JOHNSON & JOHNSON LTD.,GURGAON vs. DCIT, NEW DELHI

These two appeals are filed by the assessee and the Revenue against the order dated 5/11/2014 passed by DCIT, Circle-7 (1), New Delhi u/s 143(3) read with u/s 144C of the Act for Assessment Year 2010-11.

1. That the learned Deputy Commissioner of Income Tax, Circle-7(1), New Delhi has erred both in law and on facts in determining the income of the appellant at Rs. 35,96,36,200/- as against returned total income of Rs. 20,04,81,143/- in an order of assessment dated 5.11.2014 u/s 143(3) read with section 144C of the Act in pursuance to directions issued by learned Dispute Resolution Panel-Ill, New Delhi (hereinafter referred to as “DRP ) in an order dated 20.10.2014 u/s 144C(5) of the Act. The additions made aggregating to Rs. 15,91,55,055/- are highly unjustified, arbitrary and untenable.

2. That the learned DRP has committed gross errors in confirming the adjustment aggregating to Rs. 7,88,19,769/- by mechanically confirming the transfer pricing adjustment proposed by the learned Joint Director of Income Tax, Transfer Pricing Officer-II(2), New Delhi (hereinafter referred to as the “TPO”) under section 92CA of the Act. 2.1 That the learned TPO/AO/DRP has erred both on facts and in law in holding advertising, marketing and promotion (hereinafter referred to as “AMP”) expenditure as a separate international transaction under Section 92B of the Act, without appreciating the functional profile of the appellant according to which incurring of AMP expenses was part of the appellant’s roles and responsibilities as a manufacturer-cum-distributor and the appellant’s remuneration was fixed accordingly. 2.2. That the learned TPO/AO/DRP has failed to appreciate that according to its compensation model, the appellant was already remunerated at arm’s length in relation to all the functions and risks undertaken by it (including AMP activity) and benchmarking of the same separately again, has in effect, led to double taxation 2.3. That the learned TPO/AO/DRP has failed to appreciate that once Transactional Net Margin Method (‘TNMM’) has been accepted as the most appropriate method, then an analysis of the individual elements of “cost” is inconsistent with the tenents of application of TNMM as per Rule 10B(l)(e) of the Income Tax Rules’ 1962 (“hereunder referred to as “Rules”). 2.4. That the conclusion that the AE, being the legal owner of the brand, should have compensated the assessee for alleged excessive AMP incurred as the AE derives benefit from such expenses through the creation of marketing intangible is factually and legally misconceived and therefore unsustainable. 2.5 That the learned TPO/AO/DRP has overlooked the corroborative analysis using Resale Price Method undertaken by the assessee during the TP assessment proceedings and also ignoring the fact that comparables of similar functional intensity have been selected. 2.6 That the learned TPO/AO/DRP has erred in failing to appreciate the international guidance in relation to the ‘marketing intangibles’ and ‘bright line test’ as given in OECD guidelines and OECD discussion draft on intangibles and Australian Tax Officer guidelines in context of a distributor. 2.7 That the learned TPO/AO/DRP has failed to appreciate that ‘bright line test’ is simply a computational tool and not a method prescribed under the Act read with the Income Tax Rules, 1962 (‘the Rules’) and hence the arithmetic mean of the AMP expenses of comparable companies should not be considered for computing the impugned TP adjustment. 2.8 That the learned TPO/AO/DRP has failed to appreciate that in absence of any change in facts and circumstances in the year under consideration, no adjustment was warranted in the instant year on the principle of consistency as during the earlier years identical international transactions were found to be at arm’s length. 2.9 That the learned TPO/AO/DRP has further erred both in law and on facts in a) incorrectly computing the AMP expenses/sales ratio of the assessee by taking into account the items like selling commission of Rs. 5,22,19,479/- selling expenses of Rs. 2,34,35,961/- and conference & seminar expenses of Rs. 3,36,19,859/- without appreciating that these expenses have been incurred by the assessee considering the nuances of the orthopedic industry;

b) not taking cognizance of the ruling pronounced by the Hon’ble Income Tax Appellate Tribunal (“TAT”), Delhi Bench in the case of distributor namely BMW India (P) Ltd. (BMW India”) for Assessment Year(AY) 2008-09 which was submitted before the TPO wherein Hon’ble ITAT had adjudged that if a distributor is sufficiently compensated by the AE through the pricing of products, i.e. through higher margins, the same would have catered to extra AMP expenses spent by the distributor as compared to the comparables; accordingly, no separate compensation in the form of reimbursement of excess AMP expenses was required from the AEs c) incorrectly holding the AMP expenses incurred by the assessee to be “excessive” on the basis of a “bright line limit” arrived at by the deriving a arbitrary set of 4 comparables with the pre-conceived approach to make a case of bright line for the assessee d) erroneously applying a mark-up of 12.25% in respect of assessee’s “alleged excessive” AMP expenses as per TP order.

