M/s. India Medtronics Pvt.Ltd., Baroda V. The Dy.CIT.,Circle-1(2), Baroda

ITA 480/AHD/2011

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 9514 (ITAT-MUMBAI)
• Duration Of Justice: 11 year(s) 7 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-09-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: K
• Assessment Year: 2005-2006
• Appeal Filed On: 17-02-2011
• Result in Favour of: Matter Remanded
• Court: TRIBUNAL
• Department Lawyers: APPELLANTS APPEAL; YOGESH KAMATH AKHTAR HUSSAIN ANSARI
• Assessee Lawyers: RAJAN R. VORA NIKHIL TIWARI
• Keywords: Related party transaction; Gift; Business income; Depreciation; Transfer pricing; Business expenditure; Opportunity of being heard; International transaction; Bad and doubtful debts; Commercial expediency; Revised return; Revenue expenditure; Capital expenditure
• Section: 37; 271(1)(c); 154; 92C; 234B; 37(1); 274; 13; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “K”, MUMBAI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI GAGAN GOYAL, ACCOUNTANT MEMBER ITA No.480/Ahd/2011 (A.Y: 2005–06) ITA No.3361/Ahd./2010 (A.Y: 2006–07) India Medtronic Pvt. Ltd. 1261, Solitaire Corporate Park, Building No.12, 6 th Floor, Andheri Ghatkopar Link Road, Andheri –East, Mumbai –400093 PAN – AAACI4227Q ................ Appellant Vs. Dy. Commissioner of Income Tax Circle–1(2), Baroda ................ Respondent Assesseeby : Sh. Rajan R. Vora with Sh. Nikhil Tiwari Respondent by : Dr. Yogesh Kamath/ Akhtar Hussain Ansari Date of Hearing : 30/09/2022 Date of Pronouncement : 30/09/2022 ORDER PER GAGAN GOYAL, A.M. 1. These appeals by the assessee are directed against the assessment order dated 14th December 2009 passed by the Assessing Officer for the assessment year 2006-07 and against the CIT(A) order dated 30th December 2010 for assessment year 2005-06, respectively. 2 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. 2. In ITA No. 3361/Ahd/2010, the assessee has raised the following grounds of appeal for AY 2006-07: 1. “On the facts and in the circumstances of the case and in law, based on directions of the learned DRP, the learned AO erred in assessing the total income at Rs 27,73,14,851 as against returned income of Rs 8,05,68,723 computed by the Appellant” 2. “the learned AO/ TPO [learned Additional Commissioner of Income-tax (TPO)-1, Ahmedabad (hereinafter 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 in a controlled environment cannot be selected for benchmarking international transactions”. 8. “the learned AO/ TPO has erred in making addition of Rs 2,51,44,618 on account of direct sales made by AE to third party in India by holding that the indenting commission should be equal to the net margins earned by the trading activity and thereby ignoring the fact that the trading and indenting activities of 3 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. the Assessee are distinct business activities and cannot be expected to earn similar returns on account of differences in functions performed, assets employed and risk assumed should be made”. 9. “the learned AO/ TPO erred in computing the arms length price without giving benefit of +/- 5 % under the proviso to section 92C of the Act”. 10. “erred in disallowing depreciation of Rs 4,32,957 on plant and Rs 1,76,288 on building forming part of the block of assets”. 11. “erred in disallowing Rs 39,78,302 being the provision for commission payable to the distributors, treating the same as contingent liability”. 12. “erred in disallowing Rs 3,01,066 in respect of expenses incurred on gifts”. 13. “failed to appreciate that the Assessee has paid Fringe Benefit Tax on said expenses”. 14. “erred in disallowing Rs 41,88,153 in respect of expenses incurred for sponsoring the foreign trips of doctors, etc”. 15. “failed to appreciate that the Appellant has paid Fringe Benefit Tax on said expenses”. 16. “erred in disallowing Rs 2,30,713 being depreciation on goodwill acquired at the time of purchase of assets from M/s. Medtech Devices Limited”. 17. “erred in denying the deduction of reversal of professional fees of Rs 5,62,492 offered to tax during the year under reference out of the professional fees disallowed in AY 2003-04 despite a specific direction of the learned CIT(A) in his appellate order for AY 2003-04 to consider rectification in the year under reference”. 18. “erred in charging of interest under section 234B and 234C of the Act”. 19. “erred in initiating the penalty proceedings under section 274 read with section 271 of the Act”. 20. “Erred in not granting consequential depreciation on non-compete fees as the same is held to be capital in nature in AY 2002-03”. 4 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. 21. “Based on facts and the circumstances of the case and in law, the Appellant prays that the education cess on income tax paid for the year under consideration 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: 5 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. 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 undertakes significant related party transaction; and ii. There are significant differences between activities, economic factors, competition, position in the market, turnover, duty structure in which assessee and Medtronic Malaysia operates”. 5. “erred in law and in facts in upholding the TPO’s approach for selecting only one company as comparable instead of broad set of comparables to even out inherent differences”. 6. “erred in law and facts in upholding the adjustment to accounting profit for the equipments placed at the premises of distributors/ hospitals despite the fact that the costs relating to such equipments is appropriately accounted for”. 6 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. 7. “Based on the above, the learned CIT(A) erred in upholding the transfer pricing adjustment of Rs 15,14,87,596 on account of adjustment in the arm’s length price of international transaction of purchase of goods from the AEs”. 8. “erred in upholding addition of Rs 2,64,703 in respect of difference in prices charged by its AEs to the assessee and to the third party in India. Further, in principle the learned CIT(A) had followed the direction issued by DRP for AY 2006-07 for all the transfer pricing related grounds of appeal but failed to follow the same for this ground of appeal”. 9. “erred in law and in facts in upholding the adjustment of Rs 42,31,926 as notional income relating to direct sales by AEs”. 