INDIA MEDTRONIC PRIVATE LIMITED, MUMBAI V. ACIT , 10(1)(1), MUMBAI

ITA 601/MUM/2018

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 5749 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-05-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Assessment Year: misc
• Appeal Filed On: 01-02-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; International transaction; Wholly owned subsidiary; Revenue expenditure
• Section: 143(3); 92B; 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH K MUMBAI BEFORE SHRI SAKTIJIT DEY (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) ITA NO. 601/MUM/2018 ASSESSMENT YEAR: 2013 - 14 INDIA MEDTRONIC PVT. LTD. 1241, SOLITAIRE CORPORATE PARK, BLDG. NO .12, 4 TH FLOOR, ANDHERI - GHATKOPAR LINK ROAD, ANDHERI (EAST), MUMBAI - 400093. VS. ASSISTANT COMMISSIONER OF INCOME TAX - 10(1)(1), ROOM NO. 209, AAYAKAR BHAVAN, MUMBAI - 400020. PAN NO. AAACI4227Q APPELLANT RESPONDENT ASSESSEE BY : MR. RAJAN R. VORA, AR REVENUE BY : MR. RAJNEESH YADAV, DR DATE OF HEARING : 01/05/2019 DATE OF PRONOUNCEMENT: 08/05/2019 ORDER PER N.K. PRADHAN, AM THIS IS AN APPEAL FILED BY THE ASSESSEE. THE RELEVANT ASSESSMENT YEAR IS 2013 - 14. THE APPEAL IS DIRECTED AGAINST THE ORDER OF THE ASSISTANT COMMISSIONER OF INCOME TAX, CIR. - 10(1)(1), MUMBAI (HEREINAFTER THE AO) PASSED U/S 143(3) R.W.S. 144C(1 3 ) OF THE INCOME TAX ACT 1961, (THE ACT). 2. THE 1 ST GROUND OF APPEAL IS GENERAL IN NATURE. THE 2 ND TO 27 TH GROUND S OF APPEAL ARE TRANSFER PRICING GROUNDS ON ADVERTISING, MARKETING AND PROMOTION (AMP) ADJUSTMENT. INDIA MEDTRONIC PVT. LTD. ITA NO. 601/MUM/2018 2 2.1 WE BEGIN WITH THE AMP ADJUSTMENT. THE APPELLAN T IS AN INDIAN COMPANY BEING A 100% SUBSIDIARY OF MEDTRONIC INTERNATIONAL, HONG KONG, WHICH IN TURN IS A SUBSIDIARY OF MEDTRONIC INC., A US BASED GLOBAL LEADER IN MEDICAL TECHNOLOGY ENGAGED IN DEVELOPMENT AND MANUFACTURE OF WIDE RANGE OF MEDICAL PRODUCTS. THE APPELLANT IS ENGAGED IN MARKETING AND DISTRIBUTION OF PRODUCTS OF THE GROUP COMPANIES. THE APPELLANTS PRIMARY BUSINESS IS TO DISTRIBUTE MEDICAL DEVICE. THE TRANSFER PRICING OFFICER (TPO) HELD THAT THE AMP EXPENSES INCURRED BY THE APPELLANT WAS EXCES SIVE AND BENEFITED THE GROUP ENTITIES OWING THE MEDTRONIC BRAND AND HENCE IT SHOULD HAVE BEEN COMPENSATED BY THE AES FOR SUCH AMP EXPENDITURE. THIS RESULTED IN A TRANSFER PRICING ADJUSTMENT OF RS.13,34,52,541/ - . HOWEVER, THE TPO ACCEPTED THE TRANSACTION OF IMPORT OF FINISHED GOODS FOR RESALE TO BE AT ARMS LENGTH. THE TPO, WHILE MAKING THE TP ADJUSTMENT COMPARED THE AMP EXPENSES INCURRED BY THE APPELLANT VIS - A - VIS COMPARABLE COMPANIES [USING THE BRIGHT LINE TEST (BLT)] AND OBSERVED THAT THE EXCESS AMP E XPENSES