AI Drafter 
TaxTMI 
TaxTMI 
2019 (10) TMI 122
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....s the 'Act') in pursuance of the directions issued by the Hon'ble Dispute Resolution Panel - 1 (WZ), (hereinafter referred to as the 'Hon'ble DRP') on the following grounds, each of which are without prejudice to one another: On the facts and in the circumstances of the case as well as in law, the learned AO/ Joint Commissioner of Income-tax (Transfer Pricing) - 2(3) ('TPO")/Hon'ble DRP, in fact and in law: Grounds 1. erred in assessing the total income of the Appellant at INR 2,30,29,38,703 as against INR 37,21.04,250 as computed by the Appellant; Transfer pricing grounds on Advertising, Marketing and Promotion ('AMP') adjustment 2. erred in making transfer pricing adjustment of INR 101,26,73,186 on account of AMP expenses incurred by the Appellant; AMP is not an international transaction 3. erred in considering the function of AMP as a separate purported international transaction for the purpose of transfer pricing adjustment; 4. erred in ignoring that the alleged AMP expenses incurred by the Appellant represents only domestic transactions undertaken with third parties/employees and are outside the purview of Sect....
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....transaction on account of AMP; No scientific approach while selecting comparable companies for bright line test 12. Without prejudice to the above, erred in cherry picking up of the comparable companies and has selected comparable companies of the preceding year without conducting a fresh search and thereby violated the principles of natural justice; 13. Without prejudice to the above, erred in considering Adinath Bio-Labs Limited as a comparable company not having similar product/ brand profile as the Appellant; Mark-up on AMP expenses 14. Without prejudice to the above, erred in disregarding that that even if the Appellant had to be compensated for the excessive AMP, in absence of any services element, the Appellant should be entitled to reimbursement of "actual" excessive AMP expenses incurred, rather than a mark-up on the same; 15. Without prejudice to the above, erred in holding that the Appellant should have earned a mark-up of 23.71% on the alleged excessive AMP expenses in relation to distribution segment, which are to be reimbursed to the Appellant; 16. Without prejudice to the above, erred in not adopting a sc....
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....udice to the above, erred in making disallowance/addition of convention expenses as a part of transfer pricing adjustment as well as corporate tax disallowance, thereby making double addition/disallowance, which is not permissible as per the law; Transfer Pricing Adjustment on account of recovery of expenses 27. erred in not following the binding directions issued by the Hon'ble DRP, wherein the Hon'ble DRP has directed to delete the transfer pricing adjustment of INR 1,32,76,277 on account of recovery of expenses, thereby exceeded its jurisdiction. Transfer Pricing Adjustment on account of reimbursement of expenses 28. erred in partly confirming the transfer pricing adjustment of INR 4,05,62,976 on account of reimbursement of expenses to the AEs by the Appellant by ignoring that the expenses were incurred by the AEs merely for facilitation and were reimbursed by the Appellant on cost to cost basis, thereby erred in holding that the expenses reimbursed by the Appellant are not in the nature of business expenses anddisallowing the same: 29. erred in determining the ALP of the transaction as Nil, without appreciating the sample evidence su....
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....ination of various quantitative and qualitative data which are essential for comparability analysis, the same cannot be considered as a comparable; 38. erred by not granting working capital adjustment while computing the operating margin of comparable companies for the purpose of determination of the ALP of the impugned international transaction; 39. erred by not granting risk adjustment while computing the operating margin of comparable companies for the purpose of determination of the ALP of the impugned international transaction: 40. Without prejudice to the above, erred in considering the reimbursement of expenses of INR 4,05,62,976 as part of operating cost, without appreciating that the value of said expense is taken as Nil by the TPO himself, thereby leading to double adjustment on the same; 41. erred in law in not applying the proviso to section 92C and not allowing the Appellant the benefit of variation of +/-3% in determining the ALP. Other direct tax disallowances Disallowance of depreciation on building 42. erred in disallowing an amount of INR 75,886 being depreciation on building without appreciating the f....
