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TMI Blog2023 (3) TMI 546X X X X Extracts X X X X X X X X Extracts X X X X ..... ansfer 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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., 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urred 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. X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be made". 9. "the learned AO/ TPO erred in computing the arms length price without giving benefit of +/- 5 % under the proviso to section 92C of the Act". 10. "erred in disallowing depreciation of Rs 4,32,957 on plant and Rs 1,76,288 on building forming part of the block of assets". 11. "erred in disallowing Rs 39,78,302 being the provision for commission payable to the distributors, treating the same as contingent liability". 12. "erred in disallowing Rs 3,01,066 in respect of expenses incurred on gifts". 13. "failed to appreciate that the Assessee has paid Fringe Benefit Tax on said expenses". 14. "erred in disallowing Rs 41,88,153 in respect of expenses incurred for sponsoring the foreign trips of doctors, etc". 15. "failed to appreciate that the Appellant has paid Fringe Benefit Tax on said expenses". 16. "erred in disallowing Rs 2,30,713 being depreciation on goodwill acquired at the time of purchase of assets from M/s. Medtech Devices Limited". 17. "erred in denying the deduction of reversal of professional fees of Rs 5,62,492 offered to tax during the year under reference out of the professional fees disallowed in AY 2003-04 despite a specific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the costs relating to such equipments is appropriately accounted for". 7. "Based on the above, the learned CIT(A) erred in upholding the transfer pricing adjustment of Rs 15,14,87,596 on account of adjustment in the arm's length price of international transaction of purchase of goods from the AEs". 8. "erred in upholding addition of Rs 2,64,703 in respect of difference in prices charged by its AEs to the assessee and to the third party in India. Further, in principle the learned CIT(A) had followed the direction issued by DRP for AY 2006-07 for all the transfer pricing related grounds of appeal but failed to follow the same for this ground of appeal". 9. "erred in law and in facts in upholding the adjustment of Rs 42,31,926 as notional income relating to direct sales by AEs". 10. "without prejudice to above, it is submitted that expenses which ought to have been incurred by the company in respect of earning such commission should be reduced from such commission". 11. "erred in law and facts in not granting of relief of 5% to the arithmetic mean as provided under proviso to section 92C(2) of the Act". 12. "erred in upholding the disallowance made by the AO of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting and distribution of proprietary products of group companies i.e related to Cardiac Rhythm Disease Management (CRDM), Neuro-modulation, Spinal and Biologics, Diabetes, Cardio-vascular, Surgical technologies and physio-control. ITA No. 3361/Ahd/2010-Assessee's Appeal 5. Ground no.1 to 3, are general in nature, hence, does not require adjudication. 6. In grounds no. 4 to 7, the Assessee has basically challenged the rejection of Transactional Net Margin Method (TNMM) as the most appropriate method and further, rejection of comparables selected while benchmarking the transaction relating to import of finished goods from the Associated Enterprises (AE). 7. Brief facts are, the Assesseee, an Indian company, was incorporated in the year 1993. 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 Appellant, on its part, is enga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer Pricing Officer applied RPM by considering Medtronic Malaysia, the AE as the comparable contending that Medtronic Malaysia is performing similar functions in Asia region. Accordingly, he compared the resale discount percentage of Medtronic International Ltd., Malaysia @ 39.01% (based on the Annual report of Medtronic Malaysia for FY 2004-05) with Appellant's the actual gross margin at 29.79% and determined the arm's length price of the imported finished goods. Thus, considering the gross profit margin of 39.01%, the Transfer Pricing Officer proposed an adjustment of Rs. 16,79,78,272/-. The aforesaid adjustment proposed by the Transfer Pricing Officer was added back to the income of the assessee in the draft assessment order. The assessee filed its objections before the DRP that upheld the transfer pricing adjustment. 