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Income Tax Appellate Tribunal, MUMBAI BENCH “K ”, MUMBAI
Before: SHRI VIKAS AWASTHY & SHRI M. BALAGANESH
ORDER
PER VIKAS AWASTHY, JM:
This appeal by the assessee is against the assessment order dated 25/10/2019 for the assessment year 2015-16 passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 [in short ‘the Act’].
The assessee in appeal has raised as many as 56 grounds and one additional ground assailing Transfer Pricing Adjustment( TP adjustment) and the additions made under regular provisions of the Act by the Assessing Officer. For the sake of convenience of deciding multiple grounds raised in the appeal, the grounds raised by the assessee are grouped under the heads in which additions have been made.
The assessee is a subsidiary of Medtronic International Ltd. Hong Kong, a Group Company of Medtronic Inc. USA. The parent company is a global leader in medical technology and is engaged in the business of manufacturing wide range of products and therapies. The assessee is engaged in the business of marketing and distributing products of group companies relating to Cardiac Rhythm Disease Management(CRDM), Neuro-modulation, Spinal and Biologics, Diabetics, Cardio-vascular, Surgical technologies and Physio-control. During the period relevant to the assessment year under appeal the assessee entered into following international transactions with its AE:
Nature of International Transactions Amount (Rs.) Method Adopted Sr.No. 1 Purchase of finished goods for Resale 3,914,881,870 TNMM 2 Purchase of capital assets 115,064,572 TNMM 3 Receipt of Management fee in respect 25,887,867 TNMM of direct sales made by AEs in India 4 Provision of contract research and 89,227,639 TNMM development support services to AEs 5 Provision of clinical trial support 12,722,303 TNMM services to AEs 6 Provision of IT management and 42,464,251 TNMM related support services to AEs 7 Reimbursement of expenses to AEs 40,453,709 Other method 8 Recovery of expenses from AEs 144,175,658 Other method Total 4,384,877,869 3.1 The Transfer Pricing Officer (TPO) vide order dated 31/10/2018 made following adjustments:
Sr.No. International Transaction Adjustment (in Rs.) 1. Import of finished goods 26,87,15,669 2. Provision of IT management 32,66,062 3. Reimbursement of expenses 1,22,62,124 3. AMP expenses 1,13,76,39,711 Total Adjustment 1,42,18,83,566 3.2 The Assessing Officer passed the draft assessment order dated 28/12/2018, inter-alia, making various additions/disallowances apart from the adjustment proposed by the TPO. The assessee filed objections before Dispute Resolution Panel(DRP). The DRP vide directions dated 13/09/2019 upheld substantial additions/ TP adjustments and accepted objections of the assessee in part. In line with the directions of DRP, the Assessing Officer passed the impugned assessment order. Hence, the present appeal by assessee.
3.3 The ground No.1 of appeal is general in nature, hence, require no adjudication.
TP Adjustment on Advertising, Marking and Promotion(AMP):
The assessee in ground No.2 to 19 of grounds of appeal has assailed TP adjustment of Rs.95,07,33,625/- on account of AMP expenses. Shri Rajan Vora . appearing on behalf of the assessee submitted at the outset that similar adjustment was made in Assessment Year 2010-11. The Tribunal after appreciating the facts and considering various decisions decided the issue in favour of the assessee. The facts germane to the issue in the impugned assessment year are identical to the facts in Assessment Year 2010-11. The ld. Authorized Representative for the assessee further submitted that the nature of international transactions and the manner of adjustment in the impugned assessment year is similar to the one made in Assessment Year 2010-11, therefore, the issue is squarely covered by the order of Tribunal in assessee’s own case in for assessment year 2010-11 decided on 17/01/2018.
Per contra, Shri Yogesh Kamat representing the Department vehemently defended the findings of Assessing Officer and DRP. However, the ld. Departmental Representative fairly stated that the issue raised in present appeal has been considered by the Tribunal in assessee’s own case in the Assessment Year 2010-11.