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.... Accommodation expenses 50. without prejudice to the above, erred in disallowing accommodation expense of INR 5,79,40,945 out of the convention expenses of INR 36,34,64,058, without appreciating the fact that the same was incurred for various medical practitioners attending the meeting/conference in the capacity of 'instructors/consultants' of the medical device company and not as 'delegates', the same would clearly fall outside the purview of the CBDT circular, 51. without prejudice to the above, erred in not appreciating the fact that the payment for the accommodation expenses had been directly made to medical associations and third party service providers and not to the medical practitioners, accordingly, the same is outside the purview of the MCI Regulations and CBDT circular; Continuing Medical Education Meetings ('CME Meetings') 52. without prejudice to the above, erred in not appreciating the fact that out of the convention expenses of INR 36,34,64,058, expenditure incurred for organizing CME Meetings of INR 67,39,275 is paid to third party agencies in the normal course of business, with the objective of disseminating ed....
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....al course of business and they are outside the purview of MCI Regulations and CBDT circular. 59. without prejudice to the above, erred in not appreciating the fact that the payment for car hire charges had been paid to independent third party service providers and not to medical practitioners and accordingly, the same is outside the purview of the MCI Regulations and CBDT circular; Double disallowance of convention expenses 60. without prejudice to the above, erred in holding that there is no double disallowance of the convention expenses without appreciating that the portion of the same has already been disallowed by the TPO/AO while computing the transfer pricing adjustment; Consequential depreciation on non-compete fee 61. erred in not granting consequential depreciation on non-compete fee held as capital expenditure in AY 2002-03 by the Hon'ble Income-tax Appellate Tribunal. Non-grant of credit of TDS amounting to INR 12,379 62. erred in granting credit of TDS amounting to INR 11,20,299 instead of INR 11,32,678 as claimed in the return of income. Levy of interest under section 234B of the Act 63. e....
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....essment order filed objectionswith the Dispute Resolution Panel-1 (for short 'DRP'). The DRP vide its order dated 17.09.2018 disposed off the objections filed by the assessee. The DRP in its order allowed certain reliefs to the assessee viz. (i) relief as regards the adjustment made by the TPO in respect of recovery of expenses: Rs. 1,32,76,227/-; (ii) partial relief on account of adjustment in respect of reimbursement of expenses: Rs. 73,19,620/-; and (iii) direction to the A.O to exclude the transfer pricing adjustment on account of import of finished goods of Rs. 49,60,24,206/- from the total quantum of adjustments. Subsequently, the A.O giving effect to the directions of the DRP passed the final assessment order under Sec. 143(3) r.w.s 144C(13), dated 31.10.2018 after making the following adjustments/disallowances: Sr. No. Particulars Amount (in INR) Transfer Pricing adjustment 1. Adjustment on account of AMP expenses 101,26,73,186 2. Adjustment on account of recovery of expenses from AEs 1,32,76,277 3. Adjustment on account of reimbursement of expenses to AEs 4,05,62,976 4. Alternate adjustment on account of import of finished goods....
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....it was observed by the TPO that a perusal of the 'Distribution Agreement' revealed that the assessee was obligated to market, distribute, advertise and promote the products and the brand of the AE. On the basis of his aforesaid deliberations, it was concluded by the TPO that as there was an arrangement between the assessee and its AEs to incur AMP expenses, therefore, there existed an international transaction. It was observed by the TPO that the AMP expenses incurred by the assessee in proportion to its sales worked out at 19.89%, as under: Sr. No. Particulars Amount (INR) 1. Selling and distribution expenses 2,59,70,977 2. Product giveaways and samples 13,12,94,798 3. Convention expenses 36,34,64,058 4. Salary, ages bonus and other payments (80%) 59,77,57,972 5. Travelling and conveyance expense (80%) 18,42,47,518 6. Depreciation on Plant & Machinery 6,33,05,274 Total 1,36,60,40,596 Sales 6,86,89,36,462 AMP to Sales 19.89% The TPO adopted the 'Bright Line Test' and computed the AMP to sales ratio of the comparable companies at 7.97%, as hereinbelow: Sr. No. Name....
