JOHNSON & JOHNSON LTD,MUMBAI vs. ADDL CIT LTU, MUMBAI

During the proceedings before the DRP, after considering the facts of the case and submissions of the assessee, in principle, the DRP confirmed the adjustments as well as the applicability of the BLT vide their order dated 26.12.2013. Aggrieved with the said decision of the DRP, assessee is in appeal before the Tribunal.

During the proceedings before us, Shri R.R. Vora, Ld Counsel for the assessee submitted that the purpose of advertisements given by the assessee, J&J India, is essentially to create product awareness among the Indian consumers. The said amount of AMP expenditure is directly targeted to increase the sales. This expenditure does not contribute significantly to the brand development. The market expenses do no lead to brand building and cannot be taken into consideration for making adjustments. No adjustment is called for in connection with the AMP expenditure incurred by the assessee, „J&J India‟, since, J&J India has retained entire profits in India. Further, Ld Counsel for the assessee submitted that the „bundled transaction approach‟ is required to be followed and it is not logical to treat the AMP as a separate transaction as the TPO accepted the comparables under TNM Method. Relying on the decision of the Hon‟ble Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt Ltd (ITA No.16/2014), Ld Counsel for the assessee submitted that the „BLT‟ has no statutory mandate and therefore, it cannot be used as most appropriate method. However, referring to the TPO‟s decision to include selling expenses as part of the AMP expenses, Ld Counsel for the assessee submitted that the selling expenses should be excluded while computing the adjustments on account of „excessive AMP expenses‟. Bringing our attention to various paras of the said judgment of the Delhi High Court in the case of Sony Ericsson (supra), Ld Counsel for the assessee demonstrated that issue relating to the AMP expenses can be remanded to the file of the AO / TPO considering the guidelines mentioned by the Hon‟ble Delhi High Court in their judgment in the case of Sony Ericsson (supra). 5. On the other hand, Ld DR for the Revenue mentioned that remanding the matter, so proposed by the Ld Counsel for the assessee, may be done keeping all the issues open including the benchmarking of all the transactions initially accepted by the AO / TPO involving „J&J US‟. Ld DR also relied on the said judgment of the Hon‟ble Delhi High Court in the case of Sony Ericsson (supra) for the proposition that this kind of AMP expenses to the brand development is a deemed international transaction. However, he accepted the fact of rejection of the „BLT‟ by the said Hon‟ble High Court. He also relied on various decisions of the Tribunal to support his case that the instant case requires remanding for de novo inspection of the TPO.

We have heard both the parties on this issue of benchmarking the AMP expenses qua the brand development and find the AO / TPO relied heavily on the Special Bench decision of ITAT, Delhi in the case of L.G. Electronics India Pvt Ltd (supra) in making the adjustments and in applying the „BLT‟ in benchmarking the AMP expenditure. It is an undisputed fact that the Hon‟ble Delhi High Court has rendered a judgment in the case of Sony Ericsson Mobile Communications India Pvt Ltd (supra), reversing the said Special Bench decision in the case of L.G. Electronics (supra). As on today, the „BLT‟ is not to be applied in such benchmarking exercise of the AMP expenditure. AP / TPO is statutorily bound to apply the existing methods mentioned in the IT Act, 1961 / IT Rules, 1962. We, accordingly, remand the issue, that revolves around the TP adjustment of Rs. 133.02 (rounded of), to the file of the AO / TPO to benchmark these transactions, if necessary in the light of the guidelines specified in the precedents enunciated by the Delhi High Court (supra). Further, TPO is directed to apply all the principles laid down by the Hon’ble Delhi High Court in the case of Maruti Suziki India Limited vs. CIT in 2014 and ITA 710/2015, dated 11th December, 2015 in the remand proceedings in the matters of the requirement of benchmarking the AMP transactions.

