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TMI Blog2018 (5) TMI 507X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO/TPO as they were following the order of LG [2013 (6) TMI 217 - ITAT DELHI] and did not have benefit of later judgments of the Hon’ble High Court, we would like to mention that matter can be restored back in certain conditions only. Restoration of matters to the AO's is not a tool to give one more opportunity of hearing to the litigants. It is not advisable to prolong the judicial proceedings in the name of fair play. It is not a case where new evidences have been placed on record by the assessee, that were not made available to the AO at the time of original assessment. It is not also a matter wherein some ground of appeal has remained un-adjudicated. There is violation of principles of natural justice. So, we hold that it is not a fit case to be sent back to the TPO for fresh adjudication - Decided in favour of assessee. Depreciation on plant and machinery and building to be allowed as relying on assessee's own case[2015 (12) TMI 1673 - ITAT MUMBAI] Disallowance of payment made to doctors(Convention Expenses) - Held that:- The Hon’ble Delhi High Court in the case of MAX Hospital, Pitampura (2014 (1) TMI 1829 - DELHI HIGH COURT) has clearly held that MCI could issue guide line ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was brought to AY. 2010-11 (I. T. A. /1600/Mu/2015, dtd. 17. 01. 2018). we are reproducing the relevant portion of the order and it reads as under : 3. First effective Ground of appeal (GOA 2-9) is about Transfer Pricing (TP) adjustment made on account of advertisement, marketing, promotion(AMP)expenses amounting to ₹ 18. 36 crores. It was brought to our notice that identical issue was decided by the Tribunal while adjudicating the appeal for the AY. 2010-11 (ITA/1600/Mum/2015, Dtd. 17. 01/2018. )We are reproducing the relevant portion of the said order and it reads as under: 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT. , that there was no understanding or agreement between the assessee and the AE in that regard, that even if there was any arrangement 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "8. 3. We have heard the rival submissions and perused the material before us. In the earlier part of our order, we have mentioned that 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 ₹ 12, 25, 71, 652/-and ₹ 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 ₹ 8. 09 crores and ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactions having regard to arm's length price"]and Section 92 (1) which states that any income arising from an international transaction shall be 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 internation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), the Revenue has to show that there exists an 'agreement' or 'arrangement' or' 'understanding' between BLI -and B&L, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e may be in pursuance of an agreement' or an understanding, formal or informal; 'the acquisition of shares etc. may be direct or indirect or 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 aninternational 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be established de hors the BLT, 70. What is clear is that it. is the 'price' of an international transaction which is required to be adjusted: 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nomic trends both international and domestic, the consumption patterns, market behaviour and so on. A simplistic approach using one of the modes similar to 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. 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 forei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilding, furniture and fixtures by holding the same to be related to the discontinuity of manufacturing operation of the assessee and also holding that the same have not been used during the year. We found that 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 l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and relied on the amendments to MCI Act. He held that amendment was effective from 10/12/2009, that same was applicable to expenses incurred by the assessee, that expenses incurred on or after 10/12/09 were in violation of MCI guidelines, that same were not allowable. Finally, he made disallowance of ₹ 6. 02 crores. 5. 1. The assessee filed objections before the DRP and referred to Circular No. 05 of 2012 and case of KAP Scan and Diagnostic Centre(344 ITR 476). After considering the available material, it held that expenditure of ₹ 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 organisa -tions 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 no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Council of India (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (the Regulations) have been framed in exercise of the power conferred under Section 20-A read with Section 33 (m) of the Indian Medical Council Act, 1956, these regulations do not govern or have any concern with the facilities, infrastructure or running of the Hospitals and secondly, that the Ethics Committee of the MCI acting under the Regulations had no jurisdiction to 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 nat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee to doctors observing that the prohibition by IMA is on medical practitioners and not applicable to Pharma companies without appreciating that the Prohibition of IMA is to curb the malpractices in the medical profession and equally binding on both medical practitioners and Pharma companies? 