TaxTMI 
TaxTMI 
2021 (4) TMI 474
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....eading health care company engaged in the business of research, development, manufacture, marketing and sale of various drugs, dosage forms, active pharmaceutical ingredients (APIs) and other products. It manufactures bulk drugs, drug intermediates, tablets & capsules, cream liquids and powders. It's focus is in the areas of branded generics, APIs and bio-similars. The therapeutic segments covered in India by it include diabetes, cardiovascular, nutritional, respiratory, dermatology, gynecology, pediatrics and CNS. The assessee filed its Return of Income for AY 2010-11 on 29.09. 2010 declaring total income of Rs. 95,84,64,170/-. Thereafter, it revised the same on 14.02.2011, reporting a total income of Rs. 87,30,88,182/- under normal provisions of the Act and Rs. 2,66,38,60,976/- under MAT. 3. The 1st, 2nd and 3rd ground of appeal relate to disallowance of expenditure u/s 37(1) of the Act and raise the following: 1 The Ld. CIT(A) has erred in not appreciating that the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 ('MCI Regulations') were not applicable to the Appellant and accordingly, no disallowances under Circula....
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....ch, (ii) if the expenditure made by the assessee is in the nature of an item covered by regulations, then such expenditure is made for a purpose prohibited by law, (iii) MCI regulations have been issued under the authority of an Act of Parliament and hence, have the force in law, (iv) MCI regulations were introduced on 14.10.2009 and are effective from the date of their publication in the Gazette of India ; the Board's Circular is merely a clarificatory Circular elaborating certain issues with reference to these regulations. 6. Before us, the Ld. counsel for the assessee submits that no expenditure has been incurred by the assessee for a purpose which is an offence or which is prohibited by law. It is explained by him that the code of conduct laid down in the MCI Regulation applies only to medical practitioners and not to pharmaceutical companies or allied health sector industries. In this regard, reliance is placed by him on the decisions of the Tribunal in the case of DCIT v. PHL Pharma P Ltd (ITA No. 4605/Mum/2014) (Mumbai Tribunal); India Medtronic Private Limited v. DCIT (ITA 1600/Mum/2015); Mumbai Tribunal, India Medtronic Private Limited v. DCIT (ITA No. 601/Mum/2018) (Mu....
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....ted to delete ad-hoc disallowances of expenses amounting to Rs. 3,13,63,552/- which has been upheld by Ld. CIT(A). 7. Per contra, the Ld. Departmental Representative (DR) submits that if the expenditure made by the assessee is in the nature of an item covered by the MCI regulations, then such expenditure is made for a purpose prohibited by law; it is not relevant that it is the doctor who is committing the offence or unlawful activity by accepting the consideration; the amount should not be treated as expense for the purpose of business. Referring to the order of the CIT(A), it is stated by him that MCI regulations have been issued under the authority of an Act of Parliament and hence, have the force in law. Further, it is argued by him that MCI regulations have been introduced on 14.10.2009 and are effective from the date of their publication in the Gazette of India; the Board's Circular is merely a clarificatory Circular elaborating certain issues with reference to these regulations and hence the date of issue of Board's Circular or its content is immaterial. In this regard, reliance is placed by him on the judgment of the Hon'ble Himachal Pradesh High Court in the case of Con....
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.... accepted by the Department before the Hon'ble Bombay High Court (ITA No. 2441 of 2013 dated 04.07.2016), wherein it has been held that after the expenditure is held to be for the purpose of business, then ad-hoc disallowances cannot be made treating the same as non-business expenditure. In view of the above factual scenario and position of law, we direct the AO to delete the disallowances of expenses upheld by the CIT(A). Thus the 1st, 2nd and 3rd grounds of appeal are allowed. 9. The 4th, 5th, 6th, 7th ground of appeal relate to weighted deduction u/s 35(2AB) of the Act. These grounds of appeal read as under : 4 The Ld. CIT(A) erred in not allowing weighted deduction of expenditure of Rs. 19,93,51,575/- claimed by the Appellant under section 35(2AB) of the Act; 5 The Ld. CIT(A) erred by inadvertently referring to para 6 of the order of Income Tax Appellate Tribunal ('ITAT') in the Appellant's own case in AY 2009-10 [which is in context of certain eligible expenses of Rs. 21,87,858/-(i.e. setting-up of effluent treatment plant, etc.) incurred by the Appellant but not considered by Department of Scientific and Industrial Research (DSIR)], whil....
