INDIA MEDTRONIC PRIVATE LIMITED,MUMBAI vs. DCIT , 10(1)(1), MUMBAI

P a g e | 1 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1)

IN THE INCOME TAX APPELLATE TRIBUNAL “K” Bench, Mumbai Before Shri M. Balaganesh, Accountant Member and Shri Ravish Sood, Judicial Member ITA No.7263/Mum/2018 (Assessment Year: 2014-15)

India Medtronics Pvt. Ltd. Deputy Commissioner 1241, Solitaire Corporate Park, of Income-tax-10(1)(1), Bldg. No.12, 4th Floor, Andheri Room No. 209, Vs. Ghatkopar Link Road, Aayakar Bhavan,M.K. Road Andheri (E), Mumbai, Mumbai – 400020 Maharashtra- 400093 PAN – AAACI4227Q (Appellant) (Respondent) Appellant by: S/shri Rajan R. Vora & Nikhil Tiwari, A.Rs Respondent by: Shri Anand Mohan, D.R Date of Hearing: 11.07.2019 Date of Pronouncement: 13.09.2019

O R D E R PER RAVISH SOOD, JM The present appeal filed by the assessee is directed against the order passed by the A.O under Sec. 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (for short „Act‟), dated 31.10.2018. The assessee has assailed the impugned order by raising the following grounds of appeal before us: “Based on the facts and circumstances of the case and in law, India Medtronic Private Limited (hereinafter referred to as the Appellant') craves leave to prefer an appeal against the order passed by the learned Assistant Commissioner of Income- tax - 10(1)(1), Mumbai (hereinafter referred to as the „learned AO‟) under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 (hereinafter referred to as the „Act‟) in pursuance of the directions issued by the Hon‟ble

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Dispute Resolution Panel - 1 (WZ), (hereinafter referred to as the „Hon‟ble DRP‟) on the following grounds, each of which are without prejudice to one another: On the facts and in the circumstances of the case as well as in law, the learned AO/ Joint Commissioner of Income-tax (Transfer Pricing) - 2(3) („TPO”)/Hon'ble DRP, in fact and in law: Grounds 1. erred in assessing the total income of the Appellant at INR 2,30,29,38,703 as against INR 37,21.04,250 as computed by the Appellant; Transfer pricing grounds on Advertising, Marketing and Promotion („AMP‟) adjustment 2. erred in making transfer pricing adjustment of INR 101,26,73,186 on account of AMP expenses incurred by the Appellant; AMP is not an international transaction 3. erred in considering the function of AMP as a separate purported international transaction for the purpose of transfer pricing adjustment; 4. erred in ignoring that the alleged AMP expenses incurred by the Appellant represents only domestic transactions undertaken with third parties/employees and are outside the purview of Section 92B of the Act and is thus in excess of his jurisdiction; 5. erred in erroneously stating that there exist an explicit arrangement between the Appellant and its AEs for incurring AMP expenses; 6. erred in concluding that the Appellant is engaged in performing Development, Maintenance, Enhancement, Protection and Exploitation services (DEMPE services') which includes market development, value addition, creation of marketing intangibles etc and there is a mutual agreement' arrangement between the Appellant and AE for discharging market development functions; 7. erred in not following binding orders of the Hon‟ble Jurisdictional ITAT in Appellant's own case for AY 2008-09, AY 2010-11 and AY 2011-12, wherein the entire transfer pricing adjustment on account of AMP is deleted by holding that it is not an international transaction, in the absence of any agreement for sharing AMP expenses with the AEs; Promotion of AE's brand in India 8. erred in holding that by incurring the impugned AMP expenses, the Appellant was promoting Medtronic brand instead of appreciating that the Appellant was only carrying out its business by using the well-established brand name of Medtronic and any benefit derived by the AEs is purely incidental in nature; Transactional Net Margin Method („TNMM‟): Bundled Approach 9. erred in not appreciating that the Appellant has followed a bundled transaction approach for determining the arm's length price („ALP‟) of the trading transaction and that it would be illogical and improper to treat AMP expenses, being one of the functions of distribution activity performed by the Appellant, as a separate international transaction given that the international transaction of trading of medical devices' have been considered to be at arm's length; Application of Bright Line Method („BLT‟) 10. erred in stating that the Appellant has rendered a service to the AEs by incurring excessive AMP expenses and holding that such excessive AMP expenses should be reimbursed by the AEs by applying BLT as „Other Method‟; 11. erred in not following the binding orders of the Hon‟ble Jurisdictional ITAT in Appellant's own case for AY 2009-10 and AY 2010-11, wherein it is held

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that BLT is not an appropriate method to benchmark the alleged international transaction on account of AMP; No scientific approach while selecting comparable companies for bright line test 12. Without prejudice to the above, erred in cherry picking up of the comparable companies and has selected comparable companies of the preceding year without conducting a fresh search and thereby violated the principles of natural justice; 13. Without prejudice to the above, erred in considering Adinath Bio-Labs Limited as a comparable company not having similar product/ brand profile as the Appellant; Mark-up on AMP expenses 14. Without prejudice to the above, erred in disregarding that that even if the Appellant had to be compensated for the excessive AMP, in absence of any services element, the Appellant should be entitled to reimbursement of “actual” excessive AMP expenses incurred, rather than a mark-up on the same; 15. Without prejudice to the above, erred in holding that the Appellant should have earned a mark-up of 23.71% on the alleged excessive AMP expenses in relation to distribution segment, which are to be reimbursed to the Appellant; 16. Without prejudice to the above, erred in not adopting a scientific search process to identify companies for computing the mark-up to be applied to the alleged excessive AMP expenses; 17. Without prejudice to the above, erred in considering inappropriate comparables companies for application of a mark-up on the alleged excessive AMP expenses. 18. Without prejudice to the above, erred in computing mark-up over alleged excessive AMP expenses incurred without appreciating that an addition if any, shall be commensurate with agency function, if any, undertaken by the Appellant. Certain expenses are not in nature of AMP expenses 19. erred in not understanding the business of the Appellant and ignoring the fact that the AMP spend of the Appellant primarily consists of selling expenses/non- brand related expenses hugely benefitting the Appellant and therefore should not be considered as part of brand building expenses for the purpose of determining the AMP expense of the Appellant; 20. Without prejudice to the above, erred in including personnel cost, travelling and conveyance expenses and depreciation on equipment as part of AMP expenses; 21. erred in considering 80% of manpower expenses and travelling and conveyance costs as AMP expenses; 22. Without prejudice to the above, erred in not considering 50% of manpower expenses and travelling and conveyance costs as AMP expenses as directed by the Hon'ble DRP for AY 2009-10 and AY 2010-11; 23. erred in not providing benefit of +/-3% under proviso to section 920 of the Act for the purpose of computing the ALP. Secondary transfer pricing adjustment on account of convention expenses incurred in normal course of business 24. erred in partly confirming secondary adjustment made by the TPO by holding that in case of adjustment on amount of AMP spend is not sustained by the Appellate authorities, convention expenses to the extent of 92.03 percent ie INR

