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

ITA 7263/MUM/2018

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 8755 (ITAT-MUMBAI)
• Duration Of Justice: 8 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-09-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Assessment Year: 2014-2015
• Appeal Filed On: 18-12-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: NIKHIL TIWARI ARS
• Keywords: Capital asset; Gift; Business income; Depreciation; Transfer pricing; Business expenditure; Rectification of order; Opportunity of being heard; Principle of natural justice; International transaction; Additional evidence; Working capital adjustments; Fair market value; Revenue expenditure; Capital expenditure; TDS; Set aside
• Section: 271(1)(c); 92C; 143(3); 92B; 92F; 92E; 234B; 37(1); 64; 92

Judgement Text

P A G E | 1 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE SHRI M. BALAGANESH , ACCOUNTANT MEMBER AND SHRI RAVISH SOOD, JUDICIAL MEMBER ITA NO.7263 /MUM/2018 (ASSESSMENT YEAR: 2014 - 15 ) INDIA MEDTRONICS PVT. LTD. 1241, SOLITAIRE CORPORATE PARK, BLDG. NO.12, 4 TH FLOOR, ANDHERI GHATKOPAR LINK ROAD, ANDHERI (E), MUMBAI, MAHARASHTRA - 400093 VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1), ROOM NO. 209, AAYAKAR BHAVAN,M.K. ROAD MUMBAI 4000 20 PAN AAACI4227Q (APPELLANT) (RESPONDENT) APPELLANT BY: S /S HRI RAJAN R. VORA & NIKHIL TIWARI , A.R S RESPONDENT BY: SHRI ANAND MOHAN , D.R DATE OF HEARING: 11.0 7 .2019 DATE OF PRONOUNCEMENT: 1 3 .0 9 .2019 O R D E R PER RAVISH SOOD, JM THE PRESENT APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PASSED BY THE A.O UNDER SEC. 143(3) R.W.S. 144C(13) OF THE INCOME TAX ACT, 1961 (FOR SHORT ACT), DATED 31.10.2018. THE ASSESSEE HAS ASSAILED THE IMPUGNED ORDER BY RAISING THE FOLLOWIN G GROUNDS OF APPEAL BEFORE US: BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, INDIA MEDTRONIC PRIVATE LIMITED (HEREINAFTER REFERRED TO AS THE APPELLANT') CRAVES LEAVE TO PREFER AN APPEAL AGAINST THE ORDER PASSED BY THE LEARNED ASSISTANT COM MISSIONER OF INCOME - TAX - 10(1)(1), MUMBAI (HEREINAFTER REFERRED TO AS THE LEARNED AO ) UNDER SECTION 143(3) READ WITH SECTION 144C(13) OF THE INCOME - TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT ) IN PURSUANCE OF THE DIRECTIONS ISSUED BY THE HON BLE P A G E | 2 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) DISPUTE RESOLUTION PANEL - 1 (WZ), (HEREINAFTER REFERRED TO AS THE HON BLE DRP ) ON THE FOLLOWING GROUNDS, EACH OF WHICH ARE WITHOUT PREJUDICE TO ONE ANOTHER: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AS WELL AS IN LAW, THE LEARNED AO/ JOINT COMMISSIONER OF INCOME - TAX (TRANSFER PRICING) - 2(3) (TPO ) / HON'BLE DRP, IN FACT AND IN LAW: GROUNDS 1. ERRED IN ASSESSING THE TOTAL INCOME OF THE APPELLANT AT INR 2 ,30,29,38,703 AS AGAINST INR 37,21.04,250 AS COMPUTED BY THE APPELLANT; TRANSFER PRICING GROUNDS ON ADVERTI SING, MARKETING AND PROMOTION (AMP ) ADJUSTMENT 2. ERRED IN MAKING TRANSFER PRICIN G ADJUSTMENT OF INR 101,26,73,1 86 ON ACCOUNT OF AMP EXPENSES INCURRED BY THE APPELLANT; AMP IS NOT AN INTERNATIONAL TRANSACTION 3. ERRED IN CONSIDERING THE FUNCTION OF AMP AS A SEPARATE PURPORTED INTERNATIONAL TRANSACTION FOR THE PURPOSE OF TRANSFER PRICING ADJUSTMENT; 4. ERRED IN IGNORING THAT THE ALLEGED AMP EXPENSES INCURRED BY THE APPELLANT REPRESENTS ONLY DOMESTIC TRANSACTIONS UNDERTAKEN WITH THIRD PARTIES/EMPLOYEES AND ARE OUTSIDE THE PURVIEW OF SECTION 92B OF THE ACT AND IS THUS IN EXCESS OF HIS JURISDICTION; 5. ERRED IN ERRONEOUSLY STATING THAT THERE EXIST AN EXPL ICIT ARRANGEMENT BETWEEN THE APPELLANT AND ITS AES FOR INCURRING AMP EXPENSES; 6. ERRED IN CONCLUDING THAT THE APPELLANT IS ENGAGED IN PERFORMING DEVELOPMENT, MAINTENANCE, ENHANCEMENT, PROTECTION AND EXPLOITATION SERVICES (DEMPE SERVICES') WHICH INCLUDES MAR KET DEVELOPMENT, VALUE ADDITION, CREATION OF MARKETING INTANGIBLES ETC AND THERE IS A MUTUAL AGREEMENT' ARRANGEMENT BETWEEN THE APPELLANT AND AE FOR DISCHARGI NG MARKET DEVELOPMENT FUNCTIONS; 7. ERRED IN NOT FOLL OWING BINDING ORDERS OF THE HON BLE JURISDICTIO NAL ITAT IN APPELLANT'S OWN CASE FOR AY 2008 - 09, AY 2010 - 11 AND AY 2011 - 12, WHEREIN THE ENTIRE TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF AMP IS DELETED BY HOLDING THAT IT IS NOT AN INTERNATIONAL TRANSACTION, IN THE ABSENCE OF ANY AGREEMENT FOR SHARING AMP EXPENSES WITH THE AES; PROMOTION OF AE'S BRAND IN INDIA 8. ERRED IN HOLDING THAT BY INCURRING THE IMPUGNED AMP EXPENSES, THE APPELLANT WAS PROMOTING MEDTRONIC BRAND INSTEAD OF APPRECIATING THAT THE APPELLANT WAS ONLY CARRYING OUT ITS BUSINESS BY USING THE WELL - ESTABLISHED BRAND NAME OF MEDTRONIC AND ANY BENEFIT DERIVED BY THE AES IS PURELY INCIDENTAL IN NATURE; TR ANSACTIONAL NET MARGIN METHOD ( TNMM ): BUNDLED APPROACH 9. ERRED IN NOT APPRECIATING THAT THE APPELLANT HAS FOLLOWED A BUNDLED TRANSACTION APPROAC H FOR DETERMIN ING THE ARM'S LENGTH PRICE (ALP ) OF THE TRADING TRANSACTION AND THAT IT WOULD BE ILLOGICAL AND IMPROPER TO TREAT AMP EXPENSES, BEING ONE OF THE FUNCTIONS OF DISTRIBUTION ACTIVITY PERFORMED BY THE APPELLANT, AS A SEPARATE INTERNATIONAL TRANS ACTION GIVEN THAT THE INTERNATIONAL TRANSACTION OF TRADING OF MEDICAL DEVICES' HAVE BEEN CONSIDERED TO BE AT ARM'S LENGTH; APPLICAT ION OF BRIGHT LINE METHOD (BLT ) 10. ERRED IN STATING THAT THE APPELLANT HAS RENDERED A SERVICE TO THE AES BY INCURRING EXCESSIVE AMP EXPENSES AND HOLDING THAT SUCH EXCESSIVE AMP EXPENSES SHOULD BE REIMBURSED BY THE AES BY APPLYING BLT AS OTHER METHOD ; 11. ERRED IN NOT FOLLOWIN G THE BINDING ORDERS OF THE HON BLE JURISDICTIONAL ITAT IN APPELLANT'S OWN CASE FOR AY 2009 - 10 AND AY 2010 - 11, WHEREIN IT IS HELD P A G E | 3 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) THAT BLT IS NOT AN APPROPRIATE METHOD TO BENCHMARK THE ALLEGED INTERNATIONAL TRANSACTION ON ACCOUNT OF AMP; NO SCIENTIFIC APP ROACH WHILE SELECTING COMPARABLE COMPANIES FOR BRIGHT LINE TEST 12. WITHOUT PREJUDICE TO THE ABOVE , ERRED IN CHERRY PICKING UP OF THE COMPARABLE COMPANIES AND HAS SELECTED COMPARABLE COMPANIES OF THE PRECEDING YEAR WITHOUT CONDUCTING A FRESH SEARCH AND THEREB Y VIOLATED THE PRINCIPLES OF NATURAL JUSTICE; 13. WITHOUT PREJUDICE TO THE ABOVE , ERRED IN CONSIDERING ADINATH BIO - LABS LIMITED AS A COMPARABLE COMPANY NOT HAVING SIMILAR PRODUCT/ BRAND PROFILE AS THE APPELLANT; MARK - UP ON AMP EXPENSES 14. WITHOUT PREJUDICE TO THE ABOVE , ERRED IN DISREGARDING THAT THAT EVEN IF THE APPELLANT HAD TO BE COMPENSATED FOR THE EXCESSIVE AMP, IN ABSENCE OF ANY SERVICES ELEMENT, THE APPELLANT SHOULD BE ENTITLED TO REIMBURSEMENT OF ACTUAL EXCESSIVE AMP EXPENSES INCURRED, RATHER THAN A M ARK - UP ON THE SAME; 15. WITHOUT PREJUDICE TO THE ABOVE , ERRED IN HOLDING THAT THE APPELLANT SHOULD HAVE EARNED A MARK - UP OF 23.71% ON THE ALLEGED EXCESSIVE AMP EXPENSES IN RELATION TO DISTRIBUTION SEGMENT, WHICH ARE TO BE REIMBURSED TO THE APPELLANT; 16. WITHOUT PREJUDICE TO THE ABOVE , ERRED IN NOT ADOPTING A SCIENTIFIC SEARCH PROCESS TO IDENTIFY COMPANIES FOR COMPUTING THE MARK - UP TO BE APPLIED TO THE ALLEGED EXCESSIVE AMP EXPENSES; 17. WITHOUT PREJUDICE TO THE ABOVE , ERRED IN CONSIDERING INAPPROPRIATE COMPARABLES COMPANIES FOR APPLICATION OF A MARK - UP ON THE ALLEG ED EXCESSIVE AMP EXPENSES. 18. WITHOUT PREJUDICE TO THE ABOVE , ERRED IN COMPUTING MARK - UP OVER ALLEGED EXCESSIVE AMP EXPENSES INCURRED WITHOUT APPRECIATING THAT AN ADDITION IF ANY, SHALL BE COMMENSURATE WITH AGENCY FUNCTION, IF ANY, UNDERTAKEN BY THE APPELLANT. CERTAIN EXPENSES ARE NOT IN NATURE OF AMP EXPENSES 19. ERRED IN NOT UNDERSTANDING THE BUSINESS OF THE APPELLANT AND IGNORING THE FACT THAT THE AMP SPEND OF THE APPELLANT PRIMARIL Y CONSISTS OF SELLING EXPENSES/ NON - BRAND RELATED EXPENSES HUGELY BENEFITTING THE APPELLANT AND THEREFORE SHOULD NOT BE CONSIDERED AS PART OF BRAND BUILDING EXPENSES FOR THE PURPOSE OF DETERMINING THE AMP EXPENSE OF THE APPELLANT; 20. WITHOUT PREJUDICE TO THE ABOVE , ERRED IN INCLUD ING PERSONNEL COST, TRAVELLING AND CONVEYANCE EXPENSES AND DEPRECIATION ON EQUIPMENT AS PART OF AMP EXPENSES; 21. ERRED IN CONSIDERING 80% OF MANPOWER EXPENSES AND TRAVELLING AND CONVEYANCE COSTS AS AMP EXPENSES; 22. WITHOUT PREJUDICE TO THE ABOVE , ERRED IN NOT CONSIDERING 50% OF MANPOWER EXPENSES AND TRAVELLING AND CONVEYANCE COSTS AS AMP EXPENSES AS DIRECTED BY THE HON'BLE DRP FOR AY 2009 - 10 AND AY 2010 - 11; 23. ERRE D IN NOT PROVIDING BENEFIT OF +/ - 3% UNDER PROVISO TO SECTION 920 OF THE ACT FOR THE PURPOSE OF COMPUTING THE ALP. SECONDARY TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF CONVENTION EXPENSES INCURRED IN NORMAL COURSE OF BUSINESS 24. ERRED IN PARTLY CONFIRMING SECONDARY ADJUSTMENT MADE BY THE TPO BY HOLDING THAT IN CASE OF ADJUSTMENT ON AMOUNT OF AMP SPEND IS NOT SUSTAINED BY THE APPELLATE AUTHORITIES, CONVENTION EXPENSES TO THE EXTENT OF 92.03 PERCENT IE INR P A G E | 4 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) 33,44,95,973, SHOULD BE CONSIDERED TO BE IN THE NATURE OF EXPENSES INCURRED TOWARDS BRAND BUILDING AND BUSINESS PROMOTION AND, THEREBY AN ADJUSTMENT SH OULD BE MADE ON THE SAME: 25. ERRED IN NOT USING ANY OF THE METHO DS PRESCRIBED UNDER SECTION 92C TO UNDERTAKE ADJUSTMENT ON SECONDARY BASIS BY CONSIDERING CONVENTION EXPENSES TO BE IN THE NATURE OF EXPENSES INCURRED TOWARDS BRAND BUILDING AND BUSINESS PROMOTI ON; 26. WITHOUT PREJUDICE TO THE ABOVE, ERRED IN MAKING DISALLOWANCE/ADDITION OF CONVENTION EXPENSES AS A PART OF TRANSFER PRICING ADJUSTMENT AS WELL AS CORPORATE TAX DISALLOWANCE, THEREBY MAKING DOUBLE ADDITION/ DISALLOWANCE, WHICH IS NOT PERMISSIBLE AS PER T HE LAW; TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF RECOVERY OF EXPENSES 27. ERRED IN NOT FOLLOWING THE BINDING DIRECTIONS ISSUED BY THE HON BLE DRP, WHEREIN THE HON BLE DRP HAS DIRECTED TO DELETE THE TRANSFER PRICING ADJUSTMENT OF INR 1,32,76,277 ON ACCOUNT OF RECOVERY OF EXPENSES, THEREBY EXCEEDED ITS JURISDICTION. TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF REIMBURSEMENT OF EXPENSES 28. ERRED IN PARTLY CONFIRMING THE TRANSFER PRICING ADJUSTMENT OF INR 4,05,62,976 ON ACCOUNT OF REIMBURSEMENT OF EXPENSES TO THE A ES BY THE APPELLANT BY IGNORING THAT THE EXPENSES WERE INCURRED BY THE AES MERELY FOR FACILITATION AND WERE REIMBURSED BY THE APPELLANT ON COST TO COST BASIS, THEREBY ERRED IN HOLDING THAT THE EXPENSES REIMBURSED BY THE APPELLANT ARE NOT IN THE NATURE OF B USINESS EXPENSES AND DISALLOWING THE SAME: 29. ERRED IN DETERMINING THE ALP OF THE TRANSACTION AS NIL, WITHOUT APPRECIATING THE SAMPLE EVIDENCE SUBMITTED BY THE APPELLANT DURING THE TRANSFER PRICING ASSESSMENT PROCEEDINGS AS WELL AS REMAND PROCEEDINGS TO SUBSTANTIATE THE NATURE OF EXPENDITURE REIMBURSED; 30. WITHOUT PREJUDICE TO THE ABOVE, ERRED IN MAKING A SEPARATE TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF REIMBURSEMENT OF EXPENSES TO THE AES BY THE APPELLANT, AS SUCH COSTS ARE A PART OF THE TRADING SEGMENT AND THE ALLEGED ADJUSTMENT IS SUBSUMED IN THE ADJUSTMENT RELATED TO THE IMPORT OF FINISHED GOODS MADE BY THE TPO; 31. WITHOUT PREJUDICE TO THE ABOVE, ERRED IN GRANTING RELIEF OF ONLY INR 73, 19,620 BASED ON THE SAMPLE EVIDENCE SUBMITTED DURING THE REMAND PROCE EDINGS WHEREAS TOTAL SAMPLE EVIDENCES SUBMITTED WERE AMOUNTING TO INR 1,71,57,625, AND THEREBY THE ADJUSTMENT SHOULD BE RESTRICTED TO INR 3,07,24,971 AS AGAINST THE ADJUSTMENT OF NR 4,05,62,976; ALTERNATE TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF IMPORT O F FINISHED GOODS 32. ERRED IN MAKING TRANSFER PRI CING ADJUSTMENT OF INR 49,60,24, 206 ON ACCOUNT OF PURCHASE OF FINISHED GOODS FROM AES: 33. ERRED IN NOT FOLLOWING BINDING DIRECTIONS ISSUED BY THE HON'BLE DRP, WHERE THE HON'BLE DR P DIRECTED THAT SUCH ADJUSTMENT ON ACCOUNT OF IMPORT OF FINISHED GOODS IS A SECONDARY ADJUSTMENT WHICH IS ALREADY SUBSUMED IN THE PRIMARY ADJ USTMENT MADE ON ACCOUNT OF AMP, AND HENCE NO SEPARATE ADDITION TO TOTAL INCOME SHOULD BE MADE ON ACCOUNT OF THE SAME; 34. ERRED IN REJECTING THE APPEL LANT'S CLAIM TO USE MULTIPLE YEAR DATA FOR COMPUTING THE ALP OF THE IMPUGNED TRANSACTION INVOLVING PURCHASE OF FINISHED GOODS FROM AES, AND HAS INSTEAD ADOPTED USE OF SINGLE YEAR UPDATED DATA TO COMPUTE THE PRICE OF THE SAID TRANSACTION; P A G E | 5 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) 35. ERRED IN INCORREC TLY COMPUTING THE OPERATING MARGIN OF THE APPELLANT AND THE COMPARABLE COMPANIES BY CON SIDERING FOREIGN EXCHANGE GAIN/ LOSS AS NON - OPERATING ITEM; 36. ERRED IN ACCEPTING ADS DIAGNOSTIC LIMITED AS A COMPARABLE WITHOUT APPRECIATING THAT THE COMPANY WAS FUNCTIONALLY DIFFERENT FROM THE APPELLANT AND SHOULD HAVE BEEN REJECTED DUE TO DIFFERENCE IN FAR ANALYSIS; 37. ERRED IN CONSIDERING CONFIDENT SALES INDIA PRIVATE LIMITED AS A COMPARABLE COMPANY BY COMPUTING MARGINS FROM ANNUAL REPORT OF THE COMPANY FROM SUBS EQUENT YEAR, WITHOUT APPRECIATING THAT THE FINANCIAL STATEMENTS FOR CURRENT YEAR ARE NOT AVAILABLE IN PUBLIC DOMAIN AND HENCE, WITHOUT EXAMINATION OF VARIOUS QUANTITATIVE AND QUALITATIVE DATA WHICH ARE ESSENTIAL FOR COMPARABILITY ANALYSIS, THE SAME CANNOT BE CONSIDERED AS A COMPARABLE; 38. ERRED BY NOT GRANTING WORKING CAPITAL ADJUSTMENT WHILE COMPUTING THE OPERATING MARGIN OF COMPARABLE COMPANIES FOR THE PURPOSE OF DETERMINATION OF THE ALP OF THE IMP UGNED INTERNATIONAL TRANSACTION; 39. ERRED BY NOT GRANTING RISK ADJUSTMENT WHILE COMPUTING THE OPERATING MARGIN OF COMPARABLE COMPANIES FOR THE PURPOSE OF DETERMINATION OF THE ALP OF THE IMPUGNED INTERNATIONAL TRANSACTION: 40. WITHOUT PREJUDICE TO THE ABOVE, ERRED IN CONSIDERING THE REIMBURSEMENT OF EXPENSES OF INR 4,05,62,976 AS PART OF OPERATING COST, WITHOUT APPRECIATING THAT THE VALUE OF SAID EXPENSE IS TAKEN AS NIL BY THE TPO HIMSELF, THEREBY LEADING TO DOUBLE ADJUSTMENT ON THE SAME; 41. ERRED IN LAW IN NOT APPLYING THE PROVISO TO SECTION 92C AND NOT ALLOWING THE APPELLANT THE BENEFIT OF VARIATION OF +/ - 3% IN DETERMINING THE ALP. OTHER DIRECT TAX DISALLOWANCES DISALLOWANCE OF DEPRECIATION ON BUILDING 42. ERRED IN DISALLOWING AN AMOUNT OF INR 75,886 BEING DEPRECIATION ON BUILDING WITHOUT APPRECIATING THE FACT THAT THE ASSETS WERE FORMING PART OF BLOCK OF ASSETS AND CONTINUED TO EXIST EVEN AFTER THE MANUFACTURING UNIT WAS DISCONTINUED; DISALLOWANCE OF PAYMENT TO DOCTORS 43. ERRED IN DISALLOWING AN AMOUNT OF INR 36,34,64,058 ON ACCOUNT OF PAYMENT OF CONVENTION EXPENSES WITHOUT APPRECIATING THE FACT THAT THE CODE OF CONDUCT LAID DOWN IN THE INDIAN MEDICAL COUNCIL (PROFESSIONAL CONDUCT, ETIQUETTE AND ETHICS) REGULATIONS, 2002 (M CI REGULATIONS') ISSUED WITH EFFECT FROM 10 DECEMBER 2009 APPLIES ONLY TO MEDICAL PRACTITIONERS AND NOT TO A MEDICAL DEVICE COMPANY, LIKE THE APPELLANT; 