10. “without prejudice to above, it is submitted that expenses which ought to have been incurred by the company in respect of earning such commission should be reduced from such commission”. 11. “erred in law and facts in not granting of relief of 5% to the arithmetic mean as provided under proviso to section 92C(2) of the Act”. 12. “erred in upholding the disallowance made by the AO of Rs 7,73,152 being the amount of depreciation on plant and machinery and building forming part of the block of assets”. 13. “erred in upholding the disallowance of Rs 1,21,61,678 being the provision for commission payable to the distributors, treating the same as contingent liability”. 14. “erred in upholding the disallowance of Rs 3,28,355 in respect of expenses incurred on gifts articles and other such expenses”. 7 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. 15. “erred in upholding disallowance of Rs 3,67,123 in respect of expenses incurred for catalogues and brochures”. 16. “erred in upholding the disallowance of Rs 32,56,640 in respect 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 non- compete 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 income tax paid for the year under consideration ought to be allowed as a deduction under Section 37(1) of the Act while computing the total income”. 8 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. 4. Briefly stated, the assessee is a part of Medtronic Inc., a USA based global leader in medical technology which is engaged in developing and manufacturing a wide range of products and therapies i.e. mostly patented or IP protected items. The assessee company is a subsidiary of Medtronic International Ltd., Hongkong, which in turn is a subsidiary of Medtronic USA Inc. In India, the assessee company is engaged in the business of marketing and distribution of proprietary products of group companies i.e related to Cardiac Rhythm Disease Management (CRDM), Neuro-modulation, Spinal and Biologics, Diabetes, Cardio-vascular, Surgical technologies and physio-control. ITA No. 3361/Ahd/2010-Assessee’s Appeal 5. Ground no.1 to 3, are general in nature, hence, does not require adjudication. 6. In grounds no. 4 to 7, the Assessee has basically challenged the rejection of Transactional Net Margin Method (TNMM) as the most appropriate method and further, rejection of comparables selected while benchmarking the transaction relating to import of finished goods from the Associated Enterprises (AE). 7. Brief facts are, the Assesseee, an Indian company, was incorporated in the year 1993. The Assessee is a subsidiary of Medtronic 9 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. International Ltd., Hong Kong, which in turn, is a subsidiary of Medtronic USA Inc., a USA based company. As stated by the Transfer Pricing Officer, the parent company in USA is a global leader in medical technology and is engaged in developing and manufacturing of wide range of products and therapies, mostly, patented or intellectual property (IP) protected items. The Appellant, on its part, is engaged in the business of distributing life saving medical devices, such as, stents, pace makers, etc. For the assessment year under dispute, the Assessee filed its return of income on 30 December 2006, declaring total income of Rs. 7,78,27,318/- under the normal provisions of the Act, and subsequently revised its return of income on 27 March 2008 declaring a total income of Rs. 8,05,68,723. During the assessment proceedings, the Assessing Officer noticed that the Assessee had entered into various international transactions with its AE. Accordingly, he made a reference to the Transfer Pricing Officer for 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). 10 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. 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. Further, the Assessee had used multiple year data. He also observed that eleven companies selected by the Assessee also cannot be treated as comparables. Thus, ultimately, the Transfer Pricing Officer not only rejected the transfer pricing study report but also held that TNMM is not the most appropriate method to benchmark the transaction. Having done so, the Transfer Pricing Officer held that since the Assessee is engaged in the activity of marketing and distribution, Resale Price Method (RPM) would be the most appropriate method to benchmark the import of finished goods. Further, the Transfer Pricing Officer applied RPM by considering Medtronic Malaysia, the AE as the comparable contending that Medtronic Malaysia is performing similar functions in Asia region. Accordingly, he compared the 11 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. resale discount percentage of Medtronic International Ltd., Malaysia @ 39.01% (based on the Annual report of Medtronic Malaysia for FY 2004-05) with Appellant’s the actual gross margin at 29.79% and determined the arm's length price of the imported finished goods. Thus, considering the gross profit margin of 39.01%, the Transfer Pricing Officer proposed an adjustment of Rs. 16,79,78,272/-. The aforesaid adjustment proposed by the Transfer Pricing Officer was added back to the income of the assessee in the draft assessment order. The assessee filed its objections before the DRP that upheld the transfer pricing adjustment. 9. Shri Rajan Vora, learned Counsel for the assessee submitted, the Transfer Pricing Officer committed a fundamental error in considering Medtronic International Ltd., Malaysia, as comparable company in respect of import price of goods purchased from the AE. He submitted, Medtronic International Ltd., Malaysia, not only had significant related party transactions. Besides, there are significant difference between the activities, economic factors, competition, position in the market, turnover, debt structure in which the Assessee and Medtronic International Ltd., Malaysia, operates. 10. In this connection, the AR relied on decision of Hon’ble ITAT in Appellant’s own case for AY 2007-08 dated 16 October 2019 wherein it was held that Medtronic International Ltd., Malaysia, should not be considered as a 12 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. comparable as it is a case of controlled transaction and the company is located in a different geographical location. Further, he also relied on the Hon’ble 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, the Transfer Pricing Officer after rejecting TNMM has held that RPM is the most appropriate method. 