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.... TPO had rightly selected Adinath Bio-Lab Ltd. as a comparable; (iii) that, the mark-up of 23.71% was rightly worked out by the TPO by selecting two companies engaged in the business of providing support services for computing the ALP of the AMP expenses incurred by the assessee; (iv) that, the TPO had rightly considered 80% of manpower expenses, travelling and conveyance cost as AMP expenses; and (v) that, the TPO had rightly concluded that in case the adjustment with respect to AMP expenses was vacated by the appellate authorities then an alternate adjustment on account of convention expenses i.e the amount which was found to be in excess of 7.97% of the said expenses of Rs. 33,44,95,973/- was to be made. 8. We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record. One of the issues for which our indulgence in the present appeal has been sought by the assessee is for adjudicating as to whether the AMP expenses incurred by the assessee is to be construed as an international transaction, or not. We have given a thoughtful consideration to the facts before us and find that the aforesaid iss....
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.... 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. We would like to reproduce the relevant portion of the order of the Thomas Cook (supra),wherein the identical issue has been dealt in length, and it reads as under: "8.3.We have heard the rival submissions and perused the material before us. In the earlier part of our order, we have mentioned that we would like to deal with the issue of AMP expenses for both the years at one place, as there is no change in the facts except for the amounts involved and the non adjudication of the issue in the earlier year. The arguments of the assessee for both the years are identical. We find that assessee had incurred an expenditure of Rs. 12,25,71,652/-and Rs. 10,01,37,032/-respectively for the earlier and current AY. under the head AMP, that it was paying name and licence fee to TCUK, that the TPO held that the assessee was spending much more than Industry average in promoting and building brand of TCUK, that he made an adjustment of Rs. 8.09 crores and Rs. 8.31 crores for the....
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....n shown to justify the setting aside the issue. Here, we would also like to refer to the case of Bosch and Lomb (supra) wherein all the arguments raised by the TPO & FAA/DRP have been deliberated upon in length and the relevant portion of the order reads as under: "53.A reading of the heading of Chapter X ['Computation of income from international transactions having regard to arm's length price"]and Section 92 (1) which states that any income arising from an international transaction shall be computed having regard to the ALP and Section 92C (1) which sets out the different methods of determining the ALP, makes it clear that the transfer pricing adjustment is made by substituting the ALP for the price of the transaction. To begin with there has to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the ALP. 54. Under Sections 92B to 92F, the pre-requisite for commencing the TP exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to deter....
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....) above cannot be read disjunctively. Even if resort is had to the residuary part of clause (b) to contend that the AMP spend of BLI is "any other transaction having a bearing" on its "profits, incomes or losses", for a 'transaction' there has to be two parties. Therefore for the purposes of the 'means' part of clause (b) and the 'includes' part. of clause (c), the Revenue has to show that there exists an 'agreement' or 'arrangement' or' 'understanding' between BLI -and B&L, USA whereby BLI is obliged to spend excessively on AMP in order to promote the brand of B&L, USA. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i) (a) to (e) to Section 92B are described as an 'International transaction'. This might be only an illustrative list, but significantly' it does not list AMP spending as one such transaction. 58. In Maruti Suzuki India Ltd. (supra), one of the submissions of the Revenue was: "The mere fact that the service or benefit has been provided by one party to the other would by itself constitute a transaction irrespective of whe....
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.... acting in concert" is not about a fortuitous relationship coming into existence by accident or chance. The relationship' can come into being only by design, by meeting of minds between two or more persons leading to the shared common objective or purpose of acquisition of substantial acquisition of shares etc. of the target company. It is another matter that the common objective or purpose may be in pursuance of an agreement' or an understanding, formal or informal; 'the acquisition of shares etc. may be direct or indirect or the persons acting in concert may cooperate in actual acquisition of shares etc. or they may agree to, cooperate in such acquisition. Nonetheless, the element of the shared common objective or purpose is the sine qua non for the relationship of "persons acting in concert" to come into being. " 60. The transfer pricing adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceeding to make the adjustment of the difference in order to determine the value of....