3. The appellant prays that the order of the CIT (A) on the above ground be set aside and that of the A. O. be restored. " We are reproducing the relevant portion 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 ₹ 7, 61, 96, 260/-; 'Key Account Management expenses' (KAM)of ₹ 2, 56, 68, 509/-; gift articles of ₹ 9, 20, 22, 518/-; and cost of samples of &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2012 (supra), wherein the CBDT has referred to amendment to the "Indian Medical Council Regulations, 2002", brought from 10. 12. 2009, imposing prohibition of medical practitioner and their professional associations from taking any gift, travel facility, hospitality, cash or monetary grant from the pharmaceutical and allied health sector industries, the assessee submitted that 12 firstly, cost of free samples, KAM expenses, CRM expenses are not prohibited under any law and, secondly, the CBDT Circular 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as under:- xxxxx 6. On a plain reading of the aforesaid notification, which has been heavily relied upon by the department, it is quite apparent that the code of conduct enshrined therein is meant to be followed and adhered by medical practitioners/doctors alone. It illustrates the various kinds of conduct or activities which a medical practitioner should avoid while dealing with pharmaceutical companies and allied health sector industry. It provides guidelines 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 j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th care companies. If section 37(1) is applicable to an assessee claiming the expense then by implication, any impairment caused by Explanation1 will apply to that assessee only. Any impairment or prohibition by any law/regulation on a different class of person/assessee will not impinge upon the assessee claiming the expenditure under this section. 7. Before us the learned CIT DR strongly relied upon the fact that CBDT Circular, while clarifying the applicability 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 exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. However the CBDT in its power cannot create a new impairment adverse to an assessee or to a class of assessee without any sanction of law. The circular issued by the CBDT must confirm to tax laws and for purpose of giving administrative relief or for clarifying the provisions of law and cannot impose a burden on the assessee, leave alone creating a new burden by enlarging the scope of a different regulation issued under a different act so as to impose any 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 & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oducts. The pharmaceutical company, which is engaged in manufacturing and marketing of pharmaceutical products, can promote its sale and brand only by arranging seminars, conferences and thereby creating awareness amongst doctors about the new research in the medical field and therapeutic areas, etc. Every day there are new developments taking place around the world in the area of medicine and therapeutic, hence in order to provide correct diagnosis and treatment 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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e applicable to Pharma Companies was not argued before the Hon'ble Bench. He reiterated that the Hon'ble Delhi High Court in the case of Max Hospital (supra) and the Jurisdictional Tribunal in the case of Syncom (supra) have held that such IMC Regulations apply only to medical practitioners. He further submitted that the Tribunal in the case of ACIT vs. Liva Healthcare Ltd. (ITA 847/Mum/2012) for A. Y. 2008-09, has decided similar issue in favour of the assessee. 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 organiz ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year precedence and subsequent year orders of the same assessee. As brought on record before us, we find that similar issue of allowance of such expenditure in the case of pharmaceutical companies has been decided in favour of the assessee, in the case of UCB India Pvt. Ltd. v. ITO (ITA No. 6681/Mum/2013 order dated 13. 05. 2016, wherein it was held that CBDT circular cannot have a retrospective effect. This judgment was lost sight of by the bench. In any 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 bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... medicine has been introduced by the market and its uses are established then giving of free samples could only be the measure of sale/ promotion and development would thus be hit by subsection (3A). Said decision no way prohibits the nature of expenditure which has been incurred in the case of the assessee. Therefore, such a reference to a Hon'ble Apex Court decision is not germane to the issue involved. Thus, in our opinion, the aforesaid decision of this Tribunal 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e treated as violation of Expl. 1 to section 37(1). 5. 5. We would also like to prefer to follow the judgment of the Hon'ble Delhi High Court delivered in the case of MAX Hospital, Pitampura and the above referred two orders of the Tribunal i. e. PHL Pharma P Ltd. (supra)and Syncom Formulations(supra)over the order of Ochoa Lab. (supra). Accordingly, third effective ground of appeal(Gs. OA 20-32)is decided in favour of the assessee. " In view of above discussion, we decide Grounds no. 11-29 in favour of the assessee. 6. In the additional ground of appeal, the assessee has raised the issue of allowing consequential depreciation on non compete fee. It was argued that while deciding the appeal for the AY. 2002- 03, the Tribunal(order dtd. 25. 10. 2016) 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. ITA/1800/Mum/2016: 7. Solitary ground of appeal, raised by the AO is about not upholding the adjustment based on BLT on the premises that it was not the most appropriate method. While deciding the appeal filed by t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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