Both sides heard. We find that the TPO made adjustment in respect of AMP alleging that AMP expenses incurred by assessee are excessive and benefited the group entities, hence, the assessee should have been compensated by the Associated Enterprise (AE) for incurring AMP expenses. The DRP relying on the direction of DRP in Assessment Year 2014-15 held that AMP is an international transaction and upheld the adjustment. We find that the issue is perennial. The adjustment on account of AMP expenses has been made in case of assessee since Assessment Year 2008-09. In each of the Assessment Years since assessment year 2008-09 the issue travelled to the Tribunal. The Tribunal consistently decided the issue in favour of the assessee. The assessee referred to the order of Tribunal for Assessment Year 2010-11, wherein identical issue has been examined. For the sake of completeness the relevant extract of the said Tribunal order is reproduced herein under:
3.4.We have heard the rival submissions.We find that the TPO had held that assessee should have been compensated by its AE for the AMP expenditure incurred by it.We have gone through the agreements entered in to by the AE.s with the assessee,that in the agreements there is no condition about sharing of AMP,that the agreements talks of using best efforts to market and distribute the product or promote the products in a commercially reasonable manner.In our opinion,these terms do not give any indication that the AE and the assessee had to share AMP expenses.Secondly,if the AE was benefitted indirectly by the AMP expenditure incurred by the assessee,it cannot be held that it had entered into agreement for sharing AMP expenses.We are also of the opinion that Bright Line Method should not have been applied by the TPO.We would like to reproduce the relevant portion of the order of the Thomas Cook(supra),wherein the identical issue has been dealt in length,and it reads as under: “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 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 expenditure in India the assessee was benefitting a brand name of TCUK. 8.3.1.First of all,we would like to mention that as on today the legal position is as clear as crystal with regard to AMP expenses.The Hon’ble Delhi High Court has dealt the issue in depth and has arrived at the conclusion that in absence of any agreement for sharing AMP expenses it cannot be held that AMP expenditure was an IT.Probable incidental benefit to the AE would not make such a transaction an IT.The factors like payment under the head AMP expenditure to the third independent parties, promoting own business interest by way of AMP expenses take away the alleged ‘internationality’ of the transacttion.In absence of any direct or direct evidence of incurring of AMP expenses by the assessee for the benefit of the AE or on behalf of the AE,it is has to be held that the transaction in dispute is not covered by the provisions of section 92B or 92B(1)of the Act and hence is not an IT.Once it goes out of the ambit of being an IT,FAR analysis of comparables or any other adjustment will and cannot come in picture.Folk wisdom of rural India the says that mother(Maa)is must for existence of her sister(Mausi).Similarly the existence of an IT is the pre-requisite of applying the provisions of chapter X of the Act. The assessee from the very beginning was arguing that it is not an IT,but,the TPO and the DRP did not deal with the core issue.In these circumstances,we are of the opinion that the matter should not be remitted back to the file of the TPO/ AO. Litigation has to be put to an end at some stage.Judicial time of every authority, including the TPO/DRP,is very precious and it should not be wasted for dealing with mere academic arguments.The recourse of remanding of matters/issue to the AO.s has to resorted rarely and selectively.In the case before us,no reasonable cause has been shown to justify the setting aside the issue. Here,we would also like to refer to the case of Bosch and Lomb (supra) wherein all the arguments raised by the TPO & FAA/DRP have been deliberated upon in length and the relevant portion of the order reads as under: “53.A reading of the heading of Chapter X['Computation of income from international transactions 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.
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.
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 two or more associated enterprises, either or both of whom are non-residents; in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost. or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes 'of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to' the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise." 56.Thus, under Section 92B(1) an 'international transaction' means- (a) a transaction between two or more AEs, either or both of whom are non- resident (b) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision of service or lending or borrowing money or any other transaction having a bearing on the profits, incomes or losses of such enterprises, and (c) shall include a mutual agreement or arrangement between two or more AEs for allocation or apportionment or contribution to the any cost or expenses incurred or to be incurred in connection- with the - benefit, service or facility provided or to be provided to one or more of such enterprises.
