SYNTHES MEDICAL PRIVATE LIMITED (NOW MERGED WITH JOHNSON & JOHNSON PRIVATE LIMITED,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX - LTU-1, , MUMBAI

Per Manoj Kumar Aggarwal (Accountant Member):-

. Since common issues are involved, we dispose-off the appeals by way of this common order for the sake of convenience and brevity. IT(TP)A No.2287/Mum/2017 (2012-13):

2. This appeal contest final assessment order dated 27/01/2017 passed by Ld. Ld. Assistant Commissioner of Income Tax-LTU-1 Mumbai [AO] u/s. 143(3) r.w.s.144C (13) pursuant to directions of Ld. Dispute Resolution Panel-I, Mumbai (DRP) u/s. 144C (5) dated 13/12/2016. The income of the assessee has been determined at Rs.2320.41 Lacs after certain additions, disallowances & TP adjustments as against returned income of Rs.190.29 Lacs e-filed by the assessee on 28/11/2011.

3. The Ld. Authorised Representative for the assessee [AR], Shri M.P.Lohia, at the outset, submitted that all the issues under appeal are covered by the earlier orders of the Tribunal in assessee’s own case which is evident from the fact that early hearing was granted to the assessee vide order sheet entry dated 27/07/2018. The said facts were confronted to Ld. CIT-DR who could not rebut the same. The details for Tribunal’s order, for ease of reference, could be tabulated in the following manner: -

No. Dated AYs 1. ITA Nos.6005,6006,5807/Del/2013 31/03/2017 2007-08 & 2008-09 2. ITA Nos. 1855, 979/Del/2014 16/06/2017 2009-10 3. ITA Nos. 1784,1857/Del/2016 13/04/2018 2011-12 In the above background, our ground wise adjudication is as follows. 4.1 Ground No.1 is general in nature. Ground No.1.1 and 1.2 read as under: - Part I-Corporate Tax Adjustments On the facts and in the circumstances of the case and in law the learned AO on fact and in law has: Disallowance of amortised expense of loaner set amounting to Rs 8,15,92,059/- 1.1. erred in disallowing the amortised expense of loaner set (deferred write off of cost of equipment and instruments given on returnable basis) amounting to Rs.8,15,92,059/- treating the same to be capital in nature and allowing only depreciation on the same; 1.2. erred in disregarding the principle of consistency, more particularly since identical claim of deduction had been allowed from assessment years 2002-03 to 2006-07 in assessments framed u/s 143(3) of the Act.”

During assessment proceedings it transpired that the assessee loaned certain medical instruments, equipment which were needed for surgical fixation, correction and regeneration of human skeleton. These were supplied to hospitals / doctors on returnable basis. It was submitted that it was necessary to provide such equipment on loan basis to facilitate sale of the assessee’s products. The useful life was estimated to be 3 years and accordingly, the expenditure was amortized over a period of 3 years. It was submitted that separate accounts for such inventory was maintained since 1993 and consistent accounting methodology was being followed by the assessee, in this regard. During impugned AY, the assessee claimed proportionate deduction u/s 37(1). However, Ld. AO rejecting the accounting methodology adopted by the assessee, disallowed amortization of Rs.15.27 Crores as claimed by the assessee u/s 37(1). Consequentially, treating the same as capital expenditure, depreciation of Rs.7.11 Crores was allowed and net addition of Rs.8.15 Crores was worked out and added to the income of the assessee. The Ld. DRP, following directions in AYs 2007-08 to 2011-12, upheld the same. 4.2 We find that this issue is covered by the cited order of Tribunal for AYs 2007-08 & 2008-09, wherein the matter has been concluded in the following manner: - 4.3.5 In such circumstances, we are of considered opinion that the amount of Rs.50,33,418/- treating loaner sets expenditure as capital expenditure was not in accordance with law and therefore, directed to be deleted. Thus, the grounds No.1 and 2 of the appeal are accordingly allowed.”

This decision has been followed by the Tribunal in AYs 2009-10 & 2011-12. Since nothing on record suggest any change in material facts or circumstances, respectfully following the consistent view of Tribunal, we delete the impugned additions of Rs.8.15 Crores. The Ld. AO is directed to recompute the same in terms of our above directions. The grounds of appeal stand allowed. 5.1 The next Ground reads as under: - “Disallowance of 50% of advertisement and sales promotion expenses amounting to Rs.9,08,930/- 1.3 erred in disallowing 1/2 of the advertisement and sales promotion expenses incurred for the purpose of business amounting to Rs 9,08,930/- by holding that such expense are enduring in nature and in nature of deferred revenue expenditure; and 1.4 Without prejudice to the above, erred in not allowing amount disallowed in the earlier year.”

