TMI Blog2023 (3) TMI 655X X X X Extracts X X X X X X X X Extracts X X X X ..... z. A.Y. 2011-12, A.Y. 2012-13 and A.Y. 2013-14. We have perused the orders of the Tribunal for the said respective years and find that the said alternative adjustment on appeal was vacated by the Tribunal. Accordingly, finding ourselves to be in agreement with the view taken by the Tribunal in respect of the issue under consideration in the aforementioned preceding years, we vacate the said alternative adjustment made by the TPO/DRP. TP Adjustment on account of reimbursement of expenses - primary contention for the assessee is that the TPO had made adjustment - TPO had made adjustment of Rs.1,22,62,124/-, however, the DRP enhanced the adjustment to Rs.4,04,53,708/-. It is contended that before enhancement no show cause notice was issued to the assessee - HELD THAT:- Taking into consideration entirety of facts we deem it appropriate to restore this issue back to the file of AO for denovo consideration after affording reasonable opportunity of hearing to the assessee, in accordance with law. Consequently, ground of the appeal are allowed for statistical purpose. Working capital adjustment while computing operating margin of comparable companies - HELD THAT:- After allowing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raised as many as 56 grounds and one additional ground assailing Transfer Pricing Adjustment( TP adjustment) and the additions made under regular provisions of the Act by the Assessing Officer. For the sake of convenience of deciding multiple grounds raised in the appeal, the grounds raised by the assessee are grouped under the heads in which additions have been made. 3. The assessee is a subsidiary of Medtronic International Ltd. Hong Kong, a Group Company of Medtronic Inc. USA. The parent company is a global leader in medical technology and is engaged in the business of manufacturing wide range of products and therapies. The assessee is engaged in the business of marketing and distributing products of group companies relating to Cardiac Rhythm Disease Management(CRDM), Neuro-modulation, Spinal and Biologics, Diabetics, Cardio-vascular, Surgical technologies and Physio-control. During the period relevant to the assessment year under appeal the assessee entered into following international transactions with its AE: Sr.No. Nature of International Transactions Amount (Rs.) Method Adopted 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al in nature, hence, require no adjudication. TP Adjustment on Advertising, Marking and Promotion(AMP): 4. The assessee in ground No.2 to 19 of grounds of appeal has assailed TP adjustment of Rs.95,07,33,625/- on account of AMP expenses. Shri Rajan Vora . appearing on behalf of the assessee submitted at the outset that similar adjustment was made in Assessment Year 2010-11. The Tribunal after appreciating the facts and considering various decisions decided the issue in favour of the assessee. The facts germane to the issue in the impugned assessment year are identical to the facts in Assessment Year 2010-11. The ld. Authorized Representative for the assessee further submitted that the nature of international transactions and the manner of adjustment in the impugned assessment year is similar to the one made in Assessment Year 2010-11, therefore, the issue is squarely covered by the order of Tribunal in assessee s own case in ITA No.1600/Mum/2015 for assessment year 2010-11 decided on 17/01/2018. 5. Per contra, Shri Yogesh Kamat representing the Department vehemently defended the findings of Assessing Officer and DRP. However, the ld. Departmental Representative fairly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dication 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 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 expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 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' be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 counte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 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 onapplication 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 sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt on account of AMP is not sustained by the Appellate Authorities convention expenses to the extent of 88.45% i.e. Rs.38,11,76,234/- should be sustained towards brand building and business promotion. The ld.Authorized Representative for the assessee submitted that this issue was considered by the Tribunal in assessment year 2014-15 in ITA No.7263/Mum/2018 in appeal by the assessee. The Tribunal vide order dated 13/09/2019 allowed similar grounds raised by the assessee. The ld.Authorized Representative for the assessee further submitted that similar issue was raised in assessment years 2011-12,2012-13, 2013-14 and 2014-15. The Tribunal has been consistently holding that in the absence of any arrangement with AE for incurring AMP expenses convention expenses cannot be considered as expenses incurred for brand building. 