2022 (1) TMI 1034 - AT - Income Tax

TP Adjustment u/s 92 - Addition to provision of clinical study management and monitoring sport services - HELD THAT - We are of the considered view when issue as to removing the pass-through cost from the cost base for computing operating margin has already been decided by the Coordinate Bench of Tribunal in assessee s own case in its favour no adjustment in the given circumstances, even by taking comparables chosen by the TPO as correct one is warranted - AO is directed to verify the facts as to the claim of the assessee qua pass-through cost , if correct to allow the same. Consequently, we are of the considered view that Ld. CIT(A) has legally and validly decided the issue in favour of the assessee, hence ground no. 1 2 are determined against revenue. Transfer price adjustment qua international transaction pertaining to import of Finished Drugs Formulations (FDF) i.e. Minipress for trading purposes - HELD THAT - When the identical expenses claimed by the assessee have already been allowed by the Tribunal in AY 2002-03 and revenue while accepting the decision of the Tribunal deleted the identical expenses in AY 2000-01 which has been accepted, we find no reason to interfare into the findings returned by CIT(A) while following the rule of consistency - market expenses are incredible part of the business in the pharmaceutical field and it is not the case of the revenue that any new product has been introduced by the assessee during the year under consideration. So, the findings rendered by CIT(A) are hereby upheld. Depreciation claimed by the assessee on plant and machinery of Ankleshware Plant - HELD THAT - We are of the considered view that this contention of the Ld. DR is not tenable because once the asset is purchased and enters into a particular block of assets, the same is not individually identifiable as depreciation is available on the entire block of assets in view of section 32 of the Act. Moreover, this issue has been successively decided in favour of the assessee from AY 2001-02 to 2003-04 2010 (3) TMI 1268 - ITAT MUMBAI . Correct head of income - Rental income received from subleasing of commercial properties as income from business as against claim of the assessee being income from house property on the ground that renting out of premises amounts to commercial exploitation for business purpose by the assessee - HELD THAT - As perused the order passed by Ld. CIT(A) who has duly thrashed the facts that when the period of lease exceeds 12 years (including renewal period), it could be considered as the deemed owner of the property‟ within the meaning of section 27(iiib) r.w.s. 269UA(f) of the Act. So, we find no scope to interfare into the findings rendered by Ld. CIT(A).Ground No. 8 is determined against revenue.

Issues Involved:

1. Deletion of Transfer Pricing Adjustment of ? 3.71 crores.
2. Ignoring TPO's comparable set of 3 companies.
3. Deletion of Transfer Pricing Adjustment of ? 2.34 crores related to Import of Finished Drugs Formulation (FDFs).
4. Ignoring TPO's adjustment based on the comparison of operating loss with the average operating profit margin.
5. Deletion of disallowance related to Market Research Expenses of ? 73,29,752/-.
6. Classification of Market Research Expenses as revenue expenditure.
7. Direction to allow depreciation on plant and machinery of Ankleshwar Plant.
8. Treatment of rental income from subleasing of commercial properties.

Detailed Analysis:

1. Deletion of Transfer Pricing Adjustment of ? 3.71 crores:
The Tribunal considered the issue of Transfer Pricing (TP) adjustment related to clinical services rendered by the assessee. The assessee used the Transactional Net Margin Method (TNMM) with Operating Cost/Total Cost (OP/TC) and selected 9 comparables. The TPO rejected 7 out of 9 comparables and included an additional comparable, leading to a proposed adjustment of ? 3.71 crores. The CIT(A) accepted the assessee's contention by following a previous decision that "Pass-through Cost" should be removed from the cost base, resulting in an operating margin of 19.57%. The Tribunal upheld the CIT(A)'s decision, noting that the issue had already been decided in favor of the assessee in earlier years, making the grounds raised by the revenue infructuous.

2. Ignoring TPO's comparable set of 3 companies:
The TPO had selected 3 comparables, including one chosen by the TPO and two by the assessee. The CIT(A) accepted the operating margin computed by the assessee and directed the TPO to treat the adjustment as NIL. The Tribunal found that the CIT(A) had legally and validly decided the issue in favor of the assessee, as the issue of removing "Pass-through Cost" had already been settled in earlier years.

3. Deletion of Transfer Pricing Adjustment of ? 2.34 crores related to Import of Finished Drugs Formulation (FDFs):
The TPO compared the margin of comparable companies (3.47%) with the operating loss incurred by the assessee (-16.90%) and made an adjustment of ? 2.34 crores. The CIT(A) deleted the adjustment, noting that the loss was due to substantial marketing expenses in the initial years and not due to transactions with related parties. The Tribunal upheld the CIT(A)'s decision, agreeing that the initial business strategy of marketing penetration justified the economic adjustment.

4. Ignoring TPO's adjustment based on the comparison of operating loss with the average operating profit margin:
The Tribunal found that the CIT(A) had correctly provided economic adjustment for the initial years' marketing strategy and deleted the TP adjustment. The Tribunal noted that the profitability trend showed substantial improvement in later years, supporting the CIT(A)'s decision.

5. Deletion of disallowance related to Market Research Expenses of ? 73,29,752/-:
The CIT(A) deleted the disallowance by following earlier appellate orders, noting that market research is a routine affair for pharmaceutical companies. The Tribunal upheld the CIT(A)'s decision, finding no reason to interfere with the consistent treatment of market research expenses as revenue expenditure.

6. Classification of Market Research Expenses as revenue expenditure:
The Tribunal agreed with the CIT(A) that market research expenses are an integral part of the business in the pharmaceutical field and upheld the classification of these expenses as revenue in nature.

7. Direction to allow depreciation on plant and machinery of Ankleshwar Plant:
The CIT(A) allowed the depreciation by following earlier Tribunal decisions in the assessee's favor. The Tribunal upheld the CIT(A)'s decision, noting that once an asset enters a block of assets, it is not individually identifiable, and depreciation is available on the entire block.

8. Treatment of rental income from subleasing of commercial properties:
The CIT(A) treated the rental income as income from house property, following earlier Tribunal decisions. The Tribunal upheld the CIT(A)'s decision, noting that the lease period exceeding 12 years made the assessee the "deemed owner" of the property within the meaning of section 27(iiib) r.w.s. 269UA(f) of the Act.

Conclusion:
The Tribunal dismissed the revenue's appeal and upheld the CIT(A)'s decisions on all grounds. The cross objections filed by the assessee were also dismissed as withdrawn. The order was pronounced in the open court on 31st December 2021.

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