TaxTMI 
TaxTMI 
TaxTMI 
2024 (4) TMI 18
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....ty, we will decide ITA No. 1644/Mum/2021 and connected C.O. No. 82/Mum/2022, as a lead case and result of same would be applicable mutatis mutandis to connected appeal and CO as well. 3. ITA No. 1644/Mum/2021. At the outset, we observe that there is delay of 531 days in filling of the instant appeal, which occurred during the Covid-19 period i.e. from 15.03.2020 till 28.02.2022 and the same has been excluded/waived for the purposes of limitation as prescribed under any general or special laws in respect of all judicial or quasi-judicial proceedings, by the Hon'ble Apex Court by passing the order dated 10-01-202 in SUO MOTU WRIT PETITION (C) NO. 3 OF 2020, hence the delay of 531 days in filling of the instant appeal is condoned. 3.1 Coming to the merits of the case, we observe that in this case, the Assessee had declared its income at Rs. 1,92,02,104/- by e-filing its return of income on 29.11.2011, which was accepted by intimation dated 28.11.2012 u/s 143(1) of the Act. Subsequently, the case of the Assessee was selected for scrutiny and therefore, statutory notices were issued, in response to which the Assessee filed requisite replies/documents. By perusing the financials of th....
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....es. The agreement inter-alia provides that WPIL directly or indirectly through research scientists etc. shall perform research and development work as may be required by Wyeth or its affiliates. As the Assessee does not have adequate reserve therefore it entered into an agreement dated 07.03.2008 with Wyeth Ltd. to receive administrative support services through their employees (service agreement), copy of the same is filed with letter dated 21.01.2014. Under the service agreement, Wyeth Pharma is liable to pay support service charges at cost plus a mark-up. 3.4 The AO though considered the aforesaid reply/claim of the Assessee, but not found satisfactorily and therefore ultimately disallowed the amount of Rs. 6,14,25,224/- {claimed as reimbursement of expenses by the Assessee} by treating the same as income of the Assessee and consequently added to the total income of the Assessee, by observing and concluding as under: "5.5. The reply of the Assessee has been carefully considered but the same is not found satisfactory. It is observed that the assessee company has received an amount of Rs. 6,14,25,224 from its Associate Enterprises towards the reimbursement of expenditure on acc....
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....m- 3CEB. Therefore, following the same equation this amount is directly the income of the assessee for the assessment year under reference. 5.8 Since the assessee has failed to discharge its onus to prove the genuineness of the expenditure & also failed to produce any documentary evidences to prove that the above expenses has actually been incurred by the assessee. Further assessee also failed to produce documentary evidence to show deducting TDS on such expenditure, therefore the amount of Rs. 6,14,25,224/- claimed as reimbursement of expenses deserves to be treated as income of the assessee, Accordingly the amount of Rs. 6,14,25,224/- is added to total income. Since the assessee has furnished inaccurate particulars of its income, therefore, penalty u/s. 271(1)(c) is also initiated on this issue." 4. The Assessee being aggrieved with the aforesaid addition/disallowance of Rs. 6,14,25,224/- preferred first appeal before the Ld. Commissioner, who accepted the claim of the Assessee qua reimbursement of expenses by holding as under: 3.3. Decision: 3.3.1 I have considered the facts of the case, findings of the AO and submissions made by the appellant. The reasons for which AO....
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....proposals in which the compound or product is identified and the scope of work the be performed by WPIL is defined WPIL shall proceed to perform research and development work or engage, or award a grant or stipend to, such independent research scientists technicians and consultants it may require to perform such work, all in accordance with the provision of such proposal... As per para 2.2 of the agreement, external costs have been defined to include but not limited to "all costs and expenses to engage independent third parties on a sub- contract basis to perform research and development work under this agreement, such as the costs and expenses associated with grant, award or stipend to any independent research scientist, technician or consultant." 3.3.4 From the above terms of agreement, it is apparent that the appellant is responsible to facilitate the clinical trials of Wyeth in India and for this purposes it has to make some payments to third parties, which are not its own cost and hence not debited in its profit & loss account. It is not the case of the AO that these costs should form a part of the cost base on which mark-up is to be received from Wyeth on account of the....