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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 on the same: 25. erred in not using any of the methods prescribed under section 92C to undertake adjustment on secondary basis by considering convention expenses to be in the nature of expenses incurred towards brand building and business promotion; 26. Without prejudice to the above, erred in making disallowance/addition of convention expenses as a part of transfer pricing adjustment as well as corporate tax disallowance, thereby making double addition/disallowance, which is not permissible as per the law; Transfer Pricing Adjustment on account of recovery of expenses 27. erred in not following the binding directions issued by the Hon‟ble DRP, wherein the Hon‟ble DRP has directed to delete the transfer pricing adjustment of INR 1,32,76,277 on account of recovery of expenses, thereby exceeded its jurisdiction. Transfer Pricing Adjustment on account of reimbursement of expenses 28. erred in partly confirming the transfer pricing adjustment of INR 4,05,62,976 on account of reimbursement of expenses to the AEs by the Appellant by ignoring that the expenses were incurred by the AEs merely for facilitation and were reimbursed by the Appellant on cost to cost basis, thereby erred in holding that the expenses reimbursed by the Appellant are not in the nature of business expenses anddisallowing the same: 29. erred in determining the ALP of the transaction as Nil, without appreciating the sample evidence submitted by the Appellant during the transfer pricing assessment proceedings as well as remand proceedings to substantiate the nature of expenditure reimbursed; 30. Without prejudice to the above, erred in making a separate transfer pricing adjustment on account of reimbursement of expenses to the AEs by the Appellant, as such costs are a part of the trading segment and the alleged adjustment is subsumed in the adjustment related to the import of finished goods made by the TPO; 31. Without prejudice to the above, erred in granting relief of only INR 73,19,620 based on the sample evidence submitted during the remand proceedings whereas total sample evidences submitted were amounting to INR 1,71,57,625, and thereby the adjustment should be restricted to INR 3,07,24,971 as against the adjustment of NR 4,05,62,976; Alternate Transfer Pricing Adjustment on account of import of finished goods 32. erred in making transfer pricing adjustment of INR 49,60,24,206 on account of purchase of finished goods from AEs: 33. erred in not following binding directions issued by the Hon'ble DRP, where the Hon'ble DRP directed that such adjustment on account of import of finished goods is a secondary adjustment which is already subsumed in the primary adjustment made on account of AMP, and hence no separate addition to total income should be made on account of the same; 34. erred in rejecting the Appellant's claim to use multiple year data for computing the ALP of the impugned transaction involving purchase of finished goods from AEs, and has instead adopted use of single year updated data to compute the price of the said transaction;

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Grants to medical associations 48. without prejudice to the above, erred in not appreciating the fact that out of the convention expenses of INR 36,34,64,058, grants of INR 20,06,70,619 are provided to medical associations and not to individual medical practitioners, accordingly. the same are outside the purview of MCI Regulations and CBDT circular; Printing and equipment hire charges 49. without prejudice to the above, erred in not appreciating the fact that out of the convention expenses of INR 36,34,64,058, printing and equipment hire charges ofINR 16,21,578 are paid to independent third party service providers in the normal course of business and accordingly, the same is not covered under the MCI Regulations and CBDT circular; Accommodation expenses 50. without prejudice to the above, erred in disallowing accommodation expense of INR 5,79,40,945 out of the convention expenses of INR 36,34,64,058, without appreciating the fact that the same was incurred for various medical practitioners attending the meeting/conference in the capacity of 'instructors/consultants' of the medical device company and not as 'delegates', the same would clearly fall outside the purview of the CBDT circular, 51. without prejudice to the above, erred in not appreciating the fact that the payment for the accommodation expenses had been directly made to medical associations and third party service providers and not to the medical practitioners, accordingly, the same is outside the purview of the MCI Regulations and CBDT circular; Continuing Medical Education Meetings („CME Meetings‟) 52. without prejudice to the above, erred in not appreciating the fact that out of the convention expenses of INR 36,34,64,058, expenditure incurred for organizing CME Meetings of INR 67,39,275 is paid to third party agencies in the normal course of business, with the objective of disseminating educational and scientific information to doctors and surgeons and accordingly, the same is not prohibited by the MCI Regulations; Meals 53. without prejudice to the above, erred in disallowing the expenditure incurred for providing meals of INR 3,14,58,704 out of the convention expenses of INR 36,34,64,058, without appreciating the fact that the value of meals provided to health care professionals is low, insignificant and out of courtesy, accordingly, the same does not result in any 'freebie' to the health care professionals; Gifts 54. without prejudice to the above, erred in not appreciating the fact that out of the convention expenses of INR 36,34,64,058, gifts are provided to HCPs of a nominal value of INR 2,30,926 and with the intention of brand recall and creation of goodwill which does not affect their independence and objectivity, accordingly, the same does not amount to gifts under the MCI Regulations; Expenses for travel facilities 55. without prejudice to the above, erred in not appreciating the fact that out of the convention expenses of INR 36,34,64,058, expenses for travel facilities of INR 2,54,02,366 was incurred for various HCPs wholly and exclusively for the purpose of the business of the Assessee and accordingly, the same is outside the purview of the MCI Regulations and CBDT circular; 56. without prejudice to the above, erred in not appreciating the fact that the payment for travel facilities had been paid to travel agents/independent third

P a g e | 7 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) party service providers and not to medical practitioners and accordingly, the same is outside the purview of the MCI Regulations and CBDT circular; Registration charges 57. without prejudice to the above, erred in not appreciating the fact that out of the convention expenses of INR 36,34,64,058, registration charges of INR 3,45,75,285 was incurred by IMPL on behalf of the HCPs wholly and exclusively for the purpose of the business of the Appellant and accordingly, the same is outside the purview of the MCI Regulations and CBDT circular; Car hire charges 58. without prejudice to the above, erred in not appreciating the fact that out of the convention expenses of INR 36,34,64,058, car hire charges of INR 48,24,358 was incurred by IMPL for smooth conduct of the medical conference/symposium in the normal course of business and they are outside the purview of MCI Regulations and CBDT circular. 59. without prejudice to the above, erred in not appreciating the fact that the payment for car hire charges had been paid to independent third party service providers and not to medical practitioners and accordingly, the same is outside the purview of the MCI Regulations and CBDT circular; Double disallowance of convention expenses 60. without prejudice to the above, erred in holding that there is no double disallowance of the convention expenses without appreciating that the portion of the same has already been disallowed by the TPO/AO while computing the transfer pricing adjustment; Consequential depreciation on non-compete fee 61. erred in not granting consequential depreciation on non-compete fee held as capital expenditure in AY 2002-03 by the Hon‟ble Income-tax Appellate Tribunal. Non-grant of credit of TDS amounting to INR 12,379 62. erred in granting credit of TDS amounting to INR 11,20,299 instead of INR 11,32,678 as claimed in the return of income. Levy of interest under section 234B of the Act 63. erred in levying under section 234B of the Act. Levy of penalty under section 271(1)(c) of the Act 64. erred in initiating penalty under section 271(1)(c) of the Act; The Appellant craves, to consider each of the above grounds of appeal without prejudice to each other and craves leave to add, alter, delete or modify all or any of the above grounds of appeal.” 2. Briefly stated, the assessee is a part of Medtronic Inc., a USA based global leader in medical technology which is engaged in developing and manufacturing a wide range of products and therapies i.e mostly patented or IP protected items. The assessee company is a subsidiary of Medtronic International Ltd., Hongkong, which in turn is a subsidiary of Medtronic USA Inc. In India, the assessee company is engaged in the business of marketing and distribution of proprietary

P a g e | 8 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) 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. The assessee had e-filed its return of income for A.Y. 2014-15 on 28.11.2014, declaring its total income under the normal provisions at Rs. (37,21,04,250/-) and „book profit‟ under Sec.115JB of the Income- tax Act,1961 at Rs.35,84,52,887/-.The return of income filed by the assessee was processed as such under Sec.143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec.143(2).