9. Shri Rajan Vora, learned Counsel for the assessee submitted, the Transfer Pricing Officer committed a fundamental error in considering Medtronic International Ltd., Malaysia, as comparable company in respect of import price of goods purchased from the AE. He submitted, Medtronic International Ltd., Malaysia, not only had significant related party transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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. and Appellant's own case in AY 2007-08 as below: "9. We have considered rival submissions and perused material on record. We have also applied our mind to the decisions relied upon. Undisputedly, the assessee has benchmarked the transaction relating to import of finished goods from AE by applying TNMM as the most appropriate method. While doing so, he has applied the gross profit margin of 42% to make the adjustment. It is evident, the adoption of gross profit margin of 42% is on the basis of projected re-sale discount percentage for the financial year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertaken 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. 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. Accordingly, we uphold the decision of learned Commissioner (Appeals) in deleting the addition, though, on our own reasoning." 14. Though, we do not discount the proposition that in case of distribution/resale of goods imported from A.E., RPM could be a proper method to benchmark the ALP, however, when sufficient information relating to gross margin in uncontrolled transaction is not available, no useful purpose would be served in restoring the issue to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsel 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 Appellant. Further, he submitted, while proposing the adjustment on account of notional commission income, no prescribed method has been used by the Transfer Pricing Officer. Therefore, the addition made is in contravention to the statutory provisions. Finally, he submitted, identical issue has been decided by the Tribunal in favour of the Assessee in its own case for the assessment years 2002-03, 2003-04, 2004-05 and AY 2007- 08. In this context, he placed reliance upon the following orders passed by the Tribunal:- i) India Medtronic Pvt. Ltd. v/s ACIT, ITA no.811/Ahd./2008, dated 25.10.2016; ii) India Medtronic Pvt. Ltd. v/s ACIT, ITA no.1245/Ahd./2008, dated 25.05.2017; and iii) India Medtronic Pvt. Ltd. v/s ACIT, ITA no.812/Ahd./2008, dated 25.05.2017. iv) India Medtronic Pvt. Ltd. v/s ACIT, ITA no.4074/Mum./2012, dated 16.10.2019. 20. In addition, the learned Counsel for the Assessee relied upon the following decisions as well. i) C.A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the direction to adjudicate the issue of fresh and if in reality the assessee is in anyway involved in the international transaction in relation to supply of medical devices by the overseas entity to the hospitals in India, he shall determine the arm's length price after selecting appropriate method as provided under section 92C of the Act and keeping in view all other facts and material on record and after providing due opportunity of being heard to the assessee. Ground no. 3 he is allowed for statistical purposes." 23. In light of the above, for the earlier year of AY 2002-03, the 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. 24. We shall now advert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vi) A.Y. 2011-12 (ITA No. 1246/Mum/2016); (vii) A.Y. 2013-14 (ITA No. 601/Mum/2018); A.Y. 2014-15 (ITA No. 7263/Mum/2018),had directed the A.O to allow depreciation on plant and machinery and building as claimed by the assessee. 27. In AY 2008-09(supra), Tribunal while deciding the issue has held as follows: "7. Ground No. 19 is related with depreciation on Plant & Machinery & Building for Rs.4,55,605/-.The same has been disallowed since these assets remained idle since manufacturing process stood discontinued. We are of the opinion that once an asset forms part of block of asset, it loses its individual identity and further, there is no requirement that each and every item in the said block should actually be used in the impugned AY so as to entitle the assessee to claim depreciation thereupon. Otherwise also, this issue stood covered in assessee's favor by the cited order of the Tribunal in assessee's own case for AY 2010-11. Therefore, this addition stand deleted". 28. We thus respectfully following the view taken by the Hon'ble Tribunal in the assessee's own case for the aforementioned years delete the disallowance of depreciation on plant and machinery and building of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material on record. It is the 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. It is also evident, DRP as well as the Assessing Officer have disallowed the expenditure following the decision taken by the Departmental Authorities in the past years. 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. 