TMI Blog2018 (1) TMI 1033X X X X Extracts X X X X X X X X Extracts X X X X ..... ee and also holding that the same have not been used during the year - Held that:- The issue stands covered by the earlier orders of the Tribunal [2017 (6) TMI 334 - ITAT AHMEDABAD] wherein held With the introduction of concept of WDV of block of assets, the depreciation is allowable not on individual items but depending upon date of acquisition and put to use of the asset. Also section 38(2) deals with usage of assets for non-business purposes and does not refer to assets partly used during the year for business purposes. Depreciation is allowable on the plant and machinery, building, furniture and fixture and office equipment - Decided in favour of assessee Disallowance of payment made to doctors - Held that:- MCI guidelines are applicable to the professionals i. e. Doctors only. They do not and cannot govern the other tax entities like Drug manufacturing or drug distributing Companies or individuals other than the doctors, or HUF's or Firms etc. MCI, as a body can formulate policy for the Doctors. The assessee is not a practicing professional. So, any guidelines issued by it cannot decide the allowability or otherwise of an expenditure under the Act. Income tax Act is a code ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with its Associate Enterprise (AE). He made reference to TPO to determine the arm s length price (ALP) in relation to the IT. s. 3. 1. During the TP proceedings, the TPO observed that the assessee was a part of Medtronic s Inc. , a USA based global leader in medical technology, that the parent company was engaged in developing a wide range of products and therapies mostly patented or IP protected items, that the assessee was a subsidiary of Medtronic s International Hong Kong, that in the tax audit report it had mentioned the nature of business as trading of life saving devices , that the assertion made by it was not correct, that the items dealt with by the assessee were specialised products and technologies which required specialised workforce, infrastructure and system for marketing and distribution. He further observed that the assessee had used TNMM to determine the ALP of the IT. s, that it used operating margin as PLI , that purchase shown from AE. s were valued at ₹ 296. 88 crores, that it had purchased finished goods from Medtronic s Intl Trading (SARL) MITS, Medtronic s Sofamardamic, USA Inc. , that purchases from these two constituted for more than 90% of purch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the Rules, that in absence of a machinery provision to benchmark the AMP expenses no adjustment could be made, that based on the principles of bundled approach , as emanated by the Delhi High Court in case of Sony India Limited (374 ITR 118)no addition should have been made. He further argued that the assessee had earned an operating margin of 5. 39% which was higher than the margins earned by comparables, that it was only carrying out its own business and any benefits derived by the AEs were purely incidental in nature, the DRP had passed a non speaking order, that the TPO had not rejected the method applied by the assessee, that it was not incurring AMP expenditure on behalf of the AE, that the selling and distribution expenses were not even 1% of the total expenses, that the DRP had followed order of the then DRP for 2009-10 and had adopted Brightline Method. He also referred to cases of Li and Fung (361 ITR 85 of Hon'ble Delhi High Court), Thomas Cook India Ltd. (ITA. s/1261 1238/ Mum/ 2015, dtd 31/5/16), L Oreal India Pvt. Ltd. (ITA/7714/ Ors. /Mum/12, dtd. 4/5/16). The Departmental Representative (DR)that there was obligation on part of the AE to compensate the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of ₹ 12, 25, 71, 652/-and ₹ 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 ₹ 8. 09 crores and ₹ 8. 31 crores for the AY. s. 2009-10 and AY. 2010-11 towards AMP expenditure, that the assessee had filed additional evidences before the FAA, that the FAA did not admit the evidences referring to the provisions of Rule 46A of the Rules, that he upheld the order of the TPO, that for the AY. 2010-11 the assessee had filed objections before the DRP, that the adjustment made by the TPO were confirmed the DRP, that the adjustment was made/confirmed by the TPO/DRP because both of them were of the opinion that by incurring expenditure in India the assessee was benefitting a brand name of TCUK. 8. 3. 1. First of all, we would like to mention that as on today the legal position is as clear as crystal with regard to AMP expenses. The Hon ble Delhi High Court has dealt the issue in depth and has arrived at the conclusion that in absenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain 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 determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transaction that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price. 55. Section 928 defines 'international transaction' as under: Meaning of international transaction. 928. (1) For the purposes of this section and sections 92, 92C, 92D and 92E , international transaction means a transaction between two or more associated enterprises, either or both of whom are non-residents; in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction'. 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 whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit. This was negatived by the Court by pointing out; Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v), which defines 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', it is still incumbent on the Revenue to show the existence of an 'understanding' or an 'arrangement' or 'action in concert' between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 such AMP expenditure incurred , for the AE. In any event, after the decision in Sony Ericsson (supre), -- the question of applying the BLT to determine the existence-of an-international transaction involving AMP expenditure does not arise. 