44. ERRED IN HOLDING THAT THESE EXPENSES ARE DISALLOWABLE IN VIEW OF CIRCULAR NO. 05/2012 DATED 1 AUGUST 2 012 ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES ('CBDT CIRCULAR') READ WITH THE AMENDMENT MADE BY THE MCI REGULATIONS; 45. ERRED IN NOT APPRECIATING THE FACT THAT THE MCI REGULATIONS WERE NOT APPLICABLE TO THE APPELLANT AND ACCORDINGLY, THE QUESTION OF MAKING ANY DISALLOWANCE UNDER THE CBDT CIRCULAR DID NOT ARISE; 46. ERRED IN NOT APPRECIATING THE FACT THAT THE MCI REGULATIONS ARE BINDING AND APPLICABLE ONLY TO MEDICAL PRACTITIONERS AND ACCORDINGLY, THE MEDICAL DEVICE COMPANIES ARE NOT BOUND BY THESE REGULATIONS; 47. WITHOUT PREJUDICE TO THE ABOVE , ERRED IN NOT APPRECIATING THE FACT THAT AS PER THE CBDT CIRCULAR, ONLY THAT EXPENDITURE WHICH IS INCURRED IN CONTRAVENTION OF THE MCI REGULATIONS IS TO BE DISALLOWED AND WHETHER OR NOT THERE IS ANY CONTRAVENTION OF THE MCI REGULATIONS IS A MATTER OF FACT WHICH CAN BE DECIDED ONLY BY THE MCI AND NOT BY THE AO . P A G E | 6 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) GRANTS TO MEDICAL ASSOCIATIONS 48. WITHOUT PREJUDICE TO THE ABOVE , ERRED IN NOT APPRECIATING THE FACT THAT OUT OF THE CONVENTION EXPENSES OF INR 36,34,64 ,058, GRANTS OF INR 20,06,70, 619 ARE PROVIDED TO MEDICAL ASSOCIATIONS AND NOT TO INDIVIDUAL MEDICAL PRACTITIONERS, ACCORDINGLY. THE SAME ARE OUTSIDE THE PURVIEW OF MCI REGULATIONS AND CBDT CIRCULAR; PRINTING AND EQUIPMENT HIRE CHARGES 49. WITHOUT PREJUDICE TO THE ABOVE , ERRE D IN NOT APPRECIATING THE FACT THAT OUT OF THE CONVENTION EXPENSES OF INR 36,34,64,058, PRINTING AND EQUIPMENT HIRE CHARGES OF INR 16,21,578 ARE PAID TO INDEPENDENT THIRD PARTY SERVICE PROVIDERS IN THE NORMAL COURSE OF BUSINESS AND ACCORDINGLY, THE SAME IS NOT COVERED UNDER THE MCI REGULATIONS AND CBDT CIRCULAR; ACCOMMODATION EXPENSES 50. WITHOUT PREJUDICE TO THE ABOVE, ERRED IN DISALLOWING ACCOMMODATION EXPENSE OF INR 5,79,40,945 OUT OF THE CONVENTION EXPENSES OF INR 36,34,64,058, WITHOUT APPRECIATING THE FACT THAT THE SAME WAS INCURRED FOR VARIOUS MEDICAL PRACTITIONERS ATTENDING THE MEETI NG/ CONFERENCE I N THE CAPACITY OF 'INSTRUCTORS/ CONSULTANTS' OF THE MEDICAL DEVICE COMPANY AND NOT AS 'DELEGATES', THE SAME WOULD CLEARLY FALL OUTSIDE THE PURVIEW OF THE CBD T CIRCULAR, 51. WITHOUT PREJUDICE TO THE ABOVE, ERRED IN NOT APPRECIATING THE FACT THAT THE PAYMENT FOR THE ACCOMMODATION EXPENSES HAD BEEN DIRECTLY MADE TO MEDICAL ASSOCIATIONS AND THIRD PARTY SERVICE PROVIDERS AND NOT TO THE MEDICAL PRACTITIONERS, ACCORDING LY, THE SAME IS OUTSIDE THE PURVIEW OF THE MCI REGULATIONS AND CBDT CIRCULAR; CONTINUING MEDICAL ED UCATION MEETINGS (CME MEETINGS ) 52. WITHOUT PREJUDICE TO THE ABOVE, ERRED IN NOT APPRECIATING THE FACT THAT OUT OF THE CONVENTION EXPENSES OF INR 36,34,64,05 8, EXPENDITURE INCURRED FOR ORGANIZING CME MEETINGS OF INR 67,39,275 IS PAID TO THIRD PARTY AGENCIES IN THE NORMAL COURSE OF BUSINESS, WITH THE OBJECTIVE OF DISSEMINATING EDUCATIONAL AND SCIENTIFIC INFORMATION TO DOCTORS AND SURGEONS AND ACCORDINGLY, THE S AME IS NOT PROHIBITED BY THE MCI REGULATIONS; MEALS 53. WITHOUT PREJUDICE TO THE ABOVE, ERRED IN DISALLOWING THE EXPENDITURE INCURRED FOR PROVIDING MEALS OF INR 3,14,58,704 OUT OF THE CONVENTION EXPENSES OF INR 36,34,64,058, WITHOUT APPRECIATING THE FACT THAT THE VALUE OF MEALS PROVIDED TO HEALTH CARE PROFESSIONALS IS LOW, INSIGNIFICANT AND OUT OF COURTESY, ACCORDINGLY, THE SAME DOES NOT RESULT IN ANY 'FREEBIE' TO THE HEALTH CARE PROFESSIONALS; GIFTS 54. WITHOUT PREJUDICE TO THE ABOVE, ERRED IN NOT APPRECIAT ING THE FACT THAT OUT OF THE CONVENTION EXPENSES OF INR 36,34,64,058, GIFTS ARE PROVIDED TO HCPS OF A NOMINAL VALUE OF INR 2,30 , 926 AND WITH THE INTENTION OF BRAND RECALL AND CREATION OF GOODWILL WHICH DOES NOT AFFECT THEIR INDEPENDENCE AND OBJECTIVITY, AC CORDINGLY, THE SAME DOES NOT AMOUNT TO GIFTS UNDER THE MCI REGULATIONS; EXPENSES FOR TRAVEL FACILITIES 55. WITHOUT PREJUDICE TO THE ABOVE, ERRED IN NOT APPRECIATING THE FACT THAT OUT OF THE CONVENTION EXPENSES OF INR 36,34,64,058, EXPENSES FOR TRAVEL FACILITIES OF INR 2,54,02,366 WAS INCURRED FOR VARIOUS HCPS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE AND ACCORDINGLY, THE SAME IS OUTSIDE THE PURVIEW OF THE MCI REGU LATIONS AND CBDT CIRCULAR; 56. WITHOUT PREJUDICE TO THE ABOVE, ERRED IN NOT APPRECIATING THE FACT THAT THE PAYMENT FOR TRAVEL FACILITIES HAD BEEN PA ID TO TRAVEL AGENTS/ INDEPENDENT THIRD P A G E | 7 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) PARTY SERVICE PROVIDERS AND NOT TO MEDICAL PRACTITIONERS AND ACCORDINGLY, THE SAME IS OUTSIDE THE PURVIEW OF THE MCI REGULATIONS AND CBDT CIRCULAR; REGISTRATION CHARGES 57. WITHOUT PREJUDICE TO THE ABOVE, ERRED IN NOT APPRECIATING THE FACT THAT OUT OF THE CONVENTION EXPE NSES OF INR 36,34,64,058, REGISTRATION CHARGES OF INR 3,45,75,285 WAS INCURRED BY IMPL ON BEHALF OF THE HCPS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OF THE APPELLANT AND ACCORDINGLY, THE SAME IS OUTSIDE THE PURVIEW OF THE MCI REGULATIONS AND CBDT CIRCULAR; CAR HIRE CHARGES 58. WITHOUT PREJUDICE TO THE ABOVE , ERRED IN NOT APPRECIATING THE FACT THAT OUT OF THE CONVENTION EXPENSES OF INR 36,34,64,058, CAR HIRE CHARGES OF INR 48,24,358 WAS INCURRED BY IMPL FOR SMOOTH CON DUCT OF THE MEDICAL CONFERENCE/ SYMPOSIUM IN THE NORMAL COURSE OF BUSINESS AND THEY ARE OUTSIDE THE PURVIEW OF MCI REGULATIONS AND CBDT CIRCULAR. 59. WITHOUT PREJUDICE TO THE ABOVE, ERRED IN NOT APPRECIATING THE FACT THAT THE PAYMENT FOR CAR HIRE CHARGES HAD BEEN PAID TO INDEPEND ENT THIRD PARTY SERVICE PROVIDERS AND NOT TO MEDICAL PRACTITIONERS AND ACCORDINGLY, THE SAME IS OUTSIDE THE PURVIEW OF THE MCI REGULATIONS AND CBDT CIRCULAR; DOUBLE DISALLOWANCE OF CONVENTION EXPENSES 60. WITHOUT PREJUDICE TO THE ABOVE, ERRED IN HOLDING THAT THERE IS NO DOUBLE DISALLOWANCE OF THE CONVENTION EXPENSES WITHOUT APPRECIATING THAT THE PORTION OF THE SAME HAS ALREADY BEEN DISALLOWED BY THE TPO/AO WHILE COMPUTING THE TRANSFER PRICING ADJUSTMENT; CONSEQUENTIAL DEPRECIATION ON NON - COMPETE FEE 61. ERRED IN NOT GRANTING CONSEQUENTIAL DEPRECIATION ON NON - COMPETE FEE HELD AS CAPITAL EXPEN DITURE IN AY 2002 - 03 BY THE HON BLE INCOME - TAX APPELLATE TRIBUNAL . NON - GRANT OF CREDIT OF TDS AMOUNTING TO INR 12,379 62. ERRED IN GRANTING CREDIT OF TDS AMOUNTING TO INR 11,20,299 INSTEAD OF INR 11,32,678 AS CLAIMED IN THE RETURN OF INCOME . LEVY OF INTEREST UNDER SECTION 234B OF THE ACT 63. ERRED IN LEVYING UNDER SECTION 234B OF THE ACT . LEVY OF PENALTY UNDER SECTION 271(1)(C) OF THE ACT 64. ERRED IN INITIATING PENALTY UNDER SECTION 271(1)(C) OF THE ACT; THE APPELLANT CRAVES, TO CONSIDER EACH OF THE ABOVE GROUNDS OF APPEAL WITHOUT PREJUDICE TO EACH OTHER AND CRAVES LEAVE TO ADD, ALTER, DELETE OR MODIFY ALL OR ANY OF THE ABOVE GROUND S OF APPEAL. 2. 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 DISTRIBUT ION OF PROPRIETARY P A G E | 8 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) 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. THE ASSESSEE HAD E - FILED ITS RETURN OF INCO ME FOR A.Y. 2014 - 15 ON 28.11.2014 , DECLARING ITS TOTAL INCOME UNDER THE NORMAL PROVISIONS AT RS. ( 37,21,04,250/ - ) AND BOOK PROFIT UNDER SEC.115JB OF THE INCOME - TAX ACT,1961 AT RS. 35,84,52,887 / - .THE RETURN OF INCOME FILED BY THE ASSESSEE WAS PROCESSED AS SUCH UNDER SEC.143(1) OF THE ACT. SUBSEQUENTLY, THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY ASSESSMENT UNDER SEC.143(2). 3. DURING THE COURS E OF THE ASSESSMENT PROCEEDINGS THE A.O MADE A REFERENCE TO THE TRANSFER PRICING OFFICER (FOR SHORT TPO) UNDER SEC. 92CA(2) OF THE ACT. THE TPO VIDE HIS ORDER PASSED UNDER SEC.92CA(3), DATED 31.10.2017 PROPOSE D THE FOLLOWING ADJUSTMENTS: SR. NO. PARTICULARS 1. ADJUSTMENT ON ACCOUNT OF AMP EXPENSE S AMOUNTING TO INR 101.26 CRORES 2. ADJUSTMENT ON ACCOUNT OF RECOVERY OF EXPENSES FROM AES AMOUNTING TO INR 1.32 CRORES 3. ADJUSTMENT ON ACCOUNT OF REIMBURSEMENT OF EXPENSES TO AES AMOUNTING TO INR 4.78 CRORES 4 ALTERNATE ADJUSTMENT ON ACCOUNT OF IMPORT OF FINISHED GOODS AMOUNTING TO INR 49.60 CRORES A FTER RECEIVING THE ORDER OF THE TPO UNDER SEC. 92CA(3), DATED 31.10.2017 , THE A.O PASSED A DRAFT ASSESSMENT ORDER UNDER SEC. 143(3) R.W.S 144(1), DATED 26.12.2017 . 4 . THE ASSESSEE AGGRIEVED WITH THE ADJUSTMENT S PROPOSED BY THE A.O IN HIS DRAFT ASSESSMENT ORDER FILED OBJECTION S WITH THE DISPUTE RESOLUTION PANEL - 1 (FOR SHORT DRP). THE DRP VIDE ITS ORDER DATED 17.09.2018 DISPOSED OFF THE OBJECTIONS FILED BY THE ASSESSEE. THE DRP IN ITS ORDER ALLOWED CER TAIN RELIEF S TO THE ASSESSEE VIZ. (I) RELIEF AS REGARDS THE ADJUSTMENT MADE BY THE TPO IN RESPECT OF RECOVERY OF P A G E | 9 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) EXPENSES: RS.1,32,76,227/ - ; (II) PARTIAL RELIEF ON ACCOUNT OF ADJUSTMENT IN RESPECT OF REIMBURSEMENT OF EXPENSES: RS.73,19,620/ - ; AND (III) DIR ECTION TO THE A.O TO EXCLUDE THE TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF IMPORT OF FINISHED GOODS OF RS.49,60,24,206/ - FROM THE TOTAL QUANTUM OF ADJUSTMENTS . SUBSEQUENTLY, THE A.O GIVING EFFECT TO THE DIRECTIONS OF THE DRP PASSED THE FINAL ASSESSMENT ORD ER UNDER SEC. 143(3) R.W.S 144C(13), DATED 31.10.2018 AFTER MAKING THE FOLLOWIN G ADJUSTMENTS/DISALLOWANCES: SR. NO. PARTICULARS AMOUNT (IN INR) TRANSFER PRICING ADJUSTMENT 1. ADJUSTMENT ON ACCOUNT OF AMP EXPENSES 101,26,73,186 2. ADJUSTMENT ON ACCOUNT OF RECOVERY OF EXPENSES FROM AES 1,32,76,277 3. ADJUSTMENT ON ACCOUNT OF REIMBURSEMENT OF EXPENSES TO AES 4,05,62,976 4. ALTERNATE ADJUSTMENT ON ACCOUNT OF IMPORT OF FINISHED GOODS 49,60,24,206 TOTAL 156,25,36,645 OTHERA DJUSTMENT S. 1. DISALLOWANCE OF PAYMENTS TO DOCTORS 36,34,64,058 2. DISALLOWANCE OF DEPRECIATION ON BUILDING 75,886 3. DISALLOWANCE OF PROVISION FOR COMMISSION ON SALES 47,57,859 TOTAL 36,82,97,803 AS THERE W ERE CERTAIN MISTAKES APPARENT FROM THE ORDER PASSED BY THE A.O UNDER SEC. 143(3) R.W.S 144(13), THEREFORE, THE ASSESSEE FILED A RECTIFICATION APPLICATION DATED 22.11.2018 WITH HIM. IN THE MEANTIME THE TPO ISSUED A RECTIFIED ORDER UNDER SEC.154, DATED 05.03.2019, WHEREIN CERTAIN MISTAKES THAT HAD EMAN ATED WHILE GIV ING EFFECT TO THE DIRECTIONS OF THE DRP WERE RECTIFIED VIZ. (I) TREATMENT OF THE ADJUSTMENT ON ACCOUNT OF IMPORT OF FINISHED GOODS: RS.49,60,24,206/ - AS AN ALTERNATE ADJUSTMENT ; AND (II) DELETION OF THE ADJUSTMENT ON ACCOUNT OF RECOVERY OF EXPENSES: RS.1,32,76,277/ - . THE A.O THEREAFTER PASSED A RECTIFICATION ORDER UNDER SEC. 154, DATED 14.03.2019 AND WHILE GIVING EFFECT TO THE DIRECTIONS ISSUED BY THE DRP CONFINED THE ADJUSTMENTS/ DISALLOWANCE S AS UNDER : P A G E | 10 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) SR. NO. PARTICULARS AMOUNT 1. TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF ADVERTISING. MARKETING AND PROMOTION (AMP) EXPENSES 101,26,73,186 2. ALTERNATE TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF CONVENTION EXPENSES (TREATING THE ENTIRE AMOUNT OF CONVENTION EXPENSES INCURRED BY THE APPELLANT FOR BRAND BUILDING OF THE AE IN INDIA) 33,44,95,973 3. TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF REIMBURSEMENT OF EXPENSES 4,05,62,976 4. ALTERNATE TRANSFER PRICING ADJUSTMENT: ON ACCOUNT OF IMPORT OF FINISHED GOODS 49,60,24,206 5 . THE ASSESSEE BEING AGGRIEVED WITH THE ORDER PASSED BY THE A.O UNDER SEC.143 (3) R.W.S. 144C(13) HA S CARRIED THE MATTER IN APPEAL BEFORE US. WE SHALL IN AC H RONOLOGICAL MANNER DEAL WITH THE CONTENTION S ADVANCED BY THE AUTHORIZED REPRESENTATIVE IN RESPECT OF THE MULTIPLE ISSUE S THAT HAVE BEEN RAISED BEFORE US AND THEREIN ADJUDICATE THE SAME. 6 . AS IS DISCERNIBLE FROM THE ORDERS OF THE LOWER AUTHORITIES , THE TPO HOLDING A CONVICTION THAT THE AMP EXPENSE S INCURRED BY THE ASSESSEE WERE EXCESSIVE A ND HAD BENEFITTED ITS ASSOCIATE ENTERPRISES (AES) TOWARDS BUILDING OF ITS MEDTRONIC BRAND, THEREFORE, WAS OF THE VIEW THAT THE ASSESSEE SHOULD HAVE BEEN COMPENSATED BY THE AES FOR INCURRING OF THE AMP EXPENDITU RE ALONG WITH A MARK - UP ON THE SAME. IN FACT, IT WAS OBSERVED BY THE TPO THAT A PERUSAL OF THE DISTRIBUTION AGREEMENT REVEALED THAT THE ASSESSEE WAS OBLIGATED TO MARKET, DISTRIBUTE, ADVERTISE AND PROMOTE THE PRODUCTS AND THE BRAND OF THE AE. ON THE BASIS OF HIS AFORESAID DELIBERATIONS , IT WAS CONCLUDED BY THE TPO THAT AS THERE WAS AN ARRANGEMENT BETWEEN THE ASSESSEE AND ITS AES TO INCUR AMP EXPENSES, THEREFORE, THERE EXISTED AN INTERNATIONAL TRANSACTION. IT WAS OBSERVED BY THE TPO THAT THE AMP EXPENSES INCURRED BY THE ASSESSEE IN PROPORTION TO ITS SALES WORKED OUT AT 19.89 % , AS UNDER : SR. NO. PARTICULARS AMOUNT (INR) P A G E | 11 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) 1. SELLING AND DISTRIBUTION EXPENSES 2,59,70,977 2. PRODUCT GIVEAWAYS AND SAMPLES 13,12,94,798 3. CONVENTION EXPENSES 36,34,64,058 4. SALARY, AGES BONUS AND OTHER PAYMENTS (80%) 59,77,57,972 5. TRAVELLING AND CONVEYANCE EXPENSE (80%) 18,42,47,518 6. DEPRECIATION ON PLANT & MACHINERY 6,33,05,274 TOTAL 1,36,60,40,596 SALES 6,86,89,36,462 AMP TO SALES 19.89% THE TPO ADOPTED THE BRIGHT LINE TEST AND COMPUTED THE AMP TO SALES RATIO OF THE COMPARABLE COMPANIES AT 7.97%, AS HEREIN BELOW: SR. NO. NAME OF THE COMPANY AMP TO SALES RATIO (FY 2012 - 13) 1. SATAYJET COMMERCIAL CO. LTD. 1.57% 2. FRONTLINE ELECTRO MEDICAL LIMITED 12.54% 3. ADINATH BIO - LABS LIMITED 1.10% 4. HICKS THERMOMETERS INDIA LTD. 10.43% 5. ADS DIAGNOSTIC LTD. 19.71% 6. CONFIDENT SALES INDIA PRIVATE LIMITED 2.44% AVERAGE 7.97% ALSO, THE TPO WORKED OUT A MARK - UP ON THE AMP EXPENSES @ 23.71% OF THE RE IMBURSEMENT COST FOR BRAND PROMOTION CARRIED OUT BY THE ASSESSEE FOR ITS AES IN INDIA, AS UNDER: NAME OF THE COMPANY OPERATING PROFIT/OPERATING COST (FY 2013 - 14) AXIS INTEGRATED SYSTEMS LTD. 27.46% BVG INDIA LTD. 19.91% AVERAGE 23 .71% ACCORDINGLY, THE TPO MADE AN ADJUSTMENT OF RS. 101,26,73,186/ - TOWARDS EXCESSIVE AMP EXPENSES INCURRED BY THE ASSESSEE , WHICH AS PER HIM WERE REQUIRED TO BE REIMBURSED BY ITS AES (ALONG WITH MARK - UP), AS UNDER: P A G E | 12 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) SR. NO. PARTICULARS REFERENCE AMOUNT (INR) 1. NET SALES IN THE DISTRIBUTION SEGMENT A 6,86,89,36,462 2. ARMS LENGTH OF AMP TO SALES RATIO (AS COMPUTED BY LEARNED TPO IN THE TPO ORDER) B 7.97% 3. ARMS LENGTH AMP EXPENDITURE C=A*B 54,74,54,236 4. EXPENDITURE INCURRED BY APPELLANT D 1,36,60,40,596 5. EXCESS EXPENDITURE INCURRED FOR DEVELOPING THE INTANGIBLE E=D - C 81,85,86,360 6. ARMS LENGTH VALUE OF THE AMP EXPENSES F=E PLUS 23.71% 101,26,73,186 7. COMPENSATION RECEIVED G NIL 8. ADJUSTMENT H=F - G 101,26,73,186 ALTERNATIVELY, IT WAS OBSERVED BY THE TPO THAT IN CASE THE ADJUSTMENT WITH RESPECT TO AMP EXPENSES WAS VACATED BY THE TRIBUNAL THEN THE CONVENTION EXPENSES OF RS.36,34,64,058/ - THAT WERE INCURRED BY THE ASSESSEE WERE TO BE COMPENSATED BY THE AE AS THE SAME WERE SPENT BY THE ASSESSEE FOR BRAND BUILDING OF ITS AE IN INDIA. 