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....LT. In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the ALP. The Court does not see this as a machinery provision particularly -in-light of the fact that -the-BLT has been expressly negatived by the Court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established de hors the BLT, 70. What is clear is that it. is the 'price' of an international transaction which is required to be adjusted: The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an adjustment had to be made. The -burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed 'price' of such transaction and thereafter ask whether it is an ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdictio....
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....air 'compensation' an Indian entity would be entitled to if it is found' that there is an International transaction in that regard. In practical terms, absent a clear statutory guidance, this may encounter further difficulties. The strength of a brand,which could be product specific, may be "impacted by numerous other imponderables not limited to the nature of the industry, the geographical peculiarities, economic trends both international and domestic, the consumption patterns, market behaviour and so on.A simplistic approach using one of the modes similar to the ones contemplated by Section 92C may not only be legally impermissible but will lend itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which provides the necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance." 64. In the absence of any machinery provision, bringing an imagined transaction to tax is not possible. The decisions in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) and PNB Finance Ltd. v, CIT (2008) 307 ITR 75 (SC) make this position explicit. Therefore,where the existence....
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.... that AMP expenses incurred by the assessee had been held by us as not being an international transaction, therefore, the other grounds on the basis of which the TP adjustment in respect of the said issue had been assailed before us would be rendered as merely academic in nature. Accordingly, the Grounds of appeal No. 2 to 23 are disposed off in terms of our aforesaid observations. 9. We shall now advert to the claim of the ld. A.R that the DRP had erred in partly confirming the secondary adjustment made by the TPO by holding that in case the adjustment of AMP expenses is not sustained by the appellate authorities, then the convention expense to the extent of 92.03 percent i.e INR 33,44,95,973/- should be considered to be in the nature of expenses incurred towards brand building and business promotion, and, thereby an adjustment should be made as regards the same. It was submitted by the ld. A.R that the 'convention expenses' incurred by the assessee in the normal course of its business had wrongly been held by the TPO/DRP as AMP expenses. It is the claim of the ld. A.R that the convention expenses incurred by the assessee were in the nature of selling expenses and could not hav....
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.... to delete the transfer pricing adjustment of Rs. 1,32,76,277/- on account of recovery of expenses. The ld. A.R. had submitted that the said grievance of the assessee no more survives as the aforesaid infirmity in the order of the A.O has been rectified by him vide his order passed under Sec.154, dated 14.03.2019. Accordingly, in the backdrop of the aforesaid concession on the part of the ld. A.R the Ground of appeal No. 27 is dismissed as withdrawn. 12. We shall now advert to the transfer pricing adjustment made by the TPO on account of reimbursement of expenses of Rs. 4,05,62,976/- which as claimed by the assessee were incurred by the AEs for and on its behalf. The said expenses are stated to have been incurred by the AEs on behalf of the assessee purely on account of administrative convenience, which as stated by the ld. A.R were thereafter reimbursed by the assessee on cost to cost basis. It is the claim of the ld. A.R that the assessee had in the course of the proceedings before the TPO submitted sample invoices and back-up documents amounting to Rs. 98,38,005/- pertaining to the aforesaid expenses which were reimbursed to the AEs. As is discernible from the order of the....
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.... of the assessee purely on accountof administrative convenience, therefore, the same were reimbursed by the assessee to them on cost to cost basis. Accordingly, it was the claim of the ld. A.R that the TPO was in error in concluding that the expenses which were reimbursed by the assessee were not in the nature business expenses and were thus liable to be disallowed. 15. We have given a thoughtful consideration to the issue before us. As is discernible from the orders of the lower authorities, the assessee had in the course of the proceedings before the TPO submitted sample invoices and back up documentswhich are claimed to have substantiated the cost to cost nature of the abovementioned expenses aggregating to Rs. 98,38,005/-. Apart therefrom, in the course of the proceedings before the DRP, the assessee had further filed additional documents substantiating the incurring of the abovementioned expenses of Rs. 73,19,620/-. Also, the broad categories of the nature of the expenses incurred by the AEs for and on behalf of the assessee were submitted by the assessee in the course of the proceedings before the TPO/DRP. As is discernible from the orders of the lower authorities, the ....