SHOULD BE REIMBURSED BY THE AES TO THE APPELLANT. ACCORDINGLY, THE TPO MADE AN ADJUSTMENT OF RS.13,34,52,541/ - AS EXCESS AMP TO BE REIMBURSED TO THE APPELLANT. WITHOUT PREJUDICE TO THE ABOVE, THE TPO HELD THAT IN CASE THE ADJUSTMENT WITH RESPECT TO AMP IS NOT UPHELD BY THE ITAT, THEN AN AMOUNT OF RS.31,20,82,850/ - SPENT AS CONVENTION EXPENSES BY THE APPELLANT SHOULD BE COMPENSATED BY THE AE AS THESE EXPENSES WERE SPENT FOR BRAND INTANGIBLES IN INDIA. INDIA MEDTRONIC PVT. LTD. ITA NO. 601/MUM/2018 3 THE AO IN THE FINAL ASSESSMENT ORDER UPHELD T HE TRANSFER PRICING ADJUSTMENT OF RS.13,34,52,541/ - ON ACCOUNT OF AMP EXPENSES MADE BY THE TPO AND ALSO AS PER THE DIRECTION ISSUED BY THE DISPUTE RESOLUTION PANEL (DRP). 2.2 BEFORE US, THE LD. COUNSEL OF THE ASSESSEE SUBMITS THAT THE AMP EXPENSES INCURRED REPRESENT ONLY DOMESTIC TRANSACTIONS UNDERTAKEN WITH THIRD PARTIES AND ARE OUTSIDE THE PURVIEW OF SECTION 92B OF THE ACT. THUS IT IS STATED THAT AMP EXPENSES INCURRED BY THE APPELLANT IS NOT AN INTERNATIONAL TRANSACTION. THE LD. COUNSEL FURTHER SUBMITS TH AT THE ITAT IN ASSESSEES OWN CASE FOR AY 2010 - 11 (ITA NO. 1600/M/2015) DATED 17.01.2018, AFTER ANALYSING THE DISTRIBUTION AGREEMENT, HELD THAT IN ABSENCE OF ANY AGREEMENT FOR SHARING AMP EXPENSES, IT CANNOT BE HELD TO BE AN INTERNATIONAL TRANSACTION. FURT HER, IT HELD THAT IF THE AE WAS BENEFITED INDIRECTLY BY THE AMP EXPENDITURE INCURRED BY THE APPELLANT, IT CANNOT BE HELD THAT IT HAD ENTERED INTO AGREEMENT FOR SHARING AMP EXPENSES. FURTHER, RELYING ON THE ORDER OF THE ITAT IN ITS OWN CASE FOR AY 2008 - 09 (ITA NO. 7555/MUM/2012) DATED 04.05.2018 AND FOR AY 2011 - 12 (ITA NO. 1246/MUM/2016) DATED 02.05.2018, THE LD. COUNSEL SUBMITS THAT IN THE SAID CASES THE TRIBUNAL RELIED ON THE ABOVE RULING WITH THE SAME DISTRIBUTION AGREEMENTS AND HELD THE MATTER IN FAVOUR OF THE APPELLANT. IN CONNECTION WITH THE ABOVE THE LD. COUNSEL SUBMITS THAT THE DISTRIBUTION AGREEMENTS ARE EFFECTIVE FROM 28.04.2007 AND ARE RENEWABLE AUTOMATICALLY ON A YEAR - TO - YEAR BASIS. FURTHER, THE APPELLANT INDIA MEDTRONIC PVT. LTD. ITA NO. 601/MUM/2018 4 ENTERED INTO AN AGREEMENT WITH ANOTHER AE EFFECTIVE FROM 28.04.2012 ON SIMILAR TERMS. IT IS EXPLAINED THAT ADDITIONALLY, THE TERMS OF THE DISTRIBUTION AGREEMENTS HAVE NOT CHANGED/MODIFIED AND THE ITAT RELIED ON THE SAME DISTRIBUTION AGREEMENTS, WHILE PASSING THE ABOVE ORDERS IN FAVOUR OF THE AP PELLANT IN THE PRIOR YEARS. THUS THE LD. COUNSEL SUBMIT S THAT THE DISTRIBUTION AGREEMENTS AND ACTIVITIES HAVE REMAINED SAME IN THE PRIOR YEAR AS WELL AS SUBSEQUENT YEARS AS COMPARED TO THE YEAR UNDER CONSIDERATION. THEREFORE, IT IS ARGUED BY HIM THAT BASED ON THE ABOVE ITAT ORDERS, THERE