7 . AGGRIEVED, THE ASSESSEE ASSAILED THE AFORESAID ADJUSTMENTS PROPOSED BY TH E TPO TOWARDS IMPUGNED AMP EXPENSES BEFORE THE DRP. N OT FIND ING FAVOUR WITH THE CONTENTIONS ADVANCED BY THE ASSESSEE THAT AMP EXPENSES WERE NOT TO BE CONSTRUED AS AN INTERNATIONAL TRANSACTION , THE DRP REJECTED THE SAME . APART THEREFROM, THE DRP UPHELD THE OBSERVATIONS OF THE TPO VIZ. (I) THAT, THE BRIGHT LINE TEST METHOD WAS RIGHTLY ADOPTED BY THE TPO UNDER O THER METHOD FOR COMPUTING THE ARMS LENGTH PRICE (ALP) OF THE AMP EXPENSES; (II) THAT, THE TPO HAD RIGHTLY SELECTED ADINATH BIO - LAB LTD. AS A COMPARABLE; (III) THAT, THE MARK - UP OF 23.71% WAS RIGHTLY WORKED OUT BY THE TPO BY SELECTING TWO COMPANIES ENGAGED IN THE BUSINES S OF PROVIDING SUPPORT SERVICES FOR COMPUTING THE ALP OF THE AMP EXPENSES INCURRED BY THE ASSESSEE; (IV) THA T, THE TPO HAD RIGHTLY CONSIDERED P A G E | 13 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) 80% OF MANPOWER EXPENSES, TRAVELLING AND CONVEYANCE COST AS AMP EXPENSES; AND (V) THAT, THE TPO HAD RIGHTLY CONCLUDED THAT IN CASE THE ADJUSTMENT W ITH RESPECT TO AMP EXPENSES WAS VACATED BY THE APPELLATE AUTHORITIES THEN A N ALTERNATE ADJU STMENT ON ACCOUNT OF CONVENTION EXPENSES I.E THE AMOUNT WHICH WAS FOUND TO BE IN EXCESS OF 7.97% OF THE SAID EXPENSES OF RS. 33,44,95,973/ - WAS TO BE MADE. 8 . WE HAVE HEARD THE AUTHORISED REPRESENTATIVES FOR BOTH THE PARTIES, PERUSED THE O RDERS OF THE LOWER AUTHORITIES AND THE MATERIAL AVAILABLE ON RECORD. ONE OF THE ISSUES FOR WHICH OUR INDULGENCE IN THE PRESENT APPEAL HAS BEEN SOUGHT BY THE ASSESSEE IS FOR ADJUDICATING AS TO WHETHER THE AMP EXPENSES INCURRED BY THE ASSESSEE IS TO BE CONST RUED AS AN INTERNATIONAL TRANSACTION, OR NOT. WE HAVE GIVEN A THOUGHTFUL CONSIDERATION TO THE FACTS BEFORE US AND FIND THAT THE AFORESAID ISSUE UNDER CONSIDERATION IS SQUARELY COVERED BY THE ORDER PASSED BY THE TRIBUNAL IN THE ASSESSES OWN CASE FOR A.Y. 20 10 - 11 IN INDIA MEDTRONICS PVT. LTD. VS. DCIT - 10(1)(1), MUMBAI (ITA NO. 1600/MUM/2015, DATED 17.01.2018) . ADMITTEDLY, THE DISTRIBUTION AGREEMENT WHICH HAD BEEN EFFECTIVE FROM 28.04.2007 WAS RENEWABLE AUTOMATICALLY ON YEAR - TO - YEAR BASIS AND INVOLVING THE S AME TERMS AND CONDITIONS IT WAS APPLICABLE DURING THE PERIOD RELEVANT TO A. Y.2014 - 15 . ACCORDINGLY, THE TERMS OF THE DISTRIBUTION AGREEMENT HAD NOT CHANGED/MODIFIED. ALSO, WE FIND THAT A SIMILARLY PLACED DISTRIBUTION AGREEMENT WAS RELIED UPON BY THE TRIBU NAL WHILE DISPOSING OFF THE APPEAL OF THE ASSESSEE FOR A.Y. 2008 - 09. A PERUSAL OF THE ORDER OF THE TRIBUNAL IN THE ASSESSES OWN CASE FOR A.Y. 2010 - 11, VIZ. INDIA MEDTRONIC VS. DCIT - 10(1)(1), MUMBAI (ITA NO. 1600/MUM/2015, DATED 17.01.2018) REVEALS THAT THE TRIBUNAL HAD OBSERVED VIZ. (I) THAT, IN THE AGREEMENTS BETWEEN THE ASSESSEE AND ITS AE THERE WAS NO CONDITION OF SHARING OF AMP; (II) THAT, THE AGREEMENTS ONLY REFERRED TO USING BEST EFFORTS TO DISTRIBUTE THE PRODUCTS OR PROMOTE PRODUCTS IN A P A G E | 14 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) COMM ERCIALLY REASONABLE MANNER; AND (III) THAT, THE TERMS OF THE AGREEMENT DID NOT PROVIDE THAT THE ASSESSEE HAD TO SHARE AMP EXPENSES; (IV) THAT, EVEN IF THE AE WAS BENEFITTED INDIRECTLY BY THE AMP EXPENDITURE INCURRED BY THE ASSESSEE, IT COULD NOT BE INFERRE D THAT IT HAD ENTERED INTO AN AGREEMENT FOR SHARING AMP EXPENSES; AND (V) THAT, THE BRIGHT LINE TEST SHOULD NOT HAVE BEEN APPLIED BY THE TPO. WE FIND THAT THE TRIBUNAL AFTER RELYING ON ITS EARLIER ORDER IN THE CASE OF THOMAS COOK INDIA LTD. (ITA NO. 1261 & 1238/MUM/2015, DATED 31.05.2016), HAD THEREIN DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE, OBSERVING AS UNDER: 3.4. WE HAVE HEARD THE RIVAL SUBMISSIONS. WE FIND THAT THE TPO HAD HELD THAT ASSESSEE SHOULD HAVE BEEN COMPENSATED BY ITS AE FOR THE AMP EXPE NDITURE 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 TO 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 TH E 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 RELEVANT PORTION OF THE ORDER OF THE THOMA S COOK (SUPRA),WHEREIN THE IDENTICAL ISSUE HAS BEEN DEALT IN LENGTH, AND IT READS AS UNDER: 8.3.WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. IN THE EARLIER PART OF OUR ORDER, WE HAVE MENTIONED THAT WE WOULD LIKE TO DEAL WITH T HE ISSUE OF AMP EXPENSES FOR BOTH THE YEARS AT ONE PLACE, AS THERE IS NO CHANGE IN THE FACTS EXCEPT FOR THE AMOUNTS INVOLVED AND THE NON ADJUDICATION 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, THA T 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 TH E DRP, THAT THE ADJUSTMENT WAS MADE/CONFIRMED BY THE TPO/DRP BECAUSE BOTH OF THEM WERE OF THE OPINION THAT BY INCURRING EXPENDITURE IN INDIA THE ASSESSEE WAS BENEFITTING A BRAND NAME OF TCUK. 8.3.1.FIRST OF ALL, WE WOULD LIKE TO MENTION THAT AS ON TODAY THE LEGAL POSITION IS AS CLEAR AS CRYSTAL WITH REGARD TO AMP EXPENSES. THE HONBLE DELHI HIGH P A G E | 15 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) COURT HAS DEALT THE ISSUE IN DEPTH AND HAS ARRIVED AT THE CONCLUSION THAT IN ABSENCE OF ANY AGREEMENT FOR SHARI NG AMP EXPENSES IT CANNOT BE HELD THAT AMP EXPENDITURE WAS AN IT. PROBABLE INCIDENTAL BENEFIT TO THE AE WOULD NOT MAKE SUCH A TRANSACTION AN IT. THE FACTORS LIKE PAYMENT UNDER THE HEAD AMP EXPENDITURE TO THE THIRD INDEPENDENT PARTIES, PROMOTING OWN BUSINES S INTEREST BY WAY OF AMP EXPENSES TAKE AWAY THE ALLEGED INTERNATIONALITY OF THE TRANSACTION. IN ABSENCE OF ANY DIRECT OR DIRECT EVIDENCE OF INCURRING OF AMP EXPENSES BY THE ASSESSEE FOR THE BENEFIT OF THE AE OR ON BEHALF OF THE AE, IT IS HAS TO BE HELD T HAT THE TRANSACTION IN DISPUTE IS NOT COVERED BY THE PROVISIONS OF SECTION 92B OR 92B(1)OF THE ACT AND HENCE IS NOT AN IT. ONCE IT GOES OUT OF THE AMBIT OF BEING AN IT,FAR ANALYSIS OF COMPARABLES OR ANY OTHER ADJUSTMENT WILL AND CANNOT COME IN PICTURE. FOL K WISDOM OF RURAL INDIA THE SAYS THAT MOTHER (MAA)IS MUST FOR EXISTENCE OF HER SISTER(MAUSI).SIMILARLY THE EXISTENCE OF AN IT IS THE PRE - REQUISITE OF APPLYING THE PROVISIONS OF CHAPTER X OF THE ACT. THE ASSESSEE FROM THE VERY BEGINNING WAS ARGUING THAT IT IS NOT AN IT, BUT, THE TPO AND THE DRP DID NOT DEAL WITH THE CORE ISSUE. IN THESE CIRCUMSTANCES, WE ARE OF THE OPINION THAT THE MATTER SHOULD NOT BE REMITTED BACK TO THE FILE OF THE TPO/ AO. LITIGATION HAS TO BE PUT TO AN END AT SOME STAGE .JUDICIAL TIME O F EVERY AUTHORITY, INCLUDING THE TPO/DRP, IS VERY PRECIOUS AND IT SHOULD NOT BE WASTED FOR DEALING WITH MERE ACADEMIC ARGUMENTS. THE RECOURSE OF REMANDING OF MATTERS/ISSUE TO THE AO.S HAS TO RESORTED RARELY AND SELECTIVELY. IN THE CASE BEFORE US, NO REASON ABLE CAUSE HAS BEEN SHOWN TO JUSTIFY THE SETTING ASIDE THE ISSUE. HERE, WE WOULD ALSO LIKE TO REFER TO THE CASE OF BOSCH AND LOMB (SUPRA) WHEREIN ALL THE ARGUMENTS RAISED BY THE TPO & FAA/DRP HAVE BEEN DELIBERATED UPON IN LENGTH AND THE RELEVANT PORTION OF THE ORDER READS AS UNDER: 53.A READING OF THE HEADING OF CHAPTER X ['COMPUTATION OF INCOME FROM INTERNATIONAL TRANSACTIONS HAVING REGARD TO ARM'S LENGTH PRICE']AND SECTION 92 (1) WHICH STATES THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SH ALL BE COMPUTED HAVING REGARD TO THE ALP AND SECTION 92C (1) WHICH SETS OUT THE DIFFERENT METHODS OF DETERMINING THE ALP, MAKES IT CLEAR THAT THE TRANSFER PRICING ADJUSTMENT IS MADE BY SUBSTITUTING THE ALP FOR THE PRICE OF THE TRANSACTION. TO BEGIN WITH TH ERE 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 COMMEN CING 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 SECTIO N 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 92 B DEFINES 'INTERNATIONAL TRANSACTION' AS UNDER: ' MEANING OF INTERNATIONAL TRANSACTION. 92 B .(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 NAT URE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY, OR PROVISION OF SERVICES, OR LENDING OR BORROWING MONEY, OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISES, AND SHALL INCLUDE A MUTUAL A GREEMENT OR ARRANGEMENT BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES FOR THE ALLOCATION OR APPORTIONMENT OF, OR ANY CONTRIBUTION TO, ANY COST. OR EXPENSE INCURRED OR TO BE INCURRED IN CONNECTION WITH A BENEFIT, SERVICE OR FACILITY PROVIDED OR TO BE PROVIDED TO ANYONE OR MORE OF SUCH ENTERPRISES. (2) A TRANSACTION ENTERED INTO BY AN ENTERPRISE WITH A PERSON OTHER THAN AN ASSOCIATED ENTERPRISE SHALL, FOR THE PURPOSES 'OF SUB - SECTION (1), BE DEEMED TO BE A TRANSACTION ENTERED INTO BETWEEN TWO ASSOCIATED ENTERPRI SES, IF THERE EXISTS A PRIOR AGREEMENT IN RELATION TO' THE RELEVANT TRANSACTION BETWEEN SUCH OTHER PERSON AND THE P A G E | 16 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) ASSOCIATED ENTERPRISE, OR THE TERMS OF THE RELEVANT TRANSACTION ARE DETERMINED IN SUBSTANCE BETWEEN SUCH OTHER PERSON AND THE ASSOCIATED ENTER PRISE.' 56.THUS, UNDER SECTION 92B(1) AN 'INTERNATIONAL TRANSACTION' MEANS - (A) A TRANSACTION BETWEEN TWO OR MORE AES, EITHER OR BOTH OF WHOM ARE NON - RESIDENT (B) THE TRANSACTION IS IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPE RTY OR PROVISION OF SERVICE OR LENDING OR BORROWING MONEY OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOMES OR LOSSES OF SUCH ENTERPRISES, AND (C) SHALL INCLUDE A MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN TWO OR MORE AES FOR ALLOCATION OR APP ORTIONMENT OR CONTRIBUTION TO THE ANY COST OR EXPENSES INCURRED OR TO BE INCURRED IN CONNECTION - WITH THE - BENEFIT, SERVICE OR FACILITY PROVIDED OR TO BE PROVIDED TO ONE OR MORE OF SUCH ENTERPRISES. 57. CLAUSES (B) AND (C) ABOVE CANNOT BE READ DISJUNCTI VELY. EVEN IF RESORT IS HAD TO THE RESIDUARY PART OF CLAUSE (B) TO CONTEND THAT THE AMP SPEND OF BLI IS 'ANY OTHER TRANSACTION HAVING A BEARING' ON ITS 'PROFITS, INCOMES OR LOSSES, FOR A 'TRANSACTION' THERE HAS TO BE TWO PARTIES. THEREFORE FOR THE PURPOSE S OF THE 'MEANS' PART OF CLAUSE (B) AND THE 'INCLUDES' PART. OF CLAUSE (C), THE REVENUE HAS TO SHOW THAT THERE EXISTS AN 'AGREEMENT' OR 'ARRANGEMENT' OR' 'UNDERSTANDING' BETWEEN BLI - AND B&L, USA WHEREBY BLI IS OBLIGED TO SPEND EXCESSIVELY ON AMP IN ORDER TO PROMOTE THE BRAND OF B&L, USA. AS FAR AS THE LEGISLATIVE INTENT IS CONCERNED, IT IS SEEN THAT CERTAIN TRANSACTIONS LISTED IN THE EXPLANATION 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 NEGATIVE D BY T HE 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 'TRANSACTIO N' TO INCLUDE 'ARRANGEMENT', 'UNDERSTANDING' OR 'ACTION IN CONCERT', 'WHETHER FORMAL OR IN WRITING', IT IS STILL INCUMBENT ON THE REVENUE TO SHOW THE EXISTENCE OF AN 'UNDERSTANDING' OR AN 'ARRANGEMENT' OR 'ACTION IN CONCERT' BETWEEN MSIL AND SMC AS REGARDS AMP SPEND FOR BRAND PROMOTION. IN OTHER WORDS, FOR BOTH THE 'MEANS', PART AND THE 'INCLUDES' PART OF SECTION 928 (1) WHAT HAS TO BE DEFINITELY SHOWN IS THE EXISTENCE OF TRANSACTION WHEREBY MSIL HAS BEEN OBLIGED TO INCUR AMP OF A CERTAIN LEVEL FOR SMC FOR THE PURPOSES OF PROMOTING THE BRAND OF SMC.' 59. IN WHIRLPOOL OF INDIA LTD. (SUPRA), THE COURT INTERPRETED THE EXPRESSION 'ACTED IN CONCERT' AND IN THAT CONTEXT REFERRED TO THE DECISION OF THE SUPREME COURT IN DAIICHI SANKYO COMPANY LTD. V. JAYARAM CHIGU RUPATI 2010(6)MANU/SC/0454/2010, WHICH AROSE IN THE CONTEXT OF ACQUISITION OF SHARES OF ZENOTECH LABORATORY LTD. BY THE RANBAXY GROUP. THE QUESTION THAT WAS EXAMINED WAS WHETHER AT THE RELEVANT TIME THE APPELLANT, I.E., 'DAIICHI SANKYO COMPANY AND RANBAXY WERE 'ACTING IN CONCERT' WITHIN THE MEANING OF REGULATION 20(4) (B) OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 1997. IN. PARA 44, IT WAS OBSERVED AS UNDER: THE OTHER LIMB OF THE CONCEPT RE QUIRES TWO OR MORE PERSONS JOINING TOGETHER WITH THE SHARED COMMON OBJECTIVE AND PURPOSE OF SUBSTANTIAL ACQUISITION OF SHARES ETC. OF A CERTAIN TARGET COMPANY, THERE CAN BE NO 'PERSONS ACTING IN CONCERT' UNLESS THERE IS A SHARED COMMON OBJECTIVE OR PURPOSE BETWEEN TWO OR MORE PERSONS OF SUBSTANTIAL ACQUISITION OF SHARES ETC. OF THE TARGET COMPANY, FOR, DE HORS THE ELEMENT OF THE SHARED COMMON OBJECTIVE' OR PURPOSE THE IDEA OF 'PERSON ACTING IN CONCERT' IS AS MEANINGLESS AS CRIMINAL CONSPIRACY WITHOUT ANY AG REEMENT TO COMMIT A CRIMINAL OFFENCE. THE IDEA OF 'PERSONS ACTING IN CONCERT' IS NOT ABOUT A FORTUITOUS RELATIONSHIP COMING INTO EXISTENCE BY ACCIDENT OR CHANCE. THE RELATIONSHIP' CAN COME INTO BEING ONLY BY DESIGN, BY P A G E | 17 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) MEETING OF MINDS BETWEEN TWO OR MORE PERSONS LEADING TO THE SHARED COMMON OBJECTIVE OR PURPOSE OF ACQUISITION OF SUBSTANTIAL ACQUISITION OF SHARES ETC. OF THE TARGET COMPANY. IT IS ANOTHER MATTER THAT THE COMMON OBJECTIVE OR PURPOSE MAY BE IN PURSUANCE OF AN AGREEMENT' OR AN UNDERSTANDING, FO RMAL OR INFORMAL; 'THE ACQUISITION OF SHARES ETC. MAY BE DIRECT OR INDIRECT OR THE PERSONS ACTING IN CONCERT MAY COOPERATE IN ACTUAL ACQUISITION OF SHARES ETC. OR THEY MAY AGREE TO, COOPERATE IN SUCH ACQUISITION. NONETHELESS, THE ELEMENT OF THE SHARED COMM ON OBJECTIVE OR PURPOSE IS THE SINE QUA NON FOR THE RELATIONSHIP OF 'PERSONS ACTING IN CONCE RT' 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 IN CURRED 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 DIST INCTION IS REQUIRED TO BE DRAWN BETWEEN A 'FUNCTION' AND A 'TRANSACTION' AND THAT EVERY EXPENDITURE FORMING PART OF THE FUNCTION, CANNOT BE CONSTRUED AS A 'TRANSACTION'. FURTHER, THE - REVENUE'S ATTEMPT AT RE - CHARACTERISING THE AMP EXPENDITURE INCURRED AS A TRANSACTION BY ITSELF WHEN IT HAS NEITHER BEEN IDENTIFIED AS SUCH BY THE ASSESSEE OR LEGISLATIVELY RECOGNISED IN THE EXPLANATION TO SECTION 92 B RUNS COUNTER TO LEGAL POSITION EXPLAINED IN CIT VS. EKL APPLIANCES LTD. (SUPRA) WHICH REQUIRED A TPO 'TO EXAMI NE THE 'INTERNATIONAL TRANSACTION' AS HE ACTUALLY FINDS THE SAME.' 62. IN THE PRESENT CASE, THE MERE FACT THAT B&L, USA THROUGH B&L, SOUTH ASIA, INC HOLDS 99.9% OF THE SHARE OF THE ASSESSEE WILL NOT IPSO FACTO LEAD TO THE CONCLUSION THAT THE MERE INCREAS ING OF AMP EXPENDITURE BY THE ASSESSEE INVOLVES AN INTERNATIONAL TRANSACTION IN THAT REGARD WITH B&L, USA. A SIMILAR CONTENTION BY THE REVENUE, NAMELY THE FACT THAT EVEN IF THERE IS NO EXPLICIT ARRANGEMENT, THE FACT THAT THE BENEFIT OF SUCH AMP EXPENSES WO ULD ALSO ENS URE TO THE AE IS ITSELF SELF SUFFICIENT TO INFER THE EXISTENCE OF AN INTERNATIONAL TRANSACTION HAS BEEN NEGATIVED BY THE COURT IN MARUTI SUZUKI INDIA LTD. (SUPRA) AS UNDER: XXXXXX 68. THE ABOVE SUBMISSIONS PROCEED PURELY ON SURMISES AND CONJECTURES AND IF ACCEPTED AS SUCH WILL LEAD TO SENDING THE TAX AUTHORITIES THEMSELVES ON A WILD - GOOSE