2019 (6) TMI 471 - AT - Income Tax

Appeals partly allowed, expenses recomputed, disallowances deleted, Transfer Pricing adjustment removed, gift card expenses remitted

Synthes Medical Pvt. Ltd. (now merged with Johnson & Johnson Pvt. Ltd.) Versus ACIT-LTU-1, Mumbai

The Tribunal partly allowed both appeals, directing the AO to recompute disallowed expenses for loaner sets, advertisement and sales promotion, ... Disallowance of amortised expense of loaner set - revenue or capital expenditure - HELD THAT:- A decided in assessee's own case [2017 (4) TMI 293 - ITAT DELHI] treating loaner sets expenditure as capital expenditure was not in accordance with law and therefore, directed to be deleted. Disallowance of 50% of advertisement and sales promotion expenses - HELD THAT:- A decided in assessee's own case [2017 (4) TMI 293 - ITAT DELHI] 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 Disallowance of 4/5th of the recruitment and training expenses - 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. Disallowance of conference expense - HELD THAT:- 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 [2018 (1) TMI 1033 - ITAT MUMBAI]. 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. TP Adjustment - Advertisement, Marketing and Promotion ('AMP') expenses - HELD THAT:- We concur with the submissions that this issue is covered in assessee’s favor by the order of Tribunal for AY 2009-10 wherein 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. Allowable business expenditure u/s 37(1) - expenditure towards purchase of gift card of Reliance Digital Retail Ltd. - HELD THAT:- 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. Issues Involved:1. Disallowance of amortised expense of loaner set.2. Disallowance of 50% of advertisement and sales promotion expenses.3. Disallowance of 4/5th of recruitment and training expenses.4. Disallowance of conference expenses.5. Transfer Pricing adjustment in respect of AMP expenses.6. Levy of interest u/s 234B and initiation of penalty u/s 271(1)(c).Detailed Analysis:1. Disallowance of amortised expense of loaner set:The assessee loaned medical instruments to hospitals/doctors on a returnable basis, amortizing the expense over three years and claiming deductions under Section 37(1). The AO disallowed this, treating it as capital expenditure and allowing only depreciation. The DRP upheld this disallowance. However, the Tribunal found that this issue was covered by earlier orders for AYs 2007-08 and 2008-09, where it was concluded that such expenses should not be treated as capital expenditure. Therefore, the Tribunal deleted the addition of Rs. 8.15 Crores and directed the AO to recompute the same.2. Disallowance of 50% of advertisement and sales promotion expenses:The AO disallowed 50% of the advertisement and sales promotion expenses, treating them as deferred revenue expenditure. The DRP upheld this disallowance. The Tribunal, referring to earlier orders for AYs 2007-08 and 2008-09, found no basis for restricting the expenditure to 50% and deleted the disallowance of Rs. 9.08 Lacs.3. Disallowance of 4/5th of recruitment and training expenses:The AO disallowed 4/5th of the recruitment and training expenses, treating them as enduring in nature. The DRP upheld this disallowance. The Tribunal, referring to earlier orders for AY 2008-09, found that no asset was created by incurring these expenses and allowed the full expenditure of Rs. 55.95 Lacs for the impugned AY.4. Disallowance of conference expenses:The AO disallowed conference expenses amounting to Rs. 5.32 Crores, treating them as indirect benefits to doctors and not allowable under the Medical Council guidelines. The DRP upheld this disallowance. The Tribunal, referring to earlier orders and other judicial pronouncements, found that these expenses were incurred for business purposes and deleted the disallowance.5. Transfer Pricing adjustment in respect of AMP expenses:The AO made a TP adjustment of Rs. 7.27 Crores for AMP expenses, treating them as international transactions. The DRP upheld this adjustment to protect the department's interest. The Tribunal found that in the absence of any agreement between the assessee and its AE, these transactions could not be termed as international transactions. Referring to earlier orders for AY 2009-10, the Tribunal deleted the TP adjustment.6. Levy of interest u/s 234B and initiation of penalty u/s 271(1)(c):These grounds were considered consequential/premature and did not require any indulgence from the Tribunal.Additional Issue for AY 2013-14:For AY 2013-14, the AO disallowed 50% of advertisement and sales promotion expenses amounting to Rs. 28.62 Lacs, proposing an addition of Rs. 14.31 Lacs. The DRP deleted most of the additions except Rs. 11.66 Lacs for gift cards, which were treated as bribes. The Tribunal remitted this matter back to the AO for re-adjudication, directing the assessee to substantiate their stand.Conclusion:Both appeals were partly allowed, with specific directions for re-adjudication where necessary. The Tribunal's order was pronounced on 06th June 2019.