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TMI Blog2019 (10) TMI 1499X X X X Extracts X X X X X X X X Extracts X X X X ..... when no other method is applicable, as a method of last resort, TNMM has to be applied as most appropriate method. It is 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. Even the very same comparables, as selected in the impugned assessment year, have been accepted as good comparables in the subsequent assessment years. For the aforesaid reasons, we do not feel the necessity to restore the issue to the Assessing Officer/Transfer Pricing Officer for fresh adjudication. Transfer pricing adjustment in respect of advertisement, marketing, promotion (AMP) expenditure - HELD THAT:- Undisputedly, the assessee is a distributor of finished products, imported from the AE. The assessee sells these products to third parties in India. The entire AMP expenditure incurred by the assessee was spent in India and have been paid to third parties. No material has been brought on record by the Departmental Authorities to even remotely suggest that there is an agreement or arrangement between the assessee and its AE t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tribunal in assessee s own case, we delete the addition made by the Assessing Officer. These grounds are allowed. Disallowance of expenditure incurred in respect of foreign trip of doctors - HELD THAT:- Following the consistent view of the Tribunal in assessee s own case as well as the other decisions cited before us, we delete the addition made by the Assessing Officer. Ground raised 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 - Denial of assessee s claim by holding that goodwill is not an intangible asset under section 32(1)(ii) - 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. - Decided in favour of assessee. Depreciation on non compete fee - Additional ground of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The assessee is a subsidiary of Medtronic International Ltd., Hong Kong, which in turn, is a subsidiary of Medtronic USA Inc., a USA based company. As stated by the Transfer Pricing Officer, the parent company in USA is a global leader in medical technology and is engaged in developing and manufacturing of wide range of products and therapies, mostly, patented or intellectual property (IP) protected items. The assessee, on its part, is engaged in the business of distributing life saving medical devices, such as, stents, pace makers, etc. For the assessment year under dispute, the assessee filed its return of income on 29th October 2007, declaring total income of ₹ 8,09,15,807, under the normal provisions of the Act. During the assessment proceedings, the Assessing Officer noticed that the assessee had entered into various international transactions with its AE. Accordingly, he made a reference to the Transfer Pricing Officer for determining the arm's length price of such transactions. In the course of transfer pricing proceedings, the Transfer Pricing Officer on examining the audit report filed by the assessee in Form no.3CEB as well as the transfer pricing study report ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hed goods. Thus, considering the gross profit margin of 42%, the Transfer Pricing Officer proposed an adjustment of ₹ 23,60,70,527. The aforesaid adjustment proposed by the Transfer Pricing Officer was added back to the income of the assessee while completing the assessment. The assessee challenged the addition before the first appellate authority. Learned Commissioner (Appeals), after considering the submissions of the assessee in the context of facts and material on record, though, agreed with the Transfer Pricing Officer that TNMM cannot be the most appropriate method to benchmark the transaction but RPM is the most appropriate method, however, he observed, application of RPM was hindered due to non furnishing of required information by the assessee. Further, accepting assessee s contention learned Commissioner (Appeals) held that 42% re sale price margin used by the Transfer Pricing Officer is incorrect because the said margin was a target gross margin for compliance purpose and it was not based on any comparable transaction, controlled or uncontrolled. Accordingly, he deleted the addition made on account of adjustment proposed by the Transfer Pricing Officer in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not the most appropriate method and accepted that RPM is the most appropriate method, he could not have deleted the addition made on account of Transfer pricing adjustment by saying that sufficient information for applying RPM is not available. He submitted, in the given circumstances, learned Commissioner (Appeals) should not have left the issue relating to applicability of most appropriate method un resolved. He submitted, if learned Commissioner (Appeals) was not agreeable to the gross re sale margin applied by the Transfer Pricing Officer, he could have himself carried out a fresh benchmarking under RPM. In support of such contention, he relied upon the Special Bench decision of Tribunal, Bangalore Bench, in Aztec Software and Technologies Services Ltd. v/s ACIT, [2007] 107 ITD 141 (Gang.)(SB). Thus, he submitted, the issue has to be restored back to the Assessing Officer / Transfer Pricing Officer for undertaking a fresh benchmarking by applying RPM. Without prejudice, he submitted, the comparables selected by the assessee under TNMM are not good comparables. Therefore, if TNMM is accepted as the most appropriate method, the issue relating to selection of comparables should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded by the assessee s group and is not the actual margin. The aforesaid contention of the assessee has been accepted by the learned Commissioner (Appeals). No material has been brought on record by the Revenue to demonstrate that gross profit margin of 42% is the actual margin of the assessee and is not a target margin. Moreover, the Transfer Pricing Officer while applying RPM has referred to the gross margin earned by the Medtronic International Ltd., Malaysia, for adopting gross profit margin of 42%. On examination of the provisions of rule 10B(1)(b), it is clear that even under RPM only the gross margin derived on an uncontrolled transaction can be considered for comparability analysis. Therefore, under no circumstances, the margin earned in a controlled transaction can be considered for comparability purpose. That being the case, the margin earned by Medtronic International Ltd., Malaysia, could not have been considered by the Transfer Pricing Officer not only because it is a case of controlled transaction, but it is situated in a different geographical location. In this context, we may refer to the decision of the Hon'ble Jurisdictional High Court in Audco India Ltd. (supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12. Before the first appellate authority, the assessee had raised specific ground challenging the Transfer Pricing Officer s observation with regard to the transfer pricing adjustment on AMP expenditure. While pursuing the said ground, the assessee had submitted that firstly, the incurring of AMP expenditure in India cannot be brought within the purview of international transaction. It was submitted, the Transfer Pricing Officer made an error in including the entire salary cost while computing marketing spend. It was submitted, the salary cost comprised of salary paid to employees in various Departments besides marketing. It was submitted, marketing spend by the assessee is less than that of the comparable companies identified in the transfer pricing study report which ranges from 0.52% to 21.65% of sales. Further, it was submitted, determination of arm's length price of AMP expenditure by applying the bright line test (BLT) is without any basis. 