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....stment would be warranted in respect of the same. We find that the DRP after perusing the copies of the invoices and samples supporting the reimbursement of expensesaggregating to Rs. 73,19,620/- which were furnished by the assessee by way of 'additional evidence', had observed, that as the payment of the said amount was towards reimbursement on cost to cost basis by the assessee of the expenses which the AEs had incurred on its behalf, involving no service element, therefore, no obligation was cast upon the assessee to demonstrate the benefit received by it against making of such payments. It was further observed by the DRP that even in a third party scenario the assessee would have paid these amounts to the person who would had incurred the said expenses on its behalf. Accordingly, in the backdrop of its aforesaid observations the DRP had concluded that to the extent the assessee was able to substantiate the cost to cost nature of the reimbursement of expenses aggregating to Rs. 73,19,620/- (on the basis of documents which were filed in the course of the proceedings before it), it would be entitled to benefit to the said extent on production of the supporting details during th....
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....to the assessee. The Grounds of appeal Nos. 28 to 31 are allowed for statistical purposes in terms of our aforesaid observations. 17. We shall now advert to the transfer pricing adjustment of Rs. 49,60,24,206/- made on account of import of finished goods by the assessee company from its AEs. The assessee has assailed the aforesaid TP adjustment on multiple grounds which shall be adverted to by us in a chronological manner. Briefly stated, the assessee company had during the year under consideration carried out the following international transactions with its AEs: Sr. No. Nature of International Transactions Amount (in Rs.) Method adopted 1. Purchase of finished goods for Resale 411,27,23,732 TNMM 2. Purchase of capital assets 10,80,53,018 TNMM 3. Receipts of management fee in respect of direct sales made by AEs in India 2,21,55,658 TNMM 4. Provision of support services to AEs 1,11,11,242 TNMM 5. Reimbursement of expenses 4,78,82,596 Other Method 6. Recovery of expenses 13,27,62,769 Other Method Total 443,46,89,015 The assessee had in its 'Transfer Pricing Study Report' (for sh....
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....domain for the purpose of computing its margins. However, the TPO was of the view that as the PLI of the said company could be gathered from its 'annual report' for the succeeding year viz. F.Y. 2014-15 which was available in the public domain, therefore, the said company could safely be includedin the final list of comparables. The TPO also did not find favour with the claim of the assessee that 'foreign exchange gain' was to be treated as 'operating income' for the purpose of computing its margin. The TPO after including the aforesaid two companies which were excluded by the assessee in the course of the TP proceedings from the final list of comparables viz. (i) ADS Diagnostic Ltd. (segmental); and (ii) Confident Sales India Pvt. Ltd., therein, on the basis of the single year unadjusted margins worked out the ALP of the comparables at 9.90%, after considering the foreign exchange gain/loss as non-operating in nature. Accordingly, the TPO made an adjustment of Rs. 49,60,24,206/- in relation to the international transactions of import of finished goods by the assessee from its AEs, as under: Sr. No. Particulars Reference Amount (INR) 1. Operating Income A 6,....
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....y more. Accordingly, the aforesaid claim of the assesee is rejected. The Ground of appeal No. 33 is dismissed. 21. We shall now take up the claim of the assessee that the TPO/DRP had erred in rejecting the use of multiple year data by the assessee for computing the ALP of its transactions of import of goods from the AEs. We have perused the orders of the lower authorities and are unable to persuade ourselves to subscribe to the aforesaid claim of the assessee. As per Rule 10B(4) of the Income-tax Rules, 1962, the data to be used for analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. As per the exception carved out in the proviso to Rule 10B(4), the data relating to a period not more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of the transfer prices in relation to the transactions being compared. As is discernible from the records, the assessee in the case before us had failed to establish as to how the financial data for the earl....