13 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. 13. While doing so, he has applied the gross profit margin of 39.01% of Medtronic International Ltd., Malaysia, the AE to make the adjustment. In this regard, the Appellant’s contention, that the gross margin of AE is not comparable to the Appellant’s margin as there are significant difference between the activities, economic factors, competition, position in the market, turnover, debt structure in which the Assessee and the AE operates. 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. and Appellant’s own case in AY 2007-08 as below: “9. We have considered rival submissions and perused 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 14 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. the most appropriate method. While doing so, he has applied the gross profit margin of 42% to make the adjustment. It is evident, the adoption of gross profit margin of 42% is on the basis of projected re–sale discount percentage for the financial year 2002–03 to 2006– 07 furnished by the assessee in the course of transfer pricing proceedings. Applying the re–sale discount percentage of 42% of financial year 2006–07 the Transfer Pricing Officer has ultimately determined the gross margin of the assessee. However, the facts on record reveal that for the financial year 2006–07, assessee’s gross margin was 31.65%. In this regard, the contention of the assessee that the re–sale discount margin of 42% is only a target margin provided by the assessee’s group and is not the actual margin. The aforesaid contention of the assessee has been accepted by the learned 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 15 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. 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 proper method to benchmark the ALP, however, when both the Assessee as well as the Transfer Pricing Officer admit that sufficient information relating to gross margin in uncontrolled transaction is not available, no useful purpose would be served in restoring the issue to the Assessing Officer for fresh benchmarking under RPM. At this stage, we must observe, in view of the decision of the Hon'ble Jurisdictional High Court in Audco India Ltd. (supra), the contention of the Revenue that learned Commissioner (Appeals) having accepted RPM as the most appropriate method should have undertaken a fresh benchmarking under RPM cannot be accepted. In such circumstances, when no other method is applicable, as a method of last resort, TNMM has to be applied as most appropriate method. It is further noticed, in subsequent assessment years, not only the assessee has benchmarked the import of finished goods from the AE by applying TNMM, but the Transfer Pricing Officer has also accepted it as the most appropriate method. Even the very same comparables, as selected in the impugned assessment year, have been accepted as good comparables in the subsequent assessment years. For the aforesaid reasons, we do not feel the necessity to restore the issue to the Assessing Officer/Transfer Pricing Officer for fresh adjudication. Accordingly, we uphold the decision of learned Commissioner (Appeals) in deleting the addition, though, on our own reasoning.” 16 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. 14. Though, we do not discount the proposition that in case of distribution/resale of goods imported from A.E., RPM could be a proper method to benchmark the ALP, however, when sufficient information relating to gross margin in uncontrolled transaction is not available, no useful purpose would be served in restoring the issue to the Assessing Officer for fresh benchmarking under RPM. At this stage, we must observe, in view of the decision of the Hon'ble Jurisdictional High Court in Audco India Ltd. (supra), the contention of the Revenue that Hon’ble DRP/ TPO having accepted RPM as the most appropriate method should have undertaken a fresh benchmarking under RPM cannot be accepted. In such circumstances, when no other method is applicable, as a method of last resort, TNMM has to be applied as most appropriate method. 15. It is further noticed, in subsequent assessment years, not only the Assessee has benchmarked the import of 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 17 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. 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 the Assessee is the distributor of Medtronic products in India. Further, he observed, in the preceding assessment years, notional profit on such direct sale was added to the income of the Appellant. Accordingly, he proceeded to compute the notional profit on the direct sales made by the AEs to third parties in India at Rs. 2,51,44,618/- and suggested for addition of the said amount. 18. The Assessing Officer, after considering the submissions of the Appellant, sustained the notional addition made by the Transfer Pricing Officer which was upheld by the Hon’ble DRP. 18 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. 19. The learned Counsel for the Assessee submitted, the Assessee did not perform any marketing functions for the direct sales made by the AE to third party customers in India. Therefore, no notional commission income can be added at the hands of the Appellant. Further, he submitted, while proposing the adjustment on account of notional commission income, no prescribed method has been used by the Transfer Pricing Officer. Therefore, the addition made is in contravention to the statutory provisions. Finally, he submitted, identical issue has been decided by the Tribunal in favour of the Assessee in its own case for the assessment years 2002–03, 2003–04, 2004–05 and AY 2007- 08. In this context, he placed reliance upon the following orders passed by the Tribunal:– i) India Medtronic Pvt. Ltd. v/s ACIT, ITA no.811/Ahd./2008, dated 25.10.2016; ii) India Medtronic Pvt. Ltd. v/s ACIT, ITA no.1245/Ahd./2008, dated 25.05.2017; and iii) India Medtronic Pvt. Ltd. v/s ACIT, ITA no.812/Ahd./2008, dated 25.05.2017. iv) India Medtronic Pvt. Ltd. v/s ACIT, ITA no.4074/Mum./2012, dated 16.10.2019. 20. In addition, the learned Counsel for the Assessee relied upon the following decisions as well. 19 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. i) C.A. Computers Association Pvt. Ltd., v/s DCIT, [2010] 37 SOT 306; and ii) Kodak India Pvt. Ltd. v/s ACIT, [2013] 155 TTJ 697. 