Tribunal rules for assessee on transfer pricing, depreciation, convention expenses, and non-compete fee.

The Tribunal decided in favor of the assessee on all issues, including the Transfer Pricing Adjustment on AMP Expenditure, Disallowance of Depreciation on Plant and Machinery and Building, Disallowance of Payment Made to Doctors (Convention Expenses), and Depreciation on Non-Compete Fee. The appeal filed by the assessee was allowed, the appeal of the AO was dismissed, and the Cross Objection of the assessee was treated as infructuous. The order was pronounced on 2nd May 2018.

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Issues Involved:
1. Transfer Pricing Adjustment on AMP Expenditure
2. Disallowance of Depreciation on Plant and Machinery and Building
3. Disallowance of Payment Made to Doctors (Convention Expenses)
4. Depreciation on Non-Compete Fee

Detailed Analysis:

1. Transfer Pricing Adjustment on AMP Expenditure:
The primary issue was the Transfer Pricing (TP) adjustment related to Advertisement, Marketing, and Promotion (AMP) expenses amounting to Rs. 18.36 crores. The Tribunal noted that the assessee, a subsidiary of Medtronic’s International Hong Kong, used the Transactional Net Margin Method (TNMM) to determine the Arm's Length Price (ALP) of its international transactions. The Transfer Pricing Officer (TPO) argued that the AMP expenses incurred by the assessee created brand awareness benefiting the parent company, Medtronic’s Inc., and applied the Bright Line Test (BLT) method to determine the ALP, which was not prescribed under the Act. The Tribunal found no agreement between the assessee and its Associated Enterprises (AE) regarding sharing AMP expenses and held that the TPO should not have applied the Bright Line Method. Citing the Delhi High Court's judgments, it was concluded that AMP expenditure was not an international transaction and thus, no adjustment could be made. Consequently, the Tribunal decided this issue in favor of the assessee.

2. Disallowance of Depreciation on Plant and Machinery and Building:
The issue pertained to the disallowance of depreciation amounting to Rs. 2.96 lakhs. The Tribunal referred to its earlier orders, which allowed depreciation on plant and machinery, building, furniture, and fixtures even though the manufacturing operations had been discontinued. It was emphasized that under the concept of block of assets, depreciation is allowable on the aggregate Written Down Value (WDV) of all the assets in the block. The Tribunal concluded that the disallowance made by the Assessing Officer (AO) was not justified and decided this issue in favor of the assessee.

3. Disallowance of Payment Made to Doctors (Convention Expenses):
The AO disallowed Rs. 17.23 crores claimed as convention expenses, citing violations of Medical Council of India (MCI) guidelines. The Tribunal noted that the MCI guidelines apply to medical practitioners and not to pharmaceutical companies. It was observed that the CBDT Circular, which disallowed such expenses, was applicable from 1st August 2012 and not retrospectively. The Tribunal referred to various judgments, including the Delhi High Court's decision in Max Hospital, which clarified that MCI regulations govern doctors, not pharmaceutical companies. It was concluded that the expenses incurred were for business promotion and not in violation of any law, thus allowable under Section 37(1) of the Income Tax Act. This issue was decided in favor of the assessee.

4. Depreciation on Non-Compete Fee:
The additional ground raised by the assessee was regarding the allowance of depreciation on non-compete fees. The Tribunal, following its earlier order for AY 2002-03, directed the AO to allow depreciation on the payment made for non-compete fees, treating it as capital expenditure. This issue was also decided in favor of the assessee.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, dismissed the appeal of the AO, and treated the Cross Objection (CO) of the assessee as infructuous. The order was pronounced in the open court on 2nd May 2018.

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