IS NO ARRANGEMENT FOR SHARING AMP EXPENSES WITH AES AND HENCE THE ALLEGED AMP EXPENSES CANNOT BE HELD AS AN INTERNATIONAL TRANSACTION. RELIANCE IS PLACED BY HIM ON THE FOLLOWING HIGH COURT DECISIONS, WHEREIN IT IS HELD THAT IN ABSENCE OF ANY ARRANGEMENT WITH AE, THERE CANNOT BE SAID TO BE AN INTERNATIONAL TRANSACTION : I. MARUTI SUZUKI INDIA LTD. V. CIT (381 ITR 117) (DELHI HC), II. WHIRPOOL OF INDIA LTD . (381 ITR 154) (DELHI HC), III. HONDA SIEL POWER PRODUCTS LTD. V. DCIT (237 TAXMAN 304) (DELHI HC), IV. BAUSCH & LOMB EYECARE (INDIA) PVT. LTD. V. ACIT (381 ITR 227) (DELHI HC). 2.3 ON THE OTHER HAND, THE LD. DR SUBMITS THAT AS THE DEPARTMENT HAS FILED APPEAL ON THE ABOVE ISSUE BEFORE THE SUPREME COURT AND THE MATTER IS PENDING, THE PRESENT ISSUE BE RESTORED TO THE FILE OF THE AO. 2.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIALS ON RECORD. IT WOULD BE PERTINENT TO REFER HERE TO THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE, FACTS BEING SIMILAR. THE ITAT, IN INDIA MEDTRONIC PVT. LTD. ITA NO. 601/MUM/2018 5 APPELLANTS OWN CASE FOR AY 2010 - 11 (ITA NO. 1600/M/2015) DATED 17.01.2018 HELD AS UNDER: 3.4.WE HAVE HEARD THE RIVAL SUBMISSIONS. WE FIND THAT THE TPO HAD HELD THAT ASSESSEE SHOULD HAVE BEEN COM PENSATED BY ITS AE FOR THE AMP EXPENDITURE INCURRED BY IT. WE HAVE GONE THROUGH THE AGREEMENTS ENTERED IN TO BY THE AE.S WITH THE ASSESSEE, THAT IN THE AGREEMENTS THERE IS NO CONDITION ABOUT SHARING OF AMP, THAT THE AGREEMENTS TALKS OF USING BEST EFFORTS T O MARKET AND DISTRIBUTE THE PRODUCT OR PROMOTE THE PRODUCTS IN A COMMERCIALLY REASONABLE MANNER. IN OUR OPINION, THESE TERMS DO NOT GIVE ANY INDICATION THAT THE AE AND THE ASSESSEE HAD TO SHARE AMP EXPENSES. SECONDLY, IF THE AE WAS BENEFITTED INDIRECTLY BY THE AMP EXPENDITURE INCURRED BY THE ASSESSEE, IT CANNOT BE HELD THAT IT HAD ENTERED INTO AGREEMENT FOR SHARING AMP EXPENSES. WE ARE ALSO OF THE OPINION THAT BRIGHT LINE METHOD SHOULD NOT HAVE BEEN APPLIED BY THE TPO. WE WOULD LIKE TO REPRODUCE THE RELEVAN T PORTION OF THE ORDER OF THE THOMAS COOK(SUPRA), WHEREIN THE IDENTICAL ISSUE HAS BEEN DEALT IN LENGTH, AND IT READS AS UNDER: . 2.4.1 FACTS BEING IDENTICAL, WE FOLLOW THE ABOVE ORDER OF THE CO - ORDINATE BENCH AND DELETE THE IMPUGNED ADJUSTMENT. THUS THE 2 ND TO 27 TH GROUND OF APPEAL ARE ALLOWED. 