2023 (3) TMI 546 - AT - Income Tax

Tribunal grants relief on transfer pricing issues, upholds Assessee's challenge on TNMM vs. RPM methods

India Medtronic Pvt. Ltd. Versus Dy. Commissioner of Income Tax Circle–1 (2), Baroda  

India Medtronic Pvt. Ltd. Versus Dy. Commissioner of Income Tax Circle–1 (2), Baroda   - TMI Issues Involved:1. Rejection of Transactional Net Margin Method (TNMM) and selection of Resale Price Method (RPM) for benchmarking international transactions.2. Selection of comparables for transfer pricing analysis.3. Addition on account of adjustment in the arm's length price of international transactions.4. Addition of notional income from direct sales by Associated Enterprises (AEs) in India.5. Disallowance of depreciation on plant and machinery and building.6. Disallowance of provision for commission payable to distributors.7. Disallowance of expenses incurred on gifts.8. Disallowance of expenses incurred for sponsoring foreign trips of doctors.9. Disallowance of depreciation on goodwill.10. Disallowance of reversal of professional fees.11. Charging of interest under sections 234B and 234C of the Income Tax Act.12. Initiation of penalty proceedings under section 274 read with section 271 of the Income Tax Act.13. Non-granting of consequential depreciation on non-compete fees.14. Deduction of education cess on income tax.Detailed Analysis:1. Rejection of TNMM and Selection of RPM:The Assessee challenged the rejection of TNMM and the selection of RPM by the Transfer Pricing Officer (TPO) for benchmarking the transaction of import of finished goods from AEs. The TPO applied RPM by considering Medtronic Malaysia as a comparable, leading to an adjustment of Rs. 16,79,78,272. The tribunal noted that the TPO erred in considering Medtronic Malaysia as comparable due to significant differences in activities, economic factors, and market conditions. The tribunal upheld TNMM as the most appropriate method, as accepted in subsequent years, and allowed the grounds related to this issue.2. Selection of Comparables:The tribunal found that the TPO's selection of Medtronic Malaysia as a comparable was flawed. The tribunal emphasized that only the gross margin derived from an uncontrolled transaction can be considered for comparability analysis. The tribunal referred to the decision in the case of Audco India Ltd., which supported the Assessee's position. Consequently, the tribunal allowed the grounds challenging the selection of comparables.3. Addition on Account of Adjustment in Arm's Length Price:The TPO's adjustment based on the gross profit margin of Medtronic Malaysia was rejected by the tribunal. The tribunal held that the TPO should not have considered the margin earned by Medtronic Malaysia, as it was a controlled transaction and situated in a different geographical location. The tribunal upheld the Assessee's use of TNMM and deleted the addition.4. Addition of Notional Income from Direct Sales by AEs:The Assessee contested the addition of notional income from direct sales made by AEs to third parties in India. The tribunal noted that the TPO did not use any prescribed method to determine the notional commission income. The tribunal referred to its earlier decisions in the Assessee's own case, where similar additions were deleted. The tribunal restored the issue to the Assessing Officer (AO) for fresh adjudication, following the directions given in previous years.5. Disallowance of Depreciation on Plant and Machinery and Building:The Assessee claimed depreciation on plant and machinery and building, which was disallowed by the AO on the ground that the assets were not utilized during the year. The tribunal held that once an asset forms part of the block of assets, depreciation is allowable on the written down value of the block, irrespective of its actual use. The tribunal directed the AO to allow the depreciation as claimed by the Assessee.6. Disallowance of Provision for Commission Payable to Distributors:The Assessee did not press this ground, and the tribunal dismissed it as not pressed.7. Disallowance of Expenses Incurred on Gifts:The AO disallowed the expenditure on gift articles, holding that it was not for the purpose of the Assessee's business. The tribunal, following its earlier decisions in the Assessee's own case, held that the expenditure was incurred wholly and exclusively for the purpose of business and allowed the claim.8. Disallowance of Expenses Incurred for Sponsoring Foreign Trips of Doctors:The AO disallowed the expenditure on foreign trips of doctors, relying on the Medical Council of India (MCI) regulations. The tribunal noted that the MCI regulations were effective from 14 December 2009 and applied to expenses incurred thereafter. Since the expenses in question were incurred before this date, the tribunal allowed the claim.9. Disallowance of Depreciation on Goodwill:The AO disallowed the claim of depreciation on goodwill, which was contested by the Assessee. The tribunal, following the decision of the Supreme Court in CIT v. Smifs Securities Ltd., held that goodwill is an intangible asset eligible for depreciation. The tribunal allowed the claim of depreciation on goodwill.10. Disallowance of Reversal of Professional Fees:The Assessee claimed that the reversal of professional fees, which was disallowed in an earlier year, should not be taxed again. The tribunal directed the AO to delete the addition, following its earlier decision in the Assessee's own case.11. Charging of Interest under Sections 234B and 234C:The tribunal held that charging of interest under sections 234B and 234C is mandatory and consequential, and dismissed the ground.12. Initiation of Penalty Proceedings:The tribunal found the ground premature and dismissed it.13. Non-Granting of Consequential Depreciation on Non-Compete Fees:The Assessee claimed depreciation on non-compete fees, which was allowed by the tribunal in earlier years. The tribunal directed the AO to allow the depreciation on the opening written down value of the non-compete fee.14. Deduction of Education Cess:The Assessee withdrew this ground, and the tribunal dismissed it accordingly.Conclusion:The tribunal allowed the Assessee's appeal partly, providing relief on several grounds related to transfer pricing adjustments, disallowances, and depreciation claims. The tribunal's decisions were based on consistent views taken in the Assessee's own cases in earlier years and relevant judicial precedents.