Clauses (b) and (c) above cannot be read disjunctively. Even if resort is had to the residuary part of clause (b) to contend that the AMP spend of BLI is "any other transaction having a bearing" on its "profits, incomes or losses”, for a 'transaction' there has to be two parties. Therefore for the purposes of the 'means' part of clause (b) and the 'includes' part. of clause (c), 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.
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 concert', 'whether formal or in writing', it is still incumbent on the Revenue to show the existence of an 'understanding' or an 'arrangement' or 'action in concert' between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the 'means', part and the 'includes' part of Section 928 (1) what has to be definitely shown is the existence of transaction whereby MSIL has been obliged to incur AMP of a certain level for SMC for the purposes of promoting the brand of SMC."
In Whirlpool of India Ltd. (supra), the Court interpreted the expression "acted in concert" and in that context referred to the decision of the Supreme Court in Daiichi Sankyo Company Ltd. v.. Jayaram Chigurupati 2010(6)MANU/SC/0454/2010, which arose in the context of acquisition of shares of Zenotech Laboratory Ltd. by the Ranbaxy Group. The question that was examined was whether at the relevant time the Appellant, i.e., 'Daiichi Sankyo Company and Ranbaxy were "acting in concert" within the meaning of Regulation 20(4) (b) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. In. para 44, it was observed as under: "The other limb of the concept requires two or more persons joining together with the shared common objective and purpose of substantial acquisition of shares etc. of a- certain target company, There can be no "persons acting in concert" unless there is a shared common objective or purpose between two or more persons of substantial acquisition of shares etc. of the target company, For, de hors the element of the shared common Objective' or purpose the idea of "person acting in concert" is as meaningless as criminal conspiracy without any agreement to commit a criminal offence. The idea of "persons acting in concert" is not about a fortuitous relationship coming into existence by accident or chance. The relationship' can come into being only by design, by meeting of minds between two or more persons leading to the shared common objective or purpose of acquisition of substantial acquisition of shares etc. of the target company. It is another matter that the common objective or purpose 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. "
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.
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-characterising the AMP expenditure incurred as a transaction by itself when it has neither been identified as such by the Assessee or legislatively recognised in the Explanation to Section 92 B runs counter to legal position explained in CIT vs. EKL Appliances Ltd. (supra) which required a TPO "to examine the 'international transaction' as he actually finds the same.
In the present case, the mere fact that B&L, USA through B&L, South Asia, Inc holds 99.9% of the share of the Assessee will not ipso facto lead to the conclusion that the mere increasing of AMP expenditure by the Assessee involves an international transaction in that regard with B&L, USA. A similar contention by the Revenue, namely the fact that even if there is no explicit arrangement, the fact that the benefit of such AMP expenses would also encure to the AE is itself self sufficient to infer the existence of an international transaction has been negatived by the Court in Maruti Suzuki India Ltd. (supra) as under: xxxxxx 68. The above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wild-goose chase of what can at best be described as a 'mirage'. First of all, there has to be a clear statutory mandate for such an· exercise. The Court is unable to find one. To the question whether there is any 'machinery'
provision for determining the existence of an international transaction involving AMP expenses, Mr. Srivastava only referred to Section 92F (ii) which defines ALP to mean a price "which is applied or proposed to be applied in a transaction between persons other than AEs in uncontrolled conditions",Since the reference is to 'price' and to 'uncontrolled conditions' it implicitly brings into play the BLT. In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the ALP. The Court does not see this as a machinery provision particularly -in- light of the fact that -the-BLT has been expressly negatived by the Court in Sony Ericsson. Therefore, the existence of an international transaction will have 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 the AMP spend