CHASE OF WHAT CAN AT BEST BE DESCRIBED AS A 'MIRAGE'. FIRST OF ALL, THERE HAS TO BE A CLEAR STA TUTORY MANDATE FOR SUCH AN EXERCISE. THE COURT IS UNABLE TO FIND ONE. TO THE QUESTION WHETHER THERE IS ANY 'MACHINERY' PROVISION FOR DETERMINING THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING AMP EXPENSES, MR. SRIVASTAVA ONLY REFERRED TO SECTION 92F (II) WHICH DEFINES ALP TO MEAN A PRICE 'WHICH IS APPLIED OR PROPOSED TO BE APPLIED IN A TRANSACTION BETWEEN PERSONS OTHER THAN AES IN UNCONTROLLED CONDITIONS', SINCE THE REFERENCE IS TO 'PRICE' AND TO 'UNCONTROLLED CONDITIONS' IT IMPLICITLY BRINGS INTO PLAY THE BLT. IN OTHER WORDS, IT EMPHASISES THAT WHERE THE PRICE IS SOMETHING OTHER THAN WHAT WOULD BE PAID OR CHARGED BY ONE ENTITY FROM ANOTHER IN UNCONTROLLED SITUATIONS THEN THAT WOULD BE THE ALP. THE COURT DOES NOT SEE THIS AS A MACHINERY PROVISION P ARTICULARLY - IN - LIGHT OF THE FACT THAT - THE - BLT HAS BEEN EXPRESSLY NEGATIVED BY THE COURT IN SONY ERICSSON. THEREFORE, THE EXISTENCE OF AN INTERNATIONAL TRANSACTION WILL HAVE TO BE ESTABLISHED DE HORS THE BLT, 70. WHAT IS CLEAR IS THAT IT. IS THE 'PRICE' OF AN INTERNATIONAL TRANSACTION WHICH IS REQUIRED TO BE ADJUSTED: THE VERY EXISTENCE OF AN INTERNATIONAL TRANSACTION CANNOT BE PRESUMED BY ASSIGNING SOME PRICE TO IT AND THEN DEDUCING THAT SINCE IT IS NOT AN ALP , AN ADJUSTMENT HAD TO BE MADE. THE - BURDEN 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 P A G E | 18 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) JURISDICTION TO ANOTHER. AN 'ASSUMED' PRICE CANNOT FORM THE REASON F OR MAKING AN ALP ADJUSTMENT. ' 71. SINCE A QUANTITATIVE ADJUSTMENT IS NOT PERMISSIBLE FOR THE PURPOSES OF A TP ADJUSTMENT UNDER CHAPTER X, EQUALLY IT CANNOT BE PERMITTED IN RESPECT OF AMP EXPENSES EITHER. AS ALREADY NOTICED HEREINBEFORE, WHAT THE REVENUE HAS SOUGHT TO DO IN THE PRESENT. CASE IS TO RESORT TO A QUANTITATIVE ADJUSTMENT BY FIRST DETERMINING WHETHER THE AMP SPEND OF THE ASSESSEE ON APPLICATION OF THE BLT, IS EXCESSIVE, THEREBY EVIDENCING THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING THE AE. THE QUANTITATIVE DETERMINATION FORMS THE VERY BASIS FOR THE ENTIRE TP EXERCISE IN THE PRESENT CASE. 74.THE PROBLEM WITH THE REVENUE'S APPROACH IS THAT IT WANTS EVERY INSTANCE OF AN AMP SPEND BY AN INDIAN ENTITY WHICH HAPPENS TO USE THE BRAND OF A F OREIGN AE TO BE PRESUMED TO INVOLVE AN INTERNATIONAL TRANSACTION. AND THIS, NOTWITHSTANDING THAT THIS IS NOT ONE OF THE DEEMED INTERNATIONAL TRANSACTIONS LISTED UNDER THE EXPLANATION TO SECTION 928 OF THE ACT. THE PROBLEM DOES NOT STOP HERE. EVEN IF A TRAN SACTION INVOLVING AN AMP SPEND FOR A FOREIGN AE IS ABLE TO BE LOCATED IN SOME AGREEMENT, WRITTEN (FOR E.G., THE SAMPLE AGREEMENTS PRODUCED BEFORE THE COURT BY THE REVENUE) OR OTHERWISE, HOW SHOULD A TPO PROCEED TO BENCHMARK THE PORTION OF SUCH AMP SPEND TH AT THE INDIAN ENTITY SHOULD BE COMPENSATED FOR? 63. FURTHER, IN MARUTI SUZUKI INDIA LTD. '(SUPRA) THE COURT FURTHER EXPLAINED THE ABSENCE OF A 'MACHINERY PROVISION QUA AMP EXPENSES BY THE FOLLOWING ANALOGY: '75. AS AN ANALOGY; AND FROM OTHER PURPOSE; IN TH E - CONTEXT OF A DOMESTIC TRANSACTION INVOLVING TWO OR MORE RELATED PARTIES, REFERENCE MAY' BE MADE TO SECTION 40 A (2) (A) UNDER WHICH CERTAIN TYPES OF EXPENDITURE INCURRED BY WAY OF PAYMENT TO RELATED PARTIES IS NOT DEDUCTIBLE WHERE THE AO IS OF THE OPINI ON THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS.' IN SUCH EVENT, SO MUCH OF THE EXPENDITURE AS IS SO CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION.' THE AO IN SUCH AN INSTANCE DEPLOYS THE 'BEST JUDGMENT' ASSESSMENT AS A DEVICE TO DISALLOW WHAT HE CONSIDERS TO BE AN EXCESSIVE EXPENDITURE. THERE IS NO CORRESPONDING 'MACHINERY' PROVISION IN CHAPTER X WHICH ENABLES' AN AO TO DETERMINE WHAT SHOULD BE THE FAIR 'COMPE NSATION' AN INDIAN ENTITY WOULD BE ENTITLED TO IF IT IS FOUND' THAT THERE IS AN INTERNATIONAL TRANSACTION IN THAT REGARD. IN PRACTICAL TERMS, ABSENT A CLEAR STATUTORY GUIDANCE, THIS MAY ENCOUNTER FURTHER DIFFICULTIES. THE STRENGTH OF A BRAND,WHICH COULD BE PRODUCT SPECIFIC, MAY BE 'IMPACTED BY NUMEROUS OTHER IMPONDERABLES NOT LIMITED TO THE NATURE OF THE INDUSTRY, THE GEOGRAPHICAL PECULIARITIES, ECONOMIC TRENDS BOTH INTERNATIONAL AND DOMESTIC, THE CONSUMPTION PATTERNS, MARKET BEHAVIOUR AND SO ON.A SIMPLISTI C APPROACH USING ONE OF THE MODES SIMILAR TO THE ONES CONTEMPLATED BY SECTION 92C MAY NOT ONLY BE LEGALLY IMPERMISSIBLE BUT WILL LEND ITSELF TO ARBITRARINESS. WHAT IS THEN NEEDED IS A CLEAR STATUTORY SCHEME ENCAPSULATING THE LEGISLATIVE POLICY AND 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 SH OWN 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 SA ID THAT THE AMP EXPENSES INCURRED BY THE INDIAN ENTITY WAS FOR PROMOTING THE BRAND OF THE FOREIGN AE. AS MENTIONED - IN - SASSOON - J DAVID - (SUPRA) - 'THE - - FACT THAT - SOMEBODY OTHER THAN THE ASSESSEE IS ALSO BENEFITTED BY THE EXPENDITURE SHOULD NOT COME IN THE WAY OF AN EXPENDITURE BEING 'ALLOWED BY WAY OF A DEDUCTION UNDER SECTION 10 (2) (XV) OF THE ACT (INDIAN INCOME TAX ACT, 1922) IF IT SATISFIES OTHERWISE THE TESTS LAID D OWN BY THE LAW. WITH REFERENCE TO THE SUBMISSIONS OF THE DR,WE WOULD LIKE MENTION THA T FIRST OF ALL THE ISSUE BEFORE US IS NOT AN ASSESSEE THAT IS ENGAGED IN DISTRIBUTION AND MANUFACTURING OF CERTAIN GOODS,SO THE QUESTION OF SLICING OF EXPENSE IN TWO PORTIONS WOULD NOT ARISE. HOWEVER,THE OTHER PART OF THE ARGUMENT THAT P A G E | 19 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) MATTER SHOULD BE RES TORED BACK TO THE FILE OF THE AO/TPO AS THEY WERE FOLLOWING THE ORDER OF LG AND DID NOT HAVE BENEFIT OF LATER JUDGMENTS OF THE HONBLE HIGH COURT,WE WOULD LIKE TO MENTION THAT MATTER CAN BE RESTORED BACK IN CERTAIN CONDITIONS ONLY.RESTORATION OF MATTERS TO THE AO.S IS NOT A TOOL TO GIVE ONE MORE OPPORTUNITY OF HEARING TO THE LITIGANTS.IT IS NOT ADVISABLE TO PROLONG THE JUDICIAL PROCEEDINGS IN THE NAME OF FAIR PLAY.IT IS NOT A CASE WHERE NEW EVIDENCES HAVE BEEN PLACED ON RECORD BY THE ASSESSEE, THAT WERE NOT MADE AVAILABLE TO THE AO AT THE TIME OF ORIGINAL ASSESSMENT.IT IS NOT ALSO A MATTER WHEREIN SOME GROUND OF APPEAL HAS REMAINED UN - ADJUDICATED.THERE IS VIOLATION OF PRINCIPLES OF NATURAL JUSTICE.SO,WE HOLD THAT IT IS NOT A FIT CASE TO BE SENT BACK TO THE T PO FOR FRESH ADJUDICATION. CONSIDERING THE ABOVE,WE DECIDE THE FIRST EFFECTIVE GROUND OF APPEAL(GOA - 1 - 16)IN FAVOUR THE ASSESSEE . WE HAVE PERUSED THE AFORESAID ORDER OF THE TRIBUNAL FOR A.Y 2010 - 11, AND FINDING OURSELVES TO BE IN AGREEMENT WITH THE VIEW THEREIN TAKEN , RESPECTFULLY FOLLOW THE SAME AND DELETE THE T.P ADJUSTMENT OF RS. 101,26,73,186 / - MADE BY THE A.O IN RESPECT OF THE AMP EXPENSES IN THE HANDS OF THE ASSESSEE. AT THIS STAGE, WE MAY HEREIN OBSERVE , THAT AS THE ISSUE THAT AMP EXPENSES INCURRED BY THE ASSESSEE HAD BEEN HELD BY US AS NOT BEING AN INTERNATIONAL TRANSACTION, THEREFORE, THE OTHER GROUNDS ON THE BASIS OF WHICH THE TP ADJUSTMENT IN RESPECT OF THE SAID ISSUE HAD BEEN ASSAILED BEFORE US WOULD BE RENDERED AS MERELY ACADEMIC IN NATURE. ACC ORDINGLY, THE GROUNDS OF APPEAL NO. 2 TO 23 ARE DISPOSED OFF IN TERMS OF OUR AFORESAID OBSERVATIONS. 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 EXPENSES IS NOT SUSTAINED BY THE APPELLATE AUTHORITIES, THEN THE CONVENTION EXPENSE TO THE EXTENT OF 92.03 PERCENT I.E INR 33,44,95,97 3/ - SHOULD BE CONSIDERED TO BE IN THE NATURE OF EXPENSES INCURRED TOWARDS BRAND BUILDING AND BUSINESS PROMOTION, AND, THEREBY AN ADJUSTMENT SHOULD BE MADE AS REGARDS THE SAME. IT WAS SUBMITTED BY THE LD. A.R THAT THE C ONVENTION EXPENSES INCURRED BY THE A SSESSEE IN THE NORMAL COURSE OF ITS BUSINESS HAD WRONGLY BEEN HELD BY THE TPO/DRP AS AMP EXPENSES. IT IS THE CLAIM OF THE LD. A.R THAT THE CONVENTION EXPENSES P A G E | 20 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) INCURRED BY THE ASSESSEE WERE IN THE NATURE OF SELLING EXPENSES AND COULD NOT HAVE BEEN CONSIDERE D AS PART OF ITS AMP EXPENSES. IN ORDER TO BUTTRESS HIS AFORESAID CONTENTION , IT WAS SUBMITTED BY THE LD. A.R , THAT THE AFORESAID CLAIM OF THE ASSESSEE HAD BEEN ACCEPTED BY THE TRIBUNAL IN THE ASSESSES OWN CASE FOR A.Y 2011 - 12 VIZ. INDIA MEDTRONICS PVT. LTD . VS. DCIT 10(1)(1), MUMBAI (ITA NO. 1246/MUM/2016), DATED 02.05.2018 . APART THEREFROM, IT WAS SUBMITTED BY THE LD. A.R THAT A SIMILAR VIEW HAD THEREAFTER BEEN TAKEN BY THE TRIBUNAL IN THE CASE OF THE ASSESSEE FOR A.Y. 2012 - 13 (ITA NO. 2160/MUM/2017, DATED 27.05.2019 0 AND A.Y. 2013 - 14 (ITA NO.601/MUM/2018, DATED 08.05.2019 0 . ALTERNATIVELY, IT WAS THE CLAIM OF THE LD. A.R THAT EVEN OTHERWISE AS TPO HAD NOT USED ANY OF THE PRESCRIBED METHOD S CONTEMPLATED IN SEC. 92C OF THE ACT FOR DETERMINING THE ALP OF THE A FORESAID TRANSACTIONS AND HAD DISALLOWED THE CONVENTION EXPENSES ON AN ADHOC BASIS, THEREFORE, HIS ACTION WAS ALSO NOT SUSTAINABLE ON THE SAID GROUND. TO SUM UP, IT IS THE CLAIM OF THE LD. A.R THAT AS THE CONVENTION EXPENSES INCURRED BY THE ASSESSEE IN THE NORMAL COURSE OF ITS BUSINESS WERE IN THE NATURE OF SELLING EXPENSES AND NOT EXPENSES INCURRED FOR BRAND BUILDING OF ITS AE, THEREFORE , THE SAME COULD NOT HAVE BEEN HELD AS AMP EXPENSES. PER CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE (FOR SHORT D.R) HA D RELIED ON THE ORDERS OF THE LOWER AUTHORITIES. 10. WE HAVE GIVEN A THOUGHTFUL CONSIDERATION TO THE AFORESAID CONTENTION S ADVANCED BY THE AUTHORIZED REPRESENTATIVES FOR BOTH THE PARTIES AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES IN CONTEXT OF THE ISSUE UNDER CONSIDERATION. ADMITTEDLY, THE TPO/DRP HAD MADE A SIMILAR ALTERNATIVE ADJUSTMENT IN RESPECT OF THE CONVENTION EXP ENSES IN THE CASE OF THE ASSESSEE FOR THE AFOREMENTIONED PRECEDING YEARS VIZ. 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 P A G E | 21 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) 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. 11 . WE SHALL NOW ADVERT TO THE CLAIM OF THE ASSESSEE THAT THE A.O HAD ERRED IN NOT FOLLOW ING THE BINDING DIRECTIONS ISSUED BY THE DRP, WHICH HAD D IRECTED HIM TO DELETE THE TRANSFER PRICING ADJUSTMENT OF RS.1 ,32,76,277/ - ON ACCOUNT OF RECOVERY OF EXPENSES. TH E LD. A.R. HAD SUBMITTED THAT THE SAID GRIEVANCE OF THE ASSESSEE NO MORE SURVIVES AS THE AFORESAID INFIRMITY IN THE ORDER OF THE A.O HAS BEEN RECTIFIED BY HIM VIDE HIS ORDER PASSED UNDER SEC.154, DATED 14.03.2019. ACCORDINGLY, IN THE BACKDROP OF THE AFORESAID CONCESSION ON THE PART OF THE LD. A.R THE GROUND OF APPEAL NO. 2 7 IS DISMISSED AS WITHDRAWN. 12 . WE SHALL NOW ADVERT TO THE TRANSFER PRICING ADJUSTMENT MADE BY THE TPO ON ACCOUNT OF REIMBURSEMENT OF EXPENSES OF RS.4,05,62,976/ - WHICH AS CLAIMED BY THE ASSESSEE WERE INCURRED BY THE AES FOR AND ON ITS BEHALF. THE SAID EXPENSES ARE STATED TO HAVE BEEN INCURRED BY THE AES ON BEHALF OF THE ASSESSEE PURELY ON ACCOUNT OF ADMINISTRATIVE CONVENIENCE , WHICH AS STATED BY THE LD. A.R WERE THEREAFTER REIMBURSED BY THE ASSESSEE ON COST TO COST BASIS. IT IS THE CLAIM OF THE LD. A.R THAT THE ASSESSEE HAD IN THE COURSE OF THE PROCEEDINGS BEFORE THE TPO SUBMITTED SAMPLE INVOICES AND BACK - UP DOCUMENTS AMOUNTING TO RS.98,38,005/ - PERTAINING TO THE AFORESAID EXPENSES WHICH WERE REIMBURSED TO THE AES. AS IS DISCERNIBLE FROM THE ORDER OF THE TPO, IT WAS OBSERVED BY HIM THAT THE EXPENSES CLAIMED TO HAVE BEEN INCURRED BY THE AES ON BEHALF OF THE AS SESSEE WERE MOSTLY IN THE NATURE OF TRAVELLING EXPENSES PERTAINING TO THE EMPLOYEES OF THE P A G E | 22 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) ASSESSEE. IN THE BACKDROP OF THE AFORESAID FACTS, THE TPO WAS OF THE VIEW THAT AS THE EMPLOYEES OF THE ASSESSEE HAD TRAVELLED TO FOREIGN COUNTRIES FOR PROVIDING SERV ICES TO THE AES, THEREFORE, IN CASE OF A THIRD PARTY SCENARIO THE ASSESSEE WOULD NOT HAVE BORNE SUCH EXPENSES ON BEHALF OF ITS AE S . TO SUM UP, THE TPO WAS OF THE VIEW THAT AS THE EMPLOYEES HAD TRAVELLED TO FOREIGN COUNTRIES FOR PROVIDING SERVICES TO THE AE S, THEREFORE, THERE WAS NO JUSTIFIABLE REASON FOR THE ASSESSEE TO HAVE BORNE THE I R TRAVELLING EXPENSES . ON THE BASIS OF THE AFORESAID OBSERVATIONS THE TPO HAD DETERMINED THE ALP OF THE EXPENSES REIMBURSED BY THE ASSESSEE TO ITS AES AS NIL AND HAD MADE AN A DJUSTMENT IN THE HANDS OF THE ASSESSEE. 13. WE FIND THAT THE ASSESSEE IN THE COURSE OF THE PROCEEDINGS BEFORE THE DRP HAD BY WAY OF ADDITIONAL EVIDENCEFURTHER SUBMITTED CERTAIN ADDITIONAL SAMPLE INVOICES AND BACK UP DOCUMENTS AMOUNTING TO RS.73,19,620 / - PERTAINING TO REIMBURSEMENT OF EXPENSES TO ITS AES . IT WAS OBSERVED BY THE DRP THAT AS THERE WAS NO SERVICE ELEMENT INVOLVED IN THE REIMBURSEMENT OF EXPENSES TO THE AES, THEREFORE, THE ASSESSEE WAS NOT OBLIGATED TO DEMONSTRATE ANY BENEFIT RECEIVED OR SE RVICE PROVIDED FOR MAKING SUCH PAYMENTS. IT WAS ALSO OBSERVED BY THE DRP THAT IN A THIRD PARTY SCENARIO THE ASSESSEE WOULD HAVE MADE SUCH PAYMENTS TO THE PERSON WHO WOULD HAVE INCURRED SUCH EXPENSES ON ITS BEHALF. AS IS DISCERNIBLE FROM THE ORDER OF THE DR P, RELIEF WAS GRANTED TO THE ASSESSEE TO THE EXTENT IT HAD FURNISHED WITH THE DRP THE COPIES OF THE BACK UP INVOICES AMOUNTING TO RS. 73,19,620/ - , WHICH THEREIN SUBSTANTIAT ED THE COST TO COST NATURE OF THE REIMBURSEMENT OF EXPENSES BY THE ASSESSEE TO ITS AE S. ACCORDINGLY, T HE A.O IN HIS FINAL ASSESSMENT ORDER PASSED UNDER SEC. 143(3) R.W.S. 144C(13), DATED 31.10.2018 FOLLOWING THE DIRECTIONS OF THE DRP HAD GRANTED RELIEF OF RS. 73,19,620/ - TO THE ASSESSEE. AS SUCH , THE BALANCE AMOUNT OF TP ADJUSTMENT OF RS.4, 05,63,976/ - ON ACCOUNT OF P A G E | 23 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) REIMBURSEMENT OF EXPENSES TO AES WERE UPHELD BY THE A.O AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 14 . WE FIND THAT IT IS THE CLAIM OF THE LD. A.R THAT AS THE AFORESAID EXPENSES WERE INCURRED BY THE AES ON BEHALF OF THE ASSESSEE PURELY ON ACCOUNT OF ADMINISTRATIVE CONVENIENCE, THEREFORE, THE SAME WERE REIMBURSED BY THE ASSESSEE TO THEM ON COST TO COST BASIS. ACCORDINGLY, IT WAS THE CLAIM OF THE LD. A.R THAT THE TPO WAS IN ERROR IN CONCLUDING THAT THE EXPENSES WHICH WERE REIMBURSED BY THE ASSESSEE WERE NOT IN THE NATURE BUSINESS EXPENSES AND WERE THUS LIABLE TO BE DISALLOWED. 