Another issue connected to the above issue relates to the powers of the AO / TPO in de novo TP adjustment to the entire international transactions. In this regard, it is the submission of the Ld Counsel for the assessee that the scope of the assessment should restricted to the above issue only and not to the other international transactions. He also considered the arguments of the Ld DR for the Revenue that the scope of the judgment relating to the benchmarking of the AMP expenditure should be extended to the explanation given by the Ld Counsel for the assessee. If the assessee‟s explanation for justifying the huge AMP expenditure is going to touch upon all the transactions relating to the input of the raw material of the assessee „J&J USA‟, being inter-connected, the AO should have the power to involve the said transactions as well in benchmarking exercise of the AMP expenditure. On considering the undisputed fact that the assessee obtained concessions from the „J&J USA‟, in lieu of AMP expenditure contributing to the brand development, we are of the opinion that the AO‟s jurisdiction in this regard should revolve around all the assessee‟s explanations justifying the AMP expenditure of the assessee. Further, we have also considered the „remand guidelines‟ issued by the Tribunal in this regard, in connection with many other cases placed before us and find the said guidelines shall apply equally and AO should restrict his remand jurisdiction to the guidelines issued by the Tribunal in those cases. Accordingly, all the grounds relating to the TP issues (Ground nos. 14 to 28) are allowed for statistical purposes.

Ground nos. 41 and 42 relates to the disallowance of Rs. 1.27 Crs out of interest expenditure claimed u/s 36(1)(iii) of the Act. In this regard, at the outset, Ld Counsel for the assessee submitted that this issue has come up for the first time in this year (AY 2009-2010). Explaining the facts relating to this disallowance, Ld Counsel for the assessee submitted that the assessee debited to the P & L Account an amount of Rs.10.60 Crs. The said amount is the current account balance of M/s. DePuy Medical Pvt Ltd (DePuy India), which is the subsidiary of the assessee. On scrutiny of the said account, AO / TPO has found out that the loan was utilised by the assessee to bear various overhead expenditure of its subsidiary company as well. Assessee segregated the relatable overhead expenditure such as loan, salary, office expenses etc and raised invoice for receiving the same from the subsidiary company. However, the subsidy was not paid to the assessee-company regularly. Considering the non-receipt of the reimbursement of the overhead expenditure, the TPO / AO disallowed the relatable expenditure attributable to the subsidiary company. AO calculated the notional interest @ 12% on the said amount of Rs. 10.60 Crs without having any basis. Before us, Ld Counsel for the assessee submitted that the assessee had excess funds and relied on various financial statements, which are formed part of the paper book. He also relied on various decisions such as, the Apex Court judgment in the case of S.A. Builders Limited vs. CIT [288 ITR 1 (SC)]; jurisdictional High Court judgment in the case of Reliance Utilities (313 ITR 340) (Bom.) against the AO‟s decision to disallow the sum of Rs. 1.72 Crs.

After hearing both the parties and on perusal of the cited precedents, we find it relevant to remand the matter to the file of the AO for fresh adjudication on this issue after analysing existence of the interest free funds and applying the ratio of the jurisdictional High Court judgment in the case of Reliance Utilities (supra). In any case, in principle, we cannot approve the charging of notional interest when the assessee has raised the invoice to receive the amount relatable to the subsidiary company without rejecting the books of accounts of the assessee. Accordingly, this part of the grounds is allowed for statistical purposes. Thus, Ground nos. 41 and 42 are allowed for statistical purposes.

Ground no.1 is general in nature. Considering the general nature of the Ground no.1, the same is dismissed.

Ground nos.2 and 3 relate to the disallowance of tax on brand usage royalty of Rs. 2.21 Crs. Vide Ground no.2, assessee questioned the TPO / AO‟s decision in disallowing the above mentioned tax deducted on payment of brand usage royalty made to J&J US on the ground that the assessee should not bear the same as per the agreement entered into between the assessee and the J&J US. Without prejudice to the said Ground no.2, assessee raised Ground no.3, wherein it is questioned that even if the tax borne by J&J India on brand usage royalty is to be disallowed, the disallowance should be restricted to tax borne up to 30th June, 2008 since effective date of supplemental agreement is 1st July, 2008 which specifically provided for „net of tax‟ payment. In this regard, at the outset, Ld Counsel for the assessee submitted that an identical issue was decided by the Tribunal in favour of the assessee in assessee‟s own case for the AY 2002-03 in dated 28th August 2013, copy of which is placed at pages 217 to 244 of the paper book. He further brought our attention the paper book pages 245 to 290, wherein the copies of the Tribunal‟s decisions in assessee‟s own cases for the AY 2006-07 in ITA No.83/M/2011, dated 5.2.2014 and for the AY 2008-09 in ITA No.7133/M/2012, dated 19.2.2014, and mentioned that the similar ground was adjudicated in favour of the assessee by the Tribunal relying on the ITAT‟s decision for the AY 2002-03. In this regard, it is the submission of the Ld Counsel for the assessee that the present grounds may also be decided in the same lines considering the identicalness of the issues involved. After hearing both the parties and on perusal of the cited decisions of the Tribunal in assessee‟s own cases (supra) and also considering the commonality of the issues involved in those appeals decided by the Tribunal (supra) and that of the ones raised in Ground no.2 and 3 of the instant appeal, we are of the opinion that the it is not for the AO to question the commercial arrangements entered into by the assessee. As well, the RBI has approved the payment of brand royalty net of taxes and in this regard the RBI‟s approval dated 14th March, 2002 is relevant. Accordingly, considering the above, we allow the Ground nos. 2 and 3 of the appeal.