Sr. No. Particulars 1. Adjustment on account of AMP expenses amounting to INR 101.26 crores 2. Adjustment on account of recovery of expenses from AEs amounting to INR 1.32 crores 3. Adjustment on account of reimbursement of expenses to AEs amounting to INR 4.78 crores 4 Alternate adjustment on account of import of finished goods amounting to INR 49.60 crores

After receiving the order of the TPO under Sec. 92CA(3), dated 31.10.2017, the A.O passed a draft assessment order under Sec. 143(3) r.w.s 144(1), dated 26.12.2017. 4. The assessee aggrieved with the adjustments proposed by the A.O in his draft assessment order filed objectionswith the Dispute Resolution Panel-1 (for short „DRP‟). The DRP vide its order dated 17.09.2018 disposed off the objections filed by the assessee. The DRP in its order allowed certain reliefs to the assessee viz. (i) relief as regards the adjustment made by the TPO in respect of recovery of

P a g e | 9 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) expenses: Rs.1,32,76,227/-; (ii) partial relief on account of adjustment in respect of reimbursement of expenses: Rs.73,19,620/-; and (iii) direction to the A.O to exclude the transfer pricing adjustment on account of import of finished goods of Rs.49,60,24,206/- from the total quantum of adjustments. Subsequently, the A.O giving effect to the directions of the DRP passed the final assessment order under Sec. 143(3) r.w.s 144C(13), dated 31.10.2018 after making the following adjustments/disallowances:

Sr. No. Particulars Amount (in INR) Transfer Pricing adjustment 1. Adjustment on account of AMP expenses 101,26,73,186 2. Adjustment on account of recovery of 1,32,76,277 expenses from AEs 3. Adjustment on account of reimbursement 4,05,62,976 of expenses to AEs 4. Alternate adjustment on account of 49,60,24,206 import of finished goods Total 156,25,36,645 Otheradjustments. 1. Disallowance of payments to doctors 36,34,64,058 2. Disallowance of depreciation on building 75,886 3. Disallowance of provision for commission 47,57,859 on sales Total 36,82,97,803

As there were certain mistakes apparent from the order passed by the A.O under Sec. 143(3) r.w.s 144(13), therefore, the assessee filed a rectification application dated 22.11.2018 with him. In the meantime the TPO issued a rectified order under Sec.154, dated 05.03.2019, wherein certain mistakes that had emanated while giving effect to the directions of the DRP were rectified viz. (i) treatment of the adjustment on account of import of finished goods: Rs.49,60,24,206/- as an alternate adjustment; and (ii) deletion of the adjustment on account of recovery of expenses: Rs.1,32,76,277/-. The A.O thereafter passed a rectification order under Sec. 154, dated 14.03.2019 and while giving effect to the directions issued by the DRP confined the adjustments/disallowances as under:

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Sr. No. Particulars Amount 1. Transfer pricing adjustment on account of 101,26,73,186 Advertising. Marketing and promotion (AMP) expenses 2. Alternate transfer pricing adjustment on 33,44,95,973 account of convention expenses (treating the entire amount of convention expenses incurred by the Appellant for brand building of the AE in India) 3. Transfer pricing adjustment on account of 4,05,62,976 reimbursement of expenses 4. Alternate transfer pricing adjustment: on 49,60,24,206 account of import of finished goods

Sr. No. Particulars Amount (INR)

P a g e | 11 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) 1. Selling and distribution expenses 2,59,70,977 2. Product giveaways and samples 13,12,94,798 3. Convention expenses 36,34,64,058 4. Salary, ages bonus and other 59,77,57,972 payments (80%) 5. Travelling and conveyance expense 18,42,47,518 (80%) 6. Depreciation on Plant & Machinery 6,33,05,274 Total 1,36,60,40,596 Sales 6,86,89,36,462 AMP to 19.89% Sales

The TPO adopted the „Bright Line Test‟ and computed the AMP to sales ratio of the comparable companies at 7.97%, as hereinbelow:

Sr. No. Name of the Company AMP to Sales ratio (FY 2012- 13) 1. Satayjet Commercial Co. Ltd. 1.57% 2. Frontline Electro Medical Limited 12.54% 3. Adinath Bio-Labs Limited 1.10% 4. Hicks Thermometers India Ltd. 10.43% 5. ADS Diagnostic Ltd. 19.71% 6. Confident Sales India Private Limited 2.44% Average 7.97%

Also, the TPO worked out a mark-up on the AMP expenses @ 23.71% of the reimbursement cost for brand promotion carried out by the assessee for its AEs in India, as under:

Name of the Company Operating profit/Operating Cost (FY 2013-14) Axis Integrated Systems Ltd. 27.46% BVG India Ltd. 19.91% Average 23.71%

Accordingly, the TPO made an adjustment of Rs. 101,26,73,186/- towards excessive AMP expenses incurred by the assessee, which as per him were required to be reimbursed by its AEs (along with mark- up), as under:

P a g e | 12 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) Sr. No. Particulars Reference Amount (INR) 1. Net Sales in the A 6,86,89,36,462 distribution segment 2. Arm‟s Length of AMP to B 7.97% Sales ratio (as computed by learned TPO in the TPO order) 3. Arm‟s length AMP C=A*B 54,74,54,236 expenditure 4. Expenditure incurred D 1,36,60,40,596 by Appellant 5. Excess expenditure E=D-C 81,85,86,360 incurred for developing the intangible 6. Arm‟s length value of F=E plus 101,26,73,186 the AMP expenses 23.71% 7. Compensation received G NIL 8. Adjustment H=F-G 101,26,73,186

Alternatively, it was observed by the TPO that in case the adjustment with respect to AMP expenses was vacated by the Tribunal then the convention expenses of Rs.36,34,64,058/- that were incurred by the assessee were to be compensated by the AE as the same were spent by the assessee for brand building of its AE in India.

P a g e | 13 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) 80% of manpower expenses, travelling and conveyance cost as AMP expenses; and (v) that, the TPO had rightly concluded that in case the adjustment with respect to AMP expenses was vacated by the appellate authorities then an alternate adjustment on account of convention expenses i.e the amount which was found to be in excess of 7.97% of the said expenses of Rs.33,44,95,973/- was to be made.

P a g e | 14 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) commercially reasonable manner; and (iii) that, the terms of the agreement did not provide that the assessee had to share AMP expenses; (iv) that, even if the AE was benefitted indirectly by the AMP expenditure incurred by the assessee, it could not be inferred that it had entered into an agreement for sharing AMP expenses; and (v) that, the „Bright Line Test‟ should not have been applied by the TPO. We find that the Tribunal after relying on its earlier order in the case of Thomas Cook India Ltd. (ITA No. 1261 & 1238/Mum/2015, dated 31.05.2016), had therein decided the issue in favour of the assessee, observing as 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

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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 transaction. 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. 54. Under Sections 92B to 92F, the pre-requisite for commencing the TP exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transaction that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price. 55. Section 92B defines 'international transaction' as under: "Meaning of international transaction. 92B.(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

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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. 57. 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. 58. In Maruti Suzuki India Ltd. (supra), one of the submissions of the Revenue was: "The mere fact that the service or benefit has been provided by one party to the other would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit. “This was negatived by the Court by pointing out;"Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if 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." 59. 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

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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. “ 60. The transfer pricing adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceeding to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred, for the AE. In any event, after the decision in Sony Ericsson (supre), -- the question of applying the BLT to determine the existence-of an- international transaction involving AMP expenditure does not arise. 61. There is merit in the contention of the Assessee that a distinction is required to be drawn between a 'function' and a 'transaction' and that 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." 62. 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 ensure 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

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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 adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, 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 on application of the BLT, is excessive, thereby evidencing 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 from 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.” 64. In the absence of any machinery provision, bringing an imagined transaction to tax is not possible. The decisions in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) and PNB Finance Ltd. v, CIT (2008) 307 ITR 75 (SC) make this position explicit. Therefore,where the existence of an international transaction involving AMP expense with an ascertainable price is- unable to be shown to exist, even if such price is nil,Chapter X provisions cannot be invoked to undertake a TP adjustment exercise. 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

P a g e | 19 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) 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.” We have perused the aforesaid order of the Tribunal for A.Y 2010-11, and finding ourselves to be in agreement with the view therein taken, respectfully follow the same and delete the T.P adjustment of Rs.101,26,73,186/- made by the A.O in respect of the AMP expenses in the hands of the assessee. At this stage, we may herein observe, that as the issue that AMP expenses incurred by the assessee had been held by us as not being an international transaction, therefore, the other grounds on the basis of which the TP adjustment in respect of the said issue had been assailed before us would be rendered as merely academic in nature. Accordingly, the Grounds of appeal No. 2 to 23 are disposed off in terms of our aforesaid observations.