21. The learned Departmental Representative relied upon the observations of the Transfer Pricing Officer and DRP. 22. We have considered rival submissions and perused material on record. We have also applied our mind to the decisions relied upon. The disputed addition on account of commission on direct sales made by the AE to third customer in India was made on notional basis. Notably, identical dispute arising in Appellant’s own case for the assessment year 2002–03, came up 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 20 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. 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 of the international transaction, if at all there is any, the transfer pricing officer cannot determine the arms length price on notional basis. We have noted data transfer pricing officer has not brought on record even a single comparable to justify the price determined by him. In the case of CIT v/s C.A. Computer Associates India Pvt Ltd, the Honourable jurisdictional High Court held at arm’s length price of an international transaction has to be determined in terms of section 92C. In view of the aforesaid we are inclined to restore the issue to the file of the assessing officer with the direction to adjudicate the issue of fresh and if in reality the assessee is in anyway involved in the international transaction in relation to supply of medical devices by the overseas entity to the hospitals in India, he shall determine the arm’s length price after selecting appropriate method as provided under section 92C of the Act and keeping in view all other facts and material on record and after providing due opportunity of being heard to the assessee. Ground no. 3 he is allowed for statistical purposes.” 23. In light of the above, for the earlier year of AY 2002-03, the Tribunal restored the issue back to the Assessing Officer / Transfer Pricing Officer to verify whether there was any involvement of the Assessee in the direct sales 21 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. made by the AE in India. Similar view was expressed by the Tribunal while deciding the issue in assessment years 2003–04, 2004–05 and 2007-08. Following the consistent view of the Tribunal cited supra, we restore the issue to the Assessing Officer for fresh adjudication in terms with the directions of the tribunal in the preceding assessment years as referred to above. Grounds are allowed for statistical purposes. 24. We shall now advert to the next ground of appeal no. 10 of the assessee that the lower authorities had erred in disallowing depreciation of Rs. 6,09,245/- on plant and machinery and building. The assessee was earlier engaged in the business of manufacturing and trading had discontinued with its manufacturing processes w.e.f. 25.01.2002. During AY 2006-07, the assessee had claimed depreciation of Rs. 4,32,957/- on plant and machinery and Rs. 1,76,288/- on building belonging to such manufacturing unit. The claim of depreciation raised by the assessee was declined by the A.O on the ground that the said assets were not utilised 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 22 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. 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 written down value of the “block of asset‟ by the Taxation Laws (amendment and miscellaneous provision) Act, 1986 w.e.f. 01.04.1988, depreciation is allowable on the WDV on the “block of assets‟ and not on the individual items of the assets included in such block. In fact, we find that the Tribunal had consistently in the case of the assessee for other years viz.(i) A.Y. 2003-04 (ITA No. 1245/Ahd-2008); (ii) A.Y. 2004-05 (ITA No. 812/Ahd-2008); (iii) A.Y. 2008-09 (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); (vii) A.Y. 2013-14 (ITA No. 601/Mum/2018); A.Y. 2014-15 23 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. (ITA No. 7263/Mum/2018),had directed the A.O to allow depreciation on plant and machinery and building as claimed by the assessee. 27. In AY 2008-09(supra), Tribunal while deciding the issue has held as follows: “7. Ground No. 19 is related with depreciation on Plant & Machinery & Building for Rs.4,55,605/-.The same has been disallowed since these assets remained idle since manufacturing process stood discontinued. We are of the opinion that once an asset forms part of block of asset, it loses its individual identity and further, there is no requirement that each and every item in the said block should actually be used in the impugned AY so as to entitle the assessee to claim depreciation thereupon. Otherwise also, this issue stood covered in assessee’s favor by the cited order of the Tribunal in assessee’s own case for AY 2010-11. Therefore, this addition stand deleted”. 28. We thus respectfully following the view taken by the Hon’ble Tribunal in the assessee’s own case for the aforementioned years delete the disallowance of depreciation on plant and machinery and building of Rs. 6,09,245/-. The Ground of appeal No. 10 is allowed. 29. Ground No. 11 relating to the disallowance of provision for commission amounting to Rs 39,78,302/-. In this regard, Ld Counsel for the assessee fairly mentioned that the said ground is not pressed as the AO allowed the claim of 24 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. the assessee on payment / reversal basis. After hearing both the parties on this issue, we dismiss the said ground as not pressed. 30. In ground no. 12 and 13, the assessee has challenged disallowance of Rs. 3,01,066/-, being expenditure incurred on gift articles. 31. Brief facts are, in the course of assessment proceedings, 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 25 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. 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, identical issue has been discussed in assessee’s own case for the assessment years 2003–04, 2004–05 and 2007-08 wherein the Tribunal being satisfied that the expenditure incurred is wholly and exclusively for the purpose of assessee’s business has allowed the claim. He submitted, facts being identical, the decisions of the Tribunal in the preceding assessment years would squarely apply to the facts of the present case. 33. The learned Departmental Representative relied upon the observations of the Assessing Officer and assessment order. 