On perusal of Profit & Loss Account, it transpired that assessee debited advertisement and sales promotion expenditure for Rs.18.17 Lacs. The Ld. opined that the same were incurred to enhance the profitability. Therefore, 50% of this expenditure i.e. Rs.9.08 Lacs was deferred to subsequent year. The Ld. DRP, following directions in AYs 2008-09 to 2011-12, upheld the same. 5.2 We find that this issue is covered by the cited order of Tribunal for AYs 2007-08 & 2008-09, wherein the matter has been concluded in the following manner: - 5.3 Having considered the rival submissions and perused the relevant material on record, we are of the opinion that no basis whatsoever has been stated by the authorities to restrict the expenditure to 50% of the claim or 1/5th of the claim. The reliance placed by the Assessing Officer on the judgment of the Madras Industrial Investment Corporation Limited Vs. CIT (supra) is misconceived, misplaced and contrary to the judgment of the Hon'ble Apex Court in the case of the Taparia Tools

Limited Vs. JCIT (supra), wherein it is laid down that there is no concept of deferred revenue expenditure and is only at the instance of the assessee, a revenue expenditure can be spread or under the principle of matching concept and not otherwise. The Ld. CIT-A has observed that in respect of expenditure of key chains amounting to Rs.96,546/- to distributors and amounting to Rs.3,23,560/- to Doctors, the assessee did not establish that same was incurred wholly and exclusively for the purpose business. We observed that the assessee vide reply dated 12/08/2013 had submitted before the Ld. CIT-A that such expenditure was incurred for business of the company amongst various doctors and health workers who attended seminars. It was also stated that turnover of the assessee company has increased from Rs.31.86 crores to Rs.42.04 crores. We find that neither the Assessing Officer nor the Ld. CIT-A has disputed the genuineness of the expenditure. In such circumstances, once the genuineness of the expenditure is not in dispute, the commercial expediency cannot be rejected on the ground of suspicion. No material was led by the revenue to allege that the expenditure incurred in the course of business is not an eligible expenditure. We accept the contention of the Ld. counsel that it is not possible to get receipt of keychains either from the doctors or distributors distributed for the purpose of development of the business of the assessee. The entire action of the authorities below is based on suspicion and therefore found untenable. Accordingly, the disallowance made on this account is deleted and the ground No. 3 of the appeal is allowed.”

This decision has been followed by Tribunal in subsequent AYs 2009-10 & 2011-12. Facts and circumstances being pari-materia the same, respectfully following the consistent view of the Tribunal, we delete the impugned additions of Rs.9.08 Lacs. Ground No. 1.3 stands allowed whereas ground no. 1.4 becomes infructuous. 6.1 The next issue that fall for our consideration is as under: - Disallowance of 4/5th of the recruitment and training expenses amounting to Rs. 44,76,295 “1.5 erred in disallowing 4/5lh of the recruitment and training expenditure amounting to Rs 44,76,295 by holding that such expenditure are enduring in nature and in the nature of deferred revenue expenditure to be amortized over a period of 5 years.”

The assessee incurred an expenditure of Rs.55.95 Lacs towards staff recruitment and training. The Ld. AO treating the same as enduring benefit, allowed only 1/5th of the same and disallowed the balance expenditure to be appropriated in the next 4 years. The Ld. DRP, following directions in AYs 2008-09 to 2011-12, upheld the same. 6.2 We find that this issue is covered by the order of Tribunal for AY 2008- 09, wherein the matter has been concluded in the following manner: - 16.2 The Ld. CIT-A has clearly held that no asset was created by incurring expenditure on recruitment and training and, therefore, there was no reason for treating this expenditure as capital expenditure. The finding of the Assessing Officer has not been found by the Ld. CIT-A in accordance with accounting principles. He also found the disallowance made by the Assessing Officer against the principle of consistency. In view of above, in our opinion, the order of the Ld. CIT-A on the issue in dispute is well reasoned and we find no justification to interfere with the aforesaid finding of the Ld. CIT-A, and accordingly the ground no. 2 of the appeal of the Revenue is dismissed.