15 . WE HAVE GIVEN A THOUGHTFUL CONSIDERATION TO THE ISSUE BEFORE US. AS IS DISCERNIBLE FROM THE OR DERS OF THE LOWER AUTHORITIES, THE ASSESSEE HAD IN THE COURSE OF THE PROCEEDINGS BEFORE THE TPO SUBMITTED SAMPLE INVOICES AND BACK UP DOCUMENT SWHICH ARE CLAIMED TO HAVE SUBSTANTIAT ED THE COST TO COST NATURE OF THE ABOVEMENTIONED EXPENSES AGGREGATING TO RS.98,38,005/ - . APART THEREFROM, IN THE COURSE OF THE PROCEEDINGS BEFORE THE DRP , THE ASSESSEE HAD FURTHER FILED ADDITIONAL DOCUMENTS SUBSTANTIATING THE INCURRING OF THE ABOVEMENTIONED EXPENSES OF RS.73,19,620/ - . ALSO, THE BROAD CATEGORIES OF THE NATURE OF THE EXPENSES INCURRED BY THE AES FOR AND ON BEHALF OF THE ASSESSEE WERE SUBMITTED BY THE ASSESSEE IN THE COURSE OF THE PROCEEDINGS BEFORE THE TPO / DRP. AS IS DISCERNIBLE FROM THE ORDERS OF THE LOWER AUTHORITIES , THE TPO HAD FAILED TO TAKE COGNIZANCE OF THE DOCUMENTARY EVIDENCE ,WHICH AS CLAIMED BY THE ASSESSEE SUPPORT ED THE INCURRING OF THE ABOVEMENTIONED EXPENSES AMOUNTING TO RS.98,38,005/ - BY THE AES FOR AND ON BEHALF OF THE ASSESSEE . A LSO, THE DRP WHILE DISPOSING OFF THE OBJECTIONS OF THE ASSESSEE HAD CONFINED THE RELIEF ONLY TO THE EXTENT OF THE ADDITIONAL SAMPLE INVOICES AND BACKUP DOCUMENTS AMOUNTING TO RS.73,19,620/ - WHICH WERE FURNISHED BY THE ASSESSEE IN THE COURSE OF THE PROCEED INGS BEFORE IT. AS A MATTER OF FACT, THE P A G E | 24 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) INVOICES AND BACKUP DOCUMENTS PERTAINING TO EXPENSES OF RS. 98,38,005/ - THAT WERE FILED BY THE ASSESSEE IN THE COURSE OF THE TP PROCEEDINGS HAD NOT BEING CONSIDERED EITHER BY THE TPO OR THE DRP. WE FIND THAT THE AS SESSEE HAD ALSO FURNISHED AN APPLICATION DATED 04.07.2019 WITH US, SEEKING ADMISSION OF ADDITIONAL EVIDENCE WHICH COMPRISES OF THE COPIES OF THE INVOICES ALONG WITH THE BACKUP DOCUMENTS AS REGARDS THE BALANCE AMOUNT OF EXPENSES OF RS.3,07,24,971/ - THAT WE RE REIMBURSED BY THE ASSESSEE TO ITS AES. IT WAS SUBMITTED BY THE LD. A.R , THAT THE COMPLETE DETAILS I.E COPIES OF INVOICES ALONG WITH BACKUP DOCUMENTSEVIDENCING THE EXPENSES AGGREGATING TO RS. 4,78,82,596/ - WHICH HAVING BEEN INCURRED BY THE AES ON BEHALF OF THE ASSESSEE WERE THEREAFTER REIMBURSED TO THEM BY THE ASSESSEE ON COST TO COST BASIS ARE AVAILABLE ON RECORD, AS UNDER: PARTICULARS REF. AMOUNT IN INR SU BMITTED AT THE TIME OF TP ASSESSMENT PROCEEDINGS BEFORE THE LEARNED TPO A 98,38,005 SUBMITTED AS ADDITIONAL EVIDENCES BEFORE THE HONBLE DRP FOR WHICH RELIEF WAS GRANTED B 73,19,620 ADDITIONAL EVIDENCE SUBMITTED BEFORE YOUR HONOURS C 3,07,24,971 TOTAL REIMBURSEMENT OF EXPENSES FOR F.Y. 2013 - 14 4,78,82,596 ACCORDINGLY, IT WAS THE CLAIM OF THE LD. A.R THAT AS THE AFORESAID EXPENSES WHICH WERE INCURRED BY THE AES ON BEHALF OF THE ASSESSEE PURELY ON ACCOUNT OF ADMINISTRATIVE CONVENIENCE WERE THEREAFTER R EIMBURSED ON COST TO COST BASIS, THEREFORE, NO ADJUSTMENT WAS WARRANTED AS REGARDS THE SAME. 16 . WE HAVE GIVEN A THOUGHTFUL CONSIDERATION TO THE ISSUE BEFORE US AND ARE PRINCIPALLY IN AGREEMENT WITH THE CLAIM OF THE LD. A.R THAT IF THE AES WERE REIMBURSED ON COST TO COST BASIS BY THE ASSESSEE FOR THE P A G E | 25 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) EXPENSES WHICH INCURRED BY THEM FOR AN ON BEHALF OF THE ASSESSEE PURELY ON ACCOUNT OF ADMINISTRATIVE CONVENIENCE, THEN NO ADJUSTMENT WOULD BE WARRANTED IN RESPECT OF THE SAME . WE FIND THAT T HE DRP AFTER PERUSING THE COP IES OF THE INVOICES AND SAMPLE S SUPPORTING THE REIMBURSEMENT OF EXPENSES AGGREGATING TO RS.73,19,620/ - WHICH WERE FURNISHED BY THE ASSESSEE BY WAY OF ADDITIONAL EVIDENCE , HAD OBSERVED , THAT AS THE PAYMENT OF THE SAID AMOUNT WA S TOWARDS REIMBURSEMENT ON COST TO COST BASIS BY THE ASSESSEE OF THE EXPENSES WHICH THE AES HAD INCURRED ON ITS BEHALF , INVOLVING NO SERVICE ELEMENT , THEREFORE, NO OBLIGATION WAS C A ST UPON THE ASSESSEE TO DEMONSTRATE THE BENEFIT RECEIVED BY IT AGAINST MAKI NG OF SUCH PAYMENTS. IT WAS FURTHER OBSERVED BY THE DRP THAT EVEN IN A THIRD PARTY SCENARIO THE ASSESSEE WOULD HAVE PAID THESE AMOUNTS TO THE PERSON WHO WOULD HAD INCURRED THE SAID EXPENSES ON ITS BEHALF. ACCORDINGLY, IN THE BACKDROP OF ITS AFORESAID OBSER VATIONS THE DRP HAD CONCLUDED THAT TO THE EXTENT THE ASSESSEE WAS ABLE TO SUBSTANTIATE THE COST TO COST NATURE OF THE REIMBURSEMENT OF EXPENSES AGGREGATING TO RS.73,19,620/ - (ON THE BASIS OF DOCUMENTS WHICH WERE FILED IN THE COURSE OF THE PROCEEDINGS BEFOR E IT), IT WOULD BE ENTITLED TO BENEFIT TO THE SAID EXTENT ON PRODUCTION OF THE SUPPORTING DETAILS DURING THE COURSE OF THE REMAND PROCEEDINGS BEFORE THE TPO. WE ARE OF THE CONSIDERED VIEW THAT THE DRP WHILE CONCLUDING AS HEREINABOVE HAD LOST SIGHT O F THE SUPPORTING DOCUMENTARY EVIDENCE I.E COPIES OF INVOICES AND SAMPLE S SUPPORTING REIMBURSEMENT OF EXPENSES AGGREGATING TO RS.98,38,005/ - THAT WERE FILED BY THE ASSESSEE IN THE COURSE OF THE PROCEEDINGS BEFORE THE TPO. APART THEREFROM, WE ARE OF THE CONS IDERED VIEW THAT AS NEITHER OF THE LOWER AUTHORITIES HAD AT ANY STAGE DIRECTED THE ASSESSEE TO PLACE ON RECORD THE COMPLETE SUPPORTING DOCUMENTARY EVIDENCE AS REGARDS THE REIMBURSEMENT OF EXPENSES OF RS.4,78,82,596/ - , THEREFORE, THERE IS A JUSTIFIABLE REASO N FOR THE P A G E | 26 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) ASSESSEE FOR NOT SUBMITTING THE SUPPORTING DOCUMENTARY EVIDENCE IN RESPECT OF THE BALANCE REIMBURSEMENT OF EXPENSES OF R S.3,07,24,971/ - BEFORE THEM. ACCORDINGLY, IN OUR CONSIDERED VIEW THE ADDITIONAL EVIDENCE I.E THE COPI ES OF INVOICES ALONG WI TH BACKUP DOCUMENTS SUPPORTING REIMBURSEMENT OF EXPENSES AGGREGATING TO RS.3,07,24,971/ - [RS.4,78,82,596/ - ( - ) RS.98,38,005/ - ( - ) RS.73,19,620/ - ] THAT HAS BEEN FILED BY THE ASSESSEE BEFORE US , MERITS ADMISSION ON OUR PART. HOWEVER, WE ALSO CAN NOT REMAIN OB LIVIOUS OF THE FACT THAT AS THE SAID ADDITIONAL EVIDENCE WHICH AS CLAIMED BY THE ASSESSEE SUBSTANTIATE S THE COST TO COST NATURE OF REIMBURSEMENT OF EXPENSES OF RS. 3,07,24,971/ - TO ITS AES CANNOT BE SUMMARILY ACCEPTED ON THE VERY FACE OF IT , AND HAVING BEEN FILED FOR THE VERY FIRST TIME , WOULD THUS REQUIRE VERIFICATION ON THE PART OF THE REVENUE AUTHORITIES . IN THE BACKDROP OF OUR AFORESAID OBSERVATIONS, WE ARE OF THE CONSIDERED VIEW THAT IN ALL FAIRNESS THE MATTER REQUIRES TO BE RESTORED TO THE FI LE OF THE TPO FOR VERIFYING THE VERACITY OF THE CLAIM OF THE ASSESSEE THAT THE REMITTANCE OF RS. 4,78,82,596/ - MADE TO ITS AES WAS IN THE NATURE OF COST TO COST REIMBURSEMENT OF THE EXPENSES WHICH THE AES HAD INCURRED PURELY ON ACCOUNT OF ADMINISTRATIVE CO NVENIENCE FOR AND ON BEHALF OF THE ASSESSEE . IN CASE, THE CLAIM OF THE ASSESSEE IS FOUND TO BE IN ORDER , THEN NO ADJUSTMENT IN RESPECT OF SUCH REIMBURSEMENT OF EXPENSES WOULD BE CALLED FOR IN THE HANDS OF THE ASSESSEE. WE THUS RESTORE THE MATTER TO THE FILE OF THE TPO WHO SHALL RE - ADJUDICATE THE SAME IN TERMS OF OUR AFORESAID OBSERVATIONS. NEEDLESS TO SAY, THE TPO SHALL IN THE COURSE OF THE SET ASIDE PROCEEDINGS AFFORD A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THE GROUNDS OF APPEAL NOS. 28 T O 31 ARE ALLOWED FOR STATISTICAL PURPOSES IN TERMS OF OUR AFORESAID OBSERVATIONS. 17. WE SHALL NOW ADVERT TO THE TRANSFER PRICING ADJUSTMENT OF RS.49,60,24,206/ - MADE ON ACCOUNT OF IMPORT OF FINISHED GOODS BY THE P A G E | 27 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) ASSESSEE COMPANY FROM ITS AES. THE ASSESSEE HAS ASSAILED THE AFORESAID TP ADJUSTMENT ON MULTIPLE GROUNDS WHICH SHALL BE ADVERTED TO BY US IN A CHRONOLOGICAL MANNER. BRIEFLY STATED, THE ASSESSEE COMPANY HAD DURING THE YEAR UNDER CONSIDERAT ION CARRIED OUT THE FOLLOWING INTERNATIONAL TRANSACTI ON S WITH ITS AES: SR. NO. NATURE OF INTERNATIONAL TRANSACTIONS AMOUNT (IN RS.) METHOD ADOPTED 1. PURCHASE OF FINISHED GOODS FOR RESALE 411 , 27 , 23 , 732 TNMM 2. PURCHASE OF CAPITAL ASSETS 10,80,53,018 TNMM 3. RECEIPTS OF MANAGEMENT FEE IN RESPECT OF DIRECT SALES MADE BY AES IN INDIA 2,21,55,658 TNMM 4. PROVISION OF SUPPORT SERVICES TO AES 1,11,11,242 TNMM 5. REIMBURSEMENT OF EXPENSES 4,78,82,596 OTHER METHOD 6. RECOVERY OF EXPENSES 13,27,62,769 OTHER METHOD TOTAL 4 43,46,89,015 THE ASSESSEE HAD IN ITS TRANSFER PRICING STUDY REPORT (FOR SHORT TP STUDY REPORT) BENCHMARKED THE INTERNATIONAL TRANSACTIONS OF IMPORT OF GOODS FROM ITS AES BY ADOPTING TRANSACTION NET MARGIN METHOD (FOR SHORT TNMM) AS THE MOST APPROPRIATE METHOD. THE PROFIT L EVEL INDICATOR (FOR SHORT PLI) ADOPTED BY THE ASSESSEE WAS OPERATING PROFIT TO OPERATING REVENUE ( OP/OR). THE ASSESSEE HAD TAKEN ITSELF AS THE TESTED PARTY. THE ASSESSEE HAD IN ITS TP STUDY REPORT IDENTIFIED 7 COMPANIES AS COMPARABLES FOR BENCHMARKING I TS INTERNATIONAL TRANSACTIONS. THE ARITHMETIC MEAN OF THE 7 COMPARABLES ON THE BASIS OF THREE YEARS ADJUSTED WEIGHTED AVERAGE MARGIN WAS WORKED OUT BY THE ASSESSEE IN ITS TP STUDY REPORT 0.82%. AS THE PLI OF THE ASSESSEE WAS WORKED OUT AT 2.85%, THEREFORE, IT HAD CLAIMED ITS INTERNATIONAL TRANSACTIONS OF IMPORT OF GOODS TO BE AT ARMS LENGTH. DURING THE TP PROCEEDINGS THE TPO HAD DIRECTED THE ASSESSEE TO SUBMIT THE PLI OF THE COMPARABLE COMPANIES AFTER CONFINING ITSELF TO THEIR FINANCIALS FOR P A G E | 28 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) THE YEAR UNDER CONSIDERATION I.E F.Y. 2013 - 14 ONLY. ACCORDINGLY, THE ASSESSEE AFTER CONSIDERING THE FINANCIALS OF ITS COMPARABLES FOR THE YEAR UNDER CONSIDERATION WORKED OUT ITS PLI AT 2.35%, AS HEREIN BELOW : SR. NO. NAME OF THE COMPARABLE COMPANY ADJUSTED OPERATING P ROFIT TO OPERATING REVENUE (%) 1. ADS DIAGNOSTICS LIMITED NC 2. ADVANCED MICRONIC DEVICES LIMITED (SEGMENTAL) NC 3. ASHCO NIULAB INDUSTRIES LIMITED NA 4. FRONTLINE ELECTRO MEDICAL LIMITED 0.79 5. HICKS THERMOMETERS (INDIA) LIMITED 1.89 6. SATAYTEJ COMERCIAL COMPANY LIMITED 4.35 7. CONFIDENT SALES INDIA PRIVATE LIMITED NA ARITHMETIC MEAN 2.35 ASSESSEE 2.85 IT WAS OBSERVED BY THE TPO THAT THE ASSESSEE IN THE COURSE OF THE TP PROCEEDINGS HAD REJECTED ONE OF ITS COMPARABLE VIZ. M/S ADS DIAGNOSTIC LTD. ON THE GROUND THAT ITS TRADING INCOME WAS LESS THAN 75% OF ITS TOTAL REVENUE I.E 73.50% . HOWEVER, THE TPO OBSERVING THAT THE TRADING INCOME OF THE SAID CONCERN VIZ. M/S ADS DIAGNOSTIC LTD. WAS 74.54% OF THE TOTAL REVENUE OF ITS TRADING SEGMENT, THEREFORE, INCLUDED THE SAME IN THE FINAL LIST OF COMPARABLES. ALSO, IT WAS NOTICED BY THE TPO THAT THE ASSESSEE HAD EXCLUDED ANOTHER COMPARABLE VIZ. M/S CONFIDENT SALES PVT. LTD, FOR THE REASON, THAT TH E ANNUAL REPORT OF THE SAID COMPANY FOR THE YEAR UNDER CONSIDERATION I.E FINANCIAL YEAR 2013 - 14 WAS NOT AVAILABLE IN THE PUBLIC DOMAIN FOR THE PURPOSE OF COMPUTING ITS MARGINS. HOWEVER, THE TPO WAS OF THE VIEW THAT AS THE PLI OF THE SAID COMPANY COULD BE GATHERED FROM ITS ANNUAL REPORT FOR THE SUCCEEDING YEAR VIZ. F.Y. 2014 - 15 WHICH WAS AVAILABLE IN THE PUBLIC DOMAIN, THEREFORE, THE SAID COMPANY COULD SAFELY BE INCLUDED IN THE FINAL LIST OF COMPARABLES. THE TPO ALSO DID NOT FIND FAVOUR WITH THE CLAIM OF THE ASSESSEE THAT FOREIGN EXCHANGE GAIN W AS TO BE TREATED AS P A G E | 29 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) OPERATING INCOME FOR THE PURPOSE OF COMPUTING ITS MARGIN. THE TPO AFTER INCLUDING THE AFORESAID TWO COMPANIES WHICH WERE EXCLUDED BY THE ASSESSEE IN THE COURSE OF THE TP PROCEEDINGS FROM THE FINAL LIST OF COMPARABLES VIZ. (I) ADS DIAGNOSTIC LTD. (SEGMENTAL); AND (II) CONFIDENT SALES INDIA PVT. LTD., THEREIN, ON THE BASIS OF THE SINGLE YEAR UNADJUSTED MARGINS WORKED OUT THE ALP OF THE COMPARABLES AT 9.90%, AFTER CONSIDERING THE FOREIGN EXCHANGE GAIN/LOSS AS NON - OPERATING IN NATURE . ACCORDINGLY, THE TPO MADE AN ADJUSTMENT OF RS.49,60,24,206/ - IN RELATION TO THE INTERNATIONAL TRANSACTIONS OF IMPORT OF FINISHED GOODS BY THE ASSESS E E FROM ITS AES, AS UNDER : SR. NO. PARTICULARS REFERENCE AMOUNT (INR0 1. OPERATING INCOME A 6,93,77,49,101 2. OPERATING COST B 6,74,69,36,146 3. ARMS LENGTH MEAN MARGIN C 9.90% 4. ARMS LENGTH PRICE D=B*(1 - C) 6,25,09,11,940 5. ADJUSTMENT E=B - C 49,60,24,206 18. OBJECTING TO THE AFORESAID TP ADJUSTMENT CARRIED OUT BY THE TPO, THE ASSESSEE CARRIED THE MATTER BEFORE THE DRP. THE DRP DID NOT FIND FAVOUR WITH THE CONTENTIONS ADVANCED BY THE ASSESSEE AND UPHELD THE VIEW TAKEN BY THE TPO. HOWEVER, THE DRP WAS OF THE VIE W THAT ADS DIAGNOSTIC LTD (SEGMENTAL) WAS TO BE REJECTED AS A COMPARABLE FOR BENCHMARKING THE INTERNATIONAL TRANSACTION OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION IF ITS TRADING ACTIVITY WAS LESS THAN 75% OF ITS TOTAL REVENUE. INSOFAR THE OTHER COMPA RABLE VIZ. CONFIDENT SALES INDIA PVT. LTD. WAS CONCERNED, THE DRP DID NOT FIND FAVOUR WITH THE CLAIM OF THE ASSESSEE AND CONCLUDED THAT AS SUFFICIENT DATA FOR THE YEAR UNDER CONSIDERATION WAS AVAILABLE IN THE ANNUAL REPORT OF THE SAID COMPANY FOR FINANCI AL YEAR 2014 - 15, THEREFORE, IT COULD SAFELY BE CONSIDERED AS A COMPARABLE. AS REGARDS THE OBJECTION OF THE ASSESSEE THAT FOREIGN EXCHANGE GAIN/LOSS WAS WRONGLY TREATED BY THE TPO AS NON - OPERATING P A G E | 30 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) IN NATURE, THE SAME WAS REJECTED BY THE DRP. SIMILARLY, THE DRP UPHELD THE VIEW TAKEN BY THE TPO AND DECLINED THE CLAIM OF WORKING CAPITAL ADJUSTMENT THAT WAS RAISED BY THE ASSESSEE. 19 . WE HAVE PERUSED THE FACTS PERTAINING TO THE TP ADJUSTMENT OF RS. 49,60,24,206/ - MADE BY THE TPO/DRP AS REGARDS THE INTERNATIONAL TRANSACTIONS OF IMPORT OF FINISHED GOODS BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION. AS THE ASSESSEE HAS ASSAILED THE TP ADJUSTMENT IN RESPECT OF THE AFORESAID IMPORT TRANSACTIONS ON MULTIPLE GROUNDS, THEREFORE, WE SHALL ADVERT TO AND ADJUDICATE THE SAME IN A CHRONOLOGICAL MANNER. 20 . WE SHALL FIRST TAKE UP THE CLAIM OF THE ASSESSEE THAT THE TPO HAS ERRED IN NOT FOLLOWING THE BINDING DIRECTIONS OF THE DRP THAT AS THE IMPORT OF FINISHED GOODS WAS A SECONDARY ADJUSTMENT, THEREFORE, THE SAME WOULD BE SUBSUMED IN THE PRIMARY ADJUSTMENT MADE ON ACCOUNT OF AMP, AND HENCE , NO SEPARATE ADDITION TO THE TOTAL INCOME OF THE ASSESSEE WOULD BE CALLED FOR. WE HAVE GIVEN A THOUGHTFUL CONSIDERATION AND ARE OF THE CONSIDERED VIEW THAT AS THE ADJUSTMENT OF AMP EX PENSES HAD BEEN VACATED BY US, THEREFORE, THE SAID CLAIM OF THE ASSESSEE IS RENDERED AS ACADEMIC IN NATURE AND WOULD NOT SURVIVE ANY MORE. ACCORDINGLY, THE AFORESAID CLAIM OF THE ASSESEE IS REJECTED. THE GROUND OF APPEAL NO. 33 IS DISMISSED. 