35. The Tribunal while deciding the issue for AY 2003-04 has held as under: "40. From the record, we found that the assessee has incurred certain expenses on account of ganpati festival expense, birthday celebrations, Diwali, marriage gifts etc. totalling to approx. INR 1,00,000. The AO disallowed entire expenditure holding that same was wholly and exclusively for the business purpose. The Hon'ble CIT (A) granted a relief of INR 80,000 and disallowed INR 20,000 contenting that the expenses on Ganpati festival, birthday celebrations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oner and accordingly, when acceptance of freebies is punishable by the MCI, pharmaceutical companies cannot be granted the tax benefit for providing such freebies. AR submitted that, however, in the present case of assessee, no freebies or gifts have been provided by the assessee to HCPs and has not violated MCI regulations. Further, he submitted that Hon'ble SC while analysing the applicability of the CBDT circular in para 19 of the order has observed that the CBDT circular being clarificatory in nature, was in effect from the date of implementation of Regulation 6.8 of the 2002 Regulations, i.e., from 14.12.2009 and that disallowance was made for the expenditure and freebies incurred on or after 14 December 2009 and not for the expenses incurred earlier than that date. Reliance was also placed in the case of PCIT v Goldline Pharmaceuticals (P) Ltd. and Peerless Hospitex Hospital and Research Center Limited v Pr CIT. The ld. AR for the assessee submitted that alternatively, the matter can be restored back to the file of Assessing Officer to be decided in accordance with law expounded by Hon'ble SC of India in the case of Apex Laboratories Pvt. Ltd. (supra). 39. The ld. Depart ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e hands of such pharmaceutical or allied health sector Industries or other assessee which has provided aforesaid freebees and claimed it as a deductable expense in its accounts against income. 4. It is also clarified that the sum equivalent to value of freebees enjoyed by the aforesaid medical practitioner or professional associations is also taxable as business income or income from other sources as the case may be depending on the facts of each case. The Assessing Officers of such medical practitioner or professional associations should examine the same and take an appropriate action. This may be brought to the notice of all the officers of the charge for necessary action. (emphasis supplied) The CBDT circular being clarificatory in nature, was in effect from the date of implementation of Regulation 6.8 of the 2002 Regulations, i.e., from 14.12.2009." 41. Also, in para 32 of the order it has been observed that the 2002 Regulations, applicable to all medical practitioners (including doctors in private practice), was introduced w.e.f. 14.12.2009. The relevant para 32 has been reproduced as below: "32. Before us, Apex has continually stressed on the need to divorce i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Apex Laboratories Pvt. Ltd. vs. DCIT(supra) 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 No.14 and 15 of the appeal is allowed. 43. In ground no. 16, the assessee has challenged the disallowance of depreciation on goodwill amounting to Rs. 2,30,713/-. Brief facts are, the assessee entered into an agreement with Medtech Devices on 31st July 2001, towards purchase of goodwill for a consideration of Rs 25 lakh. In the return of income filed for the impugned assessment year, the assessee claimed depreciation @ 25% on the written down value (WDV) of goodwill by treating it as an intangible asset. However, both, the Assessing Officer as well as DRP disallowed assessee's claim by holding that goodwill is not an intangible asset under section 32(1)(ii) of the Act. 44. The learned Counsel for the assessee submitted, while deciding identical issue in assessee's own case for assessment years 2002-03, 2003-04, 2007-08 and 2008-09, depreciation has been allowed. The learned Departm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aised additional claim before the AO that since amount of Rs 5,62,492 was already disallowed in AY 2003-04, the same should not be taxable on reversal/ written off in AY 2006-07. However, The AO has not granted relief in relation to the amount of Rs 5,62,492 written back in AY 2006-07 contending that any claim made other than by way of filing revised return cannot be accepted. The Hon'ble DRP upheld the decision of the AO. 50. The Ld AR for the assessee submitted that the Hon'ble Mumbai ITAT, in the Assessee's own case for AY 2003-04 has directed not to treat the reversal of provision amounting to Rs. 5,64,492/- as income in AY 2006-07. The relevant extract of the ruling reads as below: "The said amount of provision written back has been already offered to tax by the assessee in AY 2006-07.25. In view of the above discussion and considering that the aforesaid services are required for the regular business activities, these expenses are incurred wholly and exclusively for the purpose of business and hence be allowed as a deductible expense under section 37(1) of the Act except an amount of INR 6,20,150 should be disallowed during the year under consideration. As the assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 012-13, 2013-14 and 2014-15 assessee's claim of depreciation on non-compete fee was allowed while entertaining the additional ground raised by the assessee. 