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....bles selected had no hedging income or expenses as is discernible from their 'annual reports'. The aforesaid claim of the assessee had not been dislodged by the lower authorities. The ld. A.R in support of his aforesaid claim that foreign exchange fluctuations are to be considered while computing the operating income, had relied on the order of the ITAT, Delhi in the case of Vaildor Capital India Pvt. Ltd. Vs. ITO, Ward 26(1), New Delhi [ITA No.1961/Del/2015], dated 22.11.2018. Apart there from, we find that even as per OECD TP guidelines, 2017, if a transactional net margin method is applied to a transaction in which the foreign exchange risk is borne by the tested party, the foreign exchange gains or losess should be considered as operating in nature. Also, a similar view had been taken by the various High Court's and coordinate benches of the Tribunal in the following cases: i. Rampgreen Solutions Pvt. Ltd. Vs. PCIT (ITA No.340/2016) - Hon'ble Delhi High Court ii. Vaildor Capital India Pvt. Ltd. Vs. ITO (ITA No. 1961/Del/2015) iii. M/s S. Narendra Vs. Addl CIT (ITA No. 6839/Mum2012); iv. M/s Sumit Diamond (India) Pvt. Ltd. Vs. Addl. CIT [ ITA ....
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.... from the final list of comparables of the purpose of computing the ALP of the international transactions of import of goods by the assessee during the year under consideration. The Grounds of appeal Nos. 36 & 37 are disposed off in terms of our aforesaid observations. 25. We shall now advert to the claim of the assessee that the TPO/DRP had erred in not granting working capital adjustment while computing the operating margin of the comparable companies for the purpose of determining the ALP of the international transactions of import of goods by the assessee from its AEs during the year under consideration. It is the claim of the assessee that working capital adjustments is an adjustment for the opportunity cost of capital for investments made in working capital. It is stated by the assessee that investment in working capital (i.e inventories, gains receivable/debtors and accounts payable) would require capital and operating assets, and an uncontrolled entity is expected to earn a market rate of return on that required capital independent of the services that it provides. It is the claim of the assessee that working capital yields a return resulting from viz. (i). higher sales ....
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....he open market. Apart there from, the assessee has also assailed the correctness of the observation of the DRP that ther was a cessation of the agency business of the assessee in December, 2012. We thus are of the considered view that the matter in all fairness requires to be revisited by the DRP for afresh adjudication on the issue pertaining to working capital adjustment in the hands of the assessee. Needless to say, the TPO in the course of the 'set aside' proceedings shall afford a reasonable opportunity of being heard to the assesse who shall remain at a liberty to substantiate its claim. The Ground of appeal No. 38 is allowed for statistical purposes. 27. We shall now take up the claim of the assessee that the DRP has erred in not allowing risk adjustment while computing the operating margin of the comparable companies for the purpose of determination of the ALP of its international transactions of import of goods. As the said issue does not emanate from the impugned order of the DRP, therefore, we refrain from adverting to and adjudicating the same. The Ground of appeal No. 39 is dismissed. 28. We shall now take up the grievance of the assessee that the DRP has erred i....
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....im of the assessee that the lower authorities had erred in disallowing depreciation on building of Rs. 75,886/-.The assessee which was earlier engaged in the business of manufacturing and trading had discontinued with its manufacturing processes w.e.f 25.01.2002. The claim of depreciation raised by the assessee on building was declined by the A.O on the ground that the said asset was not utilised during the year. The A.O while disallowing the assesses claim for depreciation had relied on the orders passed by his predecessor in the earlier years i.e A.Y. 2006-07 to A.Y. 2012-13 and the directions of the DRP for A.Y. 2006-07 wherein the aforesaid disallowance was confirmed. We find that the aforesaid action of the A.O for the year under consideration had been upheld by the DRP.It is the claim of the Ld. A.R that an asset forming part of the 'block of assets'looses its individual identity and becomes an inseparable part of the 'block of assets' for the purpose of its eligibility for depreciation on the same. Accordingly, it is the claim of the ld. A.R that once the asset had entered into the 'block of asset' and the same had been accepted by the A.O, then in the subsequent years thoug....