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....lysis testing to make sure if assessee's product emanating from the R&D meets their requirement or not. Based on their analysis and testing, customers sometimes choose to enter into contracts with the assessee for further commercial sale of larger batch sizes. Such income is recorded under this head. It is submitted by the Ld. counsel that the same issue was adjudicated upon by the Tribunal in assessee's own case for AY 2008-09 and AY 2009-10. Based upon an assessment of all facts, the Tribunal in Para 9 of the order has restored back the matter to the AO for statistical purposes. The Tribunal held as under : "The AO is directed to verify the claim of the assessee and allow the same after verification in the light of the decision of the Tribunal in the case of ACIT v. Wockhardt Ltd. in ITA No. 71/M/07. The additional grounds are treated as allowed for statistical purpose." Pursuant to the direction of the Tribunal, the order giving effect for AY 2008-09 and AY 2009-10 was passed. After, the directions provided by the ITAT, the Department has not preferred an appeal before the High Court. Thus it is stated that in view of the finality of the issue, the assessee's a....
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....unal in assessee's own case for AY 2008-09 and AY 2009-10. The Tribunal in para 9 of the order has restored back the matter to the AO for statistical purposes. Pursuant to the direction of the Tribunal, the AO passed order giving effect for the above assessment years. After the directions provided by the Tribunal, the Department has not preferred an appeal before the High Court. Thus the issue having attained finality in assessee's own case, we direct the AO to allow expenditure on gross basis. We make it clear that this finding is specific to the present appeal only. Thus the 4th and 7th grounds of appeal are allowed. 14. The 8th to 11th ground of appeal deal with applicability of section 50C of the Act on transfer of lease hold lands. These grounds of appeal read as under: 8 The Ld. CIT(A) erred in confirming that the provisions of section 50C of the Act was applicable while computing capital gains on transfer of leasehold rights in land by the Appellant; 9 The Ld. CIT(A) failed to appreciate that the provisions of section 50C of the Act would be applicable only to transfer of a capital asset being land or building, or both and not to leasehold rights/assignm....
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....ights in the building standing on it. Therefore, he treated the sale/assignment of leasehold rights as transfer of capital asset being land or building or both. Accordingly, he concluded that the provisions of section 50C of the Act were applicable and accordingly adopted stamp duty valuation as sales consideration amounting to Rs. 3,87,97,500/- instead of Rs. 2,87,00,000/- as considered by the assessee. 16. In appeal, the Ld. CIT(A) relying on the order of the Tribunal, Mumbai Bench in the case of Shavo Norgren Pvt. Ltd. (2013) 33 taxmann.com 491 held that the provisions of section 50C are applicable to the assessee on transfer of leasehold rights. 17. Before us, the Ld. counsel refers to copy of deed of assignment between the assessee and MIDC and submits that the provisions of section 50C are applicable in case of transfer of property, being land or building or both. However, these provisions will not come into play in a case where only leasehold rights are assigned. In this context reliance is placed by him on the decision in Kancast (P) Ltd. (ITA No. 1265/PN/2011) dated 19 January 2015 (Pune Trib.); Heatex Products Pvt. Ltd. (ITA No. 270/2014) dated 26 July 2016; Gree....
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....ne whether the assessee has transferred the plot of land or only the leasehold right in the plot of land and accordingly determine applicability of section 50C. However, in the instant case, the assessee did not have the right to construct/transfer/sub-plot or assign the property without obtaining the approval from MIDC and accordingly the assessee had limited rights in the leasehold property unlike the complete right for development of property available to the assessee in Shavo Norgren (P.) Ltd. (supra). Therefore, the present case is distinguishable from the above decision. In Atul G. Puranik (supra) the taxpayer who was allotted by CIDCO leasehold rights in respect of plot of land for 60 years transferred to third party for consideration of Rs. 2.5 crore. For AY 2006-07, the AO invoked section 50C and computed capital gains by adopting stamp duty value at Rs. 2.88 crore. ITAT accepted taxpayer's contention that transfer or assignment of leasehold rights is not transfer of land per se and hence provisions of section 50C will have no applicability to case of leasehold interest. ITAT also accepted the contention that section 50C being deeming fiction should be construed ....
