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

The appeal was allowed by the Tribunal in favor of the assessee. The Tribunal held that the Transfer Pricing adjustment on Advertisement, Marketing, and Promotion expenses was not justified as it was not considered an international transaction. Additionally, the disallowance of depreciation on plant and machinery and building was overturned, and the payments made to doctors were deemed allowable under section 37(1) of the Act. The Tribunal's decision was pronounced on 17th January 2018.

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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.

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