of the Assessee onapplication of the BLT,is excessive,thereby evidenc - ing the existence of an international transaction involving the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case. 74.The problem with the Revenue's approach is that it wants every instance of an AMP spend by an Indian entity which happens to use the brand of a foreign AE to be presumed to involve an international transaction. And this, notwithstanding that this is not one of the deemed international transactions listed under the Explanation to Section 928 of the Act.The problem does not stop here.Even if a transaction involving an AMP spend for a foreign AE is able to be located in some agreement, written (for e.g., the sample agreements produced before the Court by the Revenue) or otherwise, how should a TPO proceed to benchmark the portion of such AMP spend that the Indian entity should be compensated for? 63. Further, in Maruti Suzuki India Ltd. '(supra) the Court further explained the absence of a 'machinery provision qua AMP expenses by the following analogy: "75. As an analogy; and forno other purpose; in the- context of a domestic transaction involving two or more related parties, reference may' be made to Section 40 A (2) (a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the AO is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods." In such event, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction." The AO in such an instance deploys the 'best judgment' assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding 'machinery' provision in Chapter X which enables' an AO to determine what should be the fair 'compensation' an Indian entity would be entitled to if it is found' that there is an International transaction in that regard. In practical terms, absent a clear statutory guidance, this may encounter further difficulties. The strength of a brand,which could be product specific, may be "impacted by numerous other imponderables not limited to the nature of the industry, the geographical peculiarities, economic 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.”
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 the expenditure should not come in the way of an expenditure being 'allowed by way of a deduction under Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law". With reference to the submissions of the DR,we would like mention that first of all the issue before us is not an assessee that is engaged in distribution and manufacturing of certain goods, so the question of slicing of expense in two portions would not arise. However, the other part of the argument that matter should be restored back to the file of the AO/TPO as they were following the order of LG 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.” Considering the above, we decide the first effective ground of appeal(GOA-1-16)in favour the assessee”
The ld.Authorized Representative for the assessee pointed that the distribution agreement in the impugned assessment year is the same and is renewed automatically on year to year basis. There is no change/modification in the terms and conditions of the distribution agreement. The Tribunal has been consistently relying on same distribution agreement while passing the order in the preceding assessment years. A copy of the distribution agreement has been placed before us at page 125 to 158 of the paper book. The Revenue has not been able to controvert the submissions of ld.Authorized Representative for the assessee nor any decision contrary to the decision of Tribunal in assessee’s own case has been furnished by the Revenue. Thus, we find no reason to take a contrary view, hence, ground No.2 to 19 of the appeal are allowed in similar terms.
TP Adjustment on account of Convention Expenses incurred in normal course of business: 8. In ground No.20 to 23 of grounds of appeal, the assessee has assailed addition of Rs. 38,11,7,6,234/- in respect of alternate adjustment made by TPO holding that in case adjustment on account of AMP is not sustained by the Appellate Authorities convention expenses to the extent of 88.45% i.e. Rs.38,11,76,234/- should be sustained towards brand building and business promotion. The ld.Authorized Representative for the assessee submitted that this issue was considered by the Tribunal in assessment year 2014-15 in in appeal by the assessee. The Tribunal vide order dated 13/09/2019 allowed similar grounds raised by the assessee. The ld.Authorized Representative for the assessee further submitted that similar issue was raised in assessment years 2011-12,2012-13, 2013-14 and 2014-15. The Tribunal has been consistently holding that in the absence of any arrangement with AE for incurring AMP expenses convention expenses cannot be considered as expenses incurred for brand building.