21 . WE SHALL NOW TAKE UP THE CLAIM OF THE ASSESSEE THAT THE TPO/DRP HAD ERRED IN REJECTING THE USE OF MULTIPLE YEAR DATA BY THE ASSESSEE FOR COMPUTING THE ALP OF ITS TRANSACTIONS OF IMPORT OF GOODS FROM THE AES. WE HAVE PERUSED THE ORDERS OF THE LOWER AUTHORIT IES AND ARE UNABLE TO PERSUADE OURSELVES TO SUBSCRIBE TO THE AFORESAID CLAIM OF THE ASSESSEE. AS PER RULE 10B(4) OF THE INCOME - TAX RULES, 1962, THE DATA TO BE USED FOR ANALYSING THE COMPARABILITY OF AN UNCONTROLLED P A G E | 31 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) TRANSACTION WITH AN INTERNATIONAL TRANSAC TION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO. AS PER THE EXCEPTION CARVED OUT IN THE PROVISO TO RULE 10B(4), THE DATA RELATING TO A PERIOD NOT MORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MAY ALSO BE CONSIDERED IF SUCH DATA REVEALS FACTS WHICH COULD HAVE AN INFLUENCE ON THE DETERMINATION OF THE TRANSFER PRICES IN RELATION TO THE TRANSACTIONS BEING COMPARED. AS IS DISCERNIBLE FROM THE RECORDS, THE ASSESSEE IN THE CASE BEFORE US HAD FAI LED TO ESTABLISH AS TO HOW THE FINANCIAL DATA FOR THE EARLIER TWO YEARS OF ITS COMPARABLES, WHICH HAD BEEN USED BY IT FOR CARRYING OUT THE TRANSFER PRICING ANALYSIS HAD IN ANY WAY INFLUENCED THE DETERMINATION OF THE TRANSFER PRICES IN RELATION TO THE TRANS ACTIONS OF IMPORT OF GOODS BY THE ASSESSEE FROM ITS AES DURING THE YEAR UNDER CONSIDERATION. OUR AFORESAID OBSERVATIONS ARE FORTIFIED BY THE JUDGMENT OF THE HONBLE HIGH COURT OF BOMBAY IN THE CASE OF PTC SOFTWARE (I) PVT. LTD., (2016) 75 TAXMANN.COM 31 (B OM) . ACCORDINGLY, FINDING NO INFIRMITY IN THE ORDER OF THE DRP WHICH HAD RIGHTLY CONCURRED WITH THE TPO AS REGARDS REJECTION OF THE MULTIPLE YEAR DATA USED BY THE ASSESSEE FOR COMPUTING THE ALP OF ITS TRANSACTIONS OF IMPORT OF GOODS FROM THE AES, WE UPHOLD T HE SAME. THE GROUND OF APPEAL NO. 34 IS DISMISSED. 22 . WE SHALL NOW ADVERT TO THE VIEW TAKEN BY THE TPO/DRP THAT THE FOREIGN EXCHANGE GAIN WAS NOT TO BE ALLOWED AS A PART OF THE OPERATING INCOME FOR THE PURPOSE OF COMPUTING THE MARGIN OF THE ASSESSEE AND ITS COMPARABLES. AS OBSERVED BY US HEREINABOVE, THE TPO/DRP HAD CONCLUDED THAT FOREIGN EXCHANGE GAIN WAS TO BE TREATED AS NON - OPERATING INCOME WHILE COMPUTING THE MARGIN OF THE ASSESSEE AND THE COMPARABLE COMPANIES. IN FACT, THE DRP WHILE CONCLUDING AS HEREINABOVE, WAS OF THE VIEW THAT AS THE FOREIGN EXCHANGE GAIN/LOSS WAS SOLELY ATTRIBUTABLE TO THE VARIATION IN THE EXCHANGE RATE, THEREFORE, THERE WAS NO DIRECT/IMMEDIATE NEXUS BETWEEN THE OPERATIONS OF THE P A G E | 32 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) ASSESSEE AND THE FOREIGN EXCHANGE GAIN/LOSS. AP ART THERE FROM, THE DRP WAS OF THE VIEW THAT THE MARGINS OF TWO COMPANIES ENTERING INTO SIMILAR TRANSACTION MAY ALSO VARY SUBSTANTIALLY DEPENDING UPON THE LEVEL OF HEDGING OF THEIR FOREIGN EXCHANGE TRANSACTIONS. ALSO, THE DRP WAS OF THE VIEW THAT AS PER TH E SAFE HARBOUR RULES THE FOREIGN CURRENCY FLUCTUATIONS WERE TO BE EXCLUDED FROM THE OPERATING REVENUE/EXPENSES. 23 . WE HAVE GIVEN A THOUGHTFUL CONSIDERATION TO THE AFORESAID OBSERVATIONS OF THE LOWER AUTHORITIES AND ARE UNABLE TO PERSUADE OURSELVES TO SU BSCRIBE TO THE SAME. IN FACT, WE FIND SUBSTANTIAL FORCE IN THE CLAIM OF THE LD. A.R THAT THE FOREIGN EXCHANGE GAIN/LOSS ARISING OUT OF THE TRANSACTIONS UNDERTAKEN BY THE ASSESSEE ARE DIRECTLY ATTRIBUTABLE TO ITS ONGOING BUSINESS. RATHER, WE FIND THAT IT HA S BEEN THE CLAIM OF THE ASSESSEE THAT IT WAS NOT INTO HEDGING OF ITS FOREIGN EXCHANGE TRANSACTIONS. ALSO, IT IS CLAIMED BY THE ASSESSEE THAT THE COMPARABLES SELECTED HAD NO HEDGING INCOME OR EXPENSES AS IS DISCERNIBLE FROM THEIR ANNUAL REPORTS. THE AFORE SAID CLAIM OF THE ASSESSEE HAD NOT BEEN DISLODGED BY THE LOWER AUTHORITIES. THE LD. A.R IN SUPPORT OF HIS AFORESAID CLAIM THAT FOREIGN EXCHANGE FLUCTUATIONS ARE TO BE CONSIDERED WHILE COMPUTING THE OPERATING INCOME, HAD RELIED ON THE ORDER OF THE ITAT, DEL HI IN THE CASE OF VAILDOR CAPITAL INDIA PVT. L TD. VS. ITO, WARD 26(1), NEW DELHI [ ITA NO.1961/DEL/2015 ], DATED 22.11.2018 . APART THERE FROM, WE FIND THAT EVEN AS PER OECD TP GUIDELINES, 2017, IF A TRANSACTIONAL NET MARGIN METHOD IS APPLIED TO A TRANSACTION IN WHICH THE FOREIGN EXCHANGE RISK IS BORNE BY THE TESTED PARTY, THE FOREIGN EXCHANGE GAINS OR LOSESS SHOULD BE CONSIDERED AS OPERATING IN NATURE. ALSO, A SIMILAR VIEW HAD BEEN TAKEN BY THE VARIOUS HIGH COURTS AND COORDINATE BENCHES OF THE TRIBUNAL IN TH E FOLLOWING CASES : P A G E | 33 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) I. RAMPGREEN SOLUTIONS PVT. LTD. VS. PCIT (ITA NO.340/2016) HONBLE DELHI HIGH COURT II. VAILDOR CAPITAL INDIA PVT. LTD. VS. ITO (ITA NO. 1961/DEL/2015) III. M/S S. NARENDRA VS. ADDL CIT (ITA NO. 6839/MUM2012); IV. M/S SUMIT DIAMOND (INDIA) PVT. LTD. VS. ADDL. CIT [ ITA NO.7148/MUM/2012]; V. SAP LABS INDIA (P) LTD. VS. ACIT (IT APPEAL NOS. 398 AND 418 (BANG.) OF 2008) VI. M/S WESTFALIA SEPARATOR INDIA PVT. LTD. VS. ACIT [ITA NO.4446/DEL/2007]; VII. M/S CISCO SYSTEMS SERVICES B.E. INDIA BRANCH VS. ADIT [ITA (TP) NO. 270/BANG/2014]; VIII. M/S KENEXA TECHNOLOGIES PVT. LTD. VS. DY. CIT [ITA NO. 243/HYD/2014]; IX. M/S BEARING POINT BUSINESS CONSULTING PVT. LTD. VS. DCIT [ITA NO. 1124/BANG/2011]; X. M/S TR ILOGY E - BUSINESS SOFTWARE INDIA PVT. LTD. VS. DCIT [ITA NO. 1054/BANG/2011]; XI. M/S BRIGADE GLOBAL SERVICES PVT. LTD. VS. ITO [ITA NO. 1494/HYD/2010]; AND XII. M/S CAPITAL IQ INFORMATION SYSTEMS (INDIA) PVT. LTD. VS. DCIT [ITA NO. 1961/HYD/2011]. WE THUS ON THE BASIS OF OUR AFORESAID DELIBERATIONS ARE OF THE CONSIDERED VIEW THAT THE TPO/DRP HAD ERRED IN CONCLUDING THAT THE FOREIGN EXCHANGE GAIN WAS TO BE TREATED AS NON - OPERATING IN NATURE WHILE COMPUTING THE MARGINS OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION. ACCORDINGLY, THE TPO IS DIRECTED TO CONSIDER THE FOREIGN EXCHANGEGAIN/LOSS AS OPERATING IN NATURE WHILE COMPUTING THE MARGIN OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION. THE GROUND OF APPEAL NO. 35 IS ALLOWED. 24 . AS REGARDS THE OBSERVATIONS OF THE DRP THAT ADS DIAGNOSTIC LTD. SHOULD BE REJECTED AS A COMPARABLE IN CASE IF ITS TRADING ACTIVITY IS LESS THAN 75% OF ITS TOTAL REVENUE DURING THE YEAR UNDER CONSIDERATION, WE FIND NO INFIRMITY IN THE VIEW THEREIN TAKEN AND ACCORDINGLY UPHOLD THE SAME. AS REGARDS THE CLAIM OF THE ASSESSEE THAT THE TPO/DRP HAD ERRED IN ADOPTING THE ANNUAL REPORT OF CONFIDENT SALES INDIA PVT. LTD. P A G E | 34 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) FOR FINANCIAL YEAR 2014 - 15 , FOR DETERMINING THE PLI OF THE SAID COMPARABLE FOR THE YEAR UNDER C ONSIDERATION I.E FINANCIAL YEAR 2013 - 14, WE ARE UNABLE TO ACCEPT THE CLAIM OF THE ASSESSEE THAT THE LOWER AUTHORITIES HAD ERRED IN ADOPTING THE SAID APPROACH. AS OBSERVED BY THE LOWER AUTHORITIES, AS SUFFICIENT DATA FOR FINANCIAL YEAR 2013 - 14 WAS AVAILABLE IN THE ANNUAL REPORT OF THE ASSESSEE FOR FINANCIAL YEAR 2014 - 15, THEREFORE, IN OUR CONSIDERED VIEW THE SAID COMPANY ON ACCOUNT OF OF AVAILABILITY OF THE RELEVANT DATA WAS RIGHTLY SELECTED AS A COMPARABLE BY THE TPO/DRP. WE THUS IN TERMS OF OUR AFORESAID OBSERVATIONS UPHOLD THE VIEW TAKEN BY THE DRP AS REGARDS THE INCLUSION /EXCLUSION OF THE AFOREMENTIONED TWO COMPANIES FROM THE FINAL LIST OF COMPARABLES OF THE PURPOSE OF COMPUTING THE ALP OF THE INTERNATIONAL TRANSACTIONS OF IMPORT OF GOODS BY THE ASSESSE E DURING THE YEAR UNDER CONSIDERATION . THE GROUNDS OF APPEAL NOS. 36 & 37 ARE DISPOSED OFF IN TERMS OF OUR AFORESAID OBSERVATIONS. 25. WE SHALL NOW ADVERT TO THE CLAIM OF THE ASSESSEE THAT THE TPO/DRP HAD ERRED IN NOT GRANTING WORKING CAPITAL ADJUSTMENT W HILE COMPUTING THE OPERATING MARGIN OF THE COMPARABLE COMPANIES FOR THE PURPOSE OF DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTIONS OF IMPORT OF GOODS BY THE ASSESSEE FROM ITS AES DURING THE YEAR UNDER CONSIDERATION . IT IS THE CLAIM OF THE ASSESSEE THAT WORKING CAPITAL ADJUSTMENTS IS AN ADJUSTMENT FOR THE OPPORTUNITY COST OF CAPITAL FOR INVESTMENT S MADE IN WORKING CAPITAL. I T IS STATED BY THE ASSESSEE THAT INVESTMENT IN WORKING CAPITAL (I.E INVENTORIES, GAINS RECEIVA B LE/DEBTORS AND ACCOUNTS PAYABLE ) WOULD REQUIRE CAPITAL AND OPERATING ASSETS, AND AN UNCONTROLLED ENTITY IS EXPECTED TO EARN A MARKET RATE OF RETURN ON THAT REQUIRED CAPITAL INDEPENDENT OF THE SERVICES THAT IT PROVIDES. IT IS THE CLAIM OF THE ASSESSEE THAT WORKING CAPITAL YIELDS A RETURN RESULTING FROM VIZ. (I). HIGHER SALES PRICE; OR (II). LOWER COST OF GOODS SOLD WHICH WOULD HAVE POSITIVE IMPACT ON THE OPERATIONAL RESULT. IT IS SUBMITTED P A G E | 35 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) BY THE ASSESSEE THAT HIGHER SALES PRICE IS A RESULT OF LONGER CREDIT PERIOD GRANTED TO THE CUSTOMERS. ALSO, IN RETURN OF A LONGER CREDIT PERIOD GRANTED A FIRM WOULD BE WILLING TO PAY A HIGHER PURCHASE PRICE WHICH WOULD ADD TO THE COSTS OF THE GOODS SOLD. IN THE BACKDROP OF ITS AFORESAID SUBMISSIONS, IT IS THE CLAIM OF THE ASSESSEE THAT HIGH LEVEL OF ACCOUNTS RECEIVABLE AND INVENTORY TEND TO OVERSTATE THE OPERATING RESULTS, WHILE FOR THE HIGH 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 A GAINST ITS MARGIN . WE HAVE GIVEN A THOUGHTFUL CONSIDERATION TO THE FACTS OF THE CASE AND AFTER NECESSARY DELIBERATIONS ARE PERSUADE D TO ACCEPT THE AFORESAID CLAIM OF THE ASSESSEE. AS PER RULE 10B(1)(E)(III), IN A CASE WHERE THE INTERNATIONAL TRANSACTIONS A RE 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 UNC ONTROLLED TRANSACTION, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE NET PROFIT MARGIN IN THE OPEN MARKET. A S IS DISCERNIBLE FROM A PERUSAL OF THE FORM 3CEB AND THE RECORDS AVAILABLE BEFORE US, THE ASSESSEE HAD WORKED OUT THE ADJUSTMENT RESULTING FROM THE DIFFERENT LEVELS OF WORKING CAPITAL I.E ACCOUNTS RECEIVABLE, INVENTORY AND ACCOUNTS PAYABLE BETWEEN THE ASSESSEE I.E THE TESTED PART Y AND THE COMPARABLE COMPANIES. ALSO, THE ASSESSEE HAD IN THE COURSE OF THE PROCEEDINGS BEFORE THE LOWER AUTHORITIES SUBMITTED THAT AS WORKING CAPITAL YIELDS A RETURN RESULTING FROM VIZ. (I). HIGHER SALES PRICE; OR (II). P A G E | 36 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) LOWER COST OF GOODS SOLD, THEREFORE, THE SAME WOULD HAVE AN IMPACT ON THE OPERATIONAL RESULT. ACCORDINGLY, WE ARE UNABLE TO ACCEPT THE OBSERVATION OF THE TPO/DRP THAT THE ASSESSEE HAD FAILED TO MAKE OUT A CASE AS TO HOW THE WORKING CAPITAL ADJUSTMENT WOULD AFFECT THE NET PROFIT MARGIN IN THE OPEN MAR KET. APART THERE FROM, THE ASSESSEE HAS ALSO ASSAILED THE CORRECTNESS OF THE OBSERVATION OF THE DRP THAT THER WAS A CESSATION OF THE AGENCY BUSINESS OF THE ASSESSEE IN DECEMBER, 2012. WE THUS ARE OF THE CONSIDERED VIEW THAT THE MATTER IN ALL FAIRNESS REQUI RES TO BE REVISITED BY THE DRP FOR AFRESH ADJUDICATION ON THE ISSUE PERTAINING TO WORKING CAPITAL ADJUS TMENT IN THE HANDS OF THE ASSES SEE . NEEDLESS TO SAY, THE TPO IN THE COURSE OF THE SET ASIDE PROCEEDINGS SHALL AFFORD A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSE WHO SHALL REMAIN AT A LIBERTY TO SUBSTANTIATE ITS CLAIM. THE GROUND OF APPEAL NO. 38 IS ALLOWED FOR STATISTICAL PURPOSES. 2 7 . WE SHALL NOW TAKE UP THE CLAIM OF THE ASSESSEE THAT THE DRP HAS ERRE D IN NOT ALLOWING RISK ADJUSTMENT WHILE COMPUTING THE OPERATING MARGIN OF THE COMPARABLE COMPANIES FOR THE PURPOSE OF DETERMINATION OF THE ALP OF ITS INTERNATIONAL TRANSACTION S OF IMPORT OF GOODS . AS THE SAID ISSUE DOES NOT EMANATE FROM THE IMPUGNED ORDER OF THE DRP, THEREFORE, WE REFRAIN FROM ADVERTING TO AND ADJUDICATING THE SAME. THE GROUND OF APPEAL NO. 39 IS DISMISSED. 2 8 . WE SHALL NOW TAKE UP THE GRIEVANCE OF THE ASSESSEE THAT THE DRP HAS ERRED IN CONSIDERING THE REIMBURSEMENT OF EXPENSES OF RS. 4,05,62,976/ - AS PART OF OPERATING COST, DESPITE THE FACT THAT THE VALUE OF THE SAID EXPENSES HAD BEEN TAKEN AS NIL BY THE TPO. ADMITTEDLY, IN CASE THE ALP OF THE EXPENSES WHICH WERE CLAIMED BY THE ASSESSEE TO HAVE BEEN REIMBURSED ON COST TO COST BASIS TO ITS AES WAS TAKEN BY THE TPO AT NIL , WITH A CONSEQUENTIAL SEPARATE ADDITION ON THE SAID COUNT IN THE HANDS OF THE ASSESSEE, THEN, THERE WOULD HAD BEEN NO P A G E | 37 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) OCCASION FOR CONSIDERING THE SAID EXPENSES AS A PART OF THE OPERATING COST WHILE DETERMINING THE MARGINS OF THE ASSESSEE. W E HAVE GIVEN A THOUG HTFUL CONSIDERATION TO THE ISSUE BEFORE US. AS CAN BE GATHERED FROM OUR OBSERVATIONS RECORDED AT PARA 17 HEREINABOVE, THE ADJUSTMENT MADE BY THE TPO AS REGARDS THE REIMBURSEMENT OF EXPENSES BY THE ASSESSEE TO ITS AES HAD BEEN RESTORED BY US TO HIS FILE FOR FRESH ADJUDICATION . ACCORDINGLY, THE TPO IS DIRECTED TO CONSIDER ONLY THOSE EXPENSES AS A PART OF THE OPERATING COST, WHICH ARE ACCEPTED BY HIM IN THE SET ASIDE PROCEEDINGS AS REIMBURSEMENT OF EXPENSES ON COST TO COST BASIS BY THE ASSESSEE TO ITS AES, WHICH WERE INCURRED BY THE AES FOR AND ON BEHALF OF THE ASSSESSEE . ACCORDINGLY, THE AFORESAID ISSUE IS SET ASIDE TO THE FILE OF THE TPO FOR FRESH ADJUDICATION IN TERMS OF OUR A FORESAID OBSERVATIONS. THE GROUND OF APPEAL NO. 4 0 IS ALLOWED FOR STATISTICAL PURPOSES IN TERMS OF OUR AFORESAID OBSERVATIONS. 2 9 . WE SHALL NOW ADVERT TO THE CLAIM OF THE ASSESSEE THAT THE TPO/DRP HAD ERRED IN NOT ALLOWING THE BENEF IT OF VARIATION OF +/ - 3% N DETERMINING OF THE ALP. AS PER THE SECOND PROVISO TO SEC 92C(2) OF THE ACT, IF THE VARIATION BETWEEN THE ALP SO DETERMINED AND THE PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN DOES NOT EXCEED +/ - 3% OF THE PRICE OF SUCH INTERNATIONAL TRANSACTION, THEN THE PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN SHALL BE DEEMED TO BE ARMS LENGTH PRICE. ACCORDINGLY, WE DIRECT THE TPO THAT IF THE ALP OF THE TRANSACTIONS OF IMPORT OF GOODS BY THE ASSESSEE FROM ITS AES AS DETERMINED BY HIM IN THE COURSE OF THE SET ASIDE PROCEEDINGS DOES NOT EXCEED +/ - 3% OF THE PRICE OF SUCH INTERNATIONAL TRANSACTIONS, THEN THE SAME SHALL BE DEEMED TO BE AT ARMS LENGTH. THE GROUND OF APPEAL NO. 41 IS ALLOWED FOR STATISTICAL PURPOSES IN TERMS OF OUR AFORESAID OBSERVATIONS. P A G E | 38 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) 30 . WE SHALL NOW ADVERT TO THE CLAI M OF THE ASSESSEE THAT THE LOWER AUTHORITIES HAD ERRED IN DISALLOWING DEPRECIATION ON BUILDING OF RS.75,886/ - .THE ASSESSEE WHICH WAS EARLIER ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING HAD DISCONTINUED WITH ITS MANUFACTURING PROCESSES W.E.F 25.01. 2002. THE CLAIM OF DEPRECIATION RAISED BY THE ASSESSEE ON BUILDING WAS DECLINED BY THE A.O ON THE GROUND THAT THE SAID ASSET WAS NOT UTILISED DURING THE YEAR. THE A.O WHILE DISALLOWING THE ASSESSES CLAIM FOR DEPRECIATION HAD RELIED ON THE ORDERS PASSED BY HIS PREDECESSOR IN THE EARLIER YEARS I.E A.Y. 2006 - 07 TO A.Y. 2012 - 13 AND THE DIRECTIONS OF THE DRP FOR A.Y. 2006 - 07 WHEREIN THE AFORESAID DISALLOWANCE WAS CONFIRMED. WE FIND THAT THE AFORESAID ACTION OF THE A.O FOR THE YEAR UNDER CONSIDERATION HAD BEEN UPHELD BY THE DRP . IT IS THE CLAIM OF THE LD. A.R THAT AN ASSET FORMING PART OF THE B LOCK OF ASSETS LOOSES ITS INDIVIDUAL IDENTITY AND BECOMES AN INSEPARABLE PART OF THE BLOCK OF ASSETS FOR THE PURPOSE OF ITS ELIGIBILITY FOR DEPRECIATION ON THE SAME. ACCORDINGLY, IT IS THE CLAIM OF THE LD. A.R THAT ONCE THE ASSET HAD ENTERED INTO THE BLOCK OF ASSET AND THE SAME HAD BEEN ACCEPTED BY THE A.O, THEN IN THE SUBSEQUENT YEARS THOUGH TH ESAID ASSET FORMING PART OF THE BLOCK MAY NOT BE USED FOR THE PURPO SE 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. ON THE BASIS OF HIS AFORESAID CONTENTION , IT IS AVERRED BY THE LD. A.R. THAT THE A.O HAD ERRED IN DISALLOWING ITS CLAIM FOR DEPRECIATION ON BUILDING. 