P a g e | 20 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) 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.

P a g e | 21 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) 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.

P a g e | 22 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) assessee. In the backdrop of the aforesaid facts, the TPO was of the view that as the employees of the assessee had travelled to foreign countries for providing services to the AEs, therefore, in case of a third party scenario the assessee would not have borne such expenses on behalf of its AEs. To sum up, the TPO was of the view that as the employees had travelled to foreign countries for providing services to the AEs, therefore, there was no justifiable reason for the assessee to have borne their travelling expenses. On the basis of the aforesaid observations the TPO had determined the ALP of the expenses reimbursed by the assessee to its AEs as nil and had made an adjustment in the hands of the assessee.

P a g e | 23 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) reimbursement of expenses to AEs were upheld by the A.O and added to the total income of the assessee.

P a g e | 24 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) invoices and backup documents pertaining to expenses of Rs. 98,38,005/- that were filed by the assessee in the course of the TP proceedings had not being considered either by the TPO or the DRP. We find that the assessee had also furnished an application dated 04.07.2019 with us, seeking admission of „additional evidence‟which comprises of the copies of the invoices along with the backup documents as regards the balance amount of expenses of Rs.3,07,24,971/- that were reimbursed by the assessee to its AEs. It was submitted by the ld. A.R, that the complete details i.e copies of invoices along with backup documentsevidencing the expenses aggregating to Rs. 4,78,82,596/- which having been incurred by the AEs on behalf of the assessee were thereafter reimbursed to them by the assessee on cost to cost basis are available on record, as under:

Particulars Ref. Amount in INR Submitted at the time of TP A 98,38,005 assessment proceedings before the learned TPO Submitted as additional B 73,19,620 evidences before the Hon‟ble DRP for which relief was granted Additional evidence submitted C 3,07,24,971 before your honours Total reimbursement of expenses 4,78,82,596 for F.Y. 2013-14

Accordingly, it was the claim of the ld. A.R that as the aforesaid expenses which were incurred by the AEs on behalf of the assessee purely on account of administrative conveniencewere thereafter reimbursed on cost to cost basis, therefore, no adjustment was warranted as regards the same.

P a g e | 25 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) expenses which incurred by them for an on behalf of the assessee purely on account of administrative convenience, then no adjustment would be warranted in respect of the same. We find that the DRP after perusing the copies of the invoices and samples supporting the reimbursement of expensesaggregating to Rs.73,19,620/- which were furnished by the assessee by way of „additional evidence‟, had observed, that as the payment of the said amount was towards reimbursement on cost to cost basis by the assessee of the expenses which the AEs had incurred on its behalf, involving no service element, therefore, no obligation was cast upon the assessee to demonstrate the benefit received by it against making of such payments. It was further observed by the DRP that even in a third party scenario the assessee would have paid these amounts to the person who would had incurred the said expenses on its behalf. Accordingly, in the backdrop of its aforesaid observations the DRP had concluded that to the extent the assessee was able to substantiate the cost to cost nature of the reimbursement of expenses aggregating to Rs.73,19,620/- (on the basis of documents which were filed in the course of the proceedings before it), it would be entitled to benefit to the said extent on production of the supporting details during the course of the remand proceedings before the TPO. We are of the considered view that the DRP while concluding as hereinabove had lost sight of the supporting documentary evidence i.e copies of invoices and samples supporting reimbursement of expenses aggregating to Rs.98,38,005/- that were filed by the assessee in the course of the proceedings before the TPO. Apart therefrom, we are of the considered view that as neither of the lower authorities had at any stage directed the assessee to place on record the complete supporting documentary evidence as regards the reimbursement of expenses of Rs.4,78,82,596/-,therefore, there is a justifiable reason for the

P a g e | 26 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) assessee for not submitting the supporting documentary evidence in respect of the balance reimbursement of expenses of Rs.3,07,24,971/- before them. Accordingly, in our considered view the „additional evidence‟ i.e the copies of invoices along with backup documents supporting reimbursement of expenses aggregating to Rs.3,07,24,971/- [Rs.4,78,82,596/- (-) Rs.98,38,005/- (-) Rs.73,19,620/-] that has been filed by the assessee before us, merits admission on our part. However, we also cannot remain oblivious of the fact that as the said „additional evidence‟ which as claimed by the assessee substantiates the cost to cost nature of reimbursement of expenses of Rs. 3,07,24,971/- to its AEs cannot be summarily accepted on the very face of it, and having been filed for the very first time,would thus require verification on the part of the revenue authorities. In the backdrop of our aforesaid observations, we are of the considered view that in all fairness the matter requires to be restored to the file of the TPO for verifying the veracity of the claim of the assessee that the remittance of Rs. 4,78,82,596/- made to its AEs was in the nature of cost to cost reimbursement of the expenses which the AEs had incurred purely on account of administrative convenience for and on behalf of the assessee.In case, the claim of the assessee is found to be in order, then no adjustment in respect of such reimbursement of expenses would be called for in the hands of the assessee. We thus restore the matter to the file of the TPO who shall re-adjudicate the same in terms of our aforesaid observations. Needless to say, the TPO shall in the course of the „set aside‟ proceedings afford a reasonable opportunity of being heard to the assessee. The Grounds of appeal Nos. 28 to 31 are allowed for statistical purposes in terms of our aforesaid observations.

P a g e | 27 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) assessee company from its AEs. The assessee has assailed the aforesaid TP adjustment on multiple grounds which shall be adverted to by us in a chronological manner. Briefly stated, the assessee company had during the year under consideration carried out the following international transactions with its AEs:

Sr. No. Nature of International Amount (in Rs.) Method Transactions adopted 1. Purchase of finished goods 411,27,23,732 TNMM for Resale 2. Purchase of capital assets 10,80,53,018 TNMM 3. Receipts of management fee 2,21,55,658 TNMM in respect of direct sales made by AEs in India 4. Provision of support services 1,11,11,242 TNMM to AEs 5. Reimbursement of expenses 4,78,82,596 Other Method 6. Recovery of expenses 13,27,62,769 Other Method Total 443,46,89,015 The assessee had in its „Transfer Pricing Study Report‟ (for short „TP study report‟) benchmarked the international transactions of import of goods from its AEs by adopting „Transaction Net Margin Method‟ (for short „TNMM‟) as the most appropriate method. The „Profit Level Indicator‟ (for short „PLI‟) adopted by the assessee was Operating profit to Operating revenue (OP/OR). The assessee had taken itself as the tested party. The assessee had in its TP study report identified 7 companies as comparables for benchmarking its international transactions. The arithmetic mean of the 7 comparables on the basis of three years adjusted weighted average margin was worked out by the assessee in its TP study report 0.82%. As the PLI of the assessee was worked out at 2.85%, therefore, it had claimed its international transactions of import of goods to be at arm‟s length. During the TP proceedings the TPO had directed the assessee to submit the PLI of the comparable companies after confining itself to their financials for