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....et thereby applying internal TNMM as most appropriate method; 17 without prejudice to the above, the Ld. CIT(A) erred in not granting an adjustment for differences between sales made to AEs vis-a-vis Non-AEs while applying CUP method, inter-alia including the following. a marketing expenses computed based on individual strength of product Metformin vis-a-vis the currently granted adjustment considering all strengths of product Metformin together; b profit attributable to entrepreneurial risk undertaken for sales made to Non-AEs vis-a-vis sales made to AEs; c quantity of product Metformin sold to AEs vis-a-vis Non-AEs. 20. The Ld. CIT(A) vide order dated 27.04.2017 has taken into consideration the claim of the assessee that transfer pricing adjustment should be restricted toRs. 1,08,37,845/- as computed below: Particulars Rate p/u Adjustment for Metformin 1000 mg Sale price per tablet to non-AEs used as CUP by the learned TPO A 1.17 Adjustment on account of marketing and other expenses B 0.16 Mark-up on marketing expenditure C = B*11% 0.0176 Adjustment on account of marketing ....
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....ionally different, (iii) the assessee has not brought any evidence on record to substantiate that the variation in volume between the amounts sold to AE and non-AEs would invite volume discounts, (iv) the drug regulation in US is very stringent and starts from the manufacturing level itself and is very closely monitored; the registration requirements at USFDA as well as costs of legal challenge are substantially higher in US markets than in EU markets ; hence ordinarily, the price of drugs sold in US markets are generally higher than the price of drugs sold in EU markets, (v) the claim of the assessee that it is forced to sell the drugs at lower margins in US because of higher competition is not found tenable as the margins of the AE in US is found to be significantly higher than that of the assessee itself, in spite of limited functions performed by the AE, (vi) the Rules allow use of a method, after making suitable adjustments while comparing the transactions; the adjustments effected by the AO are correct, (vii) the dossiers are prepared by the assessee and then passed on to the AE for registration in the country of sale ; the dossiers do not shift the risk of the assessee as th....
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.... companies (9.55%-as asked by TPO during the course of transfer pricing proceedings), the said transaction was considered to meet the arm's length test from an Indian transfer pricing perspective; in absence of comparable data for application of any direct method of comparability, TNMM was considered as a preferred method for undertaking the transfer pricing analysis. It is argued that the Ld. CIT(A) accepted the international transaction of sale of pharma products (portion pertaining to sale of other products) to be at arm's length, however rejected the remaining portion (sale of Metformin product) and confirmed TP adjustment on such portion after allowing certain adjustments in connection with adoption of CUP as most appropriate method. In this regard, it is stated that the Ld. CIT(A) cannot compare the export sales of Metformin made to AE (i.e. US market) vis-à-vis non-AE (i.e. non-US market). In this regard, it is explained by him that there are key differences between the AE and non-AE markets (i.e. US and Europe respectively) like difference in business models, channel distribution, ANDA/Market authorization approvals, pricing and market risk. Elaborating further, t....
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....before the Ld. CIT(A). The actual price charged for Metformin sales to AE in US market is less than the price charged to non-AEs in the Europe market. However, as the assessee has earned a net operating margin of 24.6% from Metformin sales to AE, which is higher than the net operating margin of 23.3% from Metformin sales to non-AEs and thus the same could be concluded to be at arm's length. Thus it is stated that internal TNMM is to be considered as most appropriate method for benchmarking the international transaction in question. Without prejudice to the above, it is submitted that even in case CUP is considered as most appropriate method as proposed by the TPO/Ld. CIT(A) various adjustments on account of significantly higher functions and risks undertaken by the assessee in Europe versus US market should be allowed. In this connections, reliance was placed on the decision by the Hon'ble Delhi High Court in the case of Rolls Royce PLC v. DIT (339 ITR 147), wherein 35% of the total profit has been attributed to market activities undertaken. Also it is stated that the volume of products sold have a direct impact on the sale price i.e. the higher the volume of sales, the lower th....
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....66/Kol/2017]. The Ld. counsel submits that without prejudice to the above, if adjustment on account of marketing expenses and entrepreneurial risks are adopted, transfer pricing adjustment reduces to Rs. 20,61,578/- in AY 2010-11 and Rs. Nil in AY 2011-12. Finally, it is submitted by the Ld. counsel that the assessee has earned a net operating margin of 24.6% from sale Metformin to its AE whereas the net operating margin from sale of Metformin to non-AE is 23.3% and since the margins earned from AE segment is more than the margins earned from non- AE segment, the transactions were held to be at arm's length as required under the Indian Regulations. 22. On the other hand, the Ld. DR submits that the assessee has not produced before the TPO any evidence to substantiate that marketing and overhead expenses were incurred only for the non-AE. Referring to the order of the Ld. CIT(A), it is stated by him that the assessee has failed to adduce any evidence that the chemical variations or use of different bulk drugs result in higher price for the drug sold in European markets vis-a-vis those sold in US markets. Thus it is stated that the products manufactured for sale in the US ma....
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....allowing certain adjustment with adoption of CUP as the most appropriate method. In the instant case, we find that the TPO has straight proceeded to apply CUP method. The TPO has not examined the applicability and relevance of TNMM. 23.1 At this juncture, it would be relevant to discuss the TNMM. It is also necessary to refer to Rule 10B of the Income Tax Rules, 1962 which provides for determination of ALP under Section 92C of the Act. Sub-rule(1) of Rule 10B contains provisions in relation to various methods of calculation of ALP as provided under Section 92C of the Act and TNMM reads as under:- "10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction or a specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (e) Transactional net margin method, by which,- i. the net profit margin realised by the enterprise from an international transaction or a specified domestic transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effecte....
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.... v. CIT (2015) 60 taxmann.com 355 (Delhi) has held that : "20. In order for the benchmarking studies to be reliable for the purposes of determining the ALP, it would be essential that the entities selected as comparables are functionally similar and are subject to the similar business environment and risks as the tested party. In order to impute an ALP to a controlled transaction, it would be essential to ensure that the instances of uncontrolled entities/transactions selected as comparables are similar in all material aspects that have any bearing on the value or the profitability, as the case may be, of the transaction. Any factor, which has an influence on the PLI, would be material and it would be necessary to ensure that the comparables are also equally subjected to the influence of such factors as the tested party. This would, obviously, include business environment; the nature and functions performed by the tested party and the comparable entities; the value addition in respect of products and services provided by parties; the business model; and the assets and resources employed. It cannot be disputed that the functions performed by an entity would have a material ....
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....d the same relying on an assumption that the functional dissimilarity would be subsumed in the profit margin. As noted, the content of services provided by the Assessee and the entities in question were not similar. In addition, there were also functional dissimilarities between the Assessee and the two entities in question. In our view, these comparability factors could not be ignored by the Tribunal. While using TNMM, the search for comparables may be broadened by including comparables offering services/products which are not entirely similar to the controlled transaction/entity. However, this can be done only if (a) the functions performed by the tested party and the selected comparable entity are similar including the assets used and the risks assumed; and (b) the difference in services/products offered has no material bearing on the profitability." [Emphasis underlined by us] 23.4 In UCB India (P.) Ltd. (supra) relied on by the Ld. counsel, the Tribunal has quoted at length the following paragraphs of TP Guidelines for Multinational Enterprises and Tax Administrations issued by OECD: "70. Section 92C(1) refers to arm's length price in relation to an in....
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....aggregate basis with those of an independent enterprise. Similarly, when analyzing the transactions between the independent enterprises to the extent they are needed, profits attributable to transactions that are not similar to the controlled transactions under examination should be excluded from the comparison. Finally, when profit margins of an independent enterprise are used, the profits attributable to the transactions of the independent enterprise must not be distorted by controlled transactions of that enterprise." 23.5 Having regard to the above well-settled principles delineating the ingredients of TNMM and keeping in mind the facts in the present case, we set aside the order of the Ld. CIT(A) on the above grounds of appeal and restore the matter to the file of the TPO/AO to pass an order afresh as per Rule 10B. We hold that TNMM is the most appropriate method in the present case and while using TNMM, the search for comparables may be broadened by the assessee as well as revenue by including comparables. However, this can be done only if (a) the functions performed by the tested party and the selected comparable entity are similar including the assets used and the ris....
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.... AO, whereas the Ld. counsel supports the order passed by the Ld. CIT(A). 29. We have heard the rival submissions and perused the relevant materials on record. We find that these expenses incurred comprise largely of low value mementoes like pen, pen drives, towels, eatables, cosmetics etc. with an individual value of Rs. 5000/- or less, meant for distribution to stockists/druggists/chemists/paramedical persons for brand recall/target completion/incentive to promote and market assessee's products/as a goodwill gesture during festival/birthdays etc. to maintain/enhance business relationships. Thus it is crystal clear that the aforesaid expenditure is sales promotion expenditure incurred for the purpose of enhancing the assessee's business and is thus incurred wholly and exclusively for the purpose of business and therefore allowable as deduction u/s 37(1) of the Act. In view of the above facts, we affirm the order of the Ld. CIT(A) and dismiss the 1st ground of appeal. 30. The 2nd and 3rd ground of appeal relate to weighted deduction u/s 35AB of the Act. These grounds read as under: 2. Whether the Ld. CIT(A) has erred in facts and law in allowing the claim of weigh....