3. THE 28 TH GROUND OF APPEAL RELATES TO DISALLOWANCE OF DEPRECIATION ON BUILDING. THE APPELLANT WAS ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING. HOWEVER, THE MANUFACTURING PROCESSES WERE DISCONTINUED W.E.F. 25.01.2002. DURING THE YEAR UNDER CONSIDERATION, THE APPELLANT HAD CLAIMED DEPRECIATION ON BUILDING AMOUNTING TO INDIA MEDTRONIC PVT. LTD. ITA NO. 601/MUM/2018 6 RS.84,318/ - . HOWEVER, THE AO DISALLOWED THE DEPRECIATION ON THE SAID ASSETS ON THE GROUND THAT THESE WERE NOT UTILIZED DURING THE YEAR. 3.1 BEFORE US, THE LD. COUNSEL OF THE ASSESSEE SUBMITS THAT UNDER THE INCOME TAX ACT, FOR THE PURPOSE OF CALCULATION AND GRANT OF DEPRECIATION, THE CONCEPT OF BLOCK OF ASSETS IS FOLLOWED FROM 1988 AND AS PER THE SAID CONCEPT, ASSETS FORMING PART OF THE SA ME BLOCK OF ASSETS LOSE THEIR INDIVIDUAL IDENTITY AND BECOME AN INSEPARABLE PART OF THE BLOCK OF ASSET FOR THE PURPOSE OF TAX DEPRECIATION. THUS, THE LD. COUNSEL RELYING ON THE FOLLOWING DECISIONS OF THE TRIBUNAL IN THE ASSESSEES OWN CASE SUBMITS THAT THE CLAIM OF DEPRECIATION ON BUILDING BE ALLOWED. AY 2003 - 04 (ITA NO. 1245/AHD/2008), AY 2004 - 05 (ITA NO. 812/AHD/2008), AY 2008 - 09 (ITA NO. 7555/MUM/2012) , AY 2009 - 10 (ITA NO. 216 8 /MUM/2014), AY 2010 - 11 (ITA NO. 1600/M/2015) AND AY 2011 - 12 (ITA NO. 1246/MUM/2016) 3.2 ON THE OTHER HAND, THE LD. DR RELIES ON THE ORDER PASSED BY THE AO. 3.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIALS ON RECORD. WE FIND THAT THE ABOVE ISSUE IS COVERED IN FAVOUR OF THE APPELLANT BY THE DECISION OF THE ITAT IN ASSESSEES OWN CASE FOR AY 2009 - 10 (ITA NO. 2168/MUM/2014) DATED 31.12.2015 (DEPARTMENT NOT IN APPEAL BEFORE THE HIGH COURT), WHEREIN AFTER CONSIDERING THE ORDER OF INDIA MEDTRONIC PVT. LTD. ITA NO. 601/MUM/2018 7 THE CIT(A) FOR AY 2007 - 08 (WHERE DEPARTMENT HAS NOT FILED APPEAL BEFORE THE ITAT) AND THE DECISION IN OSTWAL AGRO (DEL) (197 TAXMAN 25) AND SWATY SYNTHETICS LTD. (38 SOT 208) (ITAT MUMBAI), THE ITAT GRANTED DEPRECIATION ON PLANT AND MACHINERY AND BUILDING. FACTS BEING IDENTICAL, WE FOLLOW THE ABOVE ORDER OF THE CO - ORDINATE BENCH AND ALLOW THE 28 TH GROUND OF APPEAL. 4. THE 29 TH TO 47 TH GROUNDS OF APPEAL RELATE TO DISALLOWANCE OF PAYMENT TO DOCTORS OF RS.30,81,96,811/ - . THE AO DISALLOWED CONVENTION EXPENSES OF RS.31,20,82,850/ - INCURRED BY THE APPELLANT U/S 37(1) ON THE GROUND THA T IT WAS IN VIOLATION OF CLAUSE 6.8 OF THE MCI REGULATIONS AND CONSEQUENTLY, WAS IN VIOLATION OF THE CBDT CIRCULAR NO.5/2012 DATED 01.08.2012. HOWEVER, THE DRP GRANTED RELIEF OF RS.1,38,86,039/ - IN RESPECT OF EDUCATIONAL GRANTS PROVIDED TO VARIOUS ORGANIZA TIONS INCLUDING HOSPITALS FOR ORGANIZING CONTINUING EDUCATION MEETINGS, CONSIDERING THE SAME CANNOT BE LINKED WITH DIRECT BENEFIT CLAIMED BY THE DOCTORS AND ACCORDINGLY NOT COVERED BY MCI REGULATIONS. 4.1 BEFORE US, THE LD. COUNSEL SUBMITS THAT THE ISSUE IS COVERED IN FAVOUR OF THE APPELLANT IN ASSESSEES OWN CASE FOR AY 2010 - 11 (ITA NO. 1600/MUM/2015) DATED 17.01.2018, AND FOR AY 2011 - 12 (ITA NO. 1246/MUM/2016) DATED 02.05.2018. 