Ground nos. 4 and 5 relate to the disallowance of service tax paid on brand usage royalty amounting to Rs. 1.82 Crs. Vide Ground no.4, assessee questioned the AO / TPO‟s decision in disallowing the service tax paid on brand usage royalty. Without prejudice, vide Ground no.5, assessee reasoned that the service tax has been suo moto disallowed by the assessee in its return of income under section 43B of the Act and therefore, any adjustment on the same would lead to double disallowance. At the outset, referring to the instant grounds, Ld Counsel for the assessee submitted that identical issue was decided by the Tribunal in assessee is own case for the AYs 2006-07 and 2008-09 vide dated 5.2.2014 and ITA No.7133/M/2013, dated 19.2.2014 respectively. In this regard, he brought our attention to pages 245 to 290 of the paper book, wherein the copies of the said decisions are placed on record. In this regard, it is the submission of the Ld Counsel for the assessee that the present grounds may also be decided in the same lines considering the identicalness of the issues involved. On hearing both the parties on this issue, we have perused the cited decisions of the Tribunal in assessee‟s own cases (supra) in general and for the AY 2006-07 in particular, wherein the Tribunal held that the taxes are liability of the assessee based on the terms of agreement. Further, the Tribunal observed that the liability of payment of service tax is of recipient of the services and since, assessee is receiver of the services, it is assessee’s liability to bear the service tax and hence no disallowance is called for service tax paid by the assessee. Considering the above as well as keeping in view the commonality of the issues involved in the appeals decided by the Tribunal (supra) and that of the ones raised in Ground no.4 and 5 of the instant appeal, we allowed these grounds in favour of the assessee.

Ground nos. 6, 7 and 8 relate to the technical know-how royalty payment on sale of traded finished goods amounting to Rs. 15.82 Crs. In these grounds, assessee also raised another issue without prejudice to the above that even if the royalty paid by J&J India on traded goods is to be disallowed, the disallowance should be restricted to the royalty paid on traded goods upto 30th June, 2008 since effective date of supplemental agreement is 1st July, 2008 which specifically provides for payment of royalty on traded products. Referring to the instant grounds, Ld Counsel for the assessee brought our attention to the agreements entered into between J&J India and J&J US for payment of technical / marketing know-how royalty. In this regard, he brought our attention to the agreements placed at pages, 339 to 392 of the paper book, which contains the Exhibits 1 to 4. He also mentioned that relevant additional evidence dated 17.9.2013 was also filed before the DRP. Further, Ld Counsel for the assessee submitted that an identical issue was decided by the Tribunal in assessee‟s own case for the AY 2002-03 in dated 28.8.2013, wherein the Tribunal dismissed the Departmental appeal on this issue, relying on the earlier decision of the ITAT, by holding that the royalty payments have to be considered in the light of the agreement between the assessee and the J&J US and upheld the order of the CIT (A). He also brought our attention to some other decisions of the Tribunal in assessee‟s own case for the AYs 2006-07 and 2008-09, the copies of which are placed on pages 245 to 290 of the paper book, and mentioned that the Tribunal has deleted the disallowance for the AYs 2006-07 and 2008-09 on the ground that the Rules do not authorize the TPO to disallow the expenditure incurred by the assessee and average royalty paid by it is comparable and lower than the ALP as per the information available on website of SIA. We have heard both the parties and perused the cited decisions of the Tribunal as well as the relevant material placed before us. On perusal of the cited decisions of the Tribunal (supra) in assessee‟s own case, we are of the opinion that the issues raised in the present grounds are identical to that of the ones decided by the Tribunal for the AYs 2002-03; 2006-07 and 2008-09. Considering the commonality of the issues as well as respectfully following the earlier decisions of the ITAT on the same issue, we of the opinion that the royalty payments have to be considered in the light of the above cited agreements (Exhibits 1 to 4) between the assessee and J&J US. Accordingly, we allowed the Ground nos. 6, 7 and 8 in favour of the assessee.