61. There is merit in the contention of the Assessee that a distinction is required to be drawn between a 'function' and a 'transaction' and that every expenditure forming part of the function, cannot be construed as a 'transaction'. Further, the- Revenue's attempt at re-characterising the AMP expenditure incurred as a transaction by itself when it has neither been identified as such by the Assessee or legislatively recognised in the Explanation to Section 92 B runs counter to legal position explained in CIT vs. EKL Appliances Ltd. (supra) which require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. 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 jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment. 71- Since a quantitative adjustment is not permissible for the purposes of a TP adjust - ment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbetore, what the Revenue has sought to do in the present. case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on- application of the BLT, is excessive, thereby evidenc - ing the existence of an international transaction involving the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case. 74. The problem with the Revenue's approach is that it wants every instance of an AMP spend by an Indian entity which happens to use the brand of a foreign AE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness 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 of an international transaction involving AMP expense with an ascertainable price is- unable to be shown to exist, even if such price is nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise. 1261 1238/M/15 Thomas Cook 33 65. As already mentioned, merely because there is an incidental benefit to the foreign AE, it cannot be said that the AMP expenses incurred by the Indian entity was for promoting the brand of the foreign AE. As mentioned-in- Sassoon -J David-(supra)- the--fact that- somebody other than the Assessee is also benefitted by the expenditure should not come in the way of an expenditure being 'allowed by way of a deduction under Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law . With reference to the submiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Learned DR fairly conceded that issue is covered in favour of the assessee by the order of the Tribunal in assessee s own case. We also found that assessee was engaged in the business of manufacturing and trading. However, the manufacturing processes were discontinued with effect from 25 January 2002. During the year under consideration, the assessee had claimed depreciation on plant and machinery, building, furniture and fixtures and office equipment. Once the concept of block of assets was brought into effect from AY 1989-90 onwards, then depreciation is allowable on the aggregate of WDV of all the assets in the block at beginning of the Financial year alongwith the additions made to the assets in the subject AY. The individual asset losses its identity for depreciation. From the record, we also found that in AY 2007-08, the Hon'ble CIT(A) has allowed the assessee s ground by placing reliance on the decisions in case of CIT v Oswal Agro Mills (197 Taxman 25) (HC), Swati Synthetics Ltd v ITA (38 SOT 208) (Mumbai ITAT) and Allied Photographics (8 SOT 318) (Mumbai ITAT). The Department has filed an appeal before the Hon'ble ITAT for AY 2007-08. However, the aforementioned is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... printing and equipment hire charges (Rs. 16. 59lakhs)accomodation expenses(Rs. 1crores), expenses incurred for organizing medical-education meeting(Rs. 1. 75 crores)and distribution of free product samples(9. 03 lakhs). The DRP further held that a regulatory body like MCA would regulate only the conduct of individuals or organisations only, that the payment made by the assessee were prohibited by MCI regulation, that the expenses were incurred by benefit of doctors and not associations, that the associations were not at liberty to spend money received by assessee, that association had to spend as per the desire and guidance of the assessee company, that the expenditure was incurred against public policy, that expenditure incurred on hospitality, travel facilities provided to medical practitioners for participation in workshop were not allowable, that MCI guidelines had prohibited giving free samples. Finally, it upheld the order of the TPO/AO. 5. 2. Before us, the AR argued that the convention expenses and expenditure incurred on distribution of free product samples did not violate any of the provisions of MCI regulation, that same were not prohibited by any law to attract prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Homes Registration Act, 1953. It is urged that in fact, an inspection was also carried out on 22. 07. 2011 by Dr. R. N. Dass, Medical Superintendent (Nursing Home) under the Directorate of Health Services, Govt. of NCT of Delhi and the necessary equipments and facilities were found to be in order which negates the observations dated 27. 10. 2012 of the Ethics Committee of the MCI. It is also the plea of the Petitioner hospital that the Petitioner was not provided an opportunity of being heard and thus the principles of natural justice were violated. 