4.2 ON THE OTHER HAND, THE LD. DR RELIES ON THE ORDER OF THE AO. 4.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIALS ON RECORD. WE FIND THAT THE ITAT IN ASSESSEES OWN CASE FOR THE AY 2010 - 11, RELYING ON THE DECISION OF MAX HOSPITAL (WPC 1334/2013) INDIA MEDTRONIC PVT. LTD. ITA NO. 601/MUM/2018 8 (DEL) AND PHL PH ARMA (163 ITD 10) (ITAT MUMBAI) HELD THAT (I) MCI GUIDELINES ARE APPLICABLE TO THE PROFESSIONALS I.E. DOCTORS ONLY AND DO NOT GOVERN THE OTHER TAX ENTITIES OR INDIVIDUALS OTHER THAN DOCTORS AND (II) MCI, AS A BODY CAN FORMULATE POLICY FOR DOCTORS AN D THE APPELLANT IS NOT A PRACTICING PROFESSIONAL AND THEREFORE, ANY GUIDELINES ISSUED BY IT CANNOT DECIDE THE ALLOWABILITY OR OTHERWISE OF AN EXPENDITURE UNDER THE ACT. FACTS BEING IDENTICAL, WE FOLLOW THE ABOVE ORDER OF THE CO - ORDINATE BENCH AND ALLOW TH E 29 TH TO 47 TH GROUND OF APPEAL. THE 48 TH AND 49 TH GROUND OF APPEAL BECOME CONSEQUENTIAL IN NATURE. 5. THE APPELLANT HAS FILED AN ADDITIONAL GROUND (50 TH ) CLAIMING CONSEQUENTIAL DEPRECIATION ON NON - COMPETE FEES PAID IN AY 2002 - 03, WHICH WAS HELD AS CAPITA L IN NATURE BY ITAT IN AY 2002 - 03. DURING AY 2002 - 03, THE APPELLANT HAD PAID NON - COMPETE FEES AMOUNTING TO USD 1 MILLION I.E. EQUIVALENT TO RS.4,73,00,000/ - TO THE DIRECTORS OF MEDTECH DEVICES LTD. AND CLAIMED THE SAME AS REVENUE EXPENDITURE. THE AO DISA LLOWED THE SAME U/S 37(1) OF THE ACT. 5.1 BEFORE US, THE LD. COUNSEL OF THE ASSESSEE SUBMITS THAT THE ITAT IN ASSESSEES OWN CASE FOR AYS 2003 - 04, 2004 - 05, 2008 - 09, 2011 - 12 HAS ADMITTED THE SIMILAR ADDITIONAL GROUNDS FILED ON CONSEQUENTIAL DEPRECIATION AN D DIRECTED THE AO TO GRANT CONSEQUENTIAL DEPRECIATION ON NON - COMPETE FEES. 5.2 ON THE OTHER HAND, THE LD. DR SUBMITS THAT THE AO HAS RIGHTLY DISALLOWED THE ABOVE SUM U/S 37(1) OF THE ACT. INDIA MEDTRONIC PVT. LTD. ITA NO. 601/MUM/2018 9 5.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT M ATERIALS ON RECORD. FACTS BEING IDENTICAL, WE FOLLOW THE ORDER OF THE CO - ORDINATE BENCH IN ASSESSEES OWN CASE AS MENTIONED AT PARA 5.1 ABOVE AND DIRECT THE AO TO GRANT CONSEQUENTIAL DEPRECIATION ON NON - COMPETE FEES. THUS THE ADDITIONAL GROUND OF APPEAL IS ALLOWED. 6. THE 51 ST AND 52 ND GROUND S OF APPEAL BECOME ACADEMIC IN NATURE AS WE HAVE ALLOWED THE 29 TH TO 47 TH GROUND OF APPEAL RELATING TO PAYMENT TO DOCTORS. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 08/05/2019. SD/ - SD/ - (SAKTIJIT DEY) (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED: 08/05/2019 RAHUL SHARMA, SR. P.S. COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A) - 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE . BY ORDER, //TRUE COPY// (SR. PRIVATE SECRETARY) ITAT, MUMBAI