Both sides heard . We find that Co-ordinate Bench in the immediately preceding assessment year i.e. assessment year 2014-15 has decided this issue by observing as under:
“ 9. We shall now advert to the claim of the ld. A.R that the DRP had erred in partly confirming the secondary adjustment made by the TPO by holding that in case the adjustment of AMP expenses is not sustained by the appellate authorities, then the convention expense to the extent of 92.03 percent i.e INR 33,44,95,973/- should be considered to be in the nature of expenses incurred towards brand building and business promotion, and, thereby an adjustment should be made as regards the same. It was submitted by the ld. A.R that the „convention expenses‟ incurred by the assessee in the normal course of its business had wrongly been held by the TPO/DRP as AMP expenses. It is the claim of the ld. A.R that the convention expenses incurred by the assessee were in the nature of selling expenses and could not have been considered as part of its AMP expenses. In order to buttress his aforesaid contention, it was submitted by the ld. A.R,that the aforesaid claim of the assessee had been accepted by the Tribunal in the assesses own case for A.Y 2011-12 viz. India Medtronics Pvt. Ltd. Vs. DCIT 10(1)(1), Mumbai (ITA No. 1246/Mum/2016), dated 02.05.2018. Apart therefrom, it was submitted by the ld. A.R that a similar view had thereafter been taken by the Tribunal in the case of the assessee for A.Y. 2012-13 (ITA No. 2160/Mum/2017, dated 27.05.20190 and A.Y. 2013-14 (ITA No.601/Mum/2018, dated 08.05.20190. Alternatively, it was the claim of the ld. A.R that even otherwise as TPO had not used any of the prescribed methods contemplated in Sec. 92C of the Act for determining the ALP of the aforesaid transactions and had disallowed the convention expenses on an adhoc basis, therefore, his action was also not sustainable on the said ground. To sum up, it is the claim of the ld. A.R that as the convention expenses incurred by the assessee in the normal course of its business were in the nature of selling expenses and not expenses incurred for brand building of its AE, therefore, the same could not have been held as AMP expenses. Per contra, the ld. Departmental Representative (for short „D.R‟) had relied on the orders of the lower authorities.
We have given a thoughtful consideration to the aforesaid contentions advanced by the authorized representatives for both the parties and perused the orders of the lower authorities in context of the issue under consideration. Admittedly, the TPO/DRP had made a similar alternative adjustment in respect of the convention expenses in the case of the assessee for the aforementioned preceding years viz. A.Y. 2011-12, A.Y. 2012-13 and A.Y. 2013-14. We have perused the orders of the Tribunal for the said respective years and find that the said alternative adjustment on appeal was vacated by the Tribunal. Accordingly, finding ourselves to be in agreement with the view taken by the Tribunal in respect of the issue under consideration in the aforementioned preceding years, we vacate the said alternative adjustment made by the TPO/DRP. The Grounds of appeal Nos. 24- 26 are allowed.”
Respectfully following the decision of Tribunal in assessee’s own case the ground No.20 to 23 of the appeal are allowed for parity of reasons.
TP Adjustment on account of reimbursement of expenses:
10. The assessee in ground No.24 to 27 of grounds of appeal has assailed adjustment of Rs.4,04,53,708/- on account of reimbursement of expenses to AEs. The primary contention of the ld.Authorized Representative for the assessee is that the TPO had made adjustment of Rs.1,22,62,124/-. After the directions of the DRP there was enhancement in adjustment. The Assessing Officer in compliance of the direction of DRP made adjustment of Rs.4,04,53,708/-. The ld.Authorized Representative for the assessee submitted that the enhancement was made by DRP without issuing show cause notice, hence, the adjustment is against the principles of natural justice. The ld.Authorized Representative for the assessee referred to the chart at page 1754 of the paper book to contend that the total reimbursement during the period relevant to the assessment year under appeal are only to the tune of Rs.36,78,644/-. The assessee is ready for the examination of the aforesaid amount. The remaining amount has already been examined by the TPO. The DRP has made enhancement on the remand report of the TPO. Before enhancing the adjustment, no show cause notice was issued to the assessee by the DRP. The ld.Authorized Representative for the assessee further submitted that the expenses are reimbursed on cost to cost basis and there was no mark-up. The ld.Authorized Representative for the assessee submitted that the issue can be restored to the Assessing Officer /TPO for examination as prayed aforesaid.
