2023 (1) TMI 1114 - AT - Income Tax

Transfer Pricing Adjustment Dismissed; Focus on Expense Evaluation

The Tribunal dismissed the Revenue's appeal, upholding the deletion of the Transfer Pricing adjustment due to unsuitability of the selected comparable. ... DRP not giving opportunity of being heard to the revenue as per provision of sec. 144C(11) - HELD THAT:- AO / TPO filed rectification application before the DRP raising certain contentions on merits. DRP has noted that the notices were issued to the AO, AO failed to appear on the date of hearing. DRP rejected the rectification application vide order dated 05.01.2015. Since notice of hearing was given to the AO / TPO and he had failed to appear, we see no merit in the contention raised in grounds 1 and 2. We dismiss grounds 1 and 2 raised by the Revenue. TP Adjustment - comparable selection - objection of RPT - HELD THAT:- Lotus Labs cannot be accepted as a comparable as it has significant RPT as per the financials of Lotus Labs for December 2010 sourced from the Ministry of Corporate Affairs Website and the year ending March 2010. Working of RPT was not controverted by Revenue, even before the Tribunal. Therefore, Lotus Labs was rightly rejected by the DRP and not taken as a comparable. In this context, we would also like to state that the Tribunal in assessee’s own case for assessment year 2009-2010, has remanded the issue of Lotus Labs RPT to the files of the TPO for verification. The TPO while giving effect to the Tribunal order for assessment year 2009-2010, had excluded Lotus Labs as a comparable after verifying the facts from the financial statement and noting that the company has significant RPT transaction. Therefore, in the light of the aforesaid reasoning, the Revenue’s appeal is dismissed. Expenditure / break up incurred on the Doctors - MCI Regulations Applicabilty - assessee has filed additional evidence - HELD THAT:- It is pertinent to note that prior to the judgment of M/s.Apex Laboratories Pvt. Ltd. [2022 (2) TMI 1114 - SUPREME COURT] many of the judicial pronouncements had held that MCI Regulations are not applicable on pharmaceutical companies and expenses incurred by such companies are not violative of CBDT Circular. During this phase of assessment, there were only adhoc summary basis evaluation of expenditure. In the present case also there is no critical evaluation of the expenses and post the Hon’ble Supreme Court judgment, the dictum laid down, same needs to be followed and each of the expenditure needs to be evaluated to see if the disallowance is justified. A.O. had primarily made disallowance by referring the CBDT Circular No.5/2012 dated 01.08.2012. The A.O. has not critically examined the nature of expenditure incurred by the assessee. In the larger interest of justice, in view of the latest judgment of the Hon’ble Apex Court, which has examined the very same issue, it becomes necessary to examine the exact nature of expenses incurred by the assessee for Doctors from all angles. Therefore, for substantial question and cause, the additional evidence are taken on record. Since the additional evidence is taken on record, necessarily, the matter needs fresh verification by the A.O. Issues Involved:1. Transfer Pricing Adjustment.2. Disallowance of Expenses on Freebies to Medical Practitioners.3. Recharacterization of Assessee's Business Activity.4. Inclusion of Reimbursement of Expenses in Cost Base for Mark-up.5. Dividend Distribution Tax Rate for Non-Resident Shareholders.Issue-Wise Detailed Analysis:1. Transfer Pricing Adjustment:The primary issue involved the determination of the Arm's Length Price (ALP) for international transactions undertaken by the assessee with its Associate Enterprises (AEs). The Transfer Pricing Officer (TPO) had proposed a Transfer Pricing adjustment of Rs.11,84,06,803 by selecting Lotus Labs as a comparable with an operating margin of 48.78%. However, the Dispute Resolution Panel (DRP) rejected Lotus Labs as a comparable due to significant Related Party Transactions (RPT) exceeding 25% of total revenue. The Tribunal upheld the DRP's decision, noting that the RPT percentage for Lotus Labs was 74.92% for December 2010 and 79.73% for March 2010, making it an unsuitable comparable. Consequently, the TP adjustment was deleted, and the Revenue's appeal on this ground was dismissed.2. Disallowance of Expenses on Freebies to Medical Practitioners:The Assessing Officer (AO) disallowed expenses amounting to Rs.1,22,44,326 incurred on travel, conveyance, gifts, and donations to medical practitioners, citing CBDT Circular No.5/2012 and the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (IMC Regulations). The DRP allowed the deduction for the cost of samples but upheld the disallowance of other expenses. The Tribunal, considering the recent Supreme Court judgment in M/s. Apex Laboratories Pvt. Ltd. v. DCIT, which held that such expenses are not allowable under section 37 of the Act, remanded the matter back to the AO for fresh verification. The Tribunal directed the AO to critically evaluate the nature of expenses in light of the Supreme Court's decision and the IMC Regulations.3. Recharacterization of Assessee's Business Activity:The TPO had recharacterized the assessee as a full-fledged Clinical Research Organisation (CRO) instead of a mere coordinator of clinical trial activities. The DRP upheld this recharacterization. However, since the Tribunal dismissed the Revenue's appeal and deleted the TP adjustment, the grounds raised by the assessee challenging the recharacterization were rendered academic and dismissed.4. Inclusion of Reimbursement of Expenses in Cost Base for Mark-up:The assessee challenged the inclusion of unrelated expenses reimbursed by the AE and third-party expenses in the cost base for mark-up purposes. Given the deletion of the TP adjustment, this ground also became academic and was dismissed.5. Dividend Distribution Tax Rate for Non-Resident Shareholders:The assessee claimed that the tax liability on dividends distributed to non-resident shareholders should be confined to the rate prescribed under the India-Sweden Double Taxation Avoidance Agreement (DTAA). The Tribunal noted that this issue has been referred to a Special Bench and restored the matter to the AO with the direction to follow the decision rendered by the Special Bench in the future.Conclusion:The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal for statistical purposes, remanding the issues related to the disallowance of expenses on freebies to medical practitioners and the dividend distribution tax rate for fresh examination and appropriate action by the AO. The Tribunal emphasized the need for a detailed evaluation of the nature of expenses in light of the Supreme Court's judgment and relevant regulations.