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....(ITA No. 7555/Mum-2012); (iv) A.Y. 2009-10 (ITA No. 2167/Mum/2014); (v) A.Y. 2010-11 (ITA No. 1600/Mum/2015; (vi) A.Y. 2011-12 (ITA No. 1246/Mum/2016); and (vii) A.Y. 2013,had directed the A.O to allow depreciation on plant and machinery and building as claimed by the assessee. We thus respectfully following the view taken by the Hon'ble High Court of jurisdiction in respect of the issue under consideration, and also the orders of the Tribunal in the assesses own case for the aforementioned years delete the disallowance of depreciation on building of Rs. 75,886/-. The Ground of appeal No. 42 is allowed. 32. We shall now advert to the contention of the ld. A.R that the A.O had erred in disallowing an amount of Rs. 36,34,64,858/- on account of payment of 'convention expenses' without appreciating the fact that the code of conduct laid down by the Indian Medical Council (professional conduct, etiquette & ethics) Regulations, 2002 ("MCI Regulations") issued w.e.f 10.12.2009 applied only to medical practitioners and was not applicable to the assessee company which was engaged in the business of importing/trading of medical equipment. In sum and substance, it is the claim of the asses....
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....id view was again reiterated by the Tribunal in the assesses own case for A.Y 2011-12 (ITA No. 1246/Mum/2016), dated 02.05.2018; A.Y 2012-13 (IT (TP) A No. 216/Mum/2017, dated 27.05.2019; and A.Y 2013-14 (ITA No. 601/Mum/2018). 34. We have given a thoughtful consideration to the issue before us and find substantial force in the contentions advanced by the ld. A.R as regards the allowability the convention expenses of Rs. 36,34,64,058/- that were incurred by the assessee in the normal course of its business for creating a market for its products across the country. We have deliberated at length on the issue under consideration and are in agreement with the claim of the ld. A.R that the issue as regards the allowability of the 'convention expenses' is squarely covered by the orders of the Tribunal in the assesses own case for the aforementioned preceding years. Apart there from, we find that the issue that the case of the assessee before us would not be hit by the 'Explanation 1' to Sec. 37 of the I.T. Act, can also safely be gathered from the order of a coordinate bench of the Tribunal i.e ITAT "A" Bench, Mumbai in the case of Aristo Pharmaceuticals Pvt. Ltd. Vs. ACIT (ITA No. 66....
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....terial available on record. We find that our indulgence in the cross appeals filed by the assessee and the revenue has been sought for adjudicating the allowability of the sales promotion expenses incurred by the assessee on the distribution of articles to the stockists, distributors, dealers, customers and doctors, in the backdrop of the CBDT Circular No. 5/2012, dated 01.08.2012 and the MCI regulations. We find that it is the case of the revenue that as per the CBDT Circular No. 5/2012, dated 01.08.2012 any expense incurred by a pharmaceutical or allied health sector industry in providing any "freebies" to medical practitioners or their professional associations in violation of the regulation issued by Medical Council of India which is a regulatory body constituted under the Medical Council Act, 1956, would be liable to be disallowed in the hands of such pharmaceutical or allied health sector industry or any other assessee which had provided such "freebies" and claimed the same as a deductible expense against its income in the accounts. 21. We have deliberated at length on the issue under consideration and after perusing the regulations issued by the Medical Council of I....
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....f conduct would not cover the pharmaceutical company or healthcare sector in any manner. We are further of the view that in the backdrop of our aforesaid observations, as the Medical Council of India does not have any jurisdiction under law to pass any order or regulation against any hospital, pharmaceutical company or any healthcare sector, then any such regulation issued by it cannot have any prohibitory effect on the manner in which the pharmaceutical company like the assessee conducts its business. On the basis of our aforesaid observations, we are unable to comprehend that now when the MCI has no jurisdiction upon the pharmaceutical companies, then where could there be an occasion for concluding that the assessee company had violated any regulation issued by MCI. We thus, in terms of our aforesaid observations are of the considered view that even if the assessee had incurred expenditure on distribution of "freebies" to doctors and medical practitioners, the same though may not be in conformity with the Indian Medical Council (Professional Conduct, Etiquette and Ethics) regulations, 2002 (as amended on 10.12.2009), however, as the same only regulates the code of conduct of the ....