The ld. Departmental Representative strongly supported the findings of theAssessing Officer and DRP. The ld. Departmental Representative prayed for upholding the findings of Assessing Officer and dismissing the ground raised by the assessee.
We have examined the orders of authorities below on this issue. The assessee has given working of reimbursement expenses. The same is reproduced herein below:
Particulars Reference Amount in INR Total reimbursement of expenses during AY 2015-16 4,04,53,708 Less: Value of transaction considered at arm’s length vide TP Order dated 31 October 2018 as well as remand report dated A (32,97,828) 24 July 2019 Less: Value of transaction considered at arm’s length vide TP Order dated 31 October 2018 disallow the same vide remand B (2,48,93,756) report dated 24 July 2019. Less: Value of transaction allowed by the learn TPO vide C (85,83,480) remand report dated 24 July 2019. Balance value of transaction submitted as additional evidence before the Hon’ble Panel(less than 10% of the total D 36,78,644 Transaction value)
The TPO had made adjustment of Rs.1,22,62,124/-, however, the DRP enhanced the adjustment to Rs.4,04,53,708/-. It is contended that before enhancement no show cause notice was issued to the assessee. Taking into consideration entirety of facts we deem it appropriate to restore this issue back to the file of Assessing Officer for denovo consideration after affording reasonable opportunity of hearing to the assessee, in accordance with law. Consequently, ground No.24 to 27 of the appeal are allowed for statistical purpose.
T.P Adjustment on import of finished goods:
In ground No.28 to 35 of appeal, the assessee has assailed TP adjustment of Rs.24,14,13,278/- on account of purchase of finished goods from AEs. The ld.Authorized Representative for the assessee stated at the outset that he is not pressing grounds No.28 to 32. He is only restricting his submissions on grounds No.33 to 35, wherein the assessee is seeking working capital adjustment while computing operating margin of comparable companies for the purpose of determining ALP. The ld.Authorized Representative for the assessee submitted that in assessment year 2014-15 in the Tribunal granted working capital adjustment and restored the issue back to the file of TPO. While giving effect to the order of Tribunal, the Assessing Officer allowed working capital adjustment after seeking comments from the TPO. The ld.Authorized Representative for the assessee referred to the Order Giving effect dated 05/07/2021 by the Assessing Officer at page 1499 of the paper book.
The ld.Authorized Representative for the assessee made statement at Bar that he is not pressing ground No.28 to 32. Accordingly the said grounds are dismissed as not pressed.
The assessee in ground No.33 of the appeal has prayed for granting working capital adjustment while computing operating margin of comparable companies. We find that similar issue was considered by the Tribunal in assessee’s own case in assessment year 2014-15. The Tribunal restored the issue back to the file of Assessing Officer /TPO by observing as under:
“25. We shall now advert to the claim of the assessee that the TPO/DRP had erred in not granting working capital adjustment while computing the operating margin of the comparable companies for the purpose of determining the ALP of the international transactions of import of goods by the assessee from its AEs during the year under consideration. It is the claim of the assessee that working capital adjustments is an adjustment for the opportunity cost of capital for investments made in working capital. It is stated by the assessee that investment in working capital (i.e inventories, gains receivable/debtors and accounts payable) would require capital and operating assets, and an uncontrolled entity is expected to earn a market rate of return on that required capital independent of the services that it provides. It is the claim of the assessee that working capital yields a return resulting from viz. (i). higher sales price; or (ii). lower cost of goods sold which would have positive impact on the operational result. It is submitted by the assessee that higher sales price is a result of longer credit period granted to the customers. Also, in return of a longer credit period granted a firm would be willing to pay a higher purchase price which would add to the costs of the goods sold. In the backdrop of its aforesaid submissions, it is the claim of the assessee that high level of accounts receivable and inventory tend to overstate the operating results, while for the high levels of accounts payable tend to understate them, which factors would thus necessitate appropriate adjustment.