13. After considering the submissions of the assessee, the learned Commissioner (Appeals) finally concluded that by incurring the AMP expenditure, the assessee had promoted the brand of its parent company. Further, he held, for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecord. We have also applied our mind to the decisions relied upon. Undisputedly, the Transfer Pricing Officer has observed that a part of AMP expenditure incurred by the assessee is towards promoting the brand of the AE, though, he did not propose any separate adjustment on account of AMP expenditure, since, such adjustment was subsumed in the adjustment proposed by him in respect of arm's length price of imported finished goods from the AE. However, the learned Commissioner (Appeals) while deleting the transfer pricing adjustment in respect of imported finished goods directed the Assessing Officer to add the adjustment on account of AMP expenditure quantified at ₹ 17,87,32,162. It is evident, the quantification/determination of the arm's length price of AMP expenditure was not by following any of the prescribed methods. Undisputedly, the assessee is a distributor of finished products, imported from the AE. The assessee sells these products to third parties in India. The entire AMP expenditure incurred by the assessee was spent in India and have been paid to third parties. No material has been brought on record by the Departmental Authorities to even remotely suggest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e distributor of Medtronic products in India. Further, he observed, in the preceding assessment years, notional profit on such direct sale was added to the income of the assessee. Accordingly, he proceeded to compute the notional profit on the direct sales made by the AEs to third parties in India at ₹ 1,51,90,344, and suggested for addition of the said amount. Being aggrieved with such addition, the assessee challenged it before the first appellate authority. 20. The learned Commissioner (Appeals), after considering the submissions of the assessee, sustained the notional addition made by the Assessing Officer / Transfer Pricing Officer. However, accepting assessee s contention, he granted partial relief by directing the Assessing Officer/Transfer Pricing Officer to re calculate the adjustment made considering the actual commission received instead of commission at notional rate of 13.1%. 21. The learned Counsel for the assessee submitted, the assessee did not perform any marketing functions for the direct sales made by the AE to third party customers in India. Therefore, no notional commission income can be added at the hands of the assessee. Further, he submitted, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee has challenged disallowance of ₹ 1,60,911, being expenditure incurred on gift articles. 27. Brief facts are, in the course of assessment proceedings, the Assessing Officer noticing that the assessee has claimed deduction on account of expenditure incurred towards gift articles given to customers called upon the assessee to justify the claim. After rejecting the explanation of the assessee, he disallowed the amount of ₹ 1,60,911, on the reasoning that it was not for the purpose of assessee s business. Assessee challenged the disallowance before the first appellate authority. 28. Learned Commissioner (Appeals), after considering the submissions of the assessee, noticed that similar disallowance was also made in the assessment years 2004 05 to 2006 07. Accordingly, he sustained the disallowance made by the Assessing Officer. 29. The learned Authorised Representative submitted, being a distributor dealing with life saving medical devices which require education and awareness programme to be conducted in order to be able to create a market which is highly competitive, the assessee has to incur expenditure in providing gift to valued customers during produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he reasoning that the benefit derived from such foreign trip is by the medical professionals and not by the assessee as they are not working exclusively for the advancement of assessee s business. Accordingly, he disallowed assessee s claim of expenditure. Assessee challenged the aforesaid disallowance before the first appellate authority. 34. Learned Commissioner (Appeals), however, confirmed the disallowance made by the Assessing Officer. 35. We have considered rival submissions and perused material on record. As could be seen from the facts placed before us, identical issue arose in assessee s own case in preceding as well as subsequent assessment years. While deciding the issue, the Tribunal has consistently held that the expenditure having been incurred for the purpose of assessee s business, is allowable under section 37(1) of the Act. While doing so, the Tribunal also held that the Medical Council of India (MCI) Regulations would not be applicable to the assessee. In this context, we may refer to the following orders of the Tribunal passed in assessee s own case. i) India Medtronic Pvt. Ltd. v/s ACIT, ITA no.812/Ahd./2008, etc., dated 25.05.2017 (A.Y. 2004 05); i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s own case for the assessment years 2002 03, 2003 04 and 2008 09, as referred to above, decided the issue in favour of the assessee. Therefore, following the consistent view of the Tribunal in assessee s own case, we allow assessee s claim of depreciation on goodwill. Ground raised is allowed. 42. In addition to the aforesaid grounds, the assessee has raised an additional ground being ground no.29, seeking allowance of depreciation on non compete fee. 43. Brief facts are, during the financial year relevant to the assessment year 2002 03, the assessee had paid non compete fee amounting to U.S. dollar one million (equivalent to ₹ 4.73 crore) to the Directors of Medtech Devices Ltd. In the return of income filed for the assessment year 2002 03, the assessee claimed the aforesaid payment as revenue expenditure under section 37(1) of the Act. However, the deduction claimed by the assessee was disallowed by the Assessing Officer and sustained by the learned Commissioner (Appeals). While deciding the appeal, though, the Tribunal upheld the decision of the Departmental Authorities in holding that the payment made towards non compete fee is capital expenditure, however, it also ..... X X X X Extracts X X X X X X X X Extracts X X X X
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