Ground no.9 relates to restricting of technical know-how royalty on manufactured goods to 1% of net sales, resulting in disallowance of Rs. 25.26 Crs out of Rs. 35.90 Crs. In principle, the issue involved in the present ground relates to the issues raised in ground nos. 6 to 8 above. While adjudicating the Ground nos.6 to 8 in the above paragraphs of this order, we held that the royalty payments have to be decided in the light of the agreement between the assessee and the J&J US. It is also held that the TPO is not authorized to disallow the expenditure by taking into account the information available on website of SIA, which provides the information about the ALP approved by the RBI. Further, an identical issue was also decided by the Tribunal and deleted the disallowance in assessee‟s own case for the AYs 2002-03; 2006-07 and 2008-09 (supra). Considering the commonality of the issues involved in the appeals decided by the Tribunal for the AYs 2002-03; 2006-07 and 2008-09 (supra) and the issue involved in the instant ground, we allowed the Ground no.9 in favour of the assessee.

Ground no.10 relates to the disallowance of tax and R&D cess paid on technical know-how royalty amounting to Rs. 8.22 Crs. In this regard, at the outset, Ld Counsel for the assessee brought our attention to decision of the Tribunal in assessee‟s own case for the AY 2002-03 in dated 28.8.2013 (pages 217 to 244 (para 42) of the paper books is relevant) and mentioned that an identical issue was decided by the Tribunal, wherein the ITAT deleted the disallowance on the ground that the payment of royalty at Arm‟s Length and hence the payment arising on account of such royalty should not be disallowed. He also brought our attention to another decision of the Tribunal for the AY 2006-07 in assessee‟s own case [pages 245 to 275 (para 35) are relevant in this regard] in (supra), wherein while deciding the similar issue, ITAT relied on the decision of the Pune Tribunal in the case of Kirloskar Ebara Pumps 48 DTR (Pune) (Trib) 348, wherein it has been held that the R&D cess and tax cannot be treated as international transactions. We have heard both the parties and perused the cited decisions of the Tribunal in assessee‟s own cases (supra). On perusal of the cited decisions of the Tribunal (supra), we are of the considered opinion that the as held by the Pune Bench of Tribunal, the R&D cess and tax cannot be treated as international transactions. Respectfully following the earlier AYs decisions of the Tribunal on the identical issue, we allowed the issue involved in the instant Ground no.10 in favour of the assessee.