7. In the counter affidavit filed by the Respondents, it is not disputed that the MCI under the 2002 Regulations has jurisdiction limited to taking action only against the registered medical practitioners. It's plea however, is that it has not passed any order against the Petitioner hospital therefore; the Petitioner cannot have any grievance against the impugned order. At the same time, it is stated that only simple observations were made by the Ethics Committee of the MCI about the state of affairs in the Petitioner hospital and the same did not harm any legal right or interest of the Petitioner. It will be apposite to extr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business of providing Pharma marketing consultancy and detailing services to develop mass market for Pharma products. . On further perusal of the details appearing in the ledger account furnished by the assessee, he further noted that there are certain expenses which has been debited by the assessee like, Customer Relationship Management expenses (CRM) of ₹ 7, 61, 96, 260/-; Key Account Management expenses (KAM)of ₹ 2, 56, 68, 509/-; gift articles of ₹ 9, 20, 22, 518/-; and cost of samples of ₹ 3, 60, 85, 320/-, which according to him are in the nature of freebies given to medical practitioners/doctors which are disallowable in terms of Explanation to section 37(1) as clarified by CBDT vide its Circular No. 5/2012 dated 1. 8. 2012. In response to the show cause notice by the AO, firstly, as regard CRM expenses, assessee submitted that expenditure under this category includes activities like holding national level seminars on new medical researches and drugs for discussion panels of eminent doctors and inviting other doctors to participate in it; arranging lectures or sponsoring knowledge upgrade course, wherein eminent doctors are invited to speak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also segregated expenses incurred after 10. 12. 2009, i. e. , the date of amendment brought in the Indian Medical Council Guidelines. After segregating the expenses, AO disallowed the expenditure aggregating to ₹ 22, 99, 72, 607/- (post 10. 12. 2009) on the ground that, firstly, the guidelines issued by the Medical Council of India is binding because it is a statutory body having been set up under the Act of the Parliament; secondly, the amended notification dated 10. 12. 2009, which has been reproduced by him in the order, clearly forbids medical practitioners to receive any kind of gift, travel facilities, hospitality and any kind of cash or monetary grants from any pharmaceutical or health care industries. Thus, such an expenses, he held that, is disallowable in terms of Explanation to section 37(1). 5. We have considered the rival contentions made by ld. CIT DR as well as ld. Sr. Counsel, Mr J. D. Mistry, perused the relevant finding given in the impugned orders and material referred to before us. The entire controversy revolves around, whether the expenditures in question incurred by the assessee (a pharmaceutical company) is hit by Explanation 1 below section 37(1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es the various kinds of conduct or activities which a medical practitioner should avoid while dealing with pharmaceutical companies and allied health sector industry. It provides guidelines to the medical practitioners of their ethical codes and moral conduct. Nowhere the regulation or the notification mentions that such a regulation or code of conduct will cover pharmaceutical companies or health care sector in any manner. The department has not brought anything on record to show that the aforesaid regulation issued by Medical Council of India is meant for pharmaceutical companies in any manner. On the contrary, before us the learned senior counsel, Shri Mistry brought to our notice the judgment of Hon ble Delhi High Court in the case of Max Hospital vs. MCI in WPC 1334/2013 judgment dated 10. 01. 2014, wherein the Medical Council of India admitted that the Indian Medical Council Regulation of 2002 has jurisdiction to take action only against the medical practitioners and not to health sector industry. Relevant portion of the said judgment reads as under: xxxxx From the aforesaid decision, it is ostensibly clear that the Medical Council of India has no jurisdiction to pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will not impinge upon the assessee claiming the expenditure under this section. 7. Before us the learned CIT DR strongly relied upon the fact that CBDT Circular, while clarifying the applicability of Explanation 1 to section 37(1) on medical practitioners and pharmaceutical companies have interpreted that Indian Medical Council Regulation is applicable for pharmaceutical companies also. He also brought to our notice that another notification was issued by Indian Medical Council which was published on 01. 12. 2016 which further prohibits such kind of embargo on medical practitioners and have added para 6. 8. 1 and also given instances of action which shall be taken upon medical practitioners. The relevant clause of the said notification as relied upon by him is reproduced hereunder: xxxxx From the aforesaid notification, ld. CIT DR submitted that so many violations and censures have been prescribed for any expenditures/ or benefit given to doctors, thus, violation of such guidelines for incurring such kind of expenditures cannot be held to be allowable expenditure. CBDT is well within its power to clarify and interpret the law and prohibit allowance of any expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r clarifying the provisions of law and cannot impose a burden on the assessee, leave alone creating a new burden by enlarging the scope of a different regulation issued under a different act so as to impose any kind of hardship or liability to the assessee. In any case, it is trite law that the CBDT circular which creates a burden or liability or imposes a new kind of imparity, same cannot be reckoned retrospectively. The beneficial circular may apply retrospectively but a circular imposing a burden has to be applied prospectively only. Here in this case the CBDT has enlarged the scope of Indian Medical Council Regulation, 2002 and made it applicable for the pharmaceutical companies. Therefore, such a CBDT circular cannot be reckoned to have retrospective effect. The same CBDT circular had come up for consideration before the co-ordinate Bench of the ITAT, Mumbai Bench in the case of Syncom Formulations (I) Ltd. (in ITA Nos. 6429 6428/Mum/2012 for A. Ys. 2010-11 and 2011-12, vide order dated 23. 