2021 (12) TMI 583 - AT - Income Tax

TP Adjustment - adjustment pertaining to marketing cost and functional differences claimed by the assessee and rejected by the Transfer Pricing Officer (TPO) - adjustment of functional difference has been denied by Ld. TPO on the ground that there was no mention in the agreement that product license and lab test expenses were to be borne by the AE and reduction in profitability of AE would not be relevant for determining ALP - HELD THAT - CIT(A) noted that these adjustments were found to be part of contract between the assessee and AE. We find that product license maintenance cost and lab analysis were borne by AE which in case of sales to non-AE was borne by the assessee. The assessee s function in case of sales to AE is restricted to manufacturing only. The assessee performs the function of contract manufacturer. The product licenses were held by the AE who was also responsible for maintenance of the product licenses. The manufacturing was done in strict adherence to Product License and the labeling on products was of assessee s AE. The same is evident from Technical agreement (page no. 342-356 of the Paper Book) between the assessee and FDC-UK (AE). In case of non-AE sales, these expenses are to be borne by the assessee, which fact remains undisputed before us. Therefore, the adjustment of this component has rightly been allowed by Ld. CIT(A). Adjustment of Marketing Costs - The marketing costs differ with geographical conditions. Sales in local markets are prescription drugs and therefore, sale promotion forms major expenses. In exports, the marketing expenses are not as high as compared to local markets as the sale would be made to fixed distributors. Marketing costs may not vary with pack size but it would vary with selling price as marketing costs are calculated as percentage of selling price. Since Ld. TPO is comparing local sale price with that of export sale price, the adjustment of marketing expenses need to be allowed as the same are already incorporated in the selling price since expenses incurred in local markets would be high and therefore, selling price of products sold in local market would also be high. We concur with the aforesaid submissions made by Ld. AR since the marketing costs would vary with geographical locations and would impact the ultimate selling price. Therefore, this adjustment has rightly been allowed by Ld. CIT(A). Adjustment of Non-variable cost - TPO has denied the same on the ground that overheads would not vary with pack size - CIT(A) upheld the same in the absence of data based evidence - This adjustment would be available to the assessee since pack-size is not similar in case of Allercom eye-drops and Moisol eye-drops. While computing ALP, hypothetical selling price and costs have been considered in proportion to the pack size. In such a case, the adjustment arising out of hypothetical non-variable cost based on the same proportion should be allowed. In case of Timolol 0.5% eye-drops, overheads were more in case of domestic sale due to manufacturing from old machineries which consumed more labour hours for packaging and maintenance costs. This fact is undisputed before us. Therefore, the same is required to be factored-in while benchmarking the prices. Hence, we direct lower authorities to allow this adjustment. Sales Return Adjustment - only reason of rejection of this adjustment is the observation of Ld. CIT(A) that the same was to be considered only in the year when the sales returns have actually taken place - As per the terms, once the products are released for sale by designated quality testing facility, the supplier s liability towards cost, expenses and losses to the extent of any claims, returns, rejection, recall would cease and the same would be on AE only without any recourse to the supplier. In case of non-AE sales, the said liability would be on assessee. Therefore, this crucial factor would require adjustment in the selling price while benchmarking the transactions. We order so. Adjustment of Competition - We are of the opinion that the competition in two geographical locations would vary due to market conditions and government regulations prevailing in the market. The assessee, vide letter dated 06/01/2014, has submitted detailed chart scientifically quantifying the competition effect. The assessee has also produced invoices raised by the AE to its customers to prove competition effect. In UK, National Health Service determines reimbursement price of each drug and reimburses the same to retailers. The assessee has also submitted its value chain of UK drug market and functions performed by each party in value chain to justify its margins and arm s length price. In the absence of any adverse findings by lower authorities, we concur with these submissions and accordingly, the assessee s plea is to be accepted. Accordingly, we direct Ld. AO / TPO to grant this adjustment. Wrong claim of R D Deduction u/s 35(2AB) for Jogeshwari Unit - expenditure has been accumulated as work-in-progress in earlier years and no deduction thereof has even been claimed by