TMI Blog2024 (4) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... e expenses incurred which have been reimbursed from Wyeth and its affiliates for clinical trials and not routing the same as pass through cost incidental or ancillary to the primary business activities of the service provider and non- deduction of tax at source, however as it appear from impugned order, it is a fact which though refuted specifically by the AR that Ld. Commissioner failed to examine the party wise details of clinical research and development expenses and support service charges, work orders for major parties, copies of debit note/ invoice/vouchers for support service charges, clinical research and development expenses and actual rendering of such expenditure and any other documentary evidence such as bank details etc. qua reimbursement of expenses that such amount represents reimbursement of cost and does not have any profit element, hence, for the limited purpose for examination of such parameters as noted above, we are inclined to remand the instant issue to the file of the Ld. Commissioner with a direction to verify the aforesaid details/documents as noted above and/or any other corroborative material which the Assessee intends to rely in order to substantiate it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ders even dated 31.01.2020, impugned herein passed by the National Faceless Appeal Centre (NFAC) Delhi/Ld. Commissioner of Income Tax (Appeals) {in short Ld. Commissioner } u/s. 250 of the Income Tax Act 1961 (in short the Act ) for AYs. 2011-12 2012-13. 2. As the facts and issues involved in the appeals and cross Objections under consideration are exactly similar except variation in amounts therefore for the sake of brevity, we are inclined to decide the same by this consolidated order. For brevity, 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 fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the year under consideration, the Assessee was engaged in the business of co-operating of research and development on behalf of the AE s business outsourcing, back office data, data processing and other business support services. The Assessee on dated 01.01.2017 entered into a clinical research and development agreement (R D agreement) with Wyeth to provide research and development services directly or indirectly to Wyeth and its affiliates. 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 reimb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore these receipts, are treated as income of the assessee for the assessment year in reference. Further, no TDS has been deducted in respect of the aforesaid expenditure incurred on account of reimbursements of Rs. 6,14,25,224/-. 5.7 The income/amounts appearing in the appendix-C have been admitted as expenditures by the Associate Enterprises of the assessee company and because for the same have been reported in the Form- 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s during the term of this Agreement to perform, either directly at its facilities in the Territory or indirectly through research scientists, technicians and consultants it may engage, such research and development work as WYETH 1.2 The request by WYETH to WPIL for performing administrative or research and development work hereunder shall be submitted to WPIL in the form of written 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the nature of pass through cost Pass through costs are ordinarily costs for which payment is made by the service provider to third parties (generally) or behalf of the Sponsor. Broadly such pass through cost are incidental or ancillary to the primary business activity of a taxpayer. Even the mark-up, shall not be covered within the scope of section 251 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th in India and supposed to make some payments to third parties. Therefore pursuant to the same, facilitated the activities of Wyeth qua clinical trials and got reimbursed the costs which were not its own cost and therefore, has not debited in its P L A/c. We observe that the Ld. Commissioner thoroughly considered the terms and conditions of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch parameters as noted above, we are inclined to remand the instant issue to the file of the Ld. Commissioner with a direction to verify the aforesaid details/documents as noted above and/or any other corroborative material which the Assessee intends to rely in order to substantiate its claim and recompute the claim of reimbursement 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 als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of work and data collected back to Wyeth group entities and therefore, in consideration for providing the above services the Assessee receives remuneration based on actual cost + mark up cost for facilitating clinical research and development activities in India as the Assessee pays the investors for the clinical and investigation 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- -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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. The Assessee on the contrary claimed that the Assessee has not performed any value added activities and the role of the Assessee is in the nature of facilitator and/or conduit between the third party Institutions (Investors) and Wyeth group. 10.1 We also observe that the OECD has also laid down certain 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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