Ground nos.11, 12 and 13 relate to the disallowance of service tax paid o technical know-how royalty paid amounting to Rs. 4.02 Crs. Referring the grounds, Ld Counsel for the assessee mentioned that identical issue was adjudicated by the Tribunal in assessee‟s own case for the AY 2006-07 in ITA No.83/M/2011, dated 5.2.2014. Vide the said order (supra), the Tribunal deleted the disallowance of service tax paid on brand royalty and held that taxes are liability of the assessee based on the terms of the agreement. Further, the Tribunal has also observed that liability of payment of service tax is of recipient of the services and since, the assessee is the receiver of the services, it is the liability of the assessee to bear the service tax and hence no disallowance is called for service tax paid by the assessee. He also mentioned that relying on the said decision of the Tribunal for the AY 2006- 07, similar issue raised in the assessee‟s own case for the AY 2008-09 was also decided in favour of the assessee. It is the prayer of the assessee that considering the commonality of the issues involved in the appeals decided by the Tribunal (supra) as well as in the instant Grounds, the disallowance of service tax paid on brand royalty should be deleted. We have heard both the parties and perused the cited decisions of the Tribunal (supra) as well as the relevant material placed before us. On perusal of the cited decisions as well as considering the commonality of the issues, we, respectfully following the said Tribunal‟s decisions (supra) on the identical issues for the AYs 2006-07 and 2008-09, we delete the disallowance made on account of service tax paid on brand royalty. Accordingly, Ground nos.11, 12 and 13 raised by the assessee are allowed. Corporate issues 17. Ground nos.29 and 30 relate to the disallowance of cost of production of advertisement films amounting to Rs. 6.05 Crs. Briefly stated relevant facts in this regard are that the assessee incurred 14.88 Crs towards „publicity expenses‟ during the year under consideration. Out of the said amount, Rs. 6.05 Crs pertains to purchase cost of films and other production expenses for producing advertisement films and commercials to be used as „TV spots‟ for advertisement. In the assessment, AO opined that the said expenses debited to the production of advertisement film accounts cannot be accepted as „revenue expenditure‟ and disallowed the same by treating as „capital expenditure‟. On appeal, DRP confirmed the said disallowance. Accordingly, AO made the said disallowance. Before us, Ld Counsel for the assessee brought our attention to various decisions of the Tribunal in assessee‟s own cases for the AYs 1997-98 to 1999-2000 [ITA Nos.145/M/01 and others]; AY 2001-02 and 2002-03 [ and 9106/M/04]; AY 2002-03 [ ITA Nos. 4070/M/07]; AY 2006-07 [ ITA No.83/M/2011] and for AY 2008- 09 in ITA No.7133/M/2012, copies of which are placed in paper book, and mentioned that the identical issue was decided by the Tribunal and allowed the expenses incurred on production of advertisement films as „revenue expenditure‟. We have heard both the parties on this issue of whether the expenditure incurred on production of advertisement films should be treated as „revenue expenditure‟ or „capital expenditure‟. We have also perused decisions of the Tribunal in assessee‟s own cases (supra) cited by the Ld Counsel for the assessee. On perusal of the same, we find the Tribunal decided similar issue in favour of the assessee and allowed the expenses incurred on production of advertisement films as „revenue expenditure‟. Respectfully following the ITAT‟s decision on similar issues in assessee‟s own cases for the earlier AYs mentioned above, we decide this issue in favour of the assessee and direct the AO to treat the expenses incurred on production of advertisement films as „revenue expenditure‟. Accordingly, Ground nos.29 and 30 are allowed.

Ground no.31 relates to the disallowance of Rs. 3.89 Crs on account of proportionate MODVAT credit attributable to closing stock. Brief facts in this regard are that the assessee consistently follows the practice of accounting for opening stock, purchases and closing stocks exclusive of excise duty which is as per the accounting standards prescribed by Institute of Chartered Accountants of India (ICAI). However, the sales are exclusive of excise duty. During the assessment proceedings, after considering the submissions of the assessee, AO made an addition of Rs. 3.89 Crs towards MODVAT credit attributable to closing stock. DRP confirmed the said addition and accordingly AO made the addition in the assessment. Before us, Ld Counsel for the assessee briefed the facts in this regard and brought our attention to various decisions of the Tribunal in assessee‟s own cases for the AYs 1997-98 to 1999-2000 [ITA Nos.145/M/01 and others]; AY 2001- 02 and 2002-03 [ and 9106/M/04]; AY 2002-03 [ ITA Nos. 4070/M/07]; AY 2006-07 [ ITA No.83/M/2011] and for AY 2008-09 in ITA No.7133/M/2012, copies of which are placed in paper book, and mentioned that the identical issue was adjudicated by the Tribunal and remanded the matter to the file of the AO to re-work the amount in the light of the provisions of section 145A of the Act. Further, the Tribunal also directed the AO to give corresponding benefit in the opening stock in view of the judgment of jurisdictional High Court in CIT vs. Mahalaxmi Glass Works P. Ltd [2009] 318 ITR 116 (Bom.). After hearing both the parties and respectfully following the said decision of the Tribunal in the earlier years (supra), we remand this issue to the file of the AO with identical directions. Accordingly, Ground no.31 raised by the assessee is allowed for statistical purposes.