the assessee, in any manner - HELD THAT -. The assessee has already furnished permission from Directorate General of Health Service in support of the fact that the technology became operative in this year only. We find that the Accounting Standard-26 (AS-26) on intangibles as issued by The Institute of Chartered Accountants of India mandate the assessee to recognize / capitalize intangibles only if it is probable that future economic benefits will flow to the enterprise, the asset is commercially viable and the cost of the asset can be measured reliably. Following the same, the assessee has capitalized the expenditure in this year and made the claim which is in line with the mandate Accounting Standard issued by ICAI. Therefore, in our opinion, the current year would be the correct year of claiming deduction u/s 35(2AB). Non-availability of Form 3CM - once existence of R D facility was not disputed and expenditure for that purpose was genuine in nature and recognition to facility was valid during relevant period, then merely for reason of non-issuance of approval for certain period in prescribed Form 3CM by competent authority, weighted deduction as claimed u/s 35(2AB) could not be denied. Similar is the view of Pune Tribunal in Minilec India (P.) Ltd. 2018 (4) TMI 1058 - ITAT PUNE wherein it was observed by the bench that non-receipt of Form No. 3CM is at best a procedural lapse and is not fatal for denial of claim of deduction u/s 35(2AB). Therefore, considering the entirety of facts and circumstances, we reverse the adjudication of Ld. CIT(A) and direct Ld. AO to grant weighted deduction u/s 35(2AB) as claimed by the assessee. Disallowance of R D Exp. pertaining to Roha and Goa unit-III - Assessee, during the course of proceedings before lower authorities, furnished ample evidences to substantiate its claim - assessee has sufficiently demonstrated the carrying out of R D Activities at Roha as well as Goa-III Unit. The Ld.AO, in the remand report, has accepted the affidavit of officials clarifying their statements and has not re-examined them. Therefore barring statements taken during survey proceedings, the revenue is unable to controvert the assessee s documentary evidences and bring on record any cogent material to dislodge the same. Another undisputed fact is that Survey Team never visited Goa Unit and therefore, the conclusion that no R D activity was being carried at this unit has no legs to stand. Observation of lower authorities that Form 3CM was not available - We find that the aforesaid units had valid approvals from DSIR during the year and non-availability of Form 3CM would not be fatal to claim of deduction. Our adjudication as given in preceding para 3.6 shall mutatis-mutandis apply to the findings of lower authorities - direct Ld. AO to grant weighted deduction u/s 35(2AB) against both the units. Disallowance of Publicity Expenses u/s 37(1) - promotional items were given to stockiest under an incentive scheme to promote the sale of products - HELD THAT - We find that the assessee is a pharmaceutical company engaged in the manufacturing of formulation (final medicinal products) and API (Active Pharmaceutical Ingredients). The pharmaceutical industry is prohibited from advertising its products and the biggest customer for this industry is practicing doctors who in the course of professional practice prescribe medicines for consumption by patients. Due to existence of competition in the market because of availability of pharmaceuticals from different suppliers, it would be necessary for the assessee to ensure awareness and visibility of its products amongst doctors as against advertising its products - The nature and the type of items distributed amongst doctors are not the type which can be considered as intended to influence the decisions of the Doctors. It could be gathered that the value of items given to doctors is generally below ₹ 1000/- per article. Assessee has incurred aggregate expenditure of ₹ 2922.18 Lacs during the year out of which expenditure of ₹ 1921.55 Lacs has been incurred between the period 01/04/2009 to 09/12/2009 whereas balance expenditure of ₹ 1000.63 Lacs has been incurred from 10/12/2009 to 31/03/2010. The expenditure incurred before 10/12/2009 has fully been allowed but expenditure incurred thereafter has been disallowed primarily in terms of CBDT Circular No. 5/2012 dated 01/08/2012 which provide that the medical freebies offered by the assessee in terms of violation of MCI guidelines would be inadmissible deduction. We find that the issue of applicability of CBDT circular to pharmaceutical companies has been examined in various decision of this Tribunal and it has finally been settled that the Circular do not apply to AY 2010-11 as it was issued on 01/08/2012 and the same is not applicable retrospectively - we would hold that CBDT circular was not applicable to the assessee during this year. Accordingly, the promotional / recall items being distributed to doctors for ₹ 633.13 Lacs would not be hit by cited CBDT circular and therefore, these expenses would be an allowable deduction. We order