The said decision has been followed by Tribunal in AYs 2009-10 & 2011- 12. Facts and circumstances being the same, respectfully following the earlier orders of Tribunal, we hold that the assessee was entitled to claim the said expenditure of Rs.55.95 Lacs in full during impugned AY. This ground stands allowed. 7.1 The next ground reads as under: - Disallowance of conference expense amounting to Rs 5,32,72,615 1.6 erred in disallowing the conference expenses amounting to Rs 5,32,72,615 alleging that such expenses are in the nature of sales commission to the doctors and taxes should have been deducted thereon, and also alleging that the said expenses are not permitted by law; 1.7 erred in disallowing expenses aggregating to Rs 5,32,72,615 by invoking Explanation 1 to section 37(1) of the Act. 1.8 erred in not appreciating the fact that the code of conduct laid down in the Indian Medical Council under Professional conduct etiquette & ethics regulation 2002 issued with effect from 10 December 2009 applies only to medical practitioners. 1.9 erred in holding that these expenses are disallowable in view of Circular no. 05/2012 dated 1 August 2012 issued by Central Board of Direct Taxes read with the amendments made by the MCI Regulations. It transpired that during the course of its business, the assessee incurred a sum of Rs.532.72 Lacs towards convention, education support, OPR course and symposium expenses in the nature of seminar and conference for sponsoring doctors and health care workers. These expenditures, in the opinion of Ld. AO, were against the guidelines issued by Medical Council and not in line with the professional ethics of the Doctors and therefore, not allowable. Another factor which led to the disallowance was that Ld. AO opined that the stated expenditure was nothing but indirect way of according benefits / incentives to the directors and therefore, partakes the character of commission income. Since no TDS was deducted against the same, it was to be disallowed u/s 40(a)(ia). The Ld. DRP, following directions in AYs 2008-09 to 2011-12, upheld the same. 7.2 The perusal of details of these expenditures, as tabulated on page no. 107 of the paper-book, would reveal that these expenditures have been incurred towards convention expenses, education support expenses, seminar sponsorship fees, symposium/ workshop expenses. We find that this issue, on similar factual matrix is covered by the order of the Tribunal for AY 2011-12. The Tribunal has concluded the matter in assessee’s favor by following the judgment of this Tribunal rendered in India Medtronics Pvt. Ltd. [ITA 1600/Mum/2015 dated 17/10/2018]. The Ld. AR has further drawn our attention to the fact that similar factual matrix is also covered by the subsequent decision of Hon’ble Rajasthan High Court rendered in Dr. Anil Gupta [ITA No.286 of 2018], Mumbai Tribunal in Aristo Pharmaceuticals Pvt. Ltd. [ITA No. 5553 &6129 of 2014 26/07/2018] & Pune Tribunal in Emcure Pharmaceuticals Ltd. [ITA No. 1532 of 2015 29/01/2018].

Since nothing on record suggest any change in nature of expenditure, respectfully following the binding judicial pronouncements, we delete the impugned additions. This ground stands allowed.

9.2 Facts qua the same are that certain international transactions carried out by the assessee during impugned AY with its Associated Enterprises [AE], were referred to Ld. Transfer Pricing Officer u/s 92CA(1) for determination of Arm’s Length Price [ALP]. No transaction was reported by the assessee under the head Advertising, Marketing, Sales Promotion Expenses [AMP] as international transaction. However, Ld. TPO noted that the assessee was a distributor of products manufactured by the assessee’s AE and the products bear the brand / trademark of the AEs. Therefore, by incurring these expenditures, the assessee, in the opinion of Ld. TPO, has developed marketing intangibles in the form of distribution and dealer network, network with hospitals, customer bases etc. Therefore, the assessee was required to be compensated suitably for the same. The expenses incurred by the assessee under this head amounted to Rs.14.86 Crores which worked out to be 10.62 % of gross sales. In the above background, Ld. TPO proceeded to determine the ALP of the same. 9.3 The assessee agitated the same by submitting that the AMP expenses were paid to third parties in India and there was no arrangement / agreement, whatsoever, between the assessee and its AE for undertaking any brand building activity and therefore, mere incurring of aforesaid expenditures would not constitute international transaction. These expenses were stated to have been incurred by the assessee for its own benefit and it was submitted that no services have been rendered to its AE. However, disregarding the same, Ld. TPO proceeded to compute the Arm’s Length Price of the same by adopting Bright Line Test. The mean average of 3 comparable selected by Ld. TPO worked out to 5.94% and applying the same to gross sales, excess expenditure incurred by the assessee was worked out to Rs.6.55 Crores. After adding mark-up of 11.03%, the Transfer Pricing adjustment, thus proposed worked out to Rs.7.27 Crores. 9.4 The Ld. DRP, although observed that Bright Line Test was not acceptable method to benchmark these transactions and further, in the absence of any agreement, these transactions could not be termed as international transactions, however, confirmed the addition to keep the issue alive and to protect the interest of the department. Aggrieved, the assessee is in appeal before us. The Ld. AR has submitted that the issue is covered in assessee’s favor by the order of this Tribunal for AY 2009-10. 9.5 Upon careful consideration, we concur with the submissions that this issue is covered in assessee’s favor by the order of Tribunal for AY 2009-10 wherein it has, inter-alia, been held that in the absence of any agreement, these transactions would not constitute international transaction. This decision has subsequently been followed in AY 2011-12. Facts & circumstances being pari-materia the same, respectfully following the consistent view of the Tribunal, we hold that in the absence of any agreement between the assessee and its AEs, these transactions could not be termed as international transactions and accordingly, could not be subject to determination of ALP. By deleting impugned additions, this ground stands allowed. Finally, the appeal stands partly allowed in terms our above order. (2013-14): 10. In this AY, the grievance of the assessee is on similar lines as in AY 2012-13 and the assessee is before us with similar grounds of appeal. For ease of reference, the additions under appeal could be tabulated in the following manner: -

