. From a perusal of above amendment/notification in the MCI regulation, it is quite clear again that same is applicable for medical practitione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kind of hardship or liability to the assessee. In any case, it is trite law that the CBDT circular which creates a burden or liability or imposes a new kind of imparity, same cannot be reckoned retrospectively. The beneficial circular may apply retrospectively but a circular imposing a burden has to be applied prospectively only. Here in this case the CBDT has enlarged the scope of 'Indian Medical Council Regulation, 2002' and made it applicable for the pharmaceutical companies. Therefore, such a CBDT circular cannot be reckoned to have retrospective effect. The same CBDT circular had come up for consideration before the co-ordinate Bench of the ITAT, Mumbai Bench in the case of Syncom Formulations (I) Ltd. (in ITA Nos. 6429 & 6428/Mum/2012 for A. Ys. 2010-11 and 2011-12, vide order dated 23. 12. 2015), wherein Tribunal held that CBDT circular would not be not be applicable in the A. Ys. 2010-11 and 2011-12 as it was introduced w. e. f. 1. 8. 2012. 10. From the perusal of the nature of expenditure incurred by the assessee, it is seen that under the head "Customer Relationship Management", the assessee arranges national level seminar and discussion panels of eminent doctors and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of the patients, it is imperative that the doctors should keep themselves updated with the latest developments in the medicine and the main object of such conferences and seminars is to update the doctors of the latest developments, which is beneficial to the doctors in treating the patients as well as the pharmaceutical companies. Further as pointed out and concluded by the learned CIT(A) there is no violation by the assessee in so far as giving any kind of freebies to the medical practitioners. Thus, such kind of expenditures by a pharmaceutical companies are purely for business purpose which has to be allowed as business expenditure and is not impaired by EXPLANATION 1 to section 37(1). 11. Before us, the Ld. CIT DR has also much harped upon the decision of the Hon'ble Himachal Pradesh High Court in the case of Confederation of Indian Pharmaceutical Industry (SS) vs. CBDT (supra), in support of the argument that CBDT Circular has been approved and confirmed by the High Court and therefore, it has a huge binding precedence. From the perusal of the said judgment of the Hon'ble High Court, it is seen that in that case the validity of Circular No. 5/12 dated 1. 8. 2012 was c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee. However, in A. Y. 2009-10, Hon'ble Tribunal while noting the fact that consistency has to be adopted, distinguished the order of A. Y. 2008-09 as under: "The assessee has contended that in the immediately preceding assessment year the Tribunal has decided the issue in favour of the assessee in ITA NO. 388/Mum/2012 for assessment year 2008-09. In our considered view, principles of Res judicata is not applicable to income tax proceedings although we are fully agreeable that principles of consistency is to be maintained (Hon'ble Supreme Court decision in Radha Soami Satsang v. CIT (1992) 193 ITR 321 (SC) but in the instant assessment year, we have observed that these overseas trips for Doctors and their spouses were organized by the assessee whereby no details of the contents of seminar, if any conducted by the assessee overseas has been brought on record and also even the spouses accompanied the Doctors to the overseas trip which included cruise visit to island, gala dinners, cocktail, gala entertainment etc. rather than being directed towards seminar for product information dissemination or directed towards knowledge enhancement or knowledge sharing oriented as no details o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case on careful perusal of the Tribunal order in the case of Liva Healthcare (supra) we find that the Tribunal though has incorporated the relevant provisions and clauses of the 'Indian Medical Council Regulation 2002', however, has not elaborated or dwell upon as to how this MCI regulation which is strictly meant for medical practitioners and doctors can be made applicable to pharmaceutical companies. There has to be some enabling provision or specific clause in the said regulation whereby the pharmaceutical companies are barred from conducting seminars or conferences by sponsoring the doctors. The entire conduct relates to doctors and medical practitioners and lists out the censures and fines imposed upon them. What has not been provided in the MCI regulation cannot be supplied either by the court or by the CBDT. There has to be express provision under the law whereby pharmaceutical companies are prohibited to conduct conferences or seminar or give free samples. In the Tribunal decision of Liva Healthcare, strong reference has been made to Hon'ble Himachal Pradesh High Court (supra), that the said CBDT circular has been upheld. On this aspect we have already discussed in detail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal is clearly distinguishable and cannot be held to be applicable and also we have already given our independent finding as to allowability of expenses in the hands of the assessee as business expenditure. 14. Accordingly, we uphold the order of the ld. CIT(A) deleting the disallowance aggregating to Rs. 22, 99, 72, 607/-. " 5. 3. 3. . Lastly, we want to refer to the case of Syncom Formulations in ITA No. 6429 & 6428/ Mum/2012, dated 23. 12. 2015, the Tribunal has held that the CBDT Circular, dated 1. 8. 2012 is applicable w. e. f. 1. 8. 2012 relevant to AY. 2013-14. While holding so, it was observed as under: "We have considered rival contentions and found that receiving of gifts by doctors was prohibited by MCI guidelines, giving of the same by manufacturer is not prohibited under any law for the time being in force. Giving small gifts bearing company logo to doctors does not tantamount to giving gifts to doctors but it is regarded as advertising expenses. As regards sponsoring doctors for conferences and extending hospitality, pharmaceuticals companies have been sponsoring practicing doctors to attend prestigious conferences so that they gather contemporary knowledge a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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