3. That the learned DCIT/DRP has erred both in law and on facts in making a disallowance of a sum of Rs. 4,54,56,549/- by restricting the claim of deduction in respect of loaner and demo sets at Rs. 2,68,48,473/- instead of claim of Rs. 7,23,05,022/- by the appellant company.

3.1 That the learned DCIT/DRP has failed to appreciate that loaner and demo sets given to hospitals/doctors on returnable basis for use of products sold by the appellant company are part of “inventory” of appellant company having an estimated useful life of thirty six months and as such deduction claimed was allowable on such sets in accordance with Accounting Standard- 2 issued by the Institute of Chartered Accountants of India. 3.2. That further more the finding that such assets are “capital assets” eligible for depreciation is based on fundamental misconception of facts and provisions of law and hence otherwise untenable. 3.3. That disallowance made by the learned DCIT/DRP is otherwise contrary to the principle of consistency upheld by the Apex Court in the case of CIT vs. Excel Industries Ltd. reported in 395 ITR 295 more particularly since identical claim of deduction had been allowed from assessment years 2002-03 to 2006-07 in assessments framed u/s 143(3) of the Act. 3.4. That in any case thelearned DCIT/DRP has failed to appreciate that expenditure claimed was eligible revenue expenditure incurred wholly and exclusively for the purpose of business and as such eligible for deduction u/s 37(1) of the Act.

3.5. That without prejudiceto the aforesaid and in the alternative the learned DCIT/DRP ought to have directed that depreciation be allowed the capitalized value of asset in the succeeding years.

4 That the learned DCIT/DRP has further erred both in law and on facts in making a disallowance of sum of Rs. 12,58,878/- out of expenditure incurred of Rs. 25,17,756/- under the head advertisement and sales promotional expenses incurred by the appellant company 4.1. That the finding of the learned Deputy Commissioner of Income Tax that “expenses incurred by the assessee separately under various heads which are directly relating to the increase in sale of the assessee and enhancing its profitability, the expenses incurred on advertisement and sales promotion amounting to Rs. 25,17,756/- are being amortized over a period of two years and hence only 1/2 of the expenditure shall be allowed in this year” is factually incorrect, legally untenable and hence unsustainable. 4.2 That each of the basis stated by the learned DCIT/DRP to make the disallowance of eligible business expenditure incurred and claimed by the appellant is wholly misconceived, misplaced and also contrary to the orders in preceding years.

5. That the learned DCIT/DRP has erred both in law and on facts in making a disallowance of Rs. 3,36,19,859/- representing expenditure incurred under the head seminar and conference’s by the appellant company by invoking section 40(a)(ia) of the Act. 5.1 That the learned DCIT/DRP has failed to appreciate that such expenditure was incurred towards conventions, education support, OPR courses and symposium expenses in the nature of seminar and conference (both in India and Overseas) wholly and exclusively for the business of the assessee company 5.2 That the finding of the learned DCIT/DRP that appellant was obliged to deduct TDS u/s 194H of the Act on such payments since sum incurred were indirect form of commission/incentives for increasing sale of products is factually and legally misconceived and therefore unsustainable. 5.3. That the learned DCIT/DRP has failed to appreciate that such expenditure was incurred towards conventions, education support, OPR courses and symposium expenses in the nature of seminar and conference (both in India and Overseas) does not fall in the scope of prohibitions covered by Indian Medical Council under Professional conduct etiquette & ethics regulation 2002 or CBDT circular 5/2012 as such factually and legally misconceived and therefore unsustainable.

6. That the learned DCIT has further erred both in law and on facts in levying interest under section 234B of the Act and under section 234D of the Act which are not leviable on the facts of the instant case.

It is therefore prayed that, adjustments and disallowances made by the Learned TPO/DCIT/DRP along with interest levied in the impugned order of assessment u/s 143(3)/144C of the Act be deleted and, appeal of the appellant company be allowed.”

1. On the facts and in the circumstances of the case the Hon’ble DRP-III erred in law and on facts in deleting the additions to Rs.41,07,645/- on account of Recruitment and Training expenses made by the A.O in the Draft Assessment Order.

of the human skeleton and its soft tissues. Synthes Medical Pvt. Ltd. is a subsidiary of Synthes Holding AG, Switzerland and has been operating in India since 1992 and is primarily engaged in the sales distribution and marketing in India of medical implants in the area of orthopedic Trauma & Spine, Tools and equipment imported from other Group Company. A draft assessment order u/s. 144C dated 24/02/2014 was passed and sent to assessee by speed post on 26/02/2014. The assessee preferred objections before the Dispute Resolution Panel-Ill, New Delhi. The directions of the Dispute Resolution Penal u/s. 144C(5) of the Income Tax Act 1961 passed vide order dated 20/10/2014 were received in this office on 05/11/2014. The final assessment order is accordingly passed after incorporating the directions of the Dispute Resolution Panel.