34. We have considered rival submissions and perused material on record. It is the claim of the assessee that the expenditure incurred towards gift items given to the customers is wholly and exclusively for the purpose of assessee’s business. It is also evident, DRP as well as the Assessing Officer have disallowed the expenditure following the decision taken by the Departmental Authorities in the past years. Notably, while deciding identical issue in assessment years 2003–04, 2004–05 and 2007-08 in the orders referred to above, the Co– ordinate Bench has held that the expenditure incurred on gift items being 26 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. wholly and exclusively for the purpose of assessee’s business, is an allowable expenditure. 35. The Tribunal while deciding the issue for AY 2003-04 has held as under: “40. From the record, we found that the assessee has incurred certain expenses on account of ganpati festival expense, birthday celebrations, Diwali, marriage gifts etc. totalling to approx. INR 1,00,000. The AO disallowed entire expenditure holding that same was wholly and exclusively for the business purpose. The Hon'ble CIT (A) granted a relief of INR 80,000 and disallowed INR 20,000 contenting that the expenses on Ganpati festival, birthday celebrations, Diwali, marrage gifts, etc. ensures cordial employer- employee relationship, though the entire amount cannot be said to be incurred wholly and exclusively for business purpose. The Department has not filed an appeal against the relief granted by the CIT(A) of INR 80,000. Since the expenditure was incurred wholly and exclusively for the purpose of business, we do not find any merit for the disallowance of Rs.20,000/-.” 36. Following the consistent view of the Tribunal in assessee’s own case, we delete the addition made by the Assessing Officer. Thus, the ground is allowed. 37. In ground No. 14 and 15, 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 27 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. 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 Medical Council of India regulation was notified in the official gazette on 14 December 2009 and is accordingly effective only from that date i.e. relevant to Assessment Year 2010-11 and onwards. The learned AR pointed out that the issue of MCI regulations applicability to the pharmaceuticals companies has been dealt by the Hon'ble Supreme Court (SC) in the case of Apex Laboratories Pvt Ltd (Apex) v DCIT(Tax case appeal No 723 of 2018), wherein the Hon'ble SC held that acceptance of freebies given by pharmaceutical companies is clearly an offence on part of the medical practitioner and accordingly, when acceptance of freebies is punishable by the MCI, pharmaceutical companies cannot be 28 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. granted the tax benefit for providing such freebies. AR submitted that, however, in the present case of assessee, no freebies or gifts have been provided by the assessee to HCPs and has not violated MCI regulations. Further, he submitted that Hon’ble SC while analysing the applicability of the CBDT circular in para 19 of the order has observed that the CBDT circular being clarificatory in nature, was in effect from the date of implementation of Regulation 6.8 of the 2002 Regulations, i.e., from 14.12.2009 and that disallowance was made for the expenditure and freebies incurred on or after 14 December 2009 and not for the expenses incurred earlier than that date. Reliance was also placed in the case of PCIT v Goldline Pharmaceuticals (P) Ltd. and Peerless Hospitex Hospital and Research Center Limited v Pr CIT. The ld. AR for the assessee submitted that alternatively, the matter can be restored back to the file of Assessing Officer to be decided in accordance with law expounded by Hon'ble SC of India in the case of Apex Laboratories Pvt. Ltd. (supra). 39. 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. 40. We have heard the submissions made by rival sides. The ld. Authorized Representative for the assessee has made short submissions that the grounds 29 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. raised in ground No.14 and 15 in respect of expenditure on foreign trip of doctors that the same is incurred for purpose of business and is only to be disallowed for the expenditure incurred 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 or exclusively for the purpose of business or profession. However, the explanation appended to this sub-section denies claim of any such expense, if the same has been incurred for a purpose which is either an offence or prohibited by law. Thus, the claim of any expense incurred in providing above mentioned or similar freebees in violation of the provisions of 30 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. 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 deductable 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. (emphasis supplied) The CBDT circular being clarificatory in nature, was in effect from the date of implementation of Regulation 6.8 of the 2002 Regulations, i.e., from 14.12.2009.” 41. Also, in para 32 of the order it has been observed that the 2002 Regulations, applicable to all medical practitioners (including doctors in private practice), was introduced w.e.f. 14.12.2009. The relevant para 32 has been reproduced as below: “32. Before us, Apex has continually stressed on the need to divorce interpretation of tax provisions from a perceived immorality / violation of public policy. Apex repeatedly relied on T.A. Quereshi (supra), M/s K.M. Jain (supra) and CIT v. Pt. Vishwanath Sharma31. We find that none of these judgments find much favour with the case of the appellant. T.A. Quereshi addressed a business ‘loss’, not a business ‘expenditure’ as envisioned under Section 37(1). In M/s 31 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. K.M. Jain, the ransom money paid to kidnappers of the employee of the assessee company was allowed deduction primarily based on the fact that the assessee was helpless and coerced to pay the amount in order to save 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 could not have been allowed as it is an offence under the Statutes as stated above.” *** “We are, therefore, clearly of the opinion that payment as commission to Government doctors for obtaining a favour therefrom by prescribing medicines in which the assessee was dealing cannot be said to be a “business expenditure” and no deduction can be allowed thereof under the Act.” (emphasis supplied) The 2002 Regulations, applicable to all medical practitioners (including doctors in private practice), was introduced w.e.f. 14.12.2009.” 