31 . WE HAVE GIVEN A THOUGHTFUL CONSIDERATION TO THE AFORESAID CLAIM OF THE ASSESSEE AND FIND SUBSTANTIAL FORCE IN THE SAME. ADMITTEDLY, THE CONCEP T OF BLOCK OF ASSETS WAS MADE AVAILABLE ON THE STATUTE W.E.F 01.04.1988. AS SUCH, ONCE THE ASSET ENTERED INTO THE BLOCK OF ASSET AND THE SAME WAS ACCEPTED BY THE A.O, THEREAFTER , IN THE SUBSEQUENT YEARS THE CLAIM OF CONSEQUENTIAL DEPRECIATION ON THE SA ID BLOCK OF P A G E | 39 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) ASSET COULD NOT BE DISTURBED , DESPITE THE FACT THAT SOME OF THE ASSETS FORM ING PART OF SUCH BLOCK OF ASSET WERE NO MORE USED FOR THE PURPOSE OF BUSINESS. OUR AFORESAID VIEW IS FORTIFIED BY THE JUDGMENTS OF THE HONBLE HIGH COURT OF BOMBAY I N THE CASE VIZ. (I). CIT VS. SONIC BIOCHEM EXTRACTIONS PVT. LTD. ( 2015) 94 CCH 99 (BOM) ; AND (II) CIT VS. G.R. SH IPPING LTD. [ITA NO. 598 OF 2009; DATED 28.07.2009] (BOM) . IN THE AFORESAID DECISIONS, IT WAS OBSERVED BY THE HONBLE HIGH COURT THAT DEPRECIAT ION WOULD BE ALLOWABLE EVEN IN CASE OF SALE/DISTRIBUTION OF THE ASSET , AS LONG AS THE BLOCK OF ASSET REMAINS IN EXISTENCE. IN SUM AND SUBSTANCE, IT WAS OBSERVED BY THE HONBLE HIGH COURT THAT THE TEST OF USER HAS TO BE APPLIED ON THE BLOCK OF ASSETS AS A WHOLE AND NOT ON THE INDIVIDUAL ASSETS. IN FACT, THE AFORESAID VIEW WAS TAKEN BY THE HONBLE JURISDICTIONAL HIGH COURT BY FOLLOWING ITS EARLIER VIEW TAKEN IN VIZ. (I). WHIT E ANDERSON VS. CIT (1971) 79 ITR 613(BOM) ; AND (II). CIT VS. G.N AGRAWAL ( 1996) 217 ITR 250(BOM) . ACCORDINGLY, 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 TAXA TION 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 CONSIST ENTLY IN THE CASE OF THE ASSESSEE FOR THE PRECEDING 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); AND (VII) A.Y. 2013 , HAD DIRECTED THE A.O TO ALLOW DEPRECIATION ON PLANT AND MACHINERY AND BUILDING AS CLAIMED BY THE ASSESSEE. WE THUS RESPECTFULLY FOLLOWING THE VIEW TAKEN BY THE HONBLE HIGH C OURT OF JURISDICTION IN RESPECT OF THE ISSUE UNDER CONSIDERATION, P A G E | 40 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) AND ALSO THE ORDERS OF THE TRIBUNAL IN THE ASSESSES OWN CASE FOR THE AFOREMENTIONED YEARS DELETE THE DISALLOWANCE OF DEPRECIATION ON BUILDING OF RS.75,886/ - . THE GROUND OF APPEAL NO. 42 IS ALLOW ED. 32 . WE SHALL NOW ADVERT TO THE CONTENTION OF THE LD. A.R THAT THE A.O HAD ERRED IN DISALLOWING AN AMOUNT OF RS.36,34,64,858/ - ON ACCOUNT OF PAYMENT OF CONVENTION EXPENSES WITHOUT APPRECIATING THE FACT THAT THE CODE OF CONDUCT LAID DOWN BY THE I NDIAN MEDICAL COUNCIL (PROFESSIONAL CONDUCT, ET IQUETTE & ETHICS) REGULATIONS, 2002 (MCI REGULATIONS) ISSUED W.E.F 10.12.2009 APPLIED ONLY TO MEDICAL PRACTITIONERS AND WAS NOT APPLICABLE TO THE ASSESSEE COMPANY WHICH WAS ENGAGED IN THE BUSINESS OF IMPORTI NG/TRADING OF MEDICAL EQUIPMENT. IN SUM AND SUBSTANCE, IT IS THE CLAIM OF THE ASSESSEE THAT THE LOWER AUTHORITIES HAD ERRED IN NOT APPRECIATING THE FACT THAT AS THE MCI REGULATIONS WERE NOT APPLICABLE TO THE ASSESSEE, THEREFORE, THE QUESTION OF MAKING ANY DISALLOWANCE UNDER THE CBDT CIRCULAR 05/2012, DATED 01.08.2012 DID NOT ARISE. 33 . BRIEFLY STATED, THE FACTS PERTAINING TO THE ISSUE UNDER CONSIDERATION LIES IN A NARROW COMPASS. THE ASSESSEE COMPANY DEALS IN LIFE SAVING MEDICAL DEVICES .IN ORDER TO BRING AWARENESS AND CREATE A MARKET FOR THE SAID PRODUCTS IN THE HIGHLY COMPETITIVE MARKET SCENARIO, CONTINUOUS EDUCATION AND AWARENESS PROGRAMMES WERE REQUIRED TO BE CONDUCTED ACROSS THE COUNTRY. AS IS DISCERNIBLE FROM THE ORDERS OF THE LOWER AUTHORITIES, THE E XPENSES OF RS.36,34,64,058/ - WHICH WERE INCURRED BY THE ASSESSEE IN THE NORMAL COURSE OF ITS BUSINESS FOR FACILITATING A MARKET FOR ITS PRODUCT S WERE DISALLOWED BY THE A.O. THE A.O WAS OF THE VIEW THAT AS THE AFORESAID EXPENSES INCURRED BY THE ASSESSEE WER E FOUND TO BE IN VIOLATION OF CLAUSE 6.8 OF THE MCI REGULATIONS AND CBDT CIRCULAR NO. 05/2012, DATED 01.08.2012, THEREFORE, THE SAME COULD NOT BE ALLOWED AS A DEDUCTION P A G E | 41 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) UNDER SEC. 37 OF THE ACT FOR THE PURPOSE OF WORKING OUT THE INCOME OF THE ASSESSEE. THE DRP DID NOT FIND ANY INFIRM ITY IN THE VIEW TAKEN BY THE A.O AND UPHELD THE DISALLOWANCE OF THE CONVENTION EXPENSES OF RS.36,34,64,058/ - THAT WAS MADE BY HIM UNDER SEC. 37 OF THE ACT. IT IS THE CLAIM OF THE LD. A.R, THAT THE ISSUE AS REGARDS THE ALLOWABILI TY OF THE CONVENTION EXPENSES HAD BEEN DECIDED IN FAVOUR OF THE ASSESSEE IN ITS OWN CASE FOR A.Y. 2010 - 11 IN ITA NO. 1600/MUM/2015, DATED 17.01.2018. IT IS AVERRED BY THE LD. A.R THAT THE TRIBUNAL AFTER RELYING ON THE DECISION OF THE HONBLE HIGH COURT OF DELHI IN THE CASE OF MAX HOSPITAL., PITAMPURA VS. MEDICAL COUNCIL OF INDIA [CWP NO. 1334/2013, DATED 10.01.2014] AND THE ORDER OF THE ITAT, MUMBAI , IN THE CASE OF PHL PHARMA (163 ITD 10) (MUM) , HAD CONCLUDED VIZ. (I ) THAT, THE MCI GUIDELINES ARE APPLICABLE ONLY TO THE PROFESSIONALS I.E THE DOCTORS AND DO NOT GOVERN THE OTHER TAX ENTITIES OR INDIVIDUALS OTHER THAN THE DOCTORS; AND (II) THAT, AS MCI ONLY REGULATES THE PROFESSIONAL CONDUCT OF ITS MEMBERS I.E DOCTORS, TH EREFORE, ANY GUIDELINES ISSUED BY IT WOULD HAVE NO BEARING AS REGARDS THE ALLOWABILITY OR OTHERWISE OF AN EXPENDITURE CLAIMED BY THE ASSESSEE UNDER THE I.T ACT. IT WAS FURTHER SUBMITTED BY THE LD. A.R THAT THE AFORESAID VIEW WAS AGAIN REITERATED BY THE TRI BUNAL IN THE ASSESSES OWN CASE FOR A.Y 2011 - 12 (ITA NO. 1246/MUM/2016), DATED 02.05.2018; A.Y 2012 - 13 (IT (TP) A NO. 216/MUM/2017, DATED 27.05.2019; AND A.Y 2013 - 14 (ITA NO. 601/MUM/2018). 34 . WE HAVE GIVEN A THOUGHTFUL CONSIDERATION TO THE ISSUE BEFORE U S AND FIND SUBSTANTIAL FORCE IN THE CONTENTIONS ADVANCED BY THE LD. A.R AS REGARDS THE ALLOWABILITY THE CONVENTION EXPENSES OF RS.36,34,64,058/ - THAT WERE INCURRED BY THE ASSESSEE IN THE NORMAL COURSE OF ITS BUSINESS FOR CREATING A MARKET FOR ITS PRODUCTS ACROSS THE COUNTRY. WE HAVE DELIBERATED AT LENGTH ON THE ISSUE UNDER CONSIDERATION AND ARE IN AGREEMENT WITH THE CLAIM OF THE LD. A.R THAT P A G E | 42 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) THE ISSUE AS REGARDS THE ALLOWABILITY OF THE CONVENTION EXPENSES IS SQUARELY COVERED BY THE ORDERS OF THE TRIBUNAL IN THE ASSESSES OWN CASE FOR THE AFOREMENTIONED PRECEDING YEARS. APART THERE FROM, WE FIND THAT THE ISSUE THAT THE CASE OF THE ASSESSEE BEFORE US WOULD NOT BE HIT BY THE EXPLANATION 1 TO SEC. 37 OF THE I.T. ACT, CAN ALSO SAFELY BE GATHERED FROM THE ORDER OF A COORDINATE BENCH OF THE TRIBUNAL I.E ITAT A BENCH, MUMBAI IN THE CASE OF ARISTO PHARMACEUTICALS PVT. L TD. VS. ACIT (ITA NO. 6680/MUM/2012, DATED 26.07.2018) . THE TRIBUNAL AFTER EXHAUSTIVE DELIBERATIONS IN THE AFORESAID CASE, HAD OBSERVED, THAT A PE RUSAL OF THE PROVISIONS OF THE INDIAN MEDICAL COUNCIL ACT, 1956 REVEALS THAT THE SCOPE AND AMBIT OF THE STATUTORY PROVISIONS RELATING TO PROFESSIONAL MISCONDUCT OF REGISTERED MEDICAL PRACTITIONERS UNDER THE INDIAN MEDICAL COUNCIL ACT, 1956, IS RESTRICTED O NLY TO THE PERSONS REGISTERED AS MEDICAL PRACTITIONERS WITH THE STATE MEDICAL COUNCIL AND WHOSE NAME IS ENTERED IN THE INDIAN MEDICAL REGISTER MAINTAINED UNDER SEC. 21 OF THE SAID ACT. FURTHER, IT WAS OBSERVED THAT THE SCHEME OF THE INDIAN MEDICAL COUNCIL ACT, 1956 NEITHER DEALS WITH NOR PROVIDES FOR ANY CONDUCT OF ANY ASSOCIATION/SOCIETY AND DEALS ONLY WITH THE CONDUCT OF INDIVIDUAL S REGISTERED MEDICAL PRACTITIONERS AND NOT THE PHARMACEUTICAL COMPANIES OR ALLIED HEALTH SECTOR INDUSTRIES. APART THERE FROM, THE TRIBUNAL IN ITS SAID ORDER HAD ALSO DRAWN SUPPORT FROM THE ORDER OF THE HONBLE HIGH COURT OF DELHI IN THE CASE OF MAX HOSPITAL., PITAMPURA VS. MEDICAL COUNCIL OF INDIA [CWP NO. 1334/2013, DATED 10.01.2014] . IN THE AFORESAID CASE THE MEDICAL COUNCIL OF INDIA HAD FILED AN AFFIDAVIT BEFORE THE HIGH COURT, WHEREIN IT WAS DEPOSED BY THE COUNCIL THAT ITS JURISDICTION WAS LIMITED ONLY TO TAKE ACTION AGAINST THE REGISTERED MEDICAL PROFESSIONALS UNDER THE INDIAN MEDICAL COUNCIL (PROFESSIONAL CONDUCT, ETIQUETT E AND ETHICS) REGULATIONS, 2002, AND IT HAS NO JURISDICTION TO PASS AN ORDER AFFECTING THE P A G E | 43 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) RIGHTS/INTEREST OF THE PETITIONER HOSPITAL. IN THE BACKDROP OF ITS EXHAUSTIVE DELIBERATIONS, THE TRIBUNAL HAD CONCLUDED THAT EVEN IF THE ASSESSEE HAD INCURRED EXPEND ITURE ON DISTRIBUTION OF FREEBIES TO DOCTORS AND MEDICAL PRACTITIONERS, THE SAME THOUGH MAY NOT BE IN CONFORMITY WITH THE INDIAN MEDICAL COUNCIL (PROFESSIONAL CONDUCT, ETIQUETTE AND ETHICS) REGULATIONS, 2002, HOWEVER, AS THE SAME ONLY REGULATES THE CODE OF CONDUCT OF THE MEDICAL PRACTITIONERS/DOCTORS, THEREFORE, IN THE ABSENCE OF ANY PROHIBITION ON THE PHARMACEUTICAL COMPANIES IN INCURRING OF SUCH SALES PROMOTION EXPENSES, IT CANNOT BE HELD TO HAVE INCURRED AN EXPENDITURE FOR A PURPOSE WHICH IS AN OFFENCE OR IS PROHIBITED BY LAW. THE TRIBUNAL WHILE CONCLUDING AS HEREINABOVE, HAD OBSERVED AS UNDER: 20. WE HAVE HEARD THE AUTHORISED REPRESENTATIVES FOR BOTH THE PARTIES, PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT OUR INDULGENCE IN THE CROSS APPEALS FILED BY THE ASSESSEE AND THE REVENUE HAS BEEN SOUGHT FOR ADJUDICATING THE ALLOWABILITY OF THE SALES PROMOTION EXPENSES INCURRED BY THE ASSESSEE ON THE DISTRIBUTION OF ARTICLES TO THE STOCKISTS, DISTRIBUTORS, DEALERS, CUSTOMERS AND DOCTORS, IN THE BACKDROP OF THE CBDT CIRCULAR NO. 5/2012, DATED 01.08.2012 AND TH E MCI REGULATIONS. WE FIND THAT IT IS THE CASE OF THE REVENUE THAT AS PER THE CBDT CIRCULAR NO. 5/2012, DATED 01.08.2012 ANY EXPENSE INCURRED BY A PHARMACEUTICAL OR ALLIED HEALTH SECTOR INDUSTRY IN PROVIDING ANY FREEBIES TO MEDICAL PRACTITIONERS OR THEIR PROFESSIONAL ASSOCIATIONS IN VIOLATION OF THE REGULATION ISSUED BY MEDICAL COUNCIL OF INDIA WHICH IS A REGULATORY BODY CONSTITUTED UNDER THE MEDICAL COUNCIL ACT, 1956, WOULD BE LIABLE TO BE DISALLOWED IN THE HANDS OF SUCH PHARMACEUTICAL OR ALLIED HEALTH S ECTOR INDUSTRY OR ANY OTHER ASSESSEE WHICH HAD PROVIDED SUCH FREEBIES AND CLAIMED THE SAME AS A DEDUCTIBLE EXPENSE AGAINST ITS INCOME IN THE ACCOUNTS. 21. WE HAVE DELIBERATED AT LENGTH ON THE ISSUE UNDER CONSIDERATION AND AFTER PERUSING THE REGULATIONS ISSUED BY THE MEDICAL COUNCIL OF INDIA, FIND THAT THE SAME LAYS DOWN THE CODE OF CONDUCT IN RESPECT OF THE DOCTORS AND OTHER MEDICAL PROFESSIONALS REGISTERED WITH IT, AND ARE NOT APPLICABLE TO THE PHARMACEUTICALS OR ALLIED HEALTH SECTOR INDUSTRIES. RATHER, A PERUSAL OF THE PROVISIONS OF THE INDIAN MEDICAL COUNCIL ACT, 1956, REVEALS THAT THE SCOPE AND AMBIT OF STATUTORY PROVISIONS RELATING TO PROFESSIONAL CONDUC T OF REGISTERED MEDICAL PRACTITIONERS UNDER THE INDIAN MEDICAL COUNCIL ACT, 1956 IS RESTRICTED ONLY TO THE PERSONS REGISTERED AS MEDICAL PRACTITIONERS WITH THE STATE MEDICAL COUNCIL AND WHOSE NAME ARE ENTERED IN THE INDIAN MEDICAL REGISTER MAINTAINED UNDER SEC. 21 OF THE SAID ACT. WE ARE OF THE CONSIDERED VIEW THAT THE SCHEME OF THE INDIAN MEDICAL COUNCIL ACT, 1956 NEITHER DEALS WITH NOR PROVIDES FOR ANY CONDUCT OF ANY ASSOCIATION/SOCIETY AND DEALS ONLY WITH THE CONDUCT OF INDIVIDUAL REGISTERED MEDICAL PRAC TITIONERS. IN THE BACKDROP OF THE AFORESAID FACTS, IT EMERGES THAT THE APPLICABILITY OF THE MCI REGULATIONS WOULD ONLY COVER INDIVIDUAL MEDICAL PRACTITIONERS AND NOT THE PHARMACEUTICAL COMPANIES OR ALLIED HEALTH SECTOR INDUSTRIES. INTERESTINGLY, THE SCOPE OF THE APPLICABILITY OF THE MCI REGULATIONS WAS LOOKED INTO BY THE HONBLE HIGH COURT OF DELHI IN THE CASE OF MAX HOSPITAL, PITAMPURA VS. MEDICAL COUNCIL OF INDIA (CWP NO. 1334/2013, DATED P A G E | 44 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) 10.01.2014). IN THE AFOREMENTIONED CASE THE MCI HAD FILED AN AFFID AVIT BEFORE THE HIGH COURT, WHEREIN IT WAS DEPOSED BY THE COUNCIL THAT ITS JURISDICTION IS LIMITED ONLY TO TAKE ACTION AGAINST THE REGISTERED MEDICAL PROFESSIONALS UNDER THE INDIAN MEDICAL COUNCIL (PROFESSIONAL CONDUCT, ETIQUETTE AND ETHICS) REGULATIONS, 2002, AND IT HAS NO JURISDICTION TO PASS ANY ORDER AFFECTING THE RIGHTS/INTEREST OF THE PETITIONER HOSPITAL. WE ARE OF THE CONSIDERED VIEW THAT ON THE BASIS OF THE AFORESAID DEPOSITION OF MCI THAT ITS JURISDICTION STANDS RESTRICTED TO THE REGISTERED MEDICA L PROFESSIONALS, IT CAN SAFELY BE CONCLUDED THAT THE MCI REGULATIONS WOULD IN NO WAY IMPINGE ON THE FUNCTIONING OF THE ASSESSEE COMPANY WHICH IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND SALE OF PHARMACEUTICAL AND ALLIED PRODUCTS. WE THUS, IN THE BACKDR OP OF OUR AFORESAID DELIBERATIONS ARE OF THE CONSIDERED VIEW THAT THE CODE OF CONDUCT ENSHRINED IN THE MCI REGULATIONS ARE SOLELY MEANT TO BE FOLLOWED AND ADHERED BY MEDICAL PRACTITIONERS/DOCTORS, AND SUCH A REGULATION OR CODE OF CONDUCT WOULD NOT COVER TH E PHARMACEUTICAL COMPANY OR HEALTHCARE SECTOR IN ANY MANNER. WE ARE FURTHER OF THE VIEW THAT IN THE BACKDROP OF OUR AFORESAID OBSERVATIONS, AS THE MEDICAL COUNCIL OF INDIA DOES NOT HAVE ANY JURISDICTION UNDER LAW TO PASS ANY ORDER OR REGULATION AGAINST ANY HOSPITAL, PHARMACEUTICAL COMPANY OR ANY HEALTHCARE SECTOR, THEN ANY SUCH REGULATION ISSUED BY IT CANNOT HAVE ANY PROHIBITORY EFFECT ON THE MANNER IN WHICH THE PHARMACEUTICAL COMPANY LIKE THE ASSESSEE CONDUCTS ITS BUSINESS. ON THE BASIS OF OUR AFORESAID OB SERVATIONS, WE ARE UNABLE TO COMPREHEND THAT NOW WHEN THE MCI HAS NO JURISDICTION UPON THE PHARMACEUTICAL COMPANIES, THEN WHERE COULD THERE BE AN OCCASION FOR CONCLUDING THAT THE ASSESSEE COMPANY HAD VIOLATED ANY REGULATION ISSUED BY MCI. WE THUS, IN TERMS OF OUR AFORESAID OBSERVATIONS ARE OF THE CONSIDERED VIEW THAT EVEN IF THE ASSESSEE HAD INCURRED EXPENDITURE ON DISTRIBUTION OF FREEBIES TO DOCTORS AND MEDICAL PRACTITIONERS, THE SAME THOUGH MAY NOT BE IN CONFORMITY WITH THE INDIAN MEDICAL COUNCIL (PROFE SSIONAL CONDUCT, ETIQUETTE AND ETHICS) REGULATIONS, 2002 (AS AMENDED ON 10.12.2009), HOWEVER, AS THE SAME ONLY REGULATES THE CODE OF CONDUCT OF THE MEDICAL PRACTITIONERS/DOCTORS, THEREFORE, IN THE ABSENCE OF ANY PROHIBITION ON THE PHARMACEUTICAL COMPANIES IN INCURRING OF SUCH SALES PROMOTION EXPENSES, THE LATTER CANNOT BE HELD TO HAVE INCURRED AN EXPENDITURE FOR A PURPOSE WHICH IS AN OFFENCE OR IS PROHIBITED BY LAW. IN THIS REGARD WE ARE REMINDED OF THE MAXIM EXPRESSIO UNIUS EST EXCLUSIO ALTERIUS , WHICH P ROVIDES THAT IF A PARTICULAR EXPRESSION IN THE STATUTE IS EXPRESSLY STATED FOR A PARTICULAR CLASS OF ASSESSEE, THEN BY IMPLICATION WHAT HAS NOT BEEN STATED OR EXPRESSED IN THE STATUTE HAS TO BE EXCLUDED FOR OTHER CLASS OF ASSESSES. THUS, NOW WHEN THE MCI R EGULATIONS ARE APPLICABLE TO MEDICAL PRACTITIONERS REGISTERED WITH THE MCI, THEN THE SAME CANNOT BE MADE APPLICABLE TO PHARMACEUTICAL COMPANIES OR OTHER ALLIED HEALTHCARE COMPANIES. 