Reimbursement of clinical research expenses remanded for fresh examination of documentation and markup verification

ITAT Mumbai remanded the matter to Commissioner regarding reimbursement of clinical research expenses treated as income. The AO had treated reimbursement amounts as taxable income due to insufficient documentation including party-wise details, work orders, invoices, and evidence of actual expense incurrence. The Commissioner approved the assessee's treatment but failed to examine supporting documents. ITAT directed fresh examination of documentation to verify reimbursement claims lack profit element. Regarding 13% markup on payments, ITAT ruled markup applicable only if assessee provided active services beyond mere conduit role in coordinating clinical trials. Revenue appeal partly allowed for statistical purposes with both issues remanded for fresh consideration.

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Issues Involved:
1. Delay in filing the appeal.
2. Addition of reimbursement of expenses as income.
3. Applicability of markup on reimbursement of expenses.

Summary:

1. Delay in Filing the Appeal:
The appeal was delayed by 531 days due to the Covid-19 period. The delay was condoned based on the Hon'ble Apex Court's order in SUO MOTU WRIT PETITION (C) NO. 3 OF 2020, which waived the limitation period for all judicial or quasi-judicial proceedings during the pandemic.

2. Addition of Reimbursement of Expenses as Income:
The Assessee declared an income of Rs. 1,92,02,104/- for the AY 2011-12. The AO observed that the Assessee received Rs. 6,14,25,224/- as reimbursement from its Associated Enterprises (AEs) but did not declare this amount as income in the Profit & Loss A/c. The AO added this amount to the Assessee's income, stating that the Assessee failed to provide adequate evidence that the expenses were actually incurred and reimbursed. The AO also noted the non-deduction of TDS on these expenses.

The Ld. Commissioner, however, accepted the Assessee's claim, stating that the costs were pass-through costs and not debited in the Profit & Loss A/c. The Commissioner rejected the AO's view that these costs should be treated as income due to non-deduction of TDS, as these were pass-through costs and not the Assessee's own expenses.

3. Applicability of Markup on Reimbursement of Expenses:
The Ld. Commissioner directed the AO to charge a markup of 13% on the reimbursement amount of Rs. 6,14,25,224/-. The Assessee argued that these costs were pass-through costs and should not be subject to a markup. The Commissioner held that these costs were integral to the clinical trials facilitated by the Assessee and therefore, a markup was justified.

The Tribunal remanded the issue back to the Ld. Commissioner for verification of details such as party-wise expenses, work orders, and other documentary evidence to substantiate the Assessee's claim. The Tribunal also directed the Commissioner to reassess the applicability of the markup based on the exact role played by the Assessee in facilitating the clinical trials.

Conclusion:
The appeals and cross objections were partly allowed for statistical purposes, with directions for further verification and reassessment by the Ld. Commissioner.

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