P a g e | 28 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) the year under consideration i.e F.Y. 2013-14 only. Accordingly, the assessee after considering the financials of its comparables for the year under consideration worked out its PLI at 2.35%, as herein below:

Sr. No. Name of the comparable company Adjusted Operating profit to operating revenue (%) 1. ADS Diagnostics Limited NC 2. Advanced Micronic Devices Limited NC (Segmental) 3. Ashco Niulab Industries Limited NA 4. Frontline Electro Medical Limited 0.79 5. Hicks Thermometers (India) Limited 1.89 6. Sataytej Comercial Company Limited 4.35 7. Confident Sales India Private Limited NA Arithmetic Mean 2.35 Assessee 2.85

It was observed by the TPO that the assessee in the course of the TP proceedings had rejected one of its comparable viz. M/s ADS Diagnostic Ltd. on the ground that its trading income was less than 75% of its total revenue i.e 73.50%. However, the TPO observing that the trading income of the said concern viz. M/s ADS Diagnostic Ltd. was 74.54% of the total revenue of its trading segment, therefore, included the same in the final list of comparables. Also, it was noticed by the TPO that the assessee had excluded another comparable viz. M/s Confident Sales Pvt. Ltd, for the reason, that the „annual report‟ of the said company for the year under consideration i.e financial year 2013-14 was not available in the public domain for the purpose of computing its margins. However, the TPO was of the view that as the PLI of the said company could be gathered from its „annual report‟ for the succeeding year viz. F.Y. 2014-15 which was available in the public domain, therefore, the said company could safely be includedin the final list of comparables. The TPO also did not find favour with the claim of the assessee that „foreign exchange gain‟ was to be treated as

P a g e | 29 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) „operating income‟ for the purpose of computing its margin. The TPO after including the aforesaid two companies which were excluded by the assessee in the course of the TP proceedings from the final list of comparables viz. (i) ADS Diagnostic Ltd. (segmental); and (ii) Confident Sales India Pvt. Ltd., therein, on the basis of the single year unadjusted margins worked out the ALP of the comparables at 9.90%, after considering the foreign exchange gain/loss as non-operating in nature. Accordingly, the TPO made an adjustment of Rs.49,60,24,206/- in relation to the international transactions of import of finished goods by the assessee from its AEs, as under:

Sr. No. Particulars Reference Amount (INR0 1. Operating Income A 6,93,77,49,101 2. Operating cost B 6,74,69,36,146 3. Arm‟s length mean C 9.90% margin 4. Arm‟s length price D=B*(1-C) 6,25,09,11,940 5. Adjustment E=B-C 49,60,24,206

P a g e | 30 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) in nature, the same was rejected by the DRP. Similarly, the DRP upheld the view taken by the TPO and declined the claim of working capital adjustment that was raised by the assessee.

P a g e | 31 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. As per the exception carved out in the proviso to Rule 10B(4), the data relating to a period not more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of the transfer prices in relation to the transactions being compared. As is discernible from the records, the assessee in the case before us had failed to establish as to how the financial data for the earlier two years of its comparables, which had been used by it for carrying out the transfer pricing analysis had in any way influenced the determination of the transfer prices in relation to the transactions of import of goods by the assessee from its AEs during the year under consideration. Our aforesaid observations are fortified by the judgment of the Hon‟ble High Court of Bombay in the case of PTC Software (I) Pvt. Ltd., (2016) 75 taxmann.com 31 (Bom). Accordingly, finding no infirmity in the order of the DRP which had rightly concurred with the TPO as regards rejection of the multiple year data used by the assessee for computing the ALP of its transactions of import of goods from the AEs, we uphold the same. The Ground of appeal No. 34 is dismissed.

P a g e | 32 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) assessee and the foreign exchange gain/loss. Apart there from, the DRP was of the view that the margins of two companies entering into similar transaction may also vary substantially depending upon the level of hedging of their foreign exchange transactions. Also, the DRP was of the view that as per the safe harbour rules the foreign currency fluctuations were to be excluded from the operating revenue/expenses.

P a g e | 33 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) i. Rampgreen Solutions Pvt. Ltd. Vs. PCIT (ITA No.340/2016) – Hon‟ble Delhi High Court ii. Vaildor Capital India Pvt. Ltd. Vs. ITO (ITA No. 1961/Del/2015) iii. M/s S. Narendra Vs. Addl CIT (ITA No. 6839/Mum2012); iv. M/s Sumit Diamond (India) Pvt. Ltd. Vs. Addl. CIT [ ITA No.7148/Mum/2012]; v. SAP LABS India (P) Ltd. Vs. ACIT (IT APPEAL NOS. 398 AND 418 (BANG.) OF 2008) vi. M/s Westfalia Separator India Pvt. Ltd. Vs. ACIT [ITA No.4446/Del/2007]; vii. M/s Cisco Systems Services B.E. India Branch Vs. ADIT [ITA (TP) No. 270/Bang/2014]; viii. M/s Kenexa Technologies Pvt. Ltd. Vs. Dy. CIT [ITA No. 243/HYD/2014]; ix. M/s Bearing Point Business Consulting Pvt. Ltd. Vs. DCIT [ITA No. 1124/Bang/2011]; x. M/s Trilogy E-Business Software India Pvt. Ltd. Vs. DCIT [ITA No. 1054/Bang/2011]; xi. M/s Brigade Global Services Pvt. ltd. Vs. ITO [ITA No. 1494/Hyd/2010]; and xii. M/s Capital IQ Information Systems (India) Pvt. Ltd. Vs. DCIT [ITA No. 1961/Hyd/2011].

We thus on the basis of our aforesaid deliberations are of the considered view that the TPO/DRP had erred in concluding that the foreign exchange gain was to be treated as non-operating in nature while computing the margins of the assessee for the year under consideration. Accordingly, the TPO is directed to consider the foreign exchangegain/loss as operating in nature while computing the margin of the assessee for the year under consideration. The Ground of appeal No. 35 is allowed.

P a g e | 34 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) for financial year 2014-15, for determining the PLI of the said comparable for the year under consideration i.e financial year 2013- 14, we are unable to accept the claim of the assessee that the lower authorities had erred in adopting the said approach. As observed by the lower authorities, as sufficient data for financial year 2013-14 was available in the „annual report‟ of the assessee for financial year 2014- 15, therefore, in our considered view the said company on account of of availability of the relevant data was rightly selected as a comparable by the TPO/DRP. We thus in terms of our aforesaid observations uphold the view taken by the DRP as regards the inclusion/exclusion of the aforementioned two companies from the final list of comparables of the purpose of computing the ALP of the international transactions of import of goods by the assessee during the year under consideration. The Grounds of appeal Nos. 36 & 37 are disposed off in terms of our aforesaid observations.

P a g e | 35 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) 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.

P a g e | 36 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) 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.

P a g e | 37 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) occasion for considering the said expenses as a part of the operating cost while determining the margins of the assessee. We have given a thoughtful consideration to the issue before us. As can be gathered from our observations recorded at Para 17 hereinabove, the adjustment made by the TPO as regards the reimbursement of expenses by the assessee to its AEs had been restored by us to his file for fresh adjudication. Accordingly, the TPO is directed to consider only those expenses as a part of the operating cost, which are accepted by himin the „set aside‟ proceedings as reimbursement of expenses on cost to cost basis by the assessee to its AEs, which were incurred by the AEs for and on behalf of the asssessee.Accordingly, the aforesaid issue is „set aside‟ to the file of the TPO for fresh adjudication in terms of our aforesaid observations. The Ground of appeal No. 40is allowed for statistical purposes in terms of our aforesaid observations.

