2016 (11) TMI 1453 - AT - Income Tax

TPA - determination of arms length price - adjustments in respect of the interest on outstanding receivables that the Ld. - AO also disallowed certain Corporate Additions alleged to have been made for the purposes of business - pure market support service provider - Held that - Explanation has sought to include any other debt arising during the course of business as international transaction with a retrospective effect thereby covering the assessment year under consideration That being so the payment/nonpayment of interest or receipt/non-receipt of interest on the loans accepted or allowed in the circumstances as mentioned in this clause of the Explanation also become international transactions requiring the determination of their ALP. - The decisions relied upon by the assessee are prior to the insertion of the explanation to section 92B and therefore the ratio laid down cannot be applied to the assessee before us - As the facts have not brought on record by the assessee in our opinion the DRP was right in directing the Ld.TPO to examine the facts and ascertain the interest on receivables in accordance to the decision of Hon ble Delhi High Court in the case of CIT vs. Cotton Naturals India private limited 2015 (3) TMI 1031 - DELHI HIGH COURT . - Matter restored before the TPO. Disallowances u/s 37(1)- assessee could not discharge burden of proving that the advertisement business promotion expenses and travel expenses to doctors and other medical personnel are business expenses - Held That - assessee has incurred expenses in the garb of marketing the cardiac machine onus is upon the assessee to prove that the expenses incurred do not violate any law that may be applicable. we are of the considered opinion that entertaining doctors inside/abroad and luring doctors to solicit business by which is prohibited under Regulation 6.8.1 of the MCI Regulations and hence is clearly not allowable - Decided against assessee.

Issues Involved:

1. Transfer Pricing Adjustments
2. Corporate Tax Disallowances
3. Interest on Receivables
4. Initiation of Penalty Proceedings
5. Charging of Interest under Sections 234A, 234B, and 234C

Detailed Analysis:

1. Transfer Pricing Adjustments:

The Tribunal addressed the issue of transfer pricing adjustments, specifically the enhancement of the appellant's income by ?1,80,67,400. The appellant disputed the inclusion of certain companies as comparables, arguing functional dissimilarity.

- Global Procurement Consultant Ltd: The Tribunal found that this company, which provides procurement advisory services, is not functionally comparable to the appellant, who offers marketing support services. Thus, it was directed to be excluded from the final list of comparables.

- Info Edge India Ltd: The Tribunal noted that this company operates internet-based services across various domains, which are not comparable to the appellant's marketing activities. Therefore, it was also excluded from the final list of comparables.

- Priya International Ltd: The Tribunal agreed with the appellant that the allocation of un-allocable expenses should be based on gross profit rather than sales. The TPO was directed to recompute the margin accordingly.

2. Corporate Tax Disallowances:

The Tribunal examined the disallowance of expenses under Section 37(1) of the Act, amounting to ?13,14,548 for payments to doctors, ?19,06,000 for meeting/seminar expenses, and ?8,00,000 for sponsorship payments. The appellant argued that these expenses were incurred in the normal course of business and did not constitute 'freebies' under the Medical Council of India (MCI) regulations.

- The Tribunal referred to MCI regulations and CBDT Circular No. 5/2012, which prohibit doctors from accepting gifts, travel facilities, hospitality, and cash from pharmaceutical companies. The Tribunal found that the appellant failed to provide evidence that the expenses did not violate these regulations.

- Consequently, the Tribunal upheld the disallowance of these expenses, stating that they were not allowable under Explanation 1 to Section 37 of the Act.

3. Interest on Receivables:

The Tribunal addressed the issue of imputing interest on receivables from associated enterprises (AEs). The appellant argued that interest on receivables should not be treated as an international transaction and that the interest, if any, was already built into the price charged.

- The Tribunal referred to the Finance Act 2012, which included 'any other debt arising during the course of business' as an international transaction with retrospective effect from 01/04/2002. This amendment required the determination of the arm's length price (ALP) for interest on receivables.

- The Tribunal directed the TPO to examine the facts and ascertain the interest on receivables based on the documentation provided by the appellant, following the decision in Ameriprise India Pvt. Ltd. vs. DCIT.

4. Initiation of Penalty Proceedings:

The Tribunal noted that the initiation of penalty proceedings under Section 271(1)(c) of the Act is consequential in nature. Therefore, this ground was left unanswered at this stage.

5. Charging of Interest under Sections 234A, 234B, and 234C:

The Tribunal found this issue to be premature and left it unanswered.

Conclusion:

The appeal was partially allowed, with directions to exclude certain comparables and recompute margins, while upholding the disallowance of expenses under Section 37(1) and directing the TPO to reassess interest on receivables.

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