We have perused the orders of the lower authorities and find that the DRP had concurred with the TPO for rejecting the working capital adjustments that was undertaken by the assessee for the purpose of comparing the margins of the comparable companies as against its margin. We have given a thoughtful consideration to the facts of the case and after necessary deliberations are persuaded to accept the aforesaid claim of the assessee. As per Rule 10B(1)(e)(iii), in a case where the international transactions are benchmarked applying TNMM the net profit margin realised by an unrelated enterprise from a comparable uncontrolled transaction is to be adjusted by taking into account the differences, if any, between the international transaction and the comparable uncontrolled transaction, or between the enterprises entering into such transactions, which could materially affect the net profit margin in the open market. As is discernible from a perusal of the „Form 3CEB‟ and the records available before us, the assessee had worked out the adjustment resulting from the different levels of working capital i.e accounts receivable, inventory and accounts payable between the assessee i.e the tested party and the comparable companies. Also, the assessee had in the course of the proceedings before the lower authorities submitted that as working capital yields a return resulting from viz. (i). higher sales price; or (ii). lower cost of goods sold, therefore, the same would have an impact on the operational result. Accordingly, we are unable to accept the observation of the TPO/DRP that the assessee had failed to make out a case as to how the working capital adjustment would affect the net profit margin in the open market. Apart there from, the assessee has also assailed the correctness of the observation of the DRP that ther was a cessation of the agency business of the assessee in December, 2012. We thus are of the considered view that the matter in all fairness requires to be revisited by the DRP for afresh adjudication on the issue pertaining to working capital adjustment in the hands of the assessee. Needless to say, the TPO in the course of the „set aside‟ proceedings shall afford a reasonable opportunity of being heard to the assesse who shall remain at a liberty to substantiate its claim. The Ground of appeal No. 38 is allowed for statistical purposes.” We further observe that the Assessing Officer while giving effect to the order of Tribunal has sought comments from the TPO. After allowing working capital adjustment the operating margin of the assessee company was within permissible 3% range of tolerance limit of revised arm’s length mean of comparable companies. Consequently, the adjustment in assessment year 2014-15 was deleted. In the impugned assessment year the ground of appeal No.33 to 35 are restored back to the file of Assessing Officer with similar directions. In the result, ground No.33 to 35 are allowed for statistical purpose.
Other Direct Tax Issues:
In ground No.36 to 51 of appeal, the assessee has assailed disallowance of expenditure aggregating to Rs.43,09,51,084/- on account of payments to Doctors/Convention expenses, printing and equipment, hiring charges, grants to medical association, accommodation expenses of the medical practitioners, conducting of medical education meetings, expenditure on food, travel facilities, registration charges, car hiring charges, etc. The ld.Authorized Representative for the assessee submitted that grounds No.36 to 51 can be restored back to the file of Assessing Officer to be decided in accordance with law expounded by Hon'ble Supreme Court of India in the case of Apex Laboratories Pvt. Ltd. vs. DCIT, reported as 442 ITR 1. The ld.Authorized Representative for the assessee also furnished letter dated 22/04/2022 in this regard.
The ld. Departmental Representative submitted that now the issue with regard to expenditure incurred by Pharmaceutical companies on medical practitioners directly or indirectly in the form of distribution of freebies, gifts, etc. has been held not allowable u/s. 37(1) of the Act. However, the ld. Departmental Representative did not oppose the proposal of restoring this issue back to the file of Assessing Officer with a direction to follow judgment of Hon’ble Apex Court in the case of Apex Laboratories Pvt. Ltd. (supra).
We have heard the submissions made by rival sides. The ld.Authorized Representative for the assessee has made short submissions that the grounds raised in ground No.36 to 51 in respect of expenditure on medical practitioners be restored to Assessing Officer for reconsideration in the light of decision rendered by Hon'ble Supreme Court of India in the case of Apex Laboratories Pvt. Ltd. vs. DCIT, (supra). Without commenting on merits of the issue raised in grounds No.36 to 51, they are restored 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, grounds No.36 to 51 of the appeal are allowed for statistical purpose.
