AI Drafter 
TaxTMI 
TaxTMI 
2023 (3) TMI 1299
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....f income on 30.11.2011 admitting a total income of Rs.103,50,22,080/-. The case was selected for scrutiny under CASS and a notice under Section 143(2) of the Act was duly served upon the assessee. Since the assessee had several international transactions, a reference was made to the Transfer Pricing Officer (TPO) for determination of arm's length price (ALP). The TPO recharacterised the activities of the assessee as Clinical Research Organisation (CRO) doing clinical trial activity on its own account and not coordination of clinical trial activity. Accordingly, the TPO arrived at the TP adjustment of Rs.2,66,60,541/-. The AO while passing the draft assessment order, besides the TP adjustments, made the following disallowances: - a) Cost of samples - Rs. 3,47,65,606 b) Literature provided to doctors Rs. 10,41,09,945 c) Conference expenses of doctors Rs. 16,86,162 d) Travelling & Conveyance to doctors Rs. 14,70,500 e) Gifts and donations to doctors Rs. 17,30,335 3. On further objections raised, the DRP gave partial relief to the assessee whereby the disallowance towards cost of samples and literature provided to the doctors were deleted....
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....see in its TP study and its average margin is in the range of 4.85% to 15.79% with a median of 9.71% (page 289 to 292 of the paper book-I). Since the assessee's margin as per the TP study was determined at 16.50% (page 290 of the paper book-I filed by the assessee), the assessee sought to justify the ALP of the international transactions undertaken by the assessee in respect of "provision for global clinical trial services". 10. The TPO re-characterised the activities of the assessee as CRO and accordingly based on fresh research of comparables added "Lotus Labs" to the list of comparables. Further the TPO reworked the margin of the assessee by considering the reimbursement of expenses received from AE as part of revenue, the workings of which is given below: - Global Clinical Trial Services (3CEB Report) 31,191,959 Recovery of expenses (3CEB Report) 93,995,337 Total Revenue 125,187,296 Segmental Result (refer to note 7 of sch 17) 7,311,316 Operating Cost 117,875,980 OP/OC 6.20% 11. The assessee objected to the inclusion of Lotus Labs as comparable on the ground that the data used is obtained u/s.133(6) which was not available to the assess....
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....Labs maintains its books of accounts for the year ending December (calendar year as a financial year), it is not suitable for comparability. Having heard the submissions we are of the view that if the related party transactions are more than 25% of the total revenue, such company cannot be retained as comparable. This issue was considered by the DRP for the A.year 2010-11 and the DRP held that the company Lotus Labs needs to be excluded for the RPT filter failure and different financial year filter. It held that "we have perused the Annual Reports and convinced that the RPT are more than 25% of the total revenue and therefore the above company cannot be retained as a comparable. It is also noticed from the Annual Report that the above company is maintaining the account for December end financial year and therefore not suitable for comparability. In view of the exclusion of the above company from comparables, other issues of functional differences etc., becomes academic in nature. Accordingly we direct the assessing officer to exclude the above company from the comparable". As the facts are same for this year too we consider the company lotus labs has to be excluded, accord....
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....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 TPOfor 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. 18. For the year under consideration the DRP has worked out the related party transaction of the assessee to be 73.84% and the same is supported by the Annual Reports placed on record in page 897-898 of paper book. Therefore the company fails the RPT filters for the year under consideration also. Accordingly respectfully following the decision of the coordinate bench in assessee's own case we see no reason to interfere with the decision of the DRP. This ground of the Revenue is dismissed. ITA No. 460/Bang/2016 19. The assessee raised the following grounds - Grounds raised by the assessee Based on the facts and circumstances of the case and i....
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....ospectively applying the CBDT Circular to the subject AY without considering the fact that the CBDT Circular is effective only from 1 August 2012 and hence applicable from AY 2013-14. Disallowance of contribution towards gratuity fund 9 The learned AO has erred, in law and on facts, in disallowing Rs. 72,87,811 pertaining to contribution towards gratuity fund which was paid by the Appellant before the due date of filing of return of income for the AY 2011-12 without granting sufficient opportunity to submit the factual/ technical arguments. 10 The learned AO has erred, in law and on facts, in disallowing Rs. 72,87,811 pertaining to contribution towards gratuity fund which was paid by the Appellant before the due date of filing of return of income for the AY 2011-12 without appreciating/ giving effect to the directions issued by the Hon'ble Panel to allow the above expenditure after verifying the necessary facts. 11 The learned AO has erred, in law and on facts, in disallowing Rs. 72,87,811 pertaining to contribution towards gratuity fund on the ground that the Hon'ble Panel does not have the authority to issue directions to the AO under s....
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....s deduction. 17 The learned AO has erred, in law and on facts, in disallowing the amount of Rs. 59,41,704 without considering the revised directions issued by the Hon'ble Panel under Rule 13 of the Income tax (Dispute Resolution Panel) Rules, 2009 directing the AO to allow deduction for the above expenditure. Transfer Pricing Grounds 18 The learned AO/ Hon'ble Panel have erred, in law and in facts, by not accepting the economic analysis undertaken by the Appellant with respect to recovery of expenses from associated enterprises and making a TP adjustment of Rs. 46,99,767. 19 The learned AO/ Hon'ble Panel have erred, in law and in facts, by concluding that the Appellant has rendered services as part of recovering the third party cost, incurred on. behalf of the associated enterprises amounting to Rs. 9,39,95,337 without evaluating the nature of the third party expenses and accordingly levying 5% mark-up on third party expenses. 20 The learned TPO/ AO/ Hon'ble Panel have erred, in law and in facts in not accepting the functional and economic analysis undertaken by the Appellant and in characterizing the Appellant as a Clini....
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.... AY 2010-11 wherein the Hon'ble tribunal has reproduced the elaborate submissions made by the assessee and prayed that the same submissions can considered for the year under consideration also since there is no change in the facts of the issue. The relevant extract of the submissions made are given below - Although detailed bifurcation of abovementioned expenses incurred alongwith nature of expenses were furnished before the lower authorities such expenditure was disallowed in entirety without appreciating that such expenses were not violative of MCI regulations. AO did not verify whether the expenses incurred by the Appellant falls within the ambit of MCI regulations but disallowed the entire expenditure relying onCircular5/2012withoutspecificallyhighlightingastohow each expense is violative MCI Regulations and CBDTcircular. Both the authorities failed to examine and find how details/documents filed by the Appellant justify disallowance. Disallowance was made under section 37 of the Act on a mistaken notion/presumption without verification of same in context of MCI regulations. In this context to understand the issue involved.it is pertinent to note that the Hon&....
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.... of expenses incurred by the assessee and has proceeded to disallow the same on conjecture and surmises. Thus in larger interest of justice and to ensure that disallowance is only in accordance withlaw. It becomes necessary to examine the exact nature of the expenditure from all these angles discussed hereinabove. To facilitate the same. additional evidences are being placed by way of details/documents on sample basis. We crave leave to file more complete details/documents before AO if the verification aspect is set aside/ remanded to Ld. AO. Accordingly, it is respectfully prayed that the issue may kindly be remanded and AO may kindly be directed to verify/examine such details/documents for all the above aspects. Detailed submission justifying each expense incurred by the Appellant not being violative of MCI Regulations and CBOT circular is submitted hereinbelow: Travel & Conveyance AppellantincurredRs.11,04,735ontravellingandconveyance of doctors/ professors of high repute who have been hired by the Appellant as consultants to speak! make presentations at the seminars/ conferences conducted by the Appellant on various topics. We wish to mention that the....
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....ch doctors. Appellant is also obliged to incur cost of travelling and accommodation. With regard to such arrangement/ expenses incurred. "it is submitted that such expenses would not come under the ambit of "freebies" as mentioned in IMC Regulations/ CBDT Circular, since such expenses have been incurred based on specific contractual arrangement entered with doctors and not given gratis to medical practitioners which alone is prohibited by IMC Regulations/ CBDT Circular. Even though the term "freebies" has not been defined under the Act, the same can be understood from common parlance as something that is given to another person for gratis without any obligation to incur such expense and without expecting any reciprocal service from the other person. Sample copies of agreements entered with doctors are enclosed as Annexure 4 to application for admission of additional evidences @; Pg 51- 62. * Considering that the doctors are hired as speaker/ consultant to provide presentations at the seminars/ conference conducted by the Appellant. the travel and accommodation expenses incurred by the Appellant while availing such services of doctors have been incurred in the course of con....
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....ndard rates framed by these associations. We wish to submit that the above expenditure is not specifically prohibited in the MCI regulations. Even otherwise, expenses incurred by theassessee would not be hit by the decision of Hon'bleApex Court in case of M/s Apex Laboratories Pvt. Ltd. v. DCIT (SLPNo. 2320712019) which is distinguishable on facts. Post issuance of directions dated 27.11.2014 by DRP and during the pendency of the present appeal before the Hon'ble Tribunal, Hon'ble Supreme Court in the case of Apex Laboratories Pvt Ltd. v. DCIT (2022] 135 taxmann.com 286, under the facts of that taxpayer, held freebies/gifts given to doctors to be not allowable under section 37 of the Act. In this case, taxpayer gifted expensive gifts such as hospitality, conference fees, gold coins, LCD TVs, fridges, laptops, etc. to medical practitioners to promote its nutritional health supplement 'Zincovit'. In Appellant's case, the expenditure is towards contractual obligations with some doctors for seeking their services in lieu of remuneration. In fact, in the agreement entered with the doctors. it is specifically mentioned that the latter wi....
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....eady explained herein above. Therefore. same may kindly be directed to be allowed a deduction after examination byLd.AO. In this regard. it is respectfully prayed that the issue of disallowance of expenditure incurred on doctors may kindly be restored to the file of assessing officer for fresh examination / verification." 26 The learned AR submitted that for AY 2010-11, the Hon'ble Tribunal has remitted the issue back to the AO for examination of additional evidence and allow the claim accordingly. The learned AR also submitted that for the year under consideration also, the assessee is filing additional evidences and prayed that the same may be admitted. 27 The learned D.R. submitted that the issue is covered by the decision of the Hon'ble Supreme Court in the case of Apex Laboratories Pvt. Ltd. (supra) The learned DR further submitted that since the detailed of expenses are furnished by the assessee before the Tribunal the matter may be restored to the AO to examine whether such expenditure incurred by the assessee is violative of provisions of MIR regulations on the dictum laid down by the Hon'ble Apex Court. 28 We have heard the rival contentions and perused th....
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....ctual obligation with Doctors and employees of pharmaceutical companies does not call for disallowance. In the present case, the 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., especially in the light of the recent judgment of the Hon'ble Supreme Court in the case of M/s.Apex Laboratories Pvt. Ltd. v. DCIT (supra). For the aforesaid purpose, the issues raised in grounds 4 to 8 are allowed for statistical purposes. It is ordered accordingly. 29 It is submitted that for the year under consideration also the facts are identical and accordingly, respectfully following the above decision of the coordinate ....
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....ion 144C(8) of the Act and sustained the disallowance. Since the AO has not verified the details of gratuity based on the details furnished by the assessee we remit the issue back to the AO with a direction to examine the details of payment of gratuity and decide the allowability accordingly. This ground is allowed for statistical purposes. 36 Ground Nos. 12-15 are with regard to disallowance of expenditure incurred under Voluntary Retirement Scheme (VRS). The assessee in the original return inadvertently claimed deduction of entire VRS payment of Rs.1,46,60,167 instead of 1/5th of the amount i.e. Rs.29,32,033 as per section 35DDA of the Act. The assessee filed revised return rectifying the same. The AO disallowed the same on the reason that same was not disclosed in the tax audit report. The DRP directed the AO to verify the facts in the revised return. The AO disallowed 1/5th of the amount in the revised return without verification of the evidence in view of section 144C(8) of the Act. 37 Before us, the ld. AR submitted that the auditor has inadvertently mentioned the deduction claimed as NIL u/s. 35DDA which was a technical mistake. It was submitted that a defect in Form 3....
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....d recovery of expenses to the revenue from clinical trial services and accordingly reworked the margin of the assessee at 6.20% in order to make the transfer pricing adjustment 44 The DRP held that the TPO's action to include the recovery of expenses to the revenue from clinical trial services is incorrect. However, the DRP held the reimbursement of expenses as a separate international transaction and proposed a margin of 5% to be at arm's length on recovery of cost and made the TP adjustment accordingly. The relevant portion of the directions of the DPR is extracted below: - Having considered the submission, it is noticed by us that the recovery of expenses was shown in separate international transaction in the 3CEB report, the assessee also in response to the show cause notice objected to the inclusion of such revenue for ALP adjustment which have been reproduced by the TPO in page 20 of the order passed by him , however, without recording any finding on the assessee's objection, the amount of 9,39,95,337/- has been considered as part of the total revenue for making the ALP adjustment, we do not agree with this approach of the TPO, however, it cannot be denied tha....
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....Delhi High Court decision in the case of Li & Fung Case, it was held that the payment made by the assessee to the third party on behalf of AE which was reimbursed by the AE cannot be included in the total cost of the assessee for determining the profit margin. 47 Without prejudice to the above, it was submitted that in case mark-up of 5% on the recovery of expenses is levied, the assessee would still be at arm's length margin as per the provisions of section 92C(2) of the Act and therefore TP adjustment would accordingly be at NIL. 48 The ld. DR supported the orders of the lower authorities. 49 We have heard the rival contentions and perused the material on record. The DRP has accepted the contention of the assessee that the receipts from AE towards reimbursement of expenses should not be part of the total revenue of the assessee. However the DRP has attributed a margin of 5% by stating that the assessee has rendered some service and therefore the payments needs to be marked up. The contentions of the assessee with regard to the receipts are that this is a cost to cost recovery of expenses paid i.e. pass through cost and that the payments are made on behalf of and recovere....
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.... 40. The TPO‟s reasoning to enhance the assessee's cost base by considering the cost of manufacture and export of finished goods, i.e., ready-made garments by the third party venders (which cost is certainly not the cost incurred by the assessee), is nowhere supported by the TNMM under Rule 10B(1)(e) of the Rules. Having determined that (TNMM) to be the most appropriate method, the only rules and norms prescribed in that regard could have been applied to determine whether the exercise indicated by the assessee yielded an ALP. The approach of the TPO and the tax authorities in essence imputes notional adjustment/income in the assessee's hands on the basis of a fixed percentage of the free on board value of export made by unrelated party venders. xxx xxx xxxx 50. In light of the above circumstances, this Court is of the opinion that the TPO‟s addition of the cost plus 5% markup on the FOB value of exports among third parties to LFIL‟s calculation of arm's length price using the TNMM is without foundation and liable to be deleted. The appeal is allowed and the order dated 25/11/11 of the ITAT Tribunal, Delhi Branch is liable to be and is accor....
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.... the DRP has not considered the assessee's submission that the entire expenses incurred on behalf of AE does not pertain to coordination of clinical trial segment since the AEs who have reimbursed the expenses are not those to whom clinical trial services are rendered by the assessee. In view of these discussions we are of the considered view that the issue should be remitted back to the DRP to examine the various details and submissions furnished by the assessee and decide the issue in accordance with law. The DRP is directed to keep in mind the decision of the Hon'ble Delhi High Court in the case of Li and Fung India Pvt Ltd (supra) while deciding the issue. Accordingly this ground is allowed in favour of the assessee for statistical purposes. 52 In the light of our decision above with regard to the TP adjustment Ground no 21 with regard to recharacterisation of the assessee as CRO has become academic and is left open. 53 Ground no.22 with regard to interest u/s.234C it is contended that the interest is not computed on the income as per the revised return filed by the assessee. Accordingly we direct the AO to verify and compute the interest in accordance with law. 54 The....
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....e, which does not require investigation of new facts. Hence, placing reliance on the judgment of the Hon'ble Apex Court in the case of National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383 (SC), we admit the additional grounds. 58 We heard the heard the rival submissions and perused the material on record. The ld AR in support of the above line of reasoning, relied on a decision of the coordinate bench in the case of Giesecke & Devrient India Pvt Ltd Vs ACIT [(2020) 120 taxmann.com 338 (Del). We however notice that the correctness of the aforesaid decision has been doubted by another Division Bench at Mumbai in the case of DCIT, Mumbai Circle 11(3)1), Mumbai Vs. Tata Oil India (P) Ltd., and an order of reference dated 23.6.2021 recommending constitution of a Special Bench to decide the issue has been made to the Hon'ble President of the Tribunal. We find that on this issue, there has been conflicting views and the matter has been referred by the Mumbai Bench of ITAT for constitution of a larger Bench. In the light of the development, we are of the view that it would be just and appropriate to set aside this issue to the AO for consideration afresh in the light of the law and....