Transfer pricing comparables and allowable business expenditure both turned on factual verification and timing of operative medical regulations.

Transfer pricing adjustment required fresh examination because the selected comparable's related party transactions and functional profile had not been properly tested, and the treatment of reimbursed expenses in the cost base for markup also needed factual verification; the matter was remitted for reconsideration after due opportunity. Expenditure on samples, sponsorship, medical donations and equipment donation was held allowable under income-tax law because the medical ethics restrictions relied on were operative only from 10 December 2009 and could not apply to earlier expenditure, while the CBDT circular was treated as clarificatory. The sample cost was also allowed on the basis applied in the assessee's own case.

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Issues: (i) whether the transfer pricing adjustment required reconsideration on the questions of selection of comparable company and inclusion of reimbursed expenses in the cost base for markup; (ii) whether expenditure on samples, sponsorship, medical donations and equipment donation was allowable under the income-tax law.

Issue (i): whether the transfer pricing adjustment required reconsideration on the questions of selection of comparable company and inclusion of reimbursed expenses in the cost base for markup

Analysis: The comparable selected by the Transfer Pricing Officer required proper examination for the relevant year, particularly on the issue of related party transactions and the functional profile adopted for the comparable. The assessee also showed that reimbursed amounts were treated as part of the cost base while computing the markup, though the factual position had not been properly examined and the directions earlier issued were not given effect to.

Conclusion: The issue was remitted to the Transfer Pricing Officer for fresh examination and decision in accordance with law after giving the assessee due opportunity.

Issue (ii): whether expenditure on samples, sponsorship, medical donations and equipment donation was allowable under the income-tax law

Analysis: The disallowance was made by treating the expenditure as hit by the medical ethics regulations and the CBDT circular. The relevant medical guidelines became operative only from 10 December 2009, so they could not govern expenditure incurred before that date. The circular was treated as clarificatory, and the genuineness of the expenditure was not in dispute. The cost of samples was also held allowable on the reasoning adopted in the assessee's own case.

Conclusion: The expenditure, including the cost of samples, was held allowable and the disallowance was deleted.

Final Conclusion: The appeal succeeded in part, with one set of transfer pricing issues sent back for fresh adjudication and the corporate tax disallowance deleted.

Ratio Decidendi: Where a comparable or cost base has not been properly examined on the relevant facts, the transfer pricing determination may be remitted for fresh consideration; and expenditure is not disallowable under section 37(1) merely because of a circular if the underlying prohibition was not operative for the period concerned.

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