P a g e | 38 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) 30. We shall now advert to the claim of the assessee that the lower authorities had erred in disallowing depreciation on building of Rs.75,886/-.The assessee which was earlier engaged in the business of manufacturing and trading had discontinued with its manufacturing processes w.e.f 25.01.2002. The claim of depreciation raised by the assessee on building was declined by the A.O on the ground that the said asset was not utilised during the year. The A.O while disallowing the assesses claim for depreciation had relied on the orders passed by his predecessor in the earlier years i.e A.Y. 2006-07 to A.Y. 2012-13 and the directions of the DRP for A.Y. 2006-07 wherein the aforesaid disallowance was confirmed. We find that the aforesaid action of the A.O for the year under consideration had been upheld by the DRP.It is the claim of the Ld. A.R that an asset forming part of the „block of assets‟looses its individual identity and becomes an inseparable part of the „block of assets‟ for the purpose of its eligibility for depreciation on the same. Accordingly, it is the claim of the ld. A.R that once the asset had entered into the „block of asset‟ and the same had been accepted by the A.O, then in the subsequent years thoughthesaid asset forming part of the block may not be used for the purpose of the business, however, the claim of consequential depreciation in respect of the said „block of asset‟ cannot be disturbed and has to be accepted. On the basis of his aforesaid contention, it is averred by the ld. A.R. that the A.O had erred in disallowing its claim for depreciation on building.

P a g e | 39 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) asset‟ could not be disturbed, despite the fact that some of the assets forming part of such „block of asset‟ were no more used for the purpose of business. Our aforesaid view is fortified by the judgments of the Hon‟ble High Court of Bombay in the case viz. (i). CIT Vs. Sonic Biochem Extractions Pvt. ltd. (2015) 94 CCH 99 (Bom); and (ii) CIT Vs. G.R. Shipping Ltd. [ITA No. 598 of 2009; dated 28.07.2009] (Bom). In the aforesaid decisions, it was observed by the Hon‟ble High Court that depreciation would be allowable even in case of sale/distribution of the asset, as long as the „block of asset‟ remains in existence. In sum and substance, it was observed by the Hon‟ble High Court that the test of “user” has to be applied on the „block of assets‟ as a whole and not on the individual assets. In fact, the aforesaid view was taken by the Hon‟ble Jurisdictional High Court by following its earlier view taken in viz. (i). White Anderson Vs. CIT (1971)79 ITR 613(Bom); and (ii). CIT Vs. G.N Agrawal (1996) 217 ITR 250(Bom). Accordingly, we are of the considered view, that pursuant to the introduction of the depreciation on the written down value of the „block of asset‟ by the Taxation Laws (amendment and miscellaneous provision) Act, 1986 w.e.f 01.04.1988, depreciation is allowable on the WDV on the „block of assets‟ and not on the individual items of the assets included in such block. In fact, we find that the Tribunal had consistently in the case of the assessee for the preceding years viz.(i) A.Y. 2003-04 (ITA No. 1245/Ahd-2008); (ii) A.Y. 2004-05 (ITA No. 812/Ahd-2008); (iii) A.Y. 2008-09 (ITA No. 7555/Mum-2012); (iv) A.Y. 2009-10 (ITA No. 2167/Mum/2014); (v) A.Y. 2010-11 (ITA No. 1600/Mum/2015; (vi) A.Y. 2011-12 (ITA No. 1246/Mum/2016); and (vii) A.Y. 2013,had directed the A.O to allow depreciation on plant and machinery and building as claimed by the assessee. We thus respectfully following the view taken by the Hon‟ble High Court of jurisdiction in respect of the issue under consideration,

P a g e | 40 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) and also the orders of the Tribunal in the assesses own case for the aforementioned years delete the disallowance of depreciation on building of Rs.75,886/-. The Ground of appeal No. 42 is allowed.

P a g e | 41 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) under Sec. 37 of the Act for the purpose of working out the income of the assessee. The DRP did not find any infirmity in the view taken by the A.O and upheld the disallowance of the convention expenses of Rs.36,34,64,058/- that was made by him under Sec. 37 of the Act. It is the claim of the ld. A.R, that the issue as regards the allowability of the convention expenses had been decided in favour of the assessee in its own case for A.Y. 2010-11 in ITA No. 1600/Mum/2015, dated 17.01.2018. It is averred by the ld. A.R that the Tribunal after relying on the decision of the Hon‟ble High Court of Delhi in the case of MAX Hospital., Pitampura Vs. Medical Council of India [CWP No. 1334/2013, dated 10.01.2014] and the order of the ITAT, Mumbai, in the case of PHL Pharma (163 ITD 10) (Mum), had concluded viz. (i) that, the MCI guidelines are applicable only to the professionals i.e the doctors and do not govern the other tax entities or individuals other than the doctors; and (ii) that, as MCI only regulates the professional conduct of its members i.e doctors, therefore, any guidelines issued by it would have no bearing as regards the allowability or otherwise of an expenditure claimed by the assessee under the I.T Act. It was further submitted by the Ld. A.R that the aforesaid view was again reiterated by the Tribunal in the assesses own case for A.Y 2011-12 (ITA No. 1246/Mum/2016), dated 02.05.2018; A.Y 2012-13 (IT (TP) A No. 216/Mum/2017, dated 27.05.2019; and A.Y 2013-14 (ITA No. 601/Mum/2018).

P a g e | 42 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) the issue as regards the allowability of the „convention expenses‟ is squarely covered by the orders of the Tribunal in the assesses own case for the aforementioned preceding years. Apart there from, we find that the issue that the case of the assessee before us would not be hit by the „Explanation 1‟ to Sec. 37 of the I.T. Act, can also safely be gathered from the order of a coordinate bench of the Tribunal i.e ITAT “A” Bench, Mumbai in the case of Aristo Pharmaceuticals Pvt. Ltd. Vs. ACIT (ITA No. 6680/Mum/2012, dated 26.07.2018). The Tribunal after exhaustive deliberations in the aforesaid case, had observed, that a perusal of the provisions of the Indian Medical Council Act, 1956 reveals that the scope and ambit of the statutory provisions relating to professional misconduct of registered medical practitioners under the Indian Medical Council Act, 1956, is restricted only to the persons registered as medical practitioners with the State Medical Council and whose name is entered in the Indian Medical Register maintained under Sec. 21 of the said Act. Further, it was observed that the scheme of the Indian Medical Council Act, 1956 neither deals with nor provides for any conduct of any association/society and deals only with the conduct of individuals registered medical practitioners and not the pharmaceutical companies or allied health sector industries. Apart there from, the Tribunal in its said order had also drawn support from the order of the Hon‟ble High Court of Delhi in the case of MAX Hospital., Pitampura Vs. Medical Council of India [CWP No. 1334/2013, dated 10.01.2014]. In the aforesaid case the Medical Council of India had filed an „Affidavit‟ before the High Court, wherein it was deposed by the council that its jurisdiction was limited only to take action against the registered medical professionals under the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, and it has no jurisdiction to pass an order affecting the

P a g e | 43 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) rights/interest of the petitioner hospital. In the backdrop of its exhaustive deliberations, the Tribunal had concluded that even if the assessee had incurred expenditure on distribution of „freebies‟ to doctors and medical practitioners, the same though may not be in conformity with the Indian Medical Council (Professional Conduct, Etiquette and Ethics) regulations, 2002, however, as the same only regulates the code of conduct of the medical practitioners/doctors, therefore, in the absence of any prohibition on the pharmaceutical companies in incurring of such sales promotion expenses, it cannot be held to have incurred an expenditure for a purpose which is an offence or is prohibited by law. The Tribunal while concluding as hereinabove, had observed as under:

“20. We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record. We find that our indulgence in the cross appeals filed by the assessee and the revenue has been sought for adjudicating the allowability of the sales promotion expenses incurred by the assessee on the distribution of articles to the stockists, distributors, dealers, customers and doctors, in the backdrop of the CBDT Circular No. 5/2012, dated 01.08.2012 and the MCI regulations. We find that it is the case of the revenue that as per the CBDT Circular No. 5/2012, dated 01.08.2012 any expense incurred by a pharmaceutical or allied health sector industry in providing any “freebies” to medical practitioners or their professional associations in violation of the regulation issued by Medical Council of India which is a regulatory body constituted under the Medical Council Act, 1956, would be liable to be disallowed in the hands of such pharmaceutical or allied health sector industry or any other assessee which had provided such “freebies” and claimed the same as a deductible expense against its income in the accounts. 21. We have deliberated at length on the issue under consideration and after perusing the regulations issued by the Medical Council of India, find that the same lays down the code of conduct in respect of the doctors and other medical professionals registered with it, and are not applicable to the pharmaceuticals or allied health sector industries. Rather, a perusal of the provisions of the Indian Medical Council Act, 1956, reveals that the scope and ambit of statutory provisions relating to professional conduct of registered medical practitioners under the Indian Medical Council Act, 1956 is restricted only to the persons registered as medical practitioners with the State Medical Council and whose name are entered in the Indian Medical Register maintained under Sec. 21 of the said Act. We are of the considered view that the scheme of the Indian Medical Council Act, 1956 neither deals with nor provides for any conduct of any association/society and deals only with the conduct of individual registered medical practitioners. In the backdrop of the aforesaid facts, it emerges that the applicability of the MCI regulations would only cover individual medical practitioners and not the pharmaceutical companies or allied health sector industries. Interestingly, the scope of the applicability of the MCI regulations was looked into by the Hon‟ble High Court of Delhi in the case of Max Hospital, Pitampura Vs. Medical Council of India (CWP No. 1334/2013, dated

P a g e | 44 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1)

10.01.2014). In the aforementioned case the MCI had filed an „Affidavit‟ before the High Court, wherein it was deposed by the council that its jurisdiction is limited only to take action against the registered medical professionals under the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, and it has no jurisdiction to pass any order affecting the rights/interest of the petitioner hospital. We are of the considered view that on the basis of the aforesaid deposition of MCI that its jurisdiction stands restricted to the registered medical professionals, it can safely be concluded that the MCI regulations would in no way impinge on the functioning of the assessee company which is engaged in the business of manufacturing and sale of pharmaceutical and allied products. We thus, in the backdrop of our aforesaid deliberations are of the considered view that the code of conduct enshrined in the MCI regulations are solely meant to be followed and adhered by medical practitioners/doctors, and such a regulation or code of conduct would not cover the pharmaceutical company or healthcare sector in any manner. We are further of the view that in the backdrop of our aforesaid observations, as the Medical Council of India does not have any jurisdiction under law to pass any order or regulation against any hospital, pharmaceutical company or any healthcare sector, then any such regulation issued by it cannot have any prohibitory effect on the manner in which the pharmaceutical company like the assessee conducts its business. On the basis of our aforesaid observations, we are unable to comprehend that now when the MCI has no jurisdiction upon the pharmaceutical companies, then where could there be an occasion for concluding that the assessee company had violated any regulation issued by MCI. We thus, in terms of our aforesaid observations are of the considered view that even if the assessee had incurred expenditure on distribution of “freebies” to doctors and medical practitioners, the same though may not be in conformity with the Indian Medical Council (Professional Conduct, Etiquette and Ethics) regulations, 2002 (as amended on 10.12.2009), however, as the same only regulates the code of conduct of the medical practitioners/doctors, therefore, in the absence of any prohibition on the pharmaceutical companies in incurring of such sales promotion expenses, the latter cannot be held to have incurred an expenditure for a purpose which is an offence or is prohibited by law. In this regard we are reminded of the maxim “Expressio Unius Est Exclusio Alterius”, which provides that if a particular expression in the statute is expressly stated for a particular class of assessee, then by implication what has not been stated or expressed in the statute has to be excluded for other class of assesses. Thus, now when the MCI regulations are applicable to medical practitioners registered with the MCI, then the same cannot be made applicable to pharmaceutical companies or other allied healthcare companies. 22. We shall now advert to the CBDT Circular No. 5/2012, dated 01.08.2012. We find that the aforesaid CBDT Circular reads as under:- “Inadmissibility of expenses incurred in providing freebees to medical practitioner by pharmaceutical and allied health sector industry Circular No. 5/2012 [F.No. 225/142/2012-ITA.II], dated 1-8-2012 It has been brought to the notice of the Board that some pharmaceutical and allied health sector Industries are providing freebies (freebies) to medical practitioner and their professional associations in violation of the regulations issued by Medical Council of India (the „Council‟) which is a regulatory body constituted under the Medical Council Act, 1956 2. The council in exercise of its statutory powers amended the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (the regulations) on 10-12-2009 imposing a prohibition on the medical practitioner and their professional associations from taking any Gift, Travel facility, Hospitality, Cash or monetary grant from the pharmaceutical and allied health sector Industries.

P a g e | 45 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1)

We may herein observe that a perusal of the aforesaid CBDT Circular reveals that the “freebies” provided by the pharmaceutical companies or allied health sector industries to medical practitioners or their professional associations in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) regulations, 2002 shall be inadmissible under Sec. 37(1) of the Income Tax Act, 1961, as the same would be an expense prohibited by the law. We are of the considered view that as observed by us hereinabove, the code of conduct enshrined in the notifications issued by MCI though is to be strictly followed and adhered by medical practitioners/doctors registered with the MCI, however the same cannot impinge on the conduct of the pharmaceutical companies or other healthcare sector in any manner. We find that nothing has brought on record which could persuade us to conclude that the regulations or notifications issued by MCI would as per the law also be binding on the pharmaceutical companies or other allied healthcare sector. Rather, the concession made by the MCI before the Hon‟ble High Court of Delhi in the case of Max Hospital Vs. MCI (CWP No. 1334/2013, dated 10.01.2014) fortifies our aforesaid view that MCI has no jurisdiction to pass any order or regulation against any hospital, pharmaceutical company or any healthcare sector. We further find that MCI had by adding Para 6.8.1 to its earlier notification issued as “Indian Medical Council Professional (Conduct, Etiquette and Ethics) Regulations, 2002” had even provided for action which shall be taken against medical practitioners in case they contravene the prohibitions placed on them. We find from a perusal of Para 6.8.1 that in case of receiving of any gift from any pharmaceutical or allied health care industry and their sales people or representatives, action stands restricted to the members who are registered with the MCI. In other words the censure/action as had been suggested on the violation of the code of conduct is only for the medical practitioners and not for the pharmaceutical companies or allied health sector industries. We are thus of the considered view that the regulations issued by MCI are qua the doctors/medical practitioners registered with MCI, and the same shall in no way impinge upon the conduct of the pharmaceutical companies. As a logical corollary to it, if there is any violation or prohibition as per MCI regulation in terms of Explanation to Sec. 37(1),