32 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. 42. In accordance with the decision rendered in the case of Apex Laboratories Pvt. Ltd. vs. DCIT(supra) wherein disallowance was made for the expenditure and freebies incurred on or after 14 December 2009, the expenditure incurred on foreign trip of doctors for AY 2006-07 is allowable being incurred prior to 14 December 2009. Consequently, ground No.14 and 15 of the appeal is allowed. 43. In ground no. 16, the assessee has challenged the disallowance of depreciation on goodwill amounting to Rs. 2,30,713/-. Brief facts are, the assessee entered into an agreement with Medtech Devices on 31st July 2001, towards purchase of goodwill for a consideration of Rs 25 lakh. In the return of income filed for the impugned assessment year, the assessee claimed depreciation @ 25% on the written down value (WDV) of goodwill by treating it as an intangible asset. However, both, the Assessing Officer as well as DRP disallowed assessee’s claim by holding that goodwill is not an intangible asset under section 32(1)(ii) of the Act. 44. The learned Counsel for the assessee submitted, while deciding identical issue in assessee’s own case for assessment years 2002–03, 2003–04, 2007-08 and 2008–09, depreciation has been allowed. The learned Departmental Representative relied upon the observations of learned Commissioner (Appeals) and the Assessing Officer. 33 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. 45. We have considered rival submissions and perused material on record. The issue relating to depreciation on goodwill by treating it as an intangible asset under section 32(1)(ii) of the Act is no more res integra in view of the decision of the Hon'ble Supreme Court in CIT v/s Smifs Securities Ltd., [2012] 348 ITR 302 (SC). In this decision the Hon'ble Supreme Court has held that goodwill is in the nature of any other business or commercial right or similar in nature, hence, is to be 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”. 34 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. 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. Brief facts are, he Assessee in AY 2003-04 had made a provision of Rs. 11,82,642/- for the amount of professional fees payable to M/s Johari Medical Research Foundation (JMRF) in accordance with the agreement entered into by the Assessee with JMRF. Out of the total amount of provision, a sum of Rs. 6,20,150/- was paid and the balance amount of Rs. 5,62,492/- was written back in AY 2006-07. However, the total provision of INR 11,82,642 was disallowed by the AO while framing assessment order for AY 2003-04. During the course of the assessment proceedings for AY 2006-07, the assessee raised additional claim before the AO that since amount of Rs 5,62,492 was already disallowed in AY 2003-04, the same should not be taxable on reversal/ written off in AY 2006-07. However, The AO has not granted relief in relation to the amount of Rs 5,62,492 written back in AY 2006-07 contending that any claim made other than by way of filing revised return cannot be accepted. The Hon’ble DRP upheld the decision of the AO. 35 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. 50. The Ld AR for the assessee submitted that the Hon’ble Mumbai ITAT, in the Assessee’s own case for AY 2003-04 has directed not to treat the reversal of provision amounting to Rs. 5,64,492/- as income in AY 2006-07. The relevant extract of the ruling reads as below: “The said amount of provision written back has been already offered to tax by the assessee in AY 2006-07.25. In view of the above discussion and considering that the aforesaid services are required for the regular business activities, these expenses are incurred wholly and exclusively for the purpose of business and hence be allowed as a deductible expense under section 37(1) of the Act except an amount of INR 6,20,150 should be disallowed during the year under consideration. As the assessee has suo moto reversed and offered to tax an amount of INR 5,62,492 in AY 2006-07, we direct the AO that in respect of the reversal of the amount in the books of accounts to the extent of INR 5,62,492, not to treat the same as income of AY 2006-07 as offered by assessee in the return of income as it would amount to double taxation. We direct accordingly.” 51. Notably, as Tribunal has directed to not the treat the same as income in AY 2006-07, we direct the AO to delete the addition made accordingly. This ground is allowed. 52. In ground No. 18 of appeal, the assessee has assailed charging of interest u/s. 234B and 234C of the Act. Charging of interest under the aforesaid section, is mandatory and consequential, hence, ground No. 18 is dismissed. 36 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. 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 upheld the decision of the Departmental Authorities in holding that the payment made towards non– compete fee is capital expenditure, however, it also held that the assessee is eligible to claim depreciation on such expenditure as it is an intangible asset. Accordingly, depreciation was allowed to the assessee on the expenditure 37 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. incurred towards non–compete fee. Consequential effect in terms of depreciation on the WDV of non–compete fee was allowed to the assessee in the assessment year 2003–04 and 2004–05. Even, while deciding the appeals for the assessment years 2008–09, 2011–12, 2012–13, 2013–14 and 2014-15 assessee’s claim of depreciation on non–compete fee was allowed while entertaining the additional ground raised by the assessee. 56. We have considered rival submissions and perused material on record. At the outset, we must observe that the issue raised in the additional ground can be decided without making investigation into fresh facts. Therefore, we are inclined to admit the additional ground raised by the assessee. Undisputedly, in the year of payment of non–compete fee i.e., A.Y. 2002–03, the assessee had claimed it as revenue expenditure. However, the Departmental Authorities as well as the Tribunal held that the expenditure incurred by the assessee is capital in nature. Of course, the Tribunal allowed depreciation on non– compete fee by treating it as an intangible asset. Notably, in subsequent assessment years i.e., 2003–04, 2004–05, 2008–09, 2011–12, 2012–13, 2013– 14 and 2014-15, the Tribunal has allowed assessee’s claim of depreciation on non–compete fee while entertaining additional ground raised by the assessee. 