9. Both sides heard . We find that Co-ordinate Bench in the immediately preceding assessment year i.e. assessment year 2014-15 has decided this issue by observing as under: 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 expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 011-12, A.Y. 2012-13 and A.Y. 2013-14. We have perused the orders of the Tribunal for the said respective years and find that the said alternative adjustment on appeal was vacated by the Tribunal. Accordingly, finding ourselves to be in agreement with the view taken by the Tribunal in respect of the issue under consideration in the aforementioned preceding years, we vacate the said alternative adjustment made by the TPO/DRP. The Grounds of appeal Nos. 24- 26 are allowed. Respectfully following the decision of Tribunal in assessee s own case the ground No.20 to 23 of the appeal are allowed for parity of reasons. TP Adjustment on account of reimbursement of expenses: 10. The assessee in ground No.24 to 27 of grounds of appeal has assailed adjustment of Rs.4,04,53,708/- on account of reimbursement of expenses to AEs. The primary contention of the ld.Authorized Representative for the assessee is that the TPO had made adjustment of Rs.1,22,62,124/-. After the directions of the DRP there was enhancement in adjustment. The Assessing Officer in compliance of the direction of DRP made adjustment of Rs.4,04,53,708/-. The ld.Authorized Representative for the assessee submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment of Rs.1,22,62,124/-, however, the DRP enhanced the adjustment to Rs.4,04,53,708/-. It is contended that before enhancement no show cause notice was issued to the assessee. Taking into consideration entirety of facts we deem it appropriate to restore this issue back to the file of Assessing Officer for denovo consideration after affording reasonable opportunity of hearing to the assessee, in accordance with law. Consequently, ground No.24 to 27 of the appeal are allowed for statistical purpose. T.P Adjustment on import of finished goods: 13. In ground No.28 to 35 of appeal, the assessee has assailed TP adjustment of Rs.24,14,13,278/- on account of purchase of finished goods from AEs. The ld.Authorized Representative for the assessee stated at the outset that he is not pressing grounds No.28 to 32. He is only restricting his submissions on grounds No.33 to 35, wherein the assessee is seeking working capital adjustment while computing operating margin of comparable companies for the purpose of determining ALP. The ld.Authorized Representative for the assessee submitted that in assessment year 2014-15 in ITA No.7263/Mum/2018 the Tribunal granted working capital a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levels of accounts payable tend to understate them, which factors would thus necessitate appropriate adjustment. 26. We have perused the orders of the lower authorities and find that the DRP had concurred with the TPO for rejecting the working capital adjustments that was undertaken by the assessee for the purpose of comparing the margins of the comparable companies as against its margin. We have given a thoughtful consideration to the facts of the case and after necessary deliberations are persuaded to accept the aforesaid claim of the assessee. As per Rule 10B(1)(e)(iii), in a case where the international transactions are benchmarked applying TNMM the net profit margin realised by an unrelated enterprise from a comparable uncontrolled transaction is to be adjusted by taking into account the differences, if any, between the international transaction and the comparable uncontrolled transaction, or between the enterprises entering into such transactions, which could materially affect the net profit margin in the open market. As is discernible from a perusal of the Form 3CEB‟ and the records available before us, the assessee had worked out the adjustment resulting from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thorized Representative for the assessee submitted that grounds No.36 to 51 can be restored back to the file of Assessing Officer to be decided in accordance with law expounded by Hon'ble Supreme Court of India in the case of Apex Laboratories Pvt. Ltd. vs. DCIT, reported as 442 ITR 1. The ld.Authorized Representative for the assessee also furnished letter dated 22/04/2022 in this regard. 17. The ld. Departmental Representative submitted that now the issue with regard to expenditure incurred by Pharmaceutical companies on medical practitioners directly or indirectly in the form of distribution of freebies, gifts, etc. has been held not allowable u/s. 37(1) of the Act. However, the ld. Departmental Representative did not oppose the proposal of restoring this issue back to the file of Assessing Officer with a direction to follow judgment of Hon ble Apex Court in the case of Apex Laboratories Pvt. Ltd. (supra). 18. We have heard the submissions made by rival sides. The ld.Authorized Representative for the assessee has made short submissions that the grounds raised in ground No.36 to 51 in respect of expenditure on medical practitioners be restored to Assessing Officer for re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n not granting consequential depreciation on non-compete fee paid in period relevant to assessment year 2002-03. The Tribunal while adjudicating the appeal of assessee for assessment year 2007-08 in ITA No.3993/Mum/12 vide order dated 16/09/2019 held that the depreciation is allowable to the assessee on non-compete fee. 22. We have heard the submissions made by rival sides. We find that the Co-ordinate Bench in appeal by the assessee for assessment year 2007-08 (supra) has considered the issue of depreciation on non-compete fee. The Tribunal held that the assessee is eligible to claim depreciation on noncompete fee. For the sake of completeness the relevant extract of the order of Tribunal is reproduced herein under: 43. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
