2021 (4) TMI 485 - AT - Income Tax

Disallowance of gift sales promotion - allowable business expenses or not? - Gifts given to the doctors as freebies and in violation of circular of medical council - HELD THAT - We find that in the immediate preceding assessment year similar disallowance on expenditure incurred towards gifts and sales promotion was made by Assessing Officer. The issue travelled to the Tribunal. The Co-ordinate Bench after considering CBDT Circular No. 5 of 2012 (supra) and various decisions rendered on this issue held that the prohibition imposed by Indian Medical Council with regard to acceptance of gift by medical practitioner/doctor was imposed w.e.f. 10th Dec., 2009. Thus, as could be seen, the prohibition imposed by Indian Medical Council against acceptance of gift is on the medical practitioner and doctor and not on the pharmaceutical companies. - Decided in favour of assessee. Transfer pricing adjustment in respect of guarantee fee - HELD THAT - Tribunal in assessee's own case for assessment year 2009-10 placing reliance on the decision rendered in the case of Everest Kento Cylinders Ltd. 2015 (5) TMI 395 - BOMBAY HIGH COURT held that Corporate Guarantee fee paid @ 0.5% would be at arm's length. Respectfully following the decision of Tribunal in assessee's own case 2019 (4) TMI 1429 - ITAT MUMBAI for assessment year 2009-10, the ground of the appeal is partly allowed in the same terms. Charging of interest on loan to A.E. by applying rate of interest prevalent in Romania 300 B.P.S - contention of the assessee is that since the loan was granted in EURO, therefore, EURIBOR rate should be applied - HELD THAT - We find merit in the contentions of the assessee. In the instant case, it is evident from the loan agreement that the assessee had advanced loan to its AE in Romania in EURO, therefore, the interest should be charged in EURIBOR. In principle, we accept the assessee's submissions, however, to determine interest rate we deem it appropriate to restore this issue to the Assessing Officer with a direction to applying EURIBOR base points, if required. Consequently, the ground No. 2.2 of the appeal is allowed for statistical purpose. Additional ground claiming deduction in respect of Education Cess paid on income tax and dividend distribution tax - HELD THAT - Since, the issue has been raised for the first time before the Tribunal, we deem it appropriate to admit the additional ground and restore the issue back to the Assessing Officer for consideration in the light of ratio laid down in the case of Sesa Goa Ltd. 2020 (3) TMI 347 - BOMBAY HIGH COURT . The additional ground of appeal is thus, allowed for statistical purpose.

Summary

Issues Involved:
1. Disallowance of gift and sales promotion expenses.
2. Adjustment made to Arm's Length Price (ALP) for guarantee fees and interest on loan to Associated Enterprises (AE).
3. Deduction in respect of Education Cess paid on income tax and dividend distribution tax.
4. Exemption under sections 80IB and 10B of the Income Tax Act on income derived from the sale of scrap.

Detailed Analysis:

1. Disallowance of Gift and Sales Promotion Expenses:
- Issue: The assessee challenged the disallowance of ?55,39,817/- for gifts and sales promotion expenses, which were considered freebies given to doctors, allegedly violating Medical Council regulations.
- Tribunal's Finding: The Tribunal referred to its earlier decision for the assessment year 2009-10, where a similar disallowance was deleted. It was held that the prohibition by the Medical Council is on medical practitioners accepting gifts, not on pharmaceutical companies giving them. The CBDT Circular No. 5 of 2012 does not apply retrospectively. The Tribunal found no reason to deviate from its previous decision and allowed the assessee’s claim, setting aside the CIT(A)'s findings.

2. Adjustment to Arm's Length Price (ALP):
- Guarantee Fees:
- Issue: The CIT(A) confirmed the use of the Comparable Uncontrolled Price (CUP) method to determine ALP for guarantee fees, resulting in an adjustment of ?7,33,100/-.
- Tribunal's Finding: The Tribunal followed its earlier decision in the assessee’s case for the assessment year 2009-10, where it was held that a corporate guarantee fee of 0.5% is at arm’s length. The Tribunal partly allowed the ground in the same terms.

- Interest on Loan to AE:
- Issue: The CIT(A) directed the AO to apply the interest rate prevalent in Romania plus a spread of 300 basis points, whereas the assessee contended for the application of the EURIBOR rate since the loan was in EURO.
- Tribunal's Finding: The Tribunal observed that the loan agreement indicated the loan was in EURO and referred to the decision in Tata Autocomp Systems Ltd. vs. ACIT, where it was held that the EURIBOR rate should apply for loans in EURO. The Tribunal restored the issue to the AO to apply the EURIBOR rate plus base points if required.

3. Deduction in Respect of Education Cess:
- Issue: The assessee claimed a deduction for education cess on income tax and dividend distribution tax, which was opposed by the Department on procedural grounds.
- Tribunal's Finding: The Tribunal admitted the additional ground, noting it is legal in nature and no new evidence is required. Referring to the decision in Sesa Goa Ltd. vs. JCIT, the Tribunal restored the issue to the AO for consideration in light of this precedent.

4. Exemption on Income Derived from Sale of Scrap:
- Issue: The Revenue challenged the CIT(A)'s direction to allow exemptions under sections 80IB and 10B on income from the sale of scrap.
- Tribunal's Finding: The Tribunal dismissed the Revenue’s appeal due to the low tax effect, in accordance with the CBDT Circular No. 17/2019, which prescribes a monetary limit for filing appeals.

Conclusion:
- The assessee's appeal was partly allowed, with the Tribunal setting aside the disallowance of gift and sales promotion expenses, and directing the AO to apply the EURIBOR rate for interest on loans to AE.
- The additional ground regarding the deduction of education cess was admitted and remanded to the AO.
- The Revenue's appeal was dismissed due to the low tax effect.