2021 (4) TMI 474 - AT - Income Tax

Disallowance of expenditure u/s 37(1) - expenditure under various heads of expenses such as doctors' spends, gifts external and internal conference, etc - addition on the ground that the same was in violation of the MCI Regulations and consequently, was in violation of the Circular No. 5/2012 dated 01 August 2012 issued by the CBDT - HELD THAT - It is well-settled that the CBDT Circular No. 5 of 2012 shall be applicable prospectively w.e.f. the date of Circular i.e. 01.08.2012. There is no dispute that in the decisions relied on by the Ld. counsel mentioned at para 6 hereinabove, it is held that CBDT Circular is applicable prospectively. Therefore, no disallowance u/s 37(1) of the Act r.w. Circular No. 5 of 2012 dated 01.08.2012 issued by CBDT can be made. In the instant case, neither the Ld. CIT(A) nor the Department have held/argued that the expenses incurred towards payments to the doctors is not a business expenditure. The only question is whether the expenditure is disallowable under the Explanation to section 37(1) of the Act, being violative of MCI Guidelines or not. We are of the considered view that when an expenditure is an allowable business expenditure as per the provisions of the Act, then by invoking the provisions of MCI Guidelines, ad-hoc disallowance cannot be made to the total income without any basis. In this regard, we rely on the order of the Tribunal in the case of Johnson Johnson Ltd 2013 (4) TMI 228 - ITAT MUMBAI accepted by the Department before the Hon ble Bombay High Court 2016 (7) TMI 1272 - BOMBAY HIGH COURT wherein it has been held that after the expenditure is held to be for the purpose of business, then ad-hoc disallowances cannot be made treating the same as non-business expenditure. In view of the above factual scenario and position of law, we direct the AO to delete the disallowances of expenses upheld by the CIT(A). - Decided in favour of assessee. Weighted deduction u/s 35(2AB) - HELD THAT - In the case of Microlabs Ltd. 2015 (3) TMI 982 - ITAT BANGALORE , the Tribunal has held that where the assessee-company engaged in the business of pharmaceuticals received product development charges which were credited the profit and loss account as a part of normal sales, same was not to be reduced from expenditure incurred by the assessee on carrying out scientific research on which section 35(2AB) deduction had to be allowed. As mentioned earlier, the same issue was adjudicated upon by the Tribunal in assessee s own case for AY 2008-09 and AY 2009-10. The Tribunal in para 9 of the order has restored back the matter to the AO for statistical purposes. Pursuant to the direction of the Tribunal, the AO passed order giving effect for the above assessment years. After the directions provided by the Tribunal, the Department has not preferred an appeal before the High Court. Thus the issue having attained finality in assessee s own case, we direct the AO to allow expenditure on gross basis. Computing capital gains on transfer of leasehold rights - Applicability of section 50C of the Act on transfer of lease hold lands - HELD THAT - In the instant case, the ownership of the land and superstructure on the same was with MIDC and with the approval of MIDC, the said leasehold rights were transferred from Bombay Dyeing to the assessee - After acquisition of land, the factory and the residential building, the assessee agreed in the agreement dated 31.03.2004 that it would obtain permission from MIDC for demolishing the superstructure of the said land. - Thus it is crystal clear that the assessee had no rights to construct or sub-plot or assign the rights to anyone without obtaining approval from MIDC. In fact the assessee only had limited rights to undertake construction on the said land. The assessee has assigned the leasehold rights only after obtaining approval from MIDC. - As the assessee did not have the right to construct/transfer/sub-plot or assign the property without obtaining the approval from MIDC and accordingly the assessee had limited rights in the leasehold property unlike the complete right for development of property, thus we direct the AO to delete the addition made by applying the provisions of section 50C of the Act. Accordingly, assessee grounds of appeal are allowed. TP Adjustment - order of the Ld. CIT(A) re-computing the ALP of the international transaction pertaining to sale of pharmaceutical products by the assessee to its AE and confirming an adjustment - assessee has adopted TNMM as the most appropriate method, selecting itself as the tested party and adopting OP/OC as the profit level indicator (PLI) - HELD THAT - We find merit in the contentions of the Ld. counsel that the Ld. CIT(A) has confirmed the adjustment made by the AO/TPO in respect of only part of the total products and accepted the remaining exports made by the assessee at arm s length and thus he cannot accept TNMM for only part of the same transaction. Thus it is incongruous on the part of the Ld. CIT(A) accepting the international transaction of sale of pharma products (portion pertaining to sale of other products) to be at arm s length, however rejecting the remaining portion (sale of Metformin product) and confirming TP adjustment on such portion after allowing certain adjustment with adoption of CUP as the most appropriate method. In the instant case, we find that the TPO has straight proceeded to apply CUP method. The TPO has not examined the applicability and relevance of TNMM. Thus well-settled principles delineating the ingredients of TNMM and keeping in mind the facts in the present case, we set aside the order of the Ld. CIT(A) on the above grounds of appeal and restore the matter to the file of the TPO/AO to pass an order afresh as per Rule 10B. We hold that TNMM is the most appropriate method in the present case and while using TNMM, the search for comparables may be broadened by the assessee as well as revenue by including comparables. However, this can be done only if (a) the functions performed by the tested party and the selected comparable entity are similar including the assets used and the risks assumed; and (b) the difference in services/products offered has no material bearing on the profitability. We direct the assessee to file the relevant documents/evidence before the TPO/AO. As the above grounds of appeal are restored to the file of the TPO/AO, we are not adverting to the case laws referred by the Ld. counsel. Grounds of appeal are allowed for statistical purposes. Deduction in respect of education cess on income tax paid during the year ought to be allowed as a deduction while computing the total income - HELD THAT - The Hon ble Bombay High Court in the case of Sesa Goa Ltd. 2020 (3) TMI 347 - BOMBAY HIGH COURT has held that education cess is an allowable business expenditure and not subject to disallowance u/s 40(a)(ii) of the Act. Also the Hon ble Rajasthan High Court in the case of Chambal Fertilizers Chemicals Ltd. 2018 (10) TMI 589 - RAJASTHAN HIGH COURT has held that education cess liability is eligible for deduction while computing the total income.