Ground nos. 32 and 33 relate to the disallowance of provision for reserve for cash discount Rs. 1224/-. Without prejudice to the above, it is also reasoned by the assessee that considering the fact that in AY 2008-2009, the similar provision for cash discount was not allowed as a deduction, and therefore, the write back of the same is not taxable in the year under consideration. Before us, Ld Counsel for the assessee briefed the facts which include that in the AY 2008-09, assessee claimed a deduction of Rs. 8,48,235/- on account of provision for cash discount. In the assessment, AO allowed only the discount actually availed of Rs. 2,64,331/- and the balance of Rs. 5,83,904/- was disallowed. In this regard, Ld Counsel for the assessee brought our attention to the decision of the Tribunal on similar issue in assessee‟s own case for the AY 2008-2009 in dated 19.2.2014 wherein the Tribunal restored the matter to the file of the AO. Therefore, the issue involved in the instant grounds should be decided in the same lines. We have heard both the parties and perused the cited decision of the Tribunal in assessee‟s own case for the AY 2008-2009 (supra), wherein the Tribunal, while restoring the matter to the file of the AO, directed the AO to decide the alternative grievance of the assessee that if the cash discount reserve was not allowed in the earlier assessment year, the right back of the same would amount to double taxation, therefore, the same should be deleted after due verification. Considering the same, we, respectfully following the above decision of the Tribunal for the AY 2008-2009 (supra) as well as following the principles of consistency, remand this matter to the file of the AO with identical directions. AO is also directed to exclude the excess provision for cash discount for AY 2008-09 while computing income for the year under consideration. Accordingly, Ground nos.32 and 33 are allowed for statistical purposes.

Ground nos.34 and 35 relate to the disallowance of depreciation on testing equipment of Rs. 2.62 Crs. Brief facts in this regard are that in the assessment, AO disallowed the depreciation claimed on testing equipment u/s 32 of the Act amounting to Rs. 2,62,49,180/- on the ground that the said fixed assets are not used by the appellant for the purpose of their business as they are located at different pathological laboratories, hospitals etc across the count. DRP confirmed the said disallowance and accordingly, the AO disallowed the said depreciation on the testing equipment in the assessment order. In this regard, at the outset, Ld Counsel for the assessee submitted that similar disallowance was deleted by the Tribunal in assessee‟s own case for the AY 2001-02 in ITA No.9437/M/04 (pages 199 to 216 of the paper book-I are relevant in this regard) and read out the relevant paras. After hearing both the parties on this issue and on perusal of the cited decision of the Tribunal in the assessee‟s own case for the AY 2001-02, we find, while adjudicating the similar issue in favour of the assessee in the above said appeal, the Tribunal relied on the decision of the ITAT in the assessee‟s sister concern namely NR Jet Enterprises Limited vide dated 28.5.2008, wherein it was held that the depreciation should be allowed on the testing equipment provided to laboratories and hospitals free of charge as the said equipments have been provided to the laboratories and hospitals for making profit from the sale of slides. We, respectfully following the said decision of the Tribunal, as well as following the principle of consistency, allowed the issue raised in Ground nos. 34 and 35 of the appeals in favour of the assessee.

Referring to Ground nos. 36 to 40, Ld Counsel for the assessee mentioned that the said grounds are not pressed. Accordingly, Ground nos. 36 to 40 are dismissed as not pressed.

Ground no.43 relates to the short grant of credit of TDS amounting to Rs. 7,428/-. During the assessee claimed total TDS credit of Rs. 2,35,39,455/-. In the assessment after considering the submissions of the assessee, AO granted credit of TDS of Rs. 2,35,32,027/- with short of Rs. 7,428/-. After hearing both the parties and on perusal of the relevant record in this regard, in our opinion, when an assessee approaches the Assessing Officer with requisite details and particulars in the form of TDS certificate as an evidence against any mismatched amount, the said Assessing Officer will verify whether or not the deductor has made payment of the TDS in the Government Account and if the payment has been made, credit of the same should be given to the assessee. Considering the same, we direct the AO to grant the balance credit of the TDS ie Rs. 7,428/- after verification of the relevant record as per the provisions of the Act and in accordance with law.

Ground nos. 44 and 45 relate to the levy of interest u/s 234B and 234D of the Act. As well, Ground no.46 relates to the penalty proceedings u/s 274 r.w.s