No. Nature of Addition Amount (Rs.) 1. TP adjustment of AMP expenditure 106.58 Lacs 2. Disallowance of Amortised Expenses of loaner set 957.76 Lacs 3. Disallowance of Advertisement, Sales promotion expenses 10.09 Lacs Disallowance of 4/5th of recruitment and training expenses 4. 35.50 Lacs 5. Disallowance of conference expenses 496.44 Lacs Facts being pari-materia the same, our findings, observation, conclusion as for AY 2012-13 shall mutatis mutandis apply to this year also. Accordingly, additions listed at serial nos. 1,2,4 & 5 stands deleted. 11.1 Facts qua addition of Rs.10.09 Lacs listed at serial no. 3 are slightly different in this year. The Ld.AO has disallowed 50% of advertisement and sales promotion expenses of Rs.28.62 Lacs as claimed by the assessee in the Profit & Loss Account and proposed addition of Rs.14.31 Lacs. The Ld. DRP, at para 8.1, perused the nature of expenditure and deleted the additions except addition of Rs.11.66 Lacs [wrongly referred to as Rs.10.09 Lacs in the directions of Ld. DRP]. The said amount represent expenditure towards purchase of gift card of Reliance Digital Retail Ltd. It was observed that these gift cars were actually cash which permits the recipient to buy his own choice of goods from Reliance Digital Stores as per own convenience. These cards were redeemable at all Reliance Digital Stores. The minimum value of the card was stated to be Rs.500/- whereas the maximum value could be much more. The Ld. DRP stated that the expenditure could not be termed as Advertisement & Sales Promotion expenses and it was only a bribe at best and therefore, the same was not allowable as deduction. Further, the company has not maintained any record to show as to whom these gifts cared were issued to. Therefore, an amount of Rs.10.09 Lacs [as against correct amount of Rs.11.66 Lacs] was added to the income of the assessee, against which the assessee is in appeal before us. 11.2 Upon careful consideration, we are of the opinion that additions could not be made on mere allegations or presumptions. No doubt, the onus was on assessee to prove that the aforesaid expenditure fulfills the conditions as envisaged by Section 37(1). It appears that no details, in this regard, has been submitted by the assessee and no record has been maintained to show as to whom these cards were issued. Nevertheless, keeping in view the principal of natural justice, we remit this matter back to the file of Ld. AO for re-adjudication with a direction to the assessee to substantiate his stand, in this regard. This ground stand allowed for statistical purposes. The appeal stands partly allowed. Conclusion 12. Finally, both the appeal stands partly allowed in terms of our above order. Order pronounced in the open court on 06th June, 2019. Sd/- Sd/- (Saktijit Dey) (Manoj Kumar Aggarwal) �ाियक सद� / Judicial Member लेखा सद� / Accountant Member मुंबई Mumbai; िदनांकDated : 06/06/2019 Sr.PS:-Jaisy Varghese आदेश की �ितिलिप अ�ेिषत/Copy of the Order forwarded to : अपीलाथ�/ The Appellant 1. ��थ�/ The Respondent 2. आयकरआयु�(अपील) / The CIT(A) 3. आयकरआयु�/ CIT– concerned 4. िवभागीय�ितिनिध, आयकरअपीलीयअिधकरण, मुंबई/ DR, ITAT, Mumbai 5. गाड�फाईल / Guard File 6.