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....of the Ad and therefore ought to be dropped." 5.2 The Ld. Commissioner not being convinced with the said claim/submissions of the Assessee, ultimately directed the AO to charge a mark-up of 13% on the said amount of Rs. 6,14,25,224/- by concluding as under: 3.3.8 The submission of the appellant primarily states that these costs cannot form a part of the cost base for mark-up to be charged from Wyeth because these are that parties costs. The important issue here is as to whether the services rendered by the appellant in providing facilitation services to Wyeth could have been possible without making these payments. The R & D agreement filed by the appellant is a consolidated agreement that provides for the appellant providing support services to ensure that the clinical trials of Wyeth in India are successfully conducted. As far as Wyeth is concerned, costs may be in the nature of internal or external and mark-up on the same may be decided in terms of their own agreement, but it is also essential to state that these costs are integral to the clinical trials that the appellant is expected to facilitate in India for Wyeth. The appellant has not been able to establish that these int....
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....f the said Agreement and approved the action of the Assessee in not debiting the amount under consideration in its profit & loss account by observing that it is apparent that the appellant is responsible to facilitate the clinical trials of Wyeth in India and for this purposes it has to make some payments to third parties, which are not its own cost and hence not debited in its profit & loss account. The Ld. Commissioner also rejected the finding of the AO to the effect since no expenses have been incurred, there can be no reimbursement and hence the receipt is in the nature of income. We further observe that the Ld. Commissioner also considered "as to whether the provisions of section 40A(ia) which provides for disallowances of expenses in case of non-deduction of TDS, are applicable or not" and held that since these payments are in the nature of pass through costs and have not been debited in the profit & loss account, the fact of deduction of tax at source cannot be a basis of treating these payments as income, hence this alternate finding of the AO is also rejected. We have given thoughtful consideration to the aforesaid determination/conclusion drawn by the Ld. Commissioner an....
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....nt accordingly. Hence the instant issue is remanded to the file of Ld. Commissioner accordingly. Resultantly, the Appeal i.e. 1644/Mum/2021 filed by the Revenue department is partly allowed for statistical purposes. 8. Coming to the C.O. No. 82/Mum/2022 filed by the Assessee, we observe that Assessee has challenged the direction given by the Ld. Commissioner to the AO to charge a markup of 13% on the said amount of Rs. 6,14,25,224/- on account of payment received from the said entities. We observe that the Ld. Commissioner during the appellate proceedings also asked the Assessee to explain "as to why these payments which have been claimed in the nature of reimbursement are different from the other internal expenses, on which mark up has been charged by the Assessee" and "as to why these expenses are not formed a part of cost basis, on which mark up should also be received from Wyeth or its AEs". 8.1 The Assessee inter-alia claimed that as per terms of the agreement, Wyeth and its affiliates were liable to compensate the Assessee all the internal cost with mark up and the external cost without a mark up and during the year under consideration, the Assessee incurred expenditure of ....
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....ation expenses on behalf of its AE and no value added activities are performed by Assessee qua performance or delivery of the service provided by the investors. The payment to these investors are recovered from AEs in the form of "reimbursement (-) pass through cost". Thus, such payments to the investors are excluded from the "service income" for the provision of clinical study related support services. From the aforesaid, it is evident that the Assessee does not bear any risk vis-à-vis services performed by the third parties and therefore, accordingly in absence of any value added activities being performed, the Assessee has recovered these third party external costs without adding any mark up as per internal company service agreement. Costs have been bifurcated into internal cost and external cost and agreed to be reimbursed by AE without any mark up. At last the Assessee claimed that it did not undertake the clinical trial activities on its own, hence it is not accountable for the services provided by the third parties and therefore, the Assessee has neither performed any value added activities nor assumed any significant risk with respect to the services performed by thi....
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....in guidelines qua mark-up on the cost of the services as reproduced and considered by the Hon'ble Co-ordinate Bench of the Tribunal in the case of Vedanta Limited Vs. ACIT (2020) 522 (Del-Trib.) {ITA No. 12/Del/2020 decided on 21.09.2020} and which are reproduced herein below for brevity and ready reference. "When an associated enterprise is acting only as an agent or intermediary in the provision of services, it is important in applying the cost-plus method that the return or mark- up is appropriate for the performance of an agency function rather than for the performance of the service themselves. In such a case, it may not be appropriate to- determine arm's length pricing as a mark-up on the cost of the services but rather on the cost of the agency function itself, or alternatively, depending on the type of comparable data being used, the mark-up on the cost of services should be lower than would be appropriate for the performance of the services themselves. For example, an associated enterprise may incur the costs of renting advertising space on behalf of group members, costs that the group members would have incurred directly had they been independent In such a case, it ....