2018 (1) TMI 1033 - AT - Income Tax

Tribunal rules in favor of assessee on Transfer Pricing and Depreciation issues

India Medtronic Private Limited Versus DCIT-10 (1) (1), Mumbai

The appeal was allowed by the Tribunal in favor of the assessee. The Tribunal held that the Transfer Pricing adjustment on Advertisement, Marketing, and ... TPA - AMP expenses compensation - whether AE and the assessee had to share AMP expenses? - Held that:- 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. These terms do not give any indication that the AE and the assessee had to share AMP expenses. Secondly, if the AE was benefited 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. See Thomas Cook(2016 (7) TMI 318 - ITAT MUMBAI) - Decided in favour of assessee Depreciation on plant and machinery and building - addition on the basis of discontinuity of manufacturing operation of the assessee and also holding that the same have not been used during the year - Held that:- The issue stands covered by the earlier orders of the Tribunal [2017 (6) TMI 334 - ITAT AHMEDABAD] wherein held With the introduction of concept of WDV of block of assets, the depreciation is allowable not on individual items but depending upon date of acquisition and put to use of the asset. Also section 38(2) deals with usage of assets for non-business purposes and does not refer to assets partly used during the year for business purposes. Depreciation is allowable on the plant and machinery, building, furniture and fixture and office equipment - Decided in favour of assessee Disallowance of payment made to doctors - Held that:- MCI guidelines are applicable to the professionals i. e. Doctors only. They do not and cannot govern the other tax entities like Drug manufacturing or drug distributing Companies or individuals other than the doctors, or HUF's or Firms etc. MCI, as a body can formulate policy for the Doctors. The assessee is not a practicing professional. So, any guidelines issued by it cannot decide the allowability or otherwise of an expenditure under the Act. Income tax Act is a code in itself and business income an assessee has to be assessed and taxed as envisaged by the provisions of the Act. The AO/DRP had not doubted incurring of expenditure. They have heavily relied upon the guidelines issued by the MCI for the doctors. As in the case of MAX Hospital, Pitampura (2014 (1) TMI 1829 - DELHI HIGH COURT) has clearly held that MCI could issue guide lines for the Doctors only and that the MCI in its affidavit admitted that it has ‘no jurisdiction’ to pass any order against the ‘Petitioner hospital’. Ethics Committee of MCI is authorised to pass some order about the infrastructure of any hospital. But, as far as corporate entities are concerned MCI cannot issue any guide lines. Therefore, we are not dealing with the issue as to from which AY. the guide lines would be applicable. We would also like to hold that distribution of free samples cannot be treated as violation of Expl. 1 to section 37(1).- Decided in favour of assessee Issues Involved:1. Transfer Pricing (TP) adjustment on account of advertisement, marketing, and promotion (AMP) expenses.2. Disallowance of depreciation on plant and machinery and building.3. Disallowance of payment made to doctors.Detailed Analysis:1. Transfer Pricing (TP) Adjustment on Account of Advertisement, Marketing, and Promotion (AMP) Expenses:The first effective ground of appeal pertains to the TP adjustment made on AMP expenses amounting to Rs. 30.66 crores. The Assessing Officer (AO) found that the assessee had entered into international transactions with its Associate Enterprise (AE) and referred the matter to the Transfer Pricing Officer (TPO) to determine the arm’s length price (ALP). The TPO observed that the assessee, a subsidiary of Medtronic’s International Hong Kong, used the Transactional Net Margin Method (TNMM) to determine the ALP, showing purchases from AEs valued at Rs. 296.88 crores. The TPO concluded that the AMP expenditure incurred by the assessee created brand awareness benefiting the parent company and determined the ALP of reimbursement for brand promotion at Rs. 38.72 crores.The assessee argued that AMP expenditure was not an international transaction (IT) and there was no agreement with the AE for incurring such expenses. The TPO applied the Bright Line Method, which was not prescribed under the Act and Rules. The Departmental Representative (DR) contended that the AE should compensate the assessee for the AMP expenditure, categorizing it as an IT. The Tribunal found no condition in the agreements for sharing AMP expenses and held that the Bright Line Method should not have been applied. The Tribunal referred to the case of Thomas Cook, emphasizing that the existence of an international transaction is a prerequisite for applying the provisions of Chapter X of the Act. The Tribunal decided the issue in favor of the assessee, concluding that the AMP expenditure was not an IT and should not be subject to TP adjustment.2. Disallowance of Depreciation on Plant and Machinery and Building:The second issue pertains to the disallowance of depreciation on plant and machinery and building amounting to Rs. 3.41 lakhs. The Tribunal noted that the issue was covered by earlier orders, where it was held that depreciation is allowable on the aggregate of the written down value (WDV) of all assets in the block at the beginning of the financial year along with additions made during the year. The Tribunal cited previous decisions in the assessee’s own case, confirming that depreciation is allowable on plant and machinery, building, furniture, and fixtures, even if the manufacturing processes were discontinued. The Tribunal followed the earlier order and allowed the ground in favor of the assessee, deleting the disallowance of depreciation.3. Disallowance of Payment Made to Doctors:The third issue involves the disallowance of payment made to doctors amounting to Rs. 6.02 crores. The AO disallowed expenses incurred on or after 10/12/2009, citing amendments to the Medical Council of India (MCI) Act and guidelines prohibiting such payments. The Dispute Resolution Panel (DRP) upheld the disallowance, stating that the expenses were against public policy and not allowable under section 37(1) of the Act.The assessee argued that the MCI guidelines apply to doctors and not to the assessee, a medical device company. The assessee contended that the expenses were genuine and incurred for business purposes. The Tribunal referred to various judgments, including the Delhi High Court’s decision in the case of MAX Hospital, which clarified that MCI regulations govern only medical practitioners and not pharmaceutical companies. The Tribunal also cited the case of PHL Pharma and Syncom Formulations, where it was held that the CBDT Circular dated 01.08.2012 is not applicable retrospectively and does not apply to pharmaceutical companies. The Tribunal concluded that the MCI guidelines are not applicable to the assessee and allowed the expenses, deciding the issue in favor of the assessee.Conclusion:The appeal filed by the assessee was allowed, with the Tribunal deciding all three issues in favor of the assessee. The Tribunal held that the AMP expenditure was not an international transaction, allowed the depreciation on plant and machinery and building, and concluded that the payments made to doctors were not disallowable under section 37(1) of the Act. The order was pronounced in the open court on 17th January 2018.