38 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. 57. In AY 2008-09, while deciding the similar issue, the Tribunal has allowed the ground of appeal raised by the assessee. The relevant para of the Tribunal is as under: “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 squarely covered in favour of the assessee. A perusal of the orders of the Tribunal for the preceding years reveals that the assessee was held to be eligible for depreciation on non-compete fees. Accordingly, respectfully following the view taken by the Tribunal in the assesses own case for the aforementioned preceding 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. 39 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. 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. 3361/Ahd/2010 for AY 2006-07, in the earlier part of the order. That being the case, no separate adjudication in respect of the aforesaid grounds of the Appellant’s appeal for AY 2005-06 is required at this stage except ground 8 for Appellant’s appeal for AY 2005-06. 62. Ground no. 8 raised by the Assessee in ITA no. 480/Ahd/2011 pertains to addition made by the Transfer Pricing Officer on account of difference in price Transfer Pricing Officer charged by AEs to the assessee and third party distributors. 63. 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. In the course of the transfer pricing proceedings, the Transfer Pricing Officer called upon the Assessee to furnish the details of direct sales made by the AEs to third parties in India. The 40 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. Transfer Pricing Officer observed that for certain products sold by the AEs to third parties and the Appellant, the AEs had charged a lesser price to third parties than the Appellant. The Transfer Pricing Officer made an addition of INR 2,64,703 in respect of difference in prices charged by its AEs to the assessee and to the third party in India. 64. The learned Commissioner (Appeals), followed the DRP order for AY 2006-07, wherein this adjustment was deleted, however the learned Commissioner (Appeals), inadvertently upheld addition of Rs. 2,64,703 in respect of difference in prices charged by its AEs to the assessee and to the third party in India. 65. The learned Counsel for the Assessees submitted, that it has adopted TNMM as the most appropriate method to benchmark the international transaction of import of finished goods. For this, the Assessee has earned an operating margin of 6.16% on revenue in AY 2005-06 which is higher than the margins earned by comparable companies considered by the Assessee in its transfer pricing study, i.e., 2%. Hence, the Assessee submitted that any difference/ excessive price charged by the AEs has already been considered in the TNMM. Accordingly, the same should be considered to be at arm’s length and no separate adjustment on account of price differences is not warranted. 41 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. 66. Further, the Assessee submitted that the Transfer Pricing Officer erred in making a separate transfer pricing adjustment on account of excessive purchase price charged to the 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. Grounds 10, 11 & 12 are dismissed.” 42 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. 68. The AR further submitted the Hon’ble DRP directions of AY 2006-07 where the DRP had directed the Transfer Pricing Officer to delete the addition on account of excessive purchase price as it is already benchmarked once under TNMM/RPM, as under 69. However, learned Commissioner (Appeals), inadvertently dismissed the ground, whereas it was to be allowed following DRP direction. Hence, the based on the above order, adjustment on account of excessive purchase price amounting to INR 2,64,703 should be deleted. 70. The Hon’ble Bombay High Court in the case of PCIT v Amphenol Interconnect Indian (P.) Ltd reported in [2018] 91 taxmann.com 441 (Bombay) 43 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. has upheld the decision of ITAT Pune Bench and held that when the TPO has accepted TNMM as the most appropriate method for majority of export of AE, erred in applying CUP method for some of the transactions as two methods cannot be applied for one class of transactions. 71. We have heard the submissions made by the learned counsel and perused the material on record. Apart from the fact that as per the CIT(Appeals) order the Assessing Officer was to follow the DRP directions of AY 2006-07, it is a well settled principle of law by decisions of various Courts & Tribunal that most appropriate method should be selected to benchmark international transactions of the assessee with its AE based on nature of transaction. However, it is incorrect to adopt two methods for one class of transaction and benchmarking such transaction by cherry picking a portion of the transaction undertaken by the assessee with its AEs and this principle is supported by the decision of ITAT Pune bench of Amphenol Interconnect India Pvt Ltd (supra) upheld by the Hon’ble Bombay High Court. Accordingly, we agree with the Appellants contentions and the said ground is allowed in favour of the Appellant. 72. Ground No.12 with regard to depreciation on plant and machinery and building is common as taken in Ground of appeal No. 10 for the AY 2006-07. 44 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. Following the reasoning given in the AY 2006-07, we direct the AO to allow assessee's claim of depreciation of Rs. 7,73,152/-. 73. Ground No.13 was not pressed by learned AR, the same is therefore, dismissed as not pressed. 74. Ground No. 14 relates to disallowance of expenditure incurred on gift articles of Rs. 3,28,355/-. Similar ground has been discussed in Ground 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 45 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. 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 order. 