56. We have considered rival submissions and perused material on record. At the outset, we must observe that the issue raised in the additional ground can be decided without making investigation into fresh facts. Therefore, we are inclined to admit the additional ground raised by the assessee. 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. 57. In AY 2008-09, while deciding the similar issue, the Tribunal has allowed the ground of appeal raised by the assessee. The r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts as a distributor in India, the AEs have also effected direct sales to third party customers in India. In the course of the transfer pricing proceedings, the Transfer Pricing Officer called upon the Assessee to furnish the details of direct sales made by the AEs to third parties in India. The Transfer Pricing Officer observed that for certain products sold by the AEs to third parties and the Appellant, the AEs had charged a lesser price to third parties than the Appellant. The Transfer Pricing Officer made an addition of INR 2,64,703 in respect of difference in prices charged by its AEs to the assessee and to the third party in India. 64. The learned Commissioner (Appeals), followed the DRP order for AY 2006-07, wherein this adjustment was deleted, however the learned Commissioner (Appeals), inadvertently upheld addition of Rs. 2,64,703 in respect of difference in prices charged by its AEs to the assessee and to the third party in India. 65. The learned Counsel for the Assessees submitted, that it has adopted TNMM as the most appropriate method to benchmark the international transaction of import of finished goods. For this, the Assessee has earned an operating margin of 6.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under 69. However, learned Commissioner (Appeals), inadvertently dismissed the ground, whereas it was to be allowed following DRP direction. Hence, the based on the above order, adjustment on account of excessive purchase price amounting to INR 2,64,703 should be deleted. 70. The Hon'ble Bombay High Court in the case of PCIT v Amphenol Interconnect Indian (P.) Ltd reported in [2018] 91 taxmann.com 441 (Bombay) has upheld the decision of ITAT Pune Bench and held that when the 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. 71. We have heard the submissions made by the learned counsel and perused the material on record. Apart from the fact that as per the CIT(Appeals) order the Assessing Officer was to follow the DRP directions of AY 2006-07, 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 clas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expediency. Relying on the decision of Supreme Court in case of Dhanarajgirji Raja Narsingirji (91 ITR 544), Panipat Woolen and general Mills (103 ITR 66), Eastern Investments (20 ITR 1) and the decision of Bombay High Court in case of Dinshaw (F.E) Ltd. (36 ITR 114), we do not find any 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." 78. Respectfully following the order of the Tribunal, we direct the AO to delete the addition made. 79. Ground No.16 relates to disallowance of expenditure incurred for sponsoring the foreign trips of doctors of Rs. 32,56,640/-. Similar ground has been discussed in Ground of appeal No. 14& 15 for the AY 2006-07. Following the same reasoning, we restore the issue to the file of Assessing Officer for adjudication in accordance with the decision rendered in the case of Apex Laboratories Pvt. Ltd. vs. DCIT(supra). Consequently, ground No.16 of the appeal is allowed for statistical purpose. 80. Ground No. 17 relates to disallowance of expenditure incurred on software of Rs. 1,09,985/-. During the year u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee had claimed bad debts of Rs 6,14,651 and old balance written off of Rs. 24,66,940/- and asked the assessee to justify the claim. The AO observed that out of Rs. 24,66,940/-, amount of Rs. 18,82,290/- pertains to EMD write off and disallowed the same holding that the Assessee has not submitted any evidences which prove that the debts had become bad during the year, the Assessee has not fulfilled all the conditions which enable an Assessee to claim an amount as a bad debt. Learned Commissioner (Appeals) held that the Assessee had failed to show that the EMDs was offered for taxation earlier and that since the Assessee has not submitted any evidences which prove that the loss was crystallised during the year, the Learned Commissioner (Appeals) had disallowed the claim of the Assessee. 85. Ld AR for assessee argued that EMD were given, not for acquiring of any asset giving enduring benefit and was merely given as to secure business with various hospitals and other agencies in the form of tenders. He submitted that the Assessee has submitted the details of EMDs written off during the year to the AO and in the event of forfeiture of deposits the same shall be allowed as a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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