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.... Thus, the claim of any expense incurred in providing above mentioned or similar freebees in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible under section 37(1) of the Income Tax Act being an expense prohibited by the law. This disallowance shall be made in the hands of such pharmaceutical or allied health sector Industries or other assessee which has provided aforesaid freebees and claimed it as a deductible expense in its accounts against income. 4. It is also clarified that the sum equivalent to value of freebees enjoyed by the aforesaid medical practitioner or professional associations is also taxable as business income or income from other sources as the case may be depending on the facts of each case. The assessing officers of such medical practitioner or professional associations should examine the same and take an appropriate action. This may be brought to the notice of all the officers of the charge for necessary action." We may herein observe that a perusal of the aforesaid CBDT Circular reveals that the "freebies" provided by the pharmaceutical comp....
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....ebar the doctors or the registered medical practitioners and not the pharmaceutical companies and the allied healthcare sector for claiming the same as an expenditure." 35. We are further of the considered view that even otherwise the enlargement of the scope of MCI regulations to the case of the assessee before us i.e a trader in medical equipments, is de hors any enabling provision either under the Income Tax Act or under the Indian Medical Council Regulations. In our considered view, though the CBDT can tone down the rigours of law in order to ensure a fair enforcement of the provisions by issuing circulars for clarifying the statutory provisions, however, it is divested of its powers to create a new impairment adverse to an assessee or to a class of assesses without any sanction or authority of law. We find that the aspect that the CBDT is divested of it powers to enlarge the scope of MCI regulation without any enabling provision either under the Income tax Act or the Indian Medical Regulations was also deliberated upon by the Tribunal in the case of Aristo Pharmaceuticals Pvt. ltd. Vs. ACIT (ITA No. 6680/Mum/2012, dated 26.07.2018), wherein in context of the issue under con....
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....e considered view that the burden imposed by the CBDT vide its aforesaid Circular No. 5/2012, dated 01.08.2012 on the pharmaceutical or allied health sector industries, despite absence of any enabling provision under the Income Tax law or under the Indian Medical Council Regulations, clearly impinges on the conduct of the pharmaceutical and allied health sector industries in carrying out its business. We thus, in the absence of any sanction or authority of law on the basis of which it could safely be concluded that the expenditure incurred by the assessee company on sales promotion expenses by way of distribution of articles to the stockists, distributors, dealers, customers and doctors, is in the nature of an expenditure which had been incurred for any purpose which is either an offence or prohibited by law, thus conclude that the same would not be hit by the Explanation to Sec. 37(1) of the Act." Apart there from, we find that the Tribunal in the assessee own case for A.Y. 2011-12 (ITA No. 1246/Mum/2016, dated 02.05.2018); A.Y. 2012-13 (ITA No. 2160/Mum/2017, dated 27.05.2019); and A.Y. 2013-14 (ITA No. 601/Mum/2016, dated 08.05.2019), had deleted a similar disallowan....
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....aken by the A.O that the non-compete fee incurred by the assessee was a 'capital expenditure', which being in the nature of any other business or commercial right would be eligible for depreciation under the provisions of the Act. It is the claim of the assessee that in the years subsequent to A.Y. 2002- 03, the Tribunal while disposing off the appeal of the assessee for A.Y. 2003-04 (ITA No. 1245/Ahd/2008), A.Y. 2004-05 (ITA No. 812/Ahd/2008), A.Y. 2008-09 (ITA No. 7555/Mum/2012), A.Y. 2011- 12 (ITA No. 1246/Mum/2016 ) and A.Y. 2013-14 (ITA No. 3461/Mum/2018) had accepted the aforesaid claim of the assessee and had directed the A.O to allow the consequential depreciation to the assessee. Accordingly, it is the claim of the assessee before us that the issue as regards allowability of depreciation on non-compete fees is squarely covered in favour of the assessee by the orders of the Tribunal in the aforementioned preceding years. 37. We have perused the orders of the Tribunal in the assesses own case for the aforementioned preceding years and are persuaded to subscribe to the claim of the ld. A.R that the issue as regards the allowability of depreciation on non-compete fees is sq....