77. We have considered rival contentions made and observe that the issue is covered by Tribunal’s order for AY 2004-05 wherein following observation is made:- “We have considered rival contentions and found that expenditure has been incurred under the commercial expediency. Relying on the decision of Supreme Court in case of Dhanarajgirji Raja Narsingirji (91 ITR 544), Panipat Woolen and general Mills (103 ITR 66), Eastern Investments (20 ITR 1) and the decision of Bombay High Court in case of Dinshaw (F.E) Ltd. (36 ITR 114), we do not find any merit for disallowance of expenditure incurred on purchase of catalogues and broachers, which were wholly and exclusively for the purpose of business. Accordingly, AO is directed to delete the same.” 78. Respectfully following the order of the Tribunal, we direct the AO to delete the addition made. 79. Ground No.16 relates to disallowance of expenditure incurred for sponsoring the foreign trips of doctors of Rs. 32,56,640/-. Similar ground has been discussed in Ground of appeal No. 14& 15 for the AY 2006-07. Following 46 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. the same reasoning, we restore the issue to the file of Assessing Officer for adjudication in accordance with the decision rendered in the case of Apex Laboratories Pvt. Ltd. vs. DCIT(supra). Consequently, ground No.16 of the appeal is allowed for statistical purpose. 80. Ground No. 17 relates to disallowance of expenditure incurred on software of Rs. 1,09,985/-. During the year under consideration, the Assessee had incurred certain expenditure towards software purchase. During the assessment, the AO called for the details and the Assessee submitted the details to AO during the assessment proceedings along with the copies of invoices. The AO disallowed the expenditure relying on earlier year order and hold that the expenditure incurred by the Assessee was of capital nature and accordingly depreciation at the rate of 25% is allowable on the expenditure incurred. Learned Commissioner (Appeals) held that the expenses were of a capital nature and had allowed depreciation on the same at the rate of 60%. 81. Learned AR for assessee submitted that the expenditure of Rs. 1,00,000/- was incurred by the Assessee was towards software development for retrieving the information about heart valve implant surgeries carried out by Bombay Hospital during the period from 1999 to 2004. Other expenses amounting to Rs. 9,985/- was towards the routine maintenance/ consumable expenses for maintaining the website of the Assessee. Further, he submitted 47 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. 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 goodwill of Rs. 3,07,617/-. We direct accordingly. 84. Ground No. 20 relates to disallowance of expenditure in respect of Earnest Money Deposit (‘EMD’) written off of Rs. 18,82,290/-. Brief facts are, during the assessment proceedings, the Assessing Officer observed that the 48 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. assessee had claimed bad debts of Rs 6,14,651 and old balance written off of Rs. 24,66,940/- and asked the assessee to justify the claim. The AO observed that out of Rs. 24,66,940/-, amount of Rs. 18,82,290/- pertains to EMD write off and disallowed the same holding that the Assessee has not submitted any evidences which prove that the debts had become bad during the year, the Assessee has not fulfilled all the conditions which enable an Assessee to claim an amount as a bad debt. Learned Commissioner (Appeals) held that the Assessee had failed to show that the EMDs was offered for taxation earlier and that since the Assessee has not submitted any evidences which prove that the loss was crystallised during the year, the Learned Commissioner (Appeals) had disallowed the claim of the Assessee. 85. Ld AR for assessee argued that EMD were given, not for acquiring of any asset giving enduring benefit and was merely given as to secure business with various hospitals and other agencies in the form of tenders. He submitted that the Assessee has submitted the details of EMDs written off during the year to the AO and in the event of forfeiture of deposits the same shall be allowed as a deduction while computing total income. The Learned Counsel for assessee relied upon the following decision: i. Pyoginam v. Additional Commissioner of Income tax [2010] 130 TTJ 7 (Delhi)(UO), 49 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. ii. Madhya Pradesh High Court (HC) in the case of Thackers H.P. & Co. vs. CIT (10 Taxman 187) iii. Narandas Mathuradas & Co (35 ITR 0461) (Bom HC) iv. Social Media India Ltd (ITA No 390/Hyd/2013) (Hyderabad ITAT) 86. The Learned Departmental Representative relied on the assessment order and observations of Learned Commissioner (Appeals). 87. We have considered rival submissions and perused material on record. Relying on the details submitted, arguments put forth by the Ld. AR for the assessee and the decisions relied upon by the assessee, we are of the considered view that the Earnest Money Deposit written off is revenue in nature and allowable as expenditure in the event of forfeiture. Accordingly, AO is directed to delete the addition made. 88. In ground No. 21 appeal, the assessee has assailed charging of interest u/s. 234C of the Act. However, the Ld. AR for assessee submitted that Pursuant to rectification application filled by the Assessee, the AO has passed rectification order under section 154 of the Act rectifying the calculation of interest levied under section 234C of the Act. In this regard, Ld Counsel for the assessee fairly mentioned that the said ground is not pressed. Accordingly, the ground is dismissed as not pressed. 50 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. 89. In addition to the aforesaid grounds, the assessee has raised an additional ground being ground no.22, seeking allowance of depreciation on non–compete fee. 90. With regard to the payment non-compete fee, the ITAT has alreadyallowed depreciation holding that IMPL has acquired intangible assets innature of any other business of commercial rights. We accordingly directthe AO to allow depreciation on the non-compete fee so incurred by theassesseeasheld above in Ground of appeal No. 20 for AY 2006-07. 91. The assessee has raised additional ground no. 23, 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. 92. In the result, similarly the Assessee’s appeal is partly allowed. Order pronounced in the open court on 30 th of September 2022. Sd/- Sd/- (AMIT SHUKLA) (GAGAN GOYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai – Dated 30/09/2022 Copy forwarded to: 1. The Appellant 2. The Respondent. 3. The CIT(A),Mumbai. 51 ITA No.480/Ahd/2011 & ITA No.3361/Ahd/2010 – India Medtronic Private limited. 4. CIT 5. DR,ITAT,Mumbai 6. Guardfile. BY ORDER (Dy./ Asst Registrar) ITAT, Mumbai