iii) Diageo India (P) Ltd. Vs. Dy CIT iv) Nivea India (P) Ltd. Vs. ACIT 92 Taxmann.com 165 (Mum) v) Fuji Film Corporation Vs. ITO 92 TAxmann.com 411 (Del)

i) CIT vs. Excel Industries 358 ITR 295 (SC) ii) Radhasoami Satsang Saomi Bagh v. CIT 193 ITR 321 (SC) iii) CIT vs. M/s. Malibu Estate P. Ltd. ITA 213/2015 & CM No.4961/2015 (Del)

26. In the instant case, the Revenue has not brought on record any material that brand loyalty has been generated by making payment on account of selling commission and selling expenses by the assessee company. Furthermore, the assessee has made payment under AMP head to its independent parties for promotion of its own business which excludes this transaction from the definition of international transaction particularly in the face of the fact that there is no agreement between the assessee and its AE

for sharing AMP expenses. When we examine all these facts in the light of the fact that no such adjustment has been made by the Revenue in earlier years, the details of which is given in tabulated form by the assessee in its synopsis as hereunder :- AY Total Expenditure Adjustment Assessment Remarks Turnover in nature of in ALP for u/s (Rs. Lacs) AMP AMPO incurred expenses claimed Rs. by Lacs) TPO/AO (Rs. Lacs) 2003-04 2,164.22 Yes Nil 143(3) NA 2004-05 2,101.04 Yes Nil 143(3) NA 2005-06 2,557.92 Yes Nil 143(3) NA 2006-07 3,186.01 Yes Nil 143(3) NA 2007-08 4,204.15 Yes Nil 143(3) NA 2008-09 5,204.54 Yes Nil 143(3) NA 2009-10 7,646.64 Yes 628.01 143(3) Disputed in appeal This adjustment made by TPO in not sustainable in the eyes of law.

27. So, in the given circumstances, we are of the considered view that addition made by TPO/AO/DRP by wrongly computing AMP expenses by including selling commission of Rs 4,99,32,478/- and selling expenses of Rs. 1,47,72,866/- as part of total turnover during the year under assessment is not sustainable in the eyes of the law. So, Grounds No. 2,2.1, 2.2, 2.3 2.4, 2.5, 2.6, 2.7, 2.8, 3.0 & 3.1 are determined in favour of the assessee and the TPO/AO are directed to benchmark the international transactions in the light of the findings returned herein above.”

The factual aspect has not been distinguished by the Ld. DR in the present assessment year which is before us. Thus, the issue is squarely covered in favour of the assessee by the Tribunal’s decision in assessee’s own case for A.Y. 2009-10. Therefore, Ground No. 2 to 2.9 are allowed.

The Ld. DR could not distinguish the factual aspect in the present assessment year and that of the earlier assessment years. Therefore, the issue is squarely covered in favour of the assessee. Ground Nos. 3 to 3.5 are allowed.

in nature, the same cannot be deferred as has already been held by Hon’ble Apex Court in the case of Taparia Tools Ltd. vs. JCIT - 372 ITR 605 (SC). In the judgment in Taparia Tools Ltd. (supra), it is held by the Hon’ble Apex Court that there is no concept of deferred revenue expenditure which can only be deferred at the instance of the assessee. Bare perusal of the findings returned by AO as well as DRP disallowing the 50% of the expenditure incurred by the assessee on advertisement and promotional expenses go to prove that the same had been made on the basis of conjecture and surmises. When genuineness of the expenditure incurred by the assessee in the course of its business has not been disputed, the addition made on account of disallowance of expenses is not sustainable. Moreover, when the Revenue has consistently accepted the genuineness of the expenditure in question as revenue expenditure in the preceding years in the similar set of facts and circumstances, the disallowance during the year under assessment is wholly untenable, hence disallowance made by the AO to the tune of Rs. 6,16,568/- is ordered to be deleted. Consequently, Grounds No. 7, 7.1 & 7.2 of are determined in favour of the assessee and Ground No. 2 of ITA No. 979/Del/2014 is determined against the Revenue.”

The Ld. DR could not distinguish the factual aspect in the present assessment year and that of the earlier assessment years. Therefore, the issue is squarely covered in favour of the assessee. Ground Nos. 4 to 4.2 are allowed.

“43. Identical issue was dealt with by the coordinate Bench of the Tribunal in assessee’s own case in AY 2008-09. AO at page 16 of his order observed that, “Even if the assessee contends that meeting of conference expenses was just to increase the knowledge of doctors about latest product, than it is also important to justify as how the expense is claimed as expense under section 37(1) of the IT Act.”

Since this issue is remanded back to the file of the Assessing Officer in the earlier Assessment Year i.e. A.Y. 2009-10 by the Tribunal, it will be appropriate to remand back this issue to the file of the Assessing Officer for examining the same. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Ground Nos. 5 to 5.3 are partly allowed for statistical purpose.

The Ld. DR could not distinguish the factual aspect in the present assessment year and that of the earlier assessment years. Therefore, the issue is squarely covered in favour of the assessee. Ground No. 1 of Revenue’s appeal is dismissed.