Tribunal upholds CIT(A)'s decisions on transfer pricing, market research, depreciation, rental income

The Tribunal upheld the CIT(A)'s decisions in favor of the assessee on various transfer pricing adjustments, market research expenses, depreciation on plant and machinery, and rental income treatment. The revenue's appeal was dismissed, and the cross objections filed by the assessee were withdrawn. The order was pronounced on 31st December 2021.

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Issues Involved:

1. Deletion of Transfer Pricing Adjustment of Rs. 3.71 crores.
2. Ignoring TPO's comparable set of 3 companies.
3. Deletion of Transfer Pricing Adjustment of Rs. 2.34 crores related to Import of Finished Drugs Formulation (FDFs).
4. Ignoring TPO's adjustment based on the comparison of operating loss with the average operating profit margin.
5. Deletion of disallowance related to Market Research Expenses of Rs. 73,29,752/-.
6. Classification of Market Research Expenses as revenue expenditure.
7. Direction to allow depreciation on plant and machinery of Ankleshwar Plant.
8. Treatment of rental income from subleasing of commercial properties.

Detailed Analysis:

1. Deletion of Transfer Pricing Adjustment of Rs. 3.71 crores:
The Tribunal considered the issue of Transfer Pricing (TP) adjustment related to clinical services rendered by the assessee. The assessee used the Transactional Net Margin Method (TNMM) with Operating Cost/Total Cost (OP/TC) and selected 9 comparables. The TPO rejected 7 out of 9 comparables and included an additional comparable, leading to a proposed adjustment of Rs. 3.71 crores. The CIT(A) accepted the assessee's contention by following a previous decision that "Pass-through Cost" should be removed from the cost base, resulting in an operating margin of 19.57%. The Tribunal upheld the CIT(A)'s decision, noting that the issue had already been decided in favor of the assessee in earlier years, making the grounds raised by the revenue infructuous.

2. Ignoring TPO's comparable set of 3 companies:
The TPO had selected 3 comparables, including one chosen by the TPO and two by the assessee. The CIT(A) accepted the operating margin computed by the assessee and directed the TPO to treat the adjustment as NIL. The Tribunal found that the CIT(A) had legally and validly decided the issue in favor of the assessee, as the issue of removing "Pass-through Cost" had already been settled in earlier years.

3. Deletion of Transfer Pricing Adjustment of Rs. 2.34 crores related to Import of Finished Drugs Formulation (FDFs):
The TPO compared the margin of comparable companies (3.47%) with the operating loss incurred by the assessee (-16.90%) and made an adjustment of Rs. 2.34 crores. The CIT(A) deleted the adjustment, noting that the loss was due to substantial marketing expenses in the initial years and not due to transactions with related parties. The Tribunal upheld the CIT(A)'s decision, agreeing that the initial business strategy of marketing penetration justified the economic adjustment.

4. Ignoring TPO's adjustment based on the comparison of operating loss with the average operating profit margin:
The Tribunal found that the CIT(A) had correctly provided economic adjustment for the initial years' marketing strategy and deleted the TP adjustment. The Tribunal noted that the profitability trend showed substantial improvement in later years, supporting the CIT(A)'s decision.

5. Deletion of disallowance related to Market Research Expenses of Rs. 73,29,752/-:
The CIT(A) deleted the disallowance by following earlier appellate orders, noting that market research is a routine affair for pharmaceutical companies. The Tribunal upheld the CIT(A)'s decision, finding no reason to interfere with the consistent treatment of market research expenses as revenue expenditure.

6. Classification of Market Research Expenses as revenue expenditure:
The Tribunal agreed with the CIT(A) that market research expenses are an integral part of the business in the pharmaceutical field and upheld the classification of these expenses as revenue in nature.

7. Direction to allow depreciation on plant and machinery of Ankleshwar Plant:
The CIT(A) allowed the depreciation by following earlier Tribunal decisions in the assessee's favor. The Tribunal upheld the CIT(A)'s decision, noting that once an asset enters a block of assets, it is not individually identifiable, and depreciation is available on the entire block.

8. Treatment of rental income from subleasing of commercial properties:
The CIT(A) treated the rental income as income from house property, following earlier Tribunal decisions. The Tribunal upheld the CIT(A)'s decision, noting that the lease period exceeding 12 years made the assessee the "deemed owner" of the property within the meaning of section 27(iiib) r.w.s. 269UA(f) of the Act.

Conclusion:
The Tribunal dismissed the revenue's appeal and upheld the CIT(A)'s decisions on all grounds. The cross objections filed by the assessee were also dismissed as withdrawn. The order was pronounced in the open court on 31st December 2021.

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