12. 2015), wherein Tribunal held that CBDT circular would not be not be applicable in the A. Ys. 2010-11 and 2011-12 as it was introduced w. e. f. 1. 8. 2012. 10. From the perusal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rch in the medical field and therapeutic areas, etc. Every day there are new developments taking place around the world in the area of medicine and therapeutic, hence in order to provide correct diagnosis and treatment of the patients, it is imperative that the doctors should keep themselves updated with the latest developments in the medicine and the main object of such conferences and seminars is to update the doctors of the latest developments, which is beneficial to the doctors in treating the patients as well as the pharmaceutical companies. Further as pointed out and concluded by the learned CIT(A) there is no violation by the assessee in so far as giving any kind of freebies to the medical practitioners. Thus, such kind of expenditures by a pharmaceutical companies are purely for business purpose which has to be allowed as business expenditure and is not impaired by EXPLANATION 1 to section 37(1). 11. Before us, the Ld. CIT DR has also much harped upon the decision of the Hon ble Himachal Pradesh High Court in the case of Confederation of Indian Pharmaceutical Industry (SS) vs. CBDT (supra), in support of the argument that CBDT Circular has been approved and confirmed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MC Regulations apply only to medical practitioners. He further submitted that the Tribunal in the case of ACIT vs. Liva Healthcare Ltd. (ITA 847/Mum/2012) for A. Y. 2008-09, has decided similar issue in favour of the assessee. However, in A. Y. 2009-10, Hon ble Tribunal while noting the fact that consistency has to be adopted, distinguished the order of A. Y. 2008-09 as under: The assessee has contended that in the immediately preceding assessment year the Tribunal has decided the issue in favour of the assessee in ITA NO. 388/Mum/2012 for assessment year 2008-09. In our considered view, principles of Res judicata is not applicable to income tax proceedings although we are fully agreeable that principles of consistency is to be maintained (Hon ble Supreme Court decision in Radha Soami Satsang v. CIT (1992) 193 ITR 321 (SC) but in the instant assessment year, we have observed that these overseas trips for Doctors and their spouses were organized by the assessee whereby no details of the contents of seminar, if any conducted by the assessee overseas has been brought on record and also even the spouses accompanied the Doctors to the overseas trip which included cruise visit to i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee, in the case of UCB India Pvt. Ltd. v. ITO (ITA No. 6681/Mum/2013 order dated 13. 05. 2016, wherein it was held that CBDT circular cannot have a retrospective effect. This judgment was lost sight of by the bench. In any case on careful perusal of the Tribunal order in the case of Liva Healthcare (supra) we find that the Tribunal though has incorporated the relevant provisions and clauses of the Indian Medical Council Regulation 2002 , however, has not elaborated or dwell upon as to how this MCI regulation which is strictly meant for medical practitioners and doctors can be made applicable to pharmaceutical companies. There has to be some enabling provision or specific clause in the said regulation whereby the pharmaceutical companies are barred from conducting seminars or conferences by sponsoring the doctors. The entire conduct relates to doctors and medical practitioners and lists out the censures and fines imposed upon them. What has not been provided in the MCI regulation cannot be supplied either by the court or by the CBDT. There has to be express provision under the law whereby pharmaceutical companies are prohibited to conduct conferences or seminar or give free ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of expenditure which has been incurred in the case of the assessee. Therefore, such a reference to a Hon ble Apex Court decision is not germane to the issue involved. Thus, in our opinion, the aforesaid decision of this Tribunal is clearly distinguishable and cannot be held to be applicable and also we have already given our independent finding as to allowability of expenses in the hands of the assessee as business expenditure. 14. Accordingly, we uphold the order of the ld. CIT(A) deleting the disallowance aggregating to ₹ 22, 99, 72, 607/-. 5. 3. 3. . Lastly, we want to refer to the case of Syncom Formulations in ITA No. 6429 6428/ Mum/2012, dated 23. 12. 2015, the Tribunal has held that the CBDT Circular, dated 1. 8. 2012 is applicable w. e. f. 1. 8. 2012 relevant to AY. 2013-14. While holding so, it was observed as under: We have considered rival contentions and found that receiving of gifts by doctors was prohibited by MCI guidelines, giving of the same by manufacturer is not prohibited under any law for the time being in force. Giving small gifts bearing company logo to doctors does not tantamount to giving gifts to doctors but it is regarded a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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