TaxTMI 
TaxTMI 
2023 (3) TMI 546
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....ter referred to as the 'learned TPO')] erred in making an addition of Rs 19,31,22,890 on account of adjustment in the arm's length price of international transaction of purchase of goods from Associated Enterprises ('AE') and notional income from direct sales by AE in India". 3. "the learned AO erred in making a reference to the learned TPO without satisfying the preconditions under section 92CA of the Act necessary for making such reference". 4. "the learned AO/ TPO erred in rejecting the transfer pricing documentation maintained by the Appellant as per rule 10D (1) of the Income-tax Rules, 1962". 5. "the learned AO/ TPO erred in selecting Resale Price Method ('RPM') as the most appropriate method and in rejecting the Transactional Net Margin Method ('TNMM') selected by the appellant". 6. "the learned AO/ TPO erred in rejecting the certain comparables for the comparability analysis under TNMM". 7. "the learned AO/ TPO erred in selecting Medtronic International Limited, operations in Malaysia (a group entity - AE) as comparable for benchmarking international transaction under RPM and making adjustment of Rs 16,79,78,272 without appreciating that the transaction by AE....
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....on ought to be allowed as a deduction under Section 37(1) of the Act while computing the total income". 3. In ITA No. 480/Ahd/2011, the assessee has raised the following grounds of appeal AY 2005-06: 1. The learned CIT(A) while adjudicating the appeal for AY 2005- 06, erred in merely following the order of learned CIT(A) for the AY 2004-05 and Honorable Dispute Resolution Panel ('DRP') for AY 2006-07 without discussing the facts of the case and legal merits for AY 2005-06". 2. "erred in facts and law in upholding the rejection of the Transactional Net Margin Method ('TNMM') as the most appropriate method for benchmarking the international transaction of import of goods from AEs made by the transfer pricing officer ('TPO')/ Assessing Officer ('AO')". 3. "erred in fact and in law in upholding that Resale Price Method ('RPM') is the most appropriate method". 4. "erred in upholding Medtronic International - Malaysia Operations ('Medtronic Malaysia') as a comparable company in respect of import prices of goods purchased from associated enterprises ('AEs'), in violation of the fundamental principles of Indian transfer pricing regulations, such as i. Medtronic Malaysia und....
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....of expenses incurred for sponsoring the foreign trips of doctors, etc. under section 37 of the Act". 17. "erred in confirming the treatment of expenses of Rs 1,09,985 being revenue expenditure incurred for the development of software as capital expenditure". 18. "erred in upholding disallowance of Rs 3,07,617 being depreciation on goodwill acquired at the time of purchase of assets from M/s. Medtech Devices Limited". 19. "without prejudice to above, further erred in not directing the AO to allocate the value of goodwill to the respective assets as the amount paid and accounted for goodwill in the books of account represented excess of amount paid over the assets purchased from M/s. Medtech Devices Limited". 20. "erred in confirming disallowance of Rs 18,82,290 being the amount of EMD written off" 21. "erred in not specifically directing the AO to compute interest under section 234C as per the revised return of income" 22. "Erred in not granting consequential depreciation on noncompete fees as the same is held to be capital in nature in AY 2002- 03". 23. "Based on facts and the circumstances of the case and in law, the appellant prays that the education cess on ....
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....determining the arm's length price of such transactions. In the course of transfer pricing proceedings, the Transfer Pricing Officer on examining the audit report filed by the Assessee in Form no.3CEB as well as the transfer pricing study report, found that for benchmarking the international transactions, the Assessee had adopted TNMM as the most appropriate method with operating profit / operating revenue as the Profit Level Indicator (PLI). 8. While benchmarking the transaction under TNMM, the Assessee had selected eight comparable companies with arithmetic mean of 3.77% as against the margin shown by the Assessee @ 8.71%. Accordingly, the transaction with the AE with regard to purchase of finished goods was claimed to be at arm's length. After examining the transfer pricing study report of the Appellant, the Transfer Pricing Officer found various defects and deficiencies in it. He observed, though the Assessee considers itself as a distribution company, however, it is carrying out marketing and distribution activities in India. Further, the Transfer Pricing Officer also pointed out defect in accepting TNMM as the most appropriate method to benchmark the transaction. Fur....
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.... Bombay High Court's decisions in case of Audco India Ltd., ITA no.1829/2016. 11. Without prejudice to the aforesaid submission, the learned Counsel submitted, in the transfer pricing study report, the Assessee had made a proper analysis on scientific basis to show that TNMM and not RPM is the most appropriate method. He submitted, while benchmarking the transactions with the AE under TNMM, the Assessee has considered uncontrolled comparable companies. He submitted, TNMM has been accepted as the most appropriate method to benchmark the import of finished goods in Appellant's own case from assessment year 2008-09 onwards. Further, the Hon'ble tribunal has accepted TNMM as most appropriate method for AY 2007-09 vide its order dated 16 October 2019. Thus, he submitted, Hon'ble DRP was not justified in upholding the Transfer Pricing Officer's decision in rejecting TNMM. 12. We have heard the submissions made by the learned counsel and perused the material on record. We have also applied our mind to the decisions relied upon. Undisputedly, the Assessee has benchmarked the transaction relating to import of finished goods from AE by applying TNMM as the most appropriate method. Whereas,....
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....rned Commissioner (Appeals). No material has been brought on record by the Revenue to demonstrate that gross profit margin of 42% is the actual margin of the assessee and is not a target margin. Moreover, the Transfer Pricing Officer while applying RPM has referred to the gross margin earned by the Medtronic International Ltd., Malaysia, for adopting gross profit margin of 42%. On examination of the provisions of rule 10B(1)(b), it is clear that even under RPM only the gross margin derived on an uncontrolled transaction can be considered for comparability analysis. Therefore, under no circumstances, the margin earned in a controlled transaction can be considered for comparability purpose. That being the case, the margin earned by Medtronic International Ltd., Malaysia, could not have been considered by the Transfer Pricing Officer not only because it is a case of controlled transaction, but it is situated in a different geographical location. In this context, we may refer to the decision of the Hon'ble Jurisdictional High Court in Audco India Ltd. (supra). Though, we do not discount the proposition that in case of distribution/resale of goods imported from A.E., RPM could be a ....
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....f finished goods from the AE by applying TNMM, but the Transfer Pricing Officer has also accepted it as the most appropriate method. For the aforesaid reasons, we do not feel the necessity to restore the issue to the Assessing Officer/Transfer Pricing Officer for fresh adjudication. The Revenue has not been able to controvert the submissions of learned counsel for the Assessee nor any decision contrary to the decision of Tribunal in Appellant's own case has been furnished by the Revenue. Thus, we find no reason to take a contrary view, hence, ground No. 4 to 7 of the appeal are allowed in similar terms.As the assessee's appeal for grounds 4 to 7 are allowed, ground no. 9 of the Assessee's appeal becomes infructuous and dismissed accordingly. 16. In ground no. 8, the Assessee has challenged the transfer pricing adjustment on account of direct sales made by the AE to third parties in India. 17. Brief facts are, apart from the sales of finished goods to the Assessee who acts as a distributor in India, the AEs have also effected direct sales to third party customers in India. The Transfer Pricing Officer was of the view that net profit on such sale should have been taxed in India as ....
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.... for consideration before the Tribunal and while deciding the issue, the Tribunal held that no such addition on account of notional commission can be made without using any prescribed method, as under: "19. We have considered the submissions of the parties and perused the material available on record. On a careful reading of the order passed by the transfer pricing officer under section 92CA(3), it is patent and obvious that while determining the commission supposedly earned by the assessee towards direct sales effected by the overseas entity to hospitals in India, he has not resorted to any of the methods approved under section 92C of the Act. At least, we have not found any such observations after transfer pricing officers in order in the order passed by him. As could be seen, the transfer pricing officer has not disputed the sales were directly made by overseas entity to the hospital in India. Therefore, there must be some basis for the transfer pricing officer to conclude that the assessee has rendered services of any manner in relation to such transactions. Without bringing any material on record or applying any of the approved method for determining the arm's length price o....
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....sed during the year. The A.O while disallowing the assessee's claim for depreciation had relied on the orders passed in earlier years. We find that the aforesaid action of the A.O for the year under consideration had been upheld by the DRP. 25. 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 though the said asset forming part of the block may not be used for the purpose of the business, however, the claim of consequential depreciation in respect of the said „block of asset‟ cannot be disturbed and has to be accepted. The stand of the assessee is that plant and machinery and building in question forms part of the block of assets and continue to exist even after manufacturing was discontinued. Further, Tribunal in assessee's own case for various assessment years has allowed the depreciation plant and machinery and building for similar issue. 26. We have given a thoughtful consideration to the aforesaid claim of the assessee and find substantial force in the same. We are of the considered view, that pursuant to the introduction of the depreciation on the....
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....ings, the Assessing Officer noticing that the assessee has claimed deduction on account of expenditure incurred towards gift articles given to customers called upon the assessee to justify the claim. After rejecting the explanation of the assessee and relying on the earlier year order, he disallowed the amount of Rs. 3,01,066/-, on the reasoning that it was not for the purpose of assessee's business. Assessee challenged the disallowance before the first appellate authority. The DRP holding that the Assessee was unable to adduce any evidence that the said expenditure was incurred wholly and exclusively for the purpose of the business, sustained the disallowance made by the Assessing Officer. 32. The learned Authorised Representative submitted, being a distributor dealing with life saving medical devices which require education and awareness programme to be conducted in order to be able to create a market which is highly competitive, the assessee has to incur expenditure in providing gift to valued customers during product launches. Thus, he submitted, the expenditure incurred being purely and exclusively for the purpose of assessee's business has to be allowed. He submitted, identi....
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...., the assessee has challenged disallowance of expenditure incurred in respect of foreign trip of doctors. Brief facts are, during the assessment proceedings, the Assessing Officer noticing that the assessee has claimed deduction of Rs. 41,88,153/-, on account of foreign trip of doctors, called upon the assessee to justify its claim. In response, it was submitted by the assessee that the expenditure had to be incurred for foreign trip of doctors to attend seminars, meetings, conferences etc. so as to enable them to use the products sold by the assessee. The AO disallowed the said expenditure relying on the assessment order for earlier years holding that same were not incurred wholly and exclusively for the purpose of business and stated that the benefit of such expenditure flowed to doctors rather than the Assessee. The DRP confirmed the disallowance made by the AO and held that the said expenditure is disallowable under section 37 of the Act referring to the notification dated 10 December 2009 issued by the Medical Council of India which amended the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002. 38. Learned A.R. for assessee submitted that M....
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....post 14 December 2009. TheHon'ble SC of India in the case of Apex Laboratories Pvt. Ltd. vs. DCIT, (supra) in its order has observed as follows: "19.The CBDT circular dated 01.08.2012 is set out below: 1. It has been brought to the notice of the Board that some pharmaceutical and allied health sector Industries are providing freebees (freebies) to medical practitioners and their professional associations in violation of the regulations issued by Medical Council of India (the 'Council') which is a regulatory body constituted under the Medical Council Act, 1956. 2. The council in exercise of its statutory powers amended the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (the regulations) on 10-12-2009 imposing a prohibition on the medical practitioner and their professional associations from taking any Gift, Travel facility, Hospitality, Cash or monetary grant from the pharmaceutical and allied health sector Industries. 3. Section 37(1) of Income Tax Act provides for deduction of any revenue expenditure (other than those failing under sections 30 to 36) from the business Income if such expense is laid out/expended wholly o....
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....ve its employee's life. Thus, the assessee was not a wilful participant in commission of an offence or activity prohibited by law. The same is not applicable to the present facts. Pharmaceutical companies have misused a legislative gap to actively perpetuate the commission of an offence. In Pt. Vishwanath Sharma, a Division Bench of the Allahabad High Court was faced with the question of whether payment of commission to government doctors could be exempted under Section 37(1). At the time, there was no statutory provision prohibiting doctors engaged in private practice from accepting such commission. Hence, the High Court held that while the Assessing Officer had correctly allowed such deduction for private doctors, the same could not be allowed for Government doctors: "In the present case, payment of commission to Government Doctors cannot be placed on the same pedestal. A distinction has already been made by the authorities while allowing deduction to the assessee in respect to commission which the assessee has paid to private doctors since in their case, payment of commission cannot be said to be an offence under any statute but in respect to Government doctors such payment c....
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....e treated as intangible asset. Following the aforesaid decision, the Tribunal in assessee's own case for the assessment years 2002- 03, 2003-04, 2007-08 and 2008-09, as referred to above, decided the issue in favour of the assessee. 46. The Tribunal while deciding the similar issue for AY 2008-09 has held as follows: "6. Ground No. 18 is related with disallowance of depreciation on Goodwill for Rs.1,29,776/-. The same has been disallowed on the premise that the goodwill did not fall under specific intangible assets as mentioned in Section 32. However, we find that the issue stood squarely covered in assessee's favor by the decision of Hon'ble Apex Court rendered in CIT Vs. Smifs Securities Limited [CA 5961 of 2012 22/08/2012] wherein it was held that Goodwill was an intangible asset eligible for depreciation u/s 32. Accordingly, by deleting this addition, we allow this ground of appeal". 47. Therefore, following the consistent view of the Tribunal inassessee's own case, we allow assessee's claim of depreciation on goodwill. Ground raised is allowed. 48. Ground No. 17 relates to disallowance of expenditure in respect of provision of expenses written back of Rs. 5,62,492/-. 49....
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..... 234B and 234C of the Act. Charging of interest under the aforesaid section, is mandatory and consequential, hence, ground No. 18 is dismissed. 53. In ground No. 19 of appeal, the assessee has assailed levy of penalty under section 271(1)(c) of the Act. We are of the considered view that as the aforesaid ground of appeal is premature, therefore, the same merits to be dismissed. The Ground of appeal No. 19 is dismissed as being premature in nature. 54. In addition to the aforesaid grounds, the assessee has raised an additional ground being ground no.20, seeking allowance of depreciation on non-compete fee. 55. Brief facts are, during the financial year relevant to the assessment year 2002-03, the assessee had paid non-compete fee amounting to U.S. dollar one million (equivalent to Rs 4.73 crore) to the Directors of Medtech Devices Ltd. In the return of income filed for the assessment year 2002-03, the assessee claimed the aforesaid payment as revenue expenditure under section 37(1) of the Act. However, the deduction claimed by the assessee was disallowed by the Assessing Officer and sustained by the learned Commissioner (Appeals). While deciding the appeal, though, the Tribunal ....
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....receding years viz. 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), we herein direct the AO to allow the consequential depreciation on the non-compete fees to the assessee company. The Ground of appeal No. 61 is allowed". 58. Therefore, following the consistent view of the Tribunal, we direct the Assessing Officer to allow depreciation on the opening WDV of the non- compete fee. This ground is allowed. 59. The assessee has raised additional ground no. 21, claiming deduction in respect of education cess. The ld. Authorized Representative for the assessee filed a letter before the Tribunal withdrawing the said ground of appeal. In view of the letter submitted for the assessee, additional ground raised is dismissed. In the result, Assessee's appeal is partly allowed. ITA No.480/Ahd/2011-Assessee's Appeal 60. The majority of grounds raised by the Assessee are similar in facts to grounds raised in AY 2006-07. 61. We have dealt with the issues while deciding corresponding grounds being grounds no. 4 to 9 in Assessee's appeal in ITA no. ....
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....Assessee by the AEs, without appreciating that such differences are related to the trading segment and already benchmarked by the Assessee under TNMM where the Transfer Pricing Officer tried to apply RPM. Accordingly, once the transaction is benchmarked specifically by the Assessee and Transfer Pricing Officer under one method, same transaction cannot be again benchmark under different method to make further adjustment as it will lead to double adjustment for the same transaction. 67. The Assessee further submitted that, the learned Commissioner (Appeals) in its order relied upon on the DRP directions in the Appellant's own case for AY 2006-07 as under: "14.1 The AO following order of TPO-I, Ahmedabad dt. 13.9.08.................................................................................................................. ................................................................................ It is however noted that all the objections of the assessee and few others have been extensively and exhaustively discussed by DRP in its order dt. 27.9.10. Respectively following the said order the aforesaid additions in regard to transfer pricing issues are confirmed. Groun....
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.... of appeal No. 12 & 13 for the AY 2006-07. Following the same reasoning, we direct the AO to allow the entire expenditure incurred on gift article. We direct accordingly. 75. Ground No. 15 relates to disallowance of expenditure incurred on purchase of catalogues and brochures. During the year under consideration, the Assessee had imported and purchased catalogues and brochures separately because the catalogues and brochures could not be imported along with the devices as the same could not be retrieved without damaging the sterile package rendering the devices unfit for implant. The Assessee had claimed a deduction of the expenses incurred on the purchase of the catalogues and brochures amounting to Rs. 3,67,123/-. The AO disallowed the said expenditure relying on earlier year order and holding that the aforesaid expenditure shall not be said to have incurred wholly and exclusively for business purpose and thereby disallowed under section 37 of the Act. Learned Commissioner (Appeals) upheld the view of the AO. 76. Learned A.R. for assessee submitted that the issue is covered by the Tribunal's order in assessee's own case for AY 2004-05. The Learned D.R. relied on the assessment o....
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....g to Rs. 9,985/- was towards the routine maintenance/ consumable expenses for maintaining the website of the Assessee. Further, he submitted that the amount incurred was small. Reliance was placed in the case of ACIT vs Asahi India Safety glass (2006) 6 SOT 0656, Empire Jute Co Ltd v CIT (1980) (124 ITR 1)(SC) and Alembic Chemical Works Co. Ltd. v. CIT [177 ITR 377 (SC)]. The ld. Departmental Representative relied on the assessment order. 82. We have considered rival submissions and perused material on record. Relying on the submissions made by the assessee and the decisions of ACIT vs Asahi India Safety glass (2006) 6 SOT 0656, Empire Jute Co Ltd v CIT (1980) (124 ITR 1)(SC) and Alembic Chemical Works Co. Ltd. v. CIT [177 ITR 377 (SC)], we do not find any merit in disallowance of expenditure incurred on software which is lower in amount and for the business purpose of the assessee. Accordingly, AO is directed to delete the same. 83. Ground No. 18 and 19 relates to disallowance of depreciation on goodwill of Rs. 3,07,617/-. Similar ground has been discussed in Ground of appeal No. 16 for the AY 2006-07. Following the same reasoning, we direct the AO to allow the depreciation on g....