Summary

Issues Involved:

1. Disallowance of expenditure under Section 37(1) of the Income Tax Act.
2. Weighted deduction under Section 35(2AB) of the Income Tax Act.
3. Applicability of Section 50C of the Income Tax Act on transfer of leasehold lands.
4. Transfer pricing adjustments.
5. Deduction in respect of education cess on income tax paid.

Issue-wise Detailed Analysis:

1. Disallowance of Expenditure under Section 37(1) of the Income Tax Act:

The primary issue was whether expenses incurred by the assessee, a health care company, under various heads such as doctors' spends, gifts, and conferences, were disallowable under Section 37(1) of the Act. The Assessing Officer (AO) disallowed these expenses citing violation of the Medical Council of India (MCI) Regulations and CBDT Circular No. 5/2012. The CIT(A) upheld the disallowance, arguing that MCI regulations, effective from 14.10.2009, prohibited such expenditures, making them non-deductible under Section 37(1).

However, it was contended that MCI regulations apply only to medical practitioners and not to pharmaceutical companies. The Tribunal agreed, citing precedents that MCI regulations do not apply to pharmaceutical companies and that the CBDT Circular is applicable prospectively from 01.08.2012. Therefore, the Tribunal directed the AO to delete the disallowance of expenses upheld by the CIT(A), allowing the assessee's appeal on this ground.

2. Weighted Deduction under Section 35(2AB) of the Income Tax Act:

The assessee claimed weighted deduction for R&D expenditure under Section 35(2AB), which the CIT(A) partially disallowed by netting off income from the sale of R&D products and assets. The Tribunal noted that similar issues in previous years had been restored to the AO for verification. Following this precedent, the Tribunal directed the AO to allow the expenditure on a gross basis, restoring the matter for verification, and allowed the assessee's appeal on this ground.

3. Applicability of Section 50C of the Income Tax Act on Transfer of Leasehold Lands:

The issue was whether Section 50C, which applies to the transfer of capital assets being land or building, applies to the transfer of leasehold rights. The AO applied Section 50C, adopting the stamp duty valuation for computing capital gains. The CIT(A) upheld this, citing the Tribunal's decision in Shavo Norgren Pvt. Ltd.

The Tribunal, however, noted that the assessee had limited rights over the leasehold property and could not transfer or develop it without MIDC's approval. Citing precedents, including the Bombay High Court's decision in Greenfield Hotels & Estate (P.) Ltd., the Tribunal held that Section 50C does not apply to the transfer of leasehold rights and directed the AO to delete the addition, allowing the assessee's appeal on this ground.

4. Transfer Pricing Adjustments:

The CIT(A) confirmed an adjustment to the income of the assessee by re-computing the Arm's Length Price (ALP) using the Comparable Uncontrolled Price (CUP) method instead of the assessee's preferred Transactional Net Margin Method (TNMM). The Tribunal found merit in the assessee's contention that TNMM was the most appropriate method and that the CIT(A) had inconsistently accepted TNMM for part of the transaction while rejecting it for another part.

The Tribunal restored the matter to the TPO/AO to re-examine the applicability of TNMM, directing that comparables be selected based on functional similarity and that differences in services/products offered should have no material bearing on profitability. The Tribunal allowed the assessee's appeal for statistical purposes on this ground.

5. Deduction in Respect of Education Cess on Income Tax Paid:

The assessee raised an additional ground for deduction of education cess on income tax paid. The Tribunal admitted this ground, citing the Bombay High Court's decision in Sesa Goa Ltd. and the Rajasthan High Court's decision in Chambal Fertilizers & Chemicals Ltd., which held that education cess is an allowable business expenditure. The Tribunal allowed this additional ground of appeal.

Revenue's Appeal:

The Revenue's appeal primarily contested the deletion of disallowances and allowances made by the CIT(A). The Tribunal upheld the CIT(A)'s decisions, dismissing the Revenue's appeal.

Summary for AY 2011-12:

The issues for AY 2011-12 were identical to those for AY 2010-11. The Tribunal's decisions for AY 2010-11 applied mutatis mutandis to AY 2011-12, resulting in the assessee's appeal being partly allowed and the Revenue's appeal being dismissed for both assessment years.

Conclusion:

For both AY 2010-11 and AY 2011-12, the Tribunal partly allowed the assessee's appeals and dismissed the Revenue's appeals.