22. WE SHALL NOW ADVERT TO THE CBDT CIRCULAR NO. 5/2012, DATED 01.08.2012 . WE FIND THAT THE AFORESAID CBDT CIRCULAR READS AS UNDER: - INADMISSIBILITY OF EXPENSES INCURRED IN PROVIDING FREEBEES TO MEDICAL PRACTITIONER BY PHARMACEUTICAL AND ALLIED HEALTH SECTOR INDUSTRY CIRCULAR NO. 5/2012 [F.NO. 225/142/2012 - ITA.II], DATED 1 - 8 - 2012 IT HAS BEEN BROUGHT TO THE NOTICE OF THE BOARD THAT SOME PHARMACEUTICAL AND ALLIED HEALTH SECTO R INDUSTRIES ARE PROVIDING FREEBI ES (FREEBIES) TO MEDICAL PRACTITIONER AND THEIR PROFESSIONAL ASSOCIATIONS IN VIOLATION OF THE REGULATIONS ISSUED BY MEDIC AL 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 INDUSTRI ES. P A G E | 45 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) 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 EXPENSES, 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 ME NTIONED OR SIMILAR FREEBEES IN VIOLATION OF THE PROVISIONS OF 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 DEDUCTIBLE 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 OFFICER S 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. WE MAY HEREIN OBSERVE THAT A PERUSAL OF THE AFO RESAID CBDT CIRCULAR REVEALS THAT THE FREEBIES PROVIDED BY THE PHARMACEUTICAL COMPANIES OR ALLIED HEALTH SECTOR INDUSTRIES TO MEDICAL PRACTITIONERS OR THEIR PROFESSIONAL ASSOCIATIONS IN VIOLATION OF THE PROVISIONS OF INDIAN MEDICAL COUNCIL (PROFESSIONAL CONDUCT, ETIQUETTE AND ETHICS) REGULATIONS, 2002 SHALL BE INADMISSIBLE UNDER SEC. 37(1) OF THE INCOME TAX ACT, 1961, AS THE SAME WOULD BE AN EXPENSE PROHIBITED BY THE LAW. WE ARE OF THE CONSIDERED VIEW THAT AS OBSERVED BY US HEREINABOVE, THE CODE OF CONDUC T ENSHRINED IN THE NOTIFICATIONS ISSUED BY MCI THOUGH IS TO BE STRICTLY FOLLOWED AND ADHERED BY MEDICAL PRACTITIONERS/DOCTORS REGISTERED WITH THE MCI, HOWEVER THE SAME CANNOT IMPINGE ON THE CONDUCT OF THE PHARMACEUTICAL COMPANIES OR OTHER HEALTHCARE SECTOR IN ANY MANNER. WE FIND THAT NOTHING HAS BROUGHT ON RECORD WHICH COULD PERSUADE US TO CONCLUDE THAT THE REGULATIONS OR NOTIFICATIONS ISSUED BY MCI WOULD AS PER THE LAW ALSO BE BINDING ON THE PHARMACEUTICAL COMPANIES OR OTHER ALLIED HEALTHCARE SECTOR. RATHE R, THE CONCESSION MADE BY THE MCI BEFORE THE HONBLE HIGH COURT OF DELHI IN THE CASE OF MAX HOSPITAL VS. MCI (CWP NO. 1334/2013, DATED 10.01.2014) FORTIFIES OUR AFORESAID VIEW THAT MCI HAS NO JURISDICTION TO PASS ANY ORDER OR REGULATION AGAINST ANY HOSPITA L, PHARMACEUTICAL COMPANY OR ANY HEALTHCARE SECTOR. WE FURTHER FIND THAT MCI HAD BY ADDING PARA 6.8.1 TO ITS EARLIER NOTIFICATION ISSUED AS INDIAN MEDICAL COUNCIL PROFESSIONAL (CONDUCT, ETIQUETTE AND ETHICS) REGULATIONS, 2002 HAD EVEN PROVIDED FOR ACTION WHICH SHALL BE TAKEN AGAINST MEDICAL PRACTITIONERS IN CASE THEY CONTRAVENE THE PROHIBITIONS PLACED ON THEM. WE FIND FROM A PERUSAL OF PARA 6.8.1 THAT IN CASE OF RECEIVING OF ANY GIFT FROM ANY PHARMACEUTICAL OR ALLIED HEALTH CARE INDUSTRY AND THEIR SALES P EOPLE OR REPRESENTATIVES, ACTION STANDS RESTRICTED TO THE MEMBERS WHO ARE REGISTERED WITH THE MCI. IN OTHER WORDS THE CENSURE/ACTION AS HAD BEEN SUGGESTED ON THE VIOLATION OF THE CODE OF CONDUCT IS ONLY FOR THE MEDICAL PRACTITIONERS AND NOT FOR THE PHARMAC EUTICAL COMPANIES OR ALLIED HEALTH SECTOR INDUSTRIES. WE ARE THUS OF THE CONSIDERED VIEW THAT THE REGULATIONS ISSUED BY MCI ARE QUA THE DOCTORS/MEDICAL PRACTITIONERS REGISTERED WITH MCI, AND THE SAME SHALL IN NO WAY IMPINGE UPON THE CONDUCT OF THE PHARMACE UTICAL COMPANIES. AS A LOGICAL COROLLARY TO IT, IF THERE IS ANY VIOLATION OR PROHIBITION AS PER MCI REGULATION IN TERMS OF EXPLANATION TO SEC. 37(1), P A G E | 46 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) THEN THE SAME WOULD DEBAR THE DOCTORS OR THE REGISTERED MEDICAL PRACTITIONERS AND NOT THE PHARMACEUTICAL C OMPANIES AND THE ALLIED HEALTHCARE SECTOR FOR CLAIMING THE SAME AS AN EXPENDITURE. 35. WE ARE FURTHER OF THE CONSIDERED VIEW THAT EVEN OTHERWISE THE ENLARGEMENT OF THE SCOPE OF MCI REGULATIONS TO THE CASE OF THE ASSESSEE BEFORE US I.E A TRADER IN MEDICAL EQUIPMENT S , IS DE HORS ANY ENABLING PROVISION EITHER UNDER THE INCOME TAX ACT OR UNDER THE INDIAN MEDICAL COUNCIL REGULATIONS. IN OUR CONSIDERED VIEW, THOUGH THE CBDT CAN TONE DOWN THE RIGOURS OF LAW IN ORDER TO ENSURE A FAIR ENFORCEMENT OF THE PROVISIONS BY ISSUING CIRCULARS F OR CLARIFYING THE STATUTORY PROVISIONS, HOWEVER, IT IS DIVESTED OF ITS POWERS TO CREATE A NEW IMPAIRMENT ADVERSE TO AN ASSESSEE OR TO A CLASS OF ASSESSES WITHOUT ANY SANCTION OR AUTHORITY OF LAW. WE FIND THAT THE ASPECT THAT THE CBDT IS DIVESTED OF IT POWE RS TO ENLARGE THE SCOPE OF MCI REGULATION WITHOUT ANY ENABLING PROVISION EITHER UNDER THE INCOME TAX ACT OR THE INDIAN MEDICAL REGULATIONS WAS ALSO DELIBERATED UPON BY THE TRIBUNAL IN THE CASE OF ARISTO PHARMACEUTICALS PVT. LTD. VS. ACIT (ITA NO. 6680/MUM/ 2012, DATED 26.07.2018) , WHEREIN IN CONTEXT OF THE ISSUE UNDER CONSIDERATION IT WAS OBSERVED AS UNDER : 23. WE FIND THAT THE CBDT AS PER ITS CIRCULAR NO. 5/2012, DATED 01.08.2012 HAD ENLARGED THE SCOPE AND APPLICABILITY OF INDIAN MEDICAL COUNCIL REG ULATION, 2002, BY MAKING THE SAME APPLICABLE EVEN TO THE PHARMACEUTICAL COMPANIES OR ALLIED HEALTHCARE SECTOR INDUSTRIES. WE ARE OF THE CONSIDERED VIEW THAT SUCH AN ENLARGEMENT OF THE SCOPE OF MCI REGULATION TO THE PHARMACEUTICAL COMPANIES BY THE CBDT IS W ITHOUT ANY ENABLING PROVISION EITHER UNDER THE INCOME TAX ACT OR UNDER THE INDIAN MEDICAL COUNCIL REGULATIONS. WE ARE OF A STRONG CONVICTION THAT THE CBDT CANNOT PROVIDE CASUS OMISSUS TO A STATUTE OR NOTIFICATION OR ANY REGULATION WHICH HAS NOT BEEN EXPRES SLY PROVIDED THEREIN. STILL FURTHER, THOUGH THE CBDT CAN TONE DOWN THE RIGOURS OF LAW IN ORDER TO ENSURE A FAIR ENFORCEMENT OF THE PROVISIONS BY ISSUING CIRCULARS FOR CLARIFYING THE STATUTORY PROVISIONS, HOWEVER, IT IS DIVESTED OF ITS POWER TO CREATE A NEW IMPAIRMENT ADVERSE TO AN ASSESSEE OR TO A CLASS OF ASSESSEE WITHOUT ANY SANCTION OR AUTHORITY OF LAW. WE ARE OF THE CONSIDERED VIEW THAT THE CIRCULARS WHICH ARE ISSUED BY THE CBDT MUST CONFIRM TO THE TAX LAWS AND THOUGH ARE MEANT FOR THE PURPOSE OF GIVING ADMINISTRATIVE RELIEF OR FOR CLARIFYING THE PROVISIONS OF LAW, BUT THE SAME CANNOT IMPOSE A BURDEN ON THE ASSESSEE, LEAVE ALONE CREATING A NEW BURDEN BY ENLARGING THE SCOPE OF A REGULATION ISSUED UNDER A DIFFERENT ACT SO AS TO IMPOSE ANY KIND OF HARDSHIP OR LIABILITY ON THE ASSESSEE. WE THUS, ARE UNABLE TO PERSUADE OURSELVES TO SUBSCRIBE TO THE RIGOURS CONTEMPLATED IN THE CBDT CIRCULAR NO. 5/2012, DATED 01.08.2012, WHICH WE WOULD NOT HESITATE TO OBSERVE, DESPITE ABSENCE OF ANYTHING PROVIDED BY THE MCI IN I TS REGULATIONS ISSUED UNDER THE MEDICAL COUNCIL ACT, 1956, CONTEMPLATING THAT THE REGULATION OF CODE OF CONDUCT WOULD ALSO COVER THE PHARMACEUTICAL COMPANIES AND HEALTHCARE SECTOR, P A G E | 47 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) HOWEVER PROVIDES THAT IN CASE A PHARMACEUTICAL OR ALLIED HEALTH SECTOR INDU STRY INCURS ANY EXPENDITURE IN PROVIDING ANY GIFT, TRAVEL FACILITY, CASH, MONETARY GRANT OR SIMILAR FREEBIES TO MEDICAL PRACTITIONERS OR THEIR PROFESSIONAL ASSOCIATIONS IN VIOLATION OF THE INDIAN MEDICAL COUNCIL (PROFESSIONAL CONDUCT, ETIQUETTE AND ETHICS) REGULATIONS, 2002, THE EXPENDITURE INCURRED ON THE SAME SHALL BE DISALLOWED IN THE HANDS OF SUCH PHARMACEUTICAL OR ALLIED HEALTH SECTOR INDUSTRY. WE ARE OF THE CONSIDERED VIEW THAT THE BURDEN IMPOSED BY THE CBDT VIDE ITS AFORESAID CIRCULAR NO. 5/2012, DAT ED 01.08.2012 ON THE PHARMACEUTICAL OR ALLIED HEALTH SECTOR INDUSTRIES, DESPITE ABSENCE OF ANY ENABLING PROVISION UNDER THE INCOME TAX LAW OR UNDER THE INDIAN MEDICAL COUNCIL REGULATIONS, CLEARLY IMPINGES ON THE CONDUCT OF THE PHARMACEUTICAL AND ALLIED HEA LTH SECTOR INDUSTRIES IN CARRYING OUT ITS BUSINESS. WE THUS, IN THE ABSENCE OF ANY SANCTION OR AUTHORITY OF LAW ON THE BASIS OF WHICH IT COULD SAFELY BE CONCLUDED THAT THE EXPENDITURE INCURRED BY THE ASSESSEE COMPANY ON SALES PROMOTION EXPENSES BY WAY OF D ISTRIBUTION OF ARTICLES TO THE STOCKISTS, DISTRIBUTORS, DEALERS, CUSTOMERS AND DOCTORS, IS IN THE NATURE OF AN EXPENDITURE WHICH HAD BEEN INCURRED FOR ANY PURPOSE WHICH IS EITHER AN OFFENCE OR PROHIBITED BY LAW, THUS CONCLUDE THAT THE SAME WOULD NOT BE HIT BY THE EXPLANATION TO SEC. 37(1) OF THE ACT. APART THERE FROM, WE FIND THAT THE TRIBUNAL IN THE ASSESSEE OWN CASE FOR A.Y. 2011 - 12 ( ITA NO. 1246/MUM/2016 , DATED 02.05.2018 ) ; A.Y. 2012 - 13 ( ITA NO. 2160/MUM/2017, DATED 27.05.2019 ) ; AND A.Y. 2013 - 14 ( ITA N O. 601/MUM/2016, DATED 08.05.2019 ) , HAD DELETED A SIMILAR DISALLOWANCE THAT WAS MADE BY THE A.O IN RESPECT OF PAYMENTS MADE TO THE DOCTORS IN THE SAID RESPECTIVE YEARS. ACCORDINGLY, FINDING OURSELVES TO BE IN AGREEMENT WITH THE VIEW TAKEN BY THE TRIBUNAL I N THE ASSESSES OWN CASE FOR THE AFOREMENTIONED PRECEDING YEARS AND ALSO OUR OBSERVATIONS RECORDED HEREINABOVE, WE DELETE THE DISALLOWANCE OF RS.36,34,64,058/ - MADE BY THE A.O IN RESPECT OF THE CONVENTION EXPENSES . THE GROUNDS OF APPEAL NOS. 43 TO 60 ARE AL LOWED IN TERMS OF OUR AFORESAID OBSERVATIONS. 36. WE SHALL NOW ADVERT TO THE CLAIM OF THE ASSESSEE THAT THE A.O HAD ERRED IN NOT GRANTING CONSEQUENTIAL DEPRECIATION ON NON - COMPETE FEE WHICH WAS HELD BY THE TRIBUNAL AS A CAPITAL EXPENDITURE WHILE DISPOSING OFF THE APPEAL OF THE ASSESSEE FOR A.Y. 2002 - 03 . AS IS DISCERNIBLE FROM THE ORDERS OF THE LOWER AUTHORITIES, THE ASSESSEE HAD ENTERED INTO AN EXCLUSIVE DISTRIBUTION AGREEMENT WITH MEDITECH DEVICE LTD. (FOR SHORT MDL) ON 01.05.2019 FOR DI STRIBUTION OF THE ASSESSES PRODUCTS IN INDIA. HOWEVER, THE SAID DISTRIBUTION AGREEMENT WAS P A G E | 48 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) TERMINATED VIDE AGREEMENT DATED 31.07.2001 ON ACCOUNT OF CERTAIN FINANCIAL CONSTRAINTS THAT WERE FACED BY MDL IN INVESTING THE REQUIRED RESOURCES TO EXPAND ITS BUSIN ESS AS PER THE REQUIREMENT S OF THE ASSESSEE. ACCORDINGLY, A NON - COMPETE AGREEMENT DATED 01.01.2002 WAS ENTERED INTO BY THE ASSESSEE WITH THE THREE DIRECTORS OF MDL VIZ. SHRI. A. DAMODHARAN, SHRI. M. SWAMINATHAN & SHRI. SANDIP DAVE, WHO WERE RETAINED AS THE CONSULTANTS BY THE ASSESSEE FOR A PERIOD OF 3 YEARS , SUBJECT TO A CONDITION THAT THEY WOULD NOT ENGAGE IN ANY COMPETING ACTIVITIES. IN TERMS OF THE SAID NON - COMPETE AGREEMENT, THE ASSESSEE HAD PAID A SUM OF USD 1 MILLION I.E EQUIVALENT TO AN AMOUNT OF RS.4, 73,00,000/ - TO THE DIRECTORS OF MDL WHICH WAS TO BE DISTRIBUTED EQUALLY AMONGST THEM. THE ASSESSEE HAD CLAIMED THE AFORESAID AMOUNT OF NON - COMPETE FEES AS A REVENUE EXPENSE UNDER SEC.37(1) OF THE ACT IN ITS RETURN OF INCOME FOR A.Y. 2002 - 03. HOWEVER, THE A .O DECLINED TO ALLOW THE SAME AS AN EXPENSE UNDER SEC. 37(1) OF THE ACT, ON THE GROUNF THAT THERE WAS NO JUSTIFIABLE REASON FOR INCURRING THE SAID EXPENDITURE. ALTERNATIVELY, THE A.O CONCLUDED THAT THE AFORESAID AMOUNT WAS TO BE CONSIDERED AS A CAPITAL EXPENDITURE . ON APPEAL, THE TRIBUNAL VIDE ITS ORDER PASSED IN ITA NO. 811/AHD/2008, DATED 25.10.2016 IN THE ASSESSES OWN CASE FOR A.Y. 2002 - 03 HAD CONCURRED WITH THE VIEW TAKEN BY THE A.O THAT THE NON - COMPETE FEE INCURRED BY THE ASSESSEE WAS A CAPITAL EX PENDITURE , WHICH BEING IN THE NATURE OF ANY OTHER BUSINESS OR COMMERCIAL RIGHT WOULD BE ELIGIBLE FOR DEPRECIATION UNDER THE PROVISIONS OF THE ACT. IT IS THE CLAIM OF THE ASSESSEE THAT IN THE YEARS SUBSEQUENT TO A.Y. 2002 - 03 , THE TRIBUNAL WHILE DISPOSING O FF THE APPEAL OF THE ASSESSEE FOR 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) HAD ACCEPTED THE AFORESAID CLA IM OF THE ASSESSEE P A G E | 49 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) AND HAD DIRECTED THE A.O TO ALLOW THE CONSEQUENTIAL DEPRECIATION TO THE ASSESSEE. ACCORDINGLY, IT IS THE CLAIM OF THE ASSESSEE BEFORE US THAT THE ISSUE AS REGARDS ALLOWABILITY OF DEPRECIATION ON NON - COMPETE FEES IS SQUARELY COVERED IN FA VOUR OF THE ASSESSEE BY THE ORDERS OF THE TRIBUNAL IN THE AFOREMENTIONED PRECEDING YEARS. 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 DEPRECI ATION O N NON - COMPETE FEES. ACCORDINGLY, RESPECTFULLY FOLLOWING THE VIEW TAKEN BY THE TRIBUNAL IN THE ASSESSES OWN CASE FOR THE AFOREMENTIONED PRECEDING YEA R S 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. 38. THE ASSESSEE HAD ASSAILED THE ORDERS OF THE LOWER AUTHORITIES ON THE GROUND THAT THEY HAD ERRED IN CONFINING THE CREDIT OF TDS TO AN AMOUNT OF RS.11,20,299/ - AS AGAINST RS .11,32,678/ - THAT WAS CLAIMED BY THE ASSESSEE IN ITS RETURN OF INCOME FOR THE YEA R UNDER CONSIDERATION. IT IS SUBMITTED BY THE LD. A.R THAT THE CLAIM FOR TDS CREDIT OF RS.11,32,678/ - WAS RAISED ON THE BASIS OF TDS CERTIFICATES . WE FIND THAT THE AFORESAID CLAIM OF THE ASSESSEE REQUIRES TO BE VERIFIED ON THE PART OF THE A.O. ACCORDINGLY, WE RESTORE THE ISSUE TO THE FILE OF THE A.O , WHO IS DIRECTED TO MAKE NECESSARY VERIFICATION S , AND IN CASE P A G E | 50 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) THE CLAIM OF THE ASSESSEE IS FOUND TO BE IN ORDER THEN THE CREDIT FOR THE DEFICIT AMOUNT OF TDS BE ALLOWED TO THE ASSESSEE . THE GROUND OF APPEAL NO. 62 IS ALLOWED FOR STATISTICAL PURPOSES. 39. THE ASSESSEE HAS ALSO ASSAILED THE LEVY OF INTEREST UNDER SEC. 234B OF THE ACT. IN OUR CONSIDERED VIEW, THE LEVY OF INTEREST UNDER SEC. 234B IS MANDATORY IN NATURE . OUR AFORESAID VIEW IS FORTIFIED BY THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. ANJU M M.H. GHASAWALA ( 2001) 252 ITR 1 (SC) . HOWEVER, AS THE AFORESAID LEVY OF INTEREST UNDER SEC.234B WOULD BE CONSEQUENTIAL TO THE ADJUDICATION OF THE ME RITS OF THE ISSUE UNDER CONSIDERATION, THEREFORE, THE A.O IS DIRECTED TO WORK OUT THE SAME ON THE BASIS OF THE TAX LIABILITY WORKED OUT IN THE HANDS OF THE ASSESSEE. THE GROUND OF APPEAL NO. 63 RAISED BY THE ASSESSEE IS DISPOSED OFF IN TERMS OF OUR AFORESA ID OBSERVATIONS. 40. THE ASSESSEE HAD CHALLENGED THE INITIATION OF PENALTY BY THE A.O UNDER SEC. 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 GROU ND OF APPEAL NO. 64 IS DISMISSED AS BEING PREMATURE IN NATURE. 41. THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED IN TERMS OF OUR AFORESAID OBSERVATIONS. ORDER PRO NOUNCED IN THE OPEN COURT ON 1 3 .09.2019 S D / - S D / - ( M.BALAGANESH ) (RAVISH SOOD) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI ; 13 .0 9 .2019 PS. ROHIT P A G E | 51 ITA NO.7263/MUM/2018 AY. 2014 - 15 INDIA MEDTRONICS PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME - TAX - 10(1)(1) / 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 . //TRUE COPY// / BY ORDER, / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI