TaxTMI 
TaxTMI 
2023 (3) TMI 1299
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.... 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. In respect of TP adjustments, the directions of the DRP reduced the TP....
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....he 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 assessee and that the related party transactions (RPT) of the company is very high thereby failing the RPT filter. The assessee also raised contentions with....
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....ions 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, accordingly we direct the AO to exclude the above company from comparables. 14. With regard to the contention of the assessee for considering reimbursement of expenses as part of operating revenue the DRP held that a margin of 5% should ....
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....0, 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 in law, AstraZeneca Pharma India Limited respectfully craves leave to prefer an appeal against the order passed by Deputy Commissioner of Income Tax, LTU, Circle - 1 ("AO"), dated 20 January 2016, under section 143(3) read with section 144C of the Income Tax Act, 1961 ("Act"), in pursuance of th....
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....y 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 section 144C(8) of the Act to conduct further enquiry without appreciating the fact that such contribution was already disclosed as part of Tax Audit Report for the AY 2011-12. Disallowance of expenditure incurred under Voluntary Retirement Scheme ("VRS") 12 The learned AO has erred, in law and on facts, in disallowing one fifth of Rs. 1,46,60,167 i.e Rs. 29,32,033 pertaining t....
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....ccepting 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 Clinical Research Organization ("CRO") as opposed to a mere coordinator of clinical trial activities being carried out in India on behalf of its AE. General Grounds 21 The learned AO has erred in law and on facts, in levying interest under section 234C of the Act on income declared in the original return of income as against the income declared in the revised return of income resulting in excess levy of Rs. 11,221 (Rs. 7,43,319 less Rs. 7,32,098). 2....
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....ive 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'ble Courts before decision of Hon'ble Supreme Court in case of M/s Apex Laboratories Pvt. Ltd. v. DCIT (SLP No. 2320712019)) held that MCI Regulations are not applicable on Pharmaceutical companies and the expenses incurred by such companies are not violative of CBDT circular. During this phase assessments were on adhoc summary basis and critical evaluation of expenditure was not carried out in present appellant's case also. After decision of Hon'ble Supreme Court it has become necessary to critically evaluate each of the expenditure to se....
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....ctfully 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 these expenses are not violative of MCI regulations for the reasons highlighted herein below: *MCI regulations only covers the expenses incurred for medical professionals who are delegates and not those who act as guest speakers. Relevant portion of the Regulations (enclosed as Annexure 2 to application for admission of additional evidences @ Pg 34-49) states asunder: Travel Facilities - A medical practitioner shall not accept any travel facility inside the country or outside, including rail, air. ship, cruise tickets, paid vacations etc. from any pharmaceutical or allied healthcar....
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....r 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 conducting its normal business operations and hence.eligiblefordeductionundersection37oftheAct. Gifts & donations * Break-up of gifts & donations expense reveals that it includes the following expenses: Conference expense of INR 50,94,395 Publicity and literature expense ofINR22,19,264,and Other marketing expense of INR38,25,933. * Conference expense includes expenses incurred on meals. accommodation, travel. conveyance. books and literature. sponsorship. audio visual set up hired. etc. On perusal of such details. it may kindly be appreciated that expenses in the nature of meals, accommodation, travel, conveyan....
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....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 will not prescribe Astra's products for gaining any business advantage for AstraZeneca (Refer Pg 52, 56, 60 of application for admission of additional evidence). It is settled law that decision of Courts has to be read in context of facts of the case. Expenses incurred in Appellant's case under a contractual obligation for receiving consultancy services of doctors are clearly distinguishable from facts of the case decided by Hon'ble Supreme Court (supra). Expenses incurred by appellant when examined in context would be clearly not in violation of the regulations framed by the Medical Council. Accordingly, it is prayed that the same deserve to be allowed. Ground of appeal no. 7: Wi....
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....boratories 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 the material on record. The additional evidence furnished by the assessee providing the details of expenditure and the breakup incurred on doctors goes to the root of the dispute, therefore for substantial justice the same is admitted and taken on record for adjudication. We notice that the similar issue is considered by the coordinate bench in assessee's own case and held that - 19. We have heard rival submissions and perused the material on record. The assessee has filed additional evidence under Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963 for admission of additional evidence. The additional evidence is details of break-up of expenses, such as travelling, conveyance, gift and donations provided to Doctors aggregating to Rs.1,22,44,326. It was stated that though the assess....
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....dgment 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 bench we remit the issue back to the AO to examine the nature of expenditure incurred by the assessee and to verify the issue afresh in the light of the recent judgement of the Hon'ble Supreme Court in the case of Apex Laboratories Pvt. Ltd. (supra). Ground Nos. 4 to 7 are allowed for statistical purposes. 30 Vide Ground No. 8 the assessee made a without prejudice submission that the CBDT circular is only prospective and applicable from AY 2013-14. Since we have decided the issue and remitted to AO for fresh examination this ground has become academic and does not warrant separate adjudication. 31 Next issue is with respect to disallowance of contribution towards gratuity funds (Ground 9 to 11). The assessee incurred Rs.4,63,24,847 (4,63,24,847 - 72,87,811) towards contribution to gratuity ....
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....he 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 3CD cannot lead to denial of deduction claimed. In view of the Supreme Court decision in the case of Goetze (India) Ltd. (supra), it was prayed that the assessee's claim may be allowed. 38 The learned D.R. did not have any objection. 39 We have heard the rival contentions and perused the material on record. We noticed that the AO has not examined the details as per the directions of the DRP and has made disallowance considering the provisions of Section 144C(8) of the Act and sustained the disallowance. Since the AO has not verified the details of spends towards VRS payments based on the details furnished by the assessee we remit the issue back to the AO with a direction to examine the details of and decide the allowability accordingly. These grounds are allowed for statistical purposes. 40 Ground Nos. 17 & 18....
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....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 that the assessee has not rendered any service for the cost which have been recovered from the AE, therefore, in our view for such services, the assessee should have recovered such amount on the cost. The Hon'ble ITAT, Hyderabad in the case of M/s Kirby Building Systems India Limited in ITA No. 1759/Hyd/2012, and in ITA 262/Hyd/2014 in respect of assessment year 2008-09 and 2009- 10, in paragraph 10 of the order held that "considering the fact that some services are certainly required and assessee has to incur cost in the beginning thereby extending some credit facility, we are of the opinion a mark up of 5% on the above reimbursement cost would justify the fact of the case." Similar circumstances exist in the case of Asseessee and therefore , respectfully following the decision of the Hon'ble ITAT, Hyderabad, we direct the Ass....
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....owever 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 recovered from certain group companies which were different from the one to which coordination of clinical trial services are rendered. It is also noticed that the assessee has not routed the payments and the recovery through the Profit and loss account. In the case of FedEx Express Transportation and Supply Chain Services India Private Limited (supra) the Mumbai Bench of ITAT has relied on the decision of the Delhi High Court in the case of Li and Fung India Pvt Ltd vs CIT' in Income Tax Appeal No.306 of 2012, judgment and order dated 16.12.2013, to hold that the compensation paid to the assessee is based on functions performed by it to the AE on the operation costs incurred by it and not on the cost of services sourced from the third party in India. The relevant extract of the decision of the Hon'ble High Court as relied on by the Tribunal is give....
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....PO‟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 accordingly set aside. The questions of law framed are answered in favour of the assessee, and against the revenue. The appeal is allowed in the above terms." 50 It is not in dispute that the payments received by the assessee from AE towards reimbursement of expenses incurred on behalf AE should not be part of the operating cost. In revenue's appeal this issue as held by the DRP has not been contended. We notice that the DRP has arrived at the margin of 5% by relying on the judgement in the case of Kirby Building Systems (supra) without going into the details of how the same is applicable to assessee's case in terms functions, assets and risk (FAR) analysis and without any bench marking. In the said case the issue involved was not a pure reimbursement of cost but cost sharing exercise in implementing ERP systems in the group and therefore is distinguishable from assess....
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.... 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 assessee raised Ground no.23 is consequential not warranting separate adjudication. 55 The assessee raised Ground No.24 to 26 as additional grounds. However during the course of hearing the assessee did not press of ground no 24 and 25 and therefore these grounds are dismissed as not pressed. 56 The additional grounds no.26 reads as under: - I. Additional legal ground to claim deduction of refund of excess taxes paid on distribution of dividend during the year With regard to the additional legal ground relating to refund of excess taxes paid on distribution of dividend, it is submitted that the Appellant out of abundant caution had not claimed the refund of said payments for the year under consideration in the absence of clarity in respect of the said issue. However, recently, the Hon'ble Delhi Income-tax Appellate Tribunal in case of Giesecke & Devrient (India) ....