In ground No.52 of appeal, the assessee has assailed disallowance of depreciation on buildings. The ld.Authorized Representative for the assessee submitted that this issue is squarely covered by the decision of Tribunal in assessee’s own case in for assessment year 2008-09 decided on 04/05/2018.
We find that in the impugned assessment year, the assessee’s claim of depreciation of building Rs.58,298/- has been disallowed by Assessing Officer for the reason that the building was not put to use during the period under assessment. The stand of the assessee is that building in question forms part of the block of assets and continue to exist even after manufacturing was discontinued. We find that for similar reasons in assessment year 2008-09 assessee’s claim on depreciation on plant, machinery and building was disallowed by the Assessing Officer. The Tribunal deleted the addition by observing as under:-
“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.” For parity of reasons, the assessee succeeds on ground No.52 of the appeal.
In ground No.53 of appeal, the assessee has assailed non granting of consequential deprecation on non compete fee. The ld.Authorized Representative for the assessee submitted that the Assessing Officer has erred in not granting consequential depreciation on non-compete fee paid in period relevant to assessment year 2002-03. The Tribunal while adjudicating the appeal of assessee for assessment year 2007-08 in vide order dated 16/09/2019 held that the depreciation is allowable to the assessee on non-compete fee.
We have heard the submissions made by rival sides. We find that the Co-ordinate Bench in appeal by the assessee for assessment year 2007-08 (supra) has considered the issue of depreciation on non-compete fee. The Tribunal held that the assessee is eligible to claim depreciation on non- compete fee. For the sake of completeness the relevant extract of the order of Tribunal is reproduced herein under:
“ 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 Rs. 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 held that the assessee is eligible to claim depreciation on such expenditure as it is an intangible asset. Accordingly, depreciation was allowed to the assessee on the expenditure incurred towards non- compete fee. Consequential effect in terms of depreciation on the WDV of non-compete fee was allowed to the assessee in the assessment year 2003-04 and 2004-05. Even, while deciding the appeals for the assessment years 2008-09, 2011-12, 2012-13 and 2013-14, assessee's claim of depreciation on non-compete fee was allowed while entertaining the additional ground raised by the assessee.
44. 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 and 2013-14, the Tribunal has allowed assessee's claim of depreciation on non-compete fee while entertaining additional ground raised by the assessee. Therefore, following the consistent view of the Tribunal, we direct the Assessing Officer to allow depreciation on the opening WDV of the non-compete fee. This ground is allowed.”
The ground No.53 of the appeal is thus, allowed for parity of reasons.
In ground No.54 of appeal, the assessee has assailed non-granting of credit of TDS amounting to Rs.7,00,000/-. The ld.Authorized Representative for the assessee submitted that the Assessing Officer has erred in granting short credit of TDS. Instead of granting TDS Rs.41,75,781/-, the Assessing Officer has granted TDS credit of Rs.34,75,781/-.
The issue is restored back to the file of Assessing Officer for the limited purpose of ascertaining the correct amount of TDS credit to be allowed to the assessee. The Assessing Officer is directed to re-examine the issue and grant TDS credit accordingly. In the result, ground No.54 of the appeal is allowed for statistical purpose.
In grounds No.55 and 56 of appeal, the assessee has assailed charging of interest u/s. 234A and 234B of the Act. Charging of interest under the aforesaid section, is mandatory and consequential, hence, ground No.55 and 56 are dismissed.
26. The assessee has raised additional ground, claiming deduction in respect of education cess. The ld.Authorized Representative for the assessee stated at Bar that he is not pressing additional ground raised in the appeal. In view of the statement made by ld.Authorized Representative for the assessee, additional ground raised is dismissed as not pressed.
In the result, appeal by assessee is partly allowed in the terms aforesaid.