P a g e | 46 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) then the same would debar the doctors or the registered medical practitioners and not the pharmaceutical companies and the allied healthcare sector for claiming the same as an expenditure.” 35. We are further of the considered view that even otherwise the enlargement of the scope of MCI regulations to the case of the assessee before us i.e a trader in medical equipments, is de hors any enabling provision either under the Income Tax Act or under the Indian Medical Council Regulations. In our considered view, though the CBDT can tone down the rigours of law in order to ensure a fair enforcement of the provisions by issuing circulars for clarifying the statutory provisions, however, it is divested of its powers to create a new impairment adverse to an assessee or to a class of assesses without any sanction or authority of law. We find that the aspect that the CBDT is divested of it powers to enlarge the scope of MCI regulation without any enabling provision either under the Income tax Act or the Indian Medical Regulations was also deliberated upon by the Tribunal in the case of Aristo Pharmaceuticals Pvt. ltd. Vs. ACIT (ITA No. 6680/Mum/2012, dated 26.07.2018), wherein in context of the issue under consideration it was observed as under :

“23. We find that the CBDT as per its Circular No. 5/2012, dated 01.08.2012 had enlarged the scope and applicability of Indian Medical Council Regulation, 2002, by making the same applicable even to the pharmaceutical companies or allied healthcare sector industries. We are of the considered view that such an enlargement of the scope of MCI regulation to the pharmaceutical companies by the CBDT is without any enabling provision either under the Income Tax Act or under the Indian Medical Council Regulations. We are of a strong conviction that the CBDT cannot provide casus omissus to a statute or notification or any regulation which has not been expressly provided therein. Still further, though the CBDT can tone down the rigours of law in order to ensure a fair enforcement of the provisions by issuing circulars for clarifying the statutory provisions, however, it is divested of its power to create a new impairment adverse to an assessee or to a class of assessee without any sanction or authority of law. We are of the considered view that the circulars which are issued by the CBDT must confirm to the tax laws and though are meant for the purpose of giving administrative relief or for clarifying the provisions of law, but the same cannot impose a burden on the assessee, leave alone creating a new burden by enlarging the scope of a regulation issued under a different act so as to impose any kind of hardship or liability on the assessee. We thus, are unable to persuade ourselves to subscribe to the rigours contemplated in the CBDT Circular No. 5/2012, dated 01.08.2012, which we would not hesitate to observe, despite absence of anything provided by the MCI in its regulations issued under the Medical Council Act, 1956, contemplating that the regulation of code of conduct would also cover the pharmaceutical companies and healthcare sector,

P a g e | 47 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) however provides that in case a pharmaceutical or allied health sector industry incurs any expenditure in providing any gift, travel facility, cash, monetary grant or similar freebies to medical practitioners or their professional associations in violation of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, the expenditure incurred on the same shall be disallowed in the hands of such pharmaceutical or allied health sector industry. We are of the considered view that the burden imposed by the CBDT vide its aforesaid Circular No. 5/2012, dated 01.08.2012 on the pharmaceutical or allied health sector industries, despite absence of any enabling provision under the Income Tax law or under the Indian Medical Council Regulations, clearly impinges on the conduct of the pharmaceutical and allied health sector industries in carrying out its business. We thus, in the absence of any sanction or authority of law on the basis of which it could safely be concluded that the expenditure incurred by the assessee company on sales promotion expenses by way of distribution of articles to the stockists, distributors, dealers, customers and doctors, is in the nature of an expenditure which had been incurred for any purpose which is either an offence or prohibited by law, thus conclude that the same would not be hit by the Explanation to Sec. 37(1) of the Act.” Apart there from, we find that the Tribunal in the assessee own case for A.Y. 2011-12 (ITA No. 1246/Mum/2016, dated 02.05.2018); A.Y. 2012-13 (ITA No. 2160/Mum/2017, dated 27.05.2019); and A.Y. 2013-14 (ITA No. 601/Mum/2016, dated 08.05.2019), had deleted a similar disallowance that was made by the A.O in respect of payments made to the doctors in the said respective years. Accordingly, finding ourselves to be in agreement with the view taken by the Tribunal in the assesses own case for the aforementioned preceding years and also our observations recorded hereinabove, we delete the disallowance of Rs.36,34,64,058/- made by the A.O in respect of the convention expenses. The Grounds of appeal Nos. 43 to 60 are allowed in terms of our aforesaid observations.

P a g e | 48 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) terminated vide agreement dated 31.07.2001 on account of certain financial constraints that were faced by MDL in investing the required resources to expand its business as per the requirements of the assessee. Accordingly, a non-compete agreement dated 01.01.2002 was entered into by the assessee with the three directors of MDL viz. Shri. A. Damodharan, Shri. M. Swaminathan & Shri. Sandip Dave, who were retained as the consultants by the assessee for a period of 3 years,subject toa condition that they would not engage in any competing activities. In terms of the said non-compete agreement, the assessee had paid a sum of USD 1 million i.e equivalent to an amount of Rs.4,73,00,000/- to the directors of MDL which was to be distributed equally amongst them. The assessee had claimed the aforesaid amount of non-compete fees as a revenue expense under Sec.37(1) of the Act in its return of income for A.Y. 2002-03. However, the A.O declined to allow the same as an expense under Sec. 37(1) of the Act, on the grounf that there was no justifiable reason for incurring the said expenditure. Alternatively, the A.O concluded that the aforesaid amount was to be considered as a „capital expenditure‟. On appeal, the Tribunal vide its order passed in ITA No. 811/Ahd/2008, dated 25.10.2016 in the assesses own case for A.Y. 2002-03 had concurred with the view taken by the A.O that the non- compete fee incurred by the assessee was a „capital expenditure‟, which being in the nature of any other business or commercial right would be eligible for depreciation under the provisions of the Act. It is the claim of the assessee that in the years subsequent to A.Y. 2002- 03, the Tribunal while disposing off the appeal of the assessee for A.Y. 2003-04 (ITA No. 1245/Ahd/2008), A.Y. 2004-05 (ITA No. 812/Ahd/2008), A.Y. 2008-09 (ITA No. 7555/Mum/2012), A.Y. 2011- 12 (ITA No. 1246/Mum/2016 ) and A.Y. 2013-14 (ITA No. 3461/Mum/2018) had accepted the aforesaid claim of the assessee

P a g e | 49 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) and had directed the A.O to allow the consequential depreciation to the assessee. Accordingly, it is the claim of the assessee before us that the issue as regards allowability of depreciation on non-compete fees is squarely covered in favour of the assessee by the orders of the Tribunal in the aforementioned preceding years.

P a g e | 50 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) the claim of the assessee is found to be in order then the credit for the deficit amount of TDS be allowed to the assessee. The Ground of appeal No. 62 is allowed for statistical purposes.

Order pronounced in the open court on 13.09.2019

Sd/- Sd/- (M.Balaganesh) (Ravish Sood) ACCOUNTANT MEMBER JUDICIAL MEMBER भ ुंफई Mumbai; ददन ुंक 13.09.2019 PS. Rohit

P a g e | 51 ITA No.7263/Mum/2018 AY. 2014-15 India Medtronics Pvt. Ltd. Vs. Deputy Commissioner of income-tax-10(1)(1) आदेशकीप्रतिलऱपिअग्रेपिि/Copy of the Order forwarded to : अऩीर थी/ The Appellant 1. प्रत्मथी/ The Respondent. 2. आमकयआम क्त(अऩीर) / The CIT(A)- 3. आमकयआम क्त/ CIT 4. 5. विब गीमप्रतततनधध, आमकयअऩीरीमअधधकयण, भ ुंफई/ DR, ITAT, Mumbai ग र्डप ईर / Guard file. 6. सत्म वऩतप्रतत //True Copy// आदेशानुसार/ BY ORDER, उि/सहायकिंजीकार (Dy./Asstt. Registrar) आयकरअिीऱीयअधिकरण, भ ुंफई / ITAT, Mumbai