so. Remaining items viz. books, journals, reference articles, prescription pad / chit block, calendars / new-year dairies items given for use in dispensaries nature of these items is similar as incurred by the assessee before 10/12/2009 which has been fully allowed by Ld. AO himself. Therefore, there is no reason as to why these are not allowable thereafter. We find that the assessee, during assessment proceedings as well as during remand proceedings, has filed sufficient documentary evidences including sample confirmations from stockiest, copies of invoices etc. in support of the expenditure and no infirmity could be found in the same by Ld. AO except for the allegation that these documents were not sufficient. Therefore, we would hold that all such expenses were incurred for business purposes and allowable u/s 37(1). Expenditure incurred on stockiest for the purpose of promoting the sale of one of the products i.e. Electral (ORS) - AO, in the remand proceedings, simply reconfirmed the disallowance by holding that confirmations are in identical Performa and seem to have been given at the insistence of the appellant. However, no investigation or third party confirmations have been obtained whereas the assessee has well documented its claim. Therefore, the observations of Ld. AO are merely on the basis of presumption, surmises and conjectures. It could also be seen that similar claim has been allowed in subsequent AYs 2012-13 2013-14 in scrutiny assessment proceedings and therefore, there could be no occasion to doubt the same in this year. Hence, we delete the addition. Bogus purchases - receipt of certain information from Sales Tax Department, Maharashtra, it transpired that the assessee made suspicious purchases - HELD THAT - As relying on assessee own case 2018 (9) TMI 2066 - ITAT MUMBAI we direct Ld. AO to restrict the additions to the extent of 12.5% of suspicious purchases. Allocation of Corporate Expenses to 80-IB / 80-IC Units - reallocation of expenditure as paid to Vision Research foundation - assessee claimed deduction u/s 80-IB @ 30% on two units viz. Goa (ORS) and Goa (Unit-III) whereas it claimed deduction u/s 80-IC @100% on Baddi Unit - HELD THAT - It is the submissions of Ld. AR that the same may not be reallocated since such contribution is in the form of contribution / donation and is not in any way related to any of the plants. Since it is in the nature of a corporate expense, no such allocation should be made. Concurring with the same, we direct Ld. AO consider the nature of receipt and if the same is in the form of donation, no allocation thereof should be made while computing the deduction. Exclusion of other income while computing the deduction - only grievance of the assessee is exclusion of scrap sale - HELD THAT - Issue decided in favour of assessee as relying on case HARJIVANDAS JUTHABHAI ZAVERI AND ANOTHER 1999 (12) TMI 5 - GUJARAT HIGH COURT as held that it cannot be said that the learned Tribunal has committed any error in holding that the deduction under Section 80-IB of the Act is allowable for the income from sale of scrap. Under the circumstances, substantial question of law raised is answered against the revenue. Disallowance u/s 14A - assessee earned exempt dividend income of ₹ 483.13 Lacs and offered suo-moto disallowance of ₹ 28.91 Lacs in the return of income - HELD THAT - The assessee has sufficient opening and closing free funds in the shape of share capital and reserves to make the investments. The free funds are way more than the investments made by the assessee and therefore, as per cited decisions, the presumption would run in assessee s favor that the investments were made out of free funds available with the assessee. Further, in terms of cited decision of special bench, no such disallowance could be made while computing Book-Profits u/s 115JB. Therefore, the additional disallowance as made by Ld. AO while computing income under normal provisions as well as while computing Book-Profits u/s 115JB is not sustainable in law. The Ld. AO is directed to delete the same. This ground stand allowed. Claim of Education Cess - HELD THAT - We find that this issue is covered in assessee s favour - As in the case of Sesa Goa Ltd. 2020 (3) TMI 347 - BOMBAY HIGH COURT has held that while the income tax is not allowable as deduction in view of Sec.40(a)(ii) of the Act, the expression Cess cannot be read into the said provisions and hence the amount of education cess and higher and secondary education cess are allowable as deduction in computing the income of the assessee. Therefore, Ld. AO is directed to verify the claim of the assessee and allow the deduction in terms of the cited decision. This ground stand allowed for statistical purposes. Erroneous levy of interest u/s 234C on tax liability determined under MAT provisions - HELD THAT - We admit this ground of appeal. Accordingly, we direct Ld. AO to bring on record the relevant factual matrix for this issue and adjudicate the issue of levy of interest u/s 234C in the light of above judicial pronouncements. This ground stand allowed for statistical purposes.

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Deduction u/s 35(2AB) for R&D Expenses
3. Disallowance of Publicity and Promotional Expenses
4. Addition on account of Alleged Bogus Purchases
5. Allocation of Corporate Expenses to 80-IB / 80-IC Units
6. Deduction u/s 80-IB / 80-IC on Scrap Sales
7. Disallowance u/s 14A
8. Claim of Education Cess
9. Erroneous Levy of Interest u/s 234C on Tax Liability Determined under MAT Provisions
10. Deduction of Export Incentives

Detailed Analysis:

1. Transfer Pricing Adjustments
The assessee benchmarked its transactions using the Cost-Plus-Method (CPM) and compared product-wise margins on sales to its Associated Enterprises (AEs) with those on sales to unrelated parties. The Transfer Pricing Officer (TPO) proposed adjustments by denying certain adjustments claimed by the assessee. The CIT(A) allowed some adjustments (functional differences and marketing costs) while denying others (non-variable costs, sales return, and competition). The tribunal upheld the CIT(A)'s decision on functional differences and marketing costs but reversed the denial of adjustments for non-variable costs, sales return, and competition, directing the AO to allow these adjustments.

2. Deduction u/s 35(2AB) for R&D Expenses
The assessee claimed weighted deduction for R&D expenses. The AO denied the deduction citing the lack of Form 3CM. The CIT(A) allowed depreciation on the intangible asset but denied the weighted deduction. The tribunal reversed the CIT(A)'s decision, directing the AO to grant the weighted deduction, noting that the R&D facility was approved by DSIR and the expenses were genuine.

3. Disallowance of Publicity and Promotional Expenses
The AO disallowed expenses on promotional items given to doctors and stockists, citing CBDT Circular No. 5/2012 and MCI regulations. The CIT(A) upheld the disallowance for promotional items given to doctors and stockists but allowed other expenses subject to verification. The tribunal held that the CBDT circular was not applicable for the assessment year in question and allowed the expenses as business deductions.

4. Addition on account of Alleged Bogus Purchases
The AO disallowed purchases from certain entities based on information from the Sales Tax Department. The CIT(A) upheld the disallowance. The tribunal, following its decision in the assessee's case for the previous year, directed the AO to restrict the addition to 12.5% of the suspicious purchases.

5. Allocation of Corporate Expenses to 80-IB / 80-IC Units
The AO reallocated operating expenses, finance expenses, and depreciation to the 80-IB / 80-IC units. The CIT(A) provided partial relief. The tribunal directed the AO to re-examine the allocation of depreciation and interest expenses, considering the nature of the expenses and their connection to the units.

6. Deduction u/s 80-IB / 80-IC on Scrap Sales
The AO excluded scrap sales from the deduction computation. The CIT(A) upheld this exclusion. The tribunal, citing relevant case law, directed the AO to include scrap sales in the deduction computation.

7. Disallowance u/s 14A
The AO made an additional disallowance under Section 14A, which was included in the normal income and the Book-Profits u/s 115JB. The tribunal, noting that the assessee had sufficient own funds, directed the AO to delete the additional disallowance.

8. Claim of Education Cess
The assessee sought deduction for education cess and secondary & higher education cess. The tribunal, citing relevant High Court decisions, directed the AO to verify the claim and allow the deduction.

9. Erroneous Levy of Interest u/s 234C on Tax Liability Determined under MAT Provisions
The AO levied interest u/s 234C on the tax liability determined under MAT provisions. The tribunal, considering judicial precedents, directed the AO to re-examine the levy of interest.

10. Deduction of Export Incentives
The assessee claimed that export incentives received under certain schemes were capital in nature and not includible in normal income or Book-Profits. The tribunal directed the AO to verify the claim and adjudicate the issue in light of relevant judicial pronouncements.

Conclusion:
The assessee's appeals for AYs 2010-11 and 2011-12 were partly allowed, while the revenue's appeal was dismissed. The tribunal provided detailed directions on various issues, emphasizing the need for verification and adherence to judicial precedents.