2023 (3) TMI 1299 - AT - Income Tax

TP Adjustment - comparable selection - exclusion of Lotus Labs as comparable by the DRP - HELD THAT - As the company fails the RPT filters for the year under consideration. Accordingly respectfully following the decision of the coordinate bench in assessee s own case 2023 (1) TMI 1114 - ITAT BANGALORE we see no reason to interfere with the decision of the DRP. This ground of the Revenue is dismissed. Expenses by pharma companies - expenditure incurred towards freebies to doctors by the Pharma Agencies as disallowable u/s.37(1) - HELD THAT - The additional evidence furnished by the assessee providing the details of expenditure and the breakup incurred on doctors goes to the root of the dispute, therefore for substantial justice the same is admitted and taken on record for adjudication. We remit the issue back to the AO to examine the nature of expenditure incurred by the assessee and to verify the issue afresh in the light of the recent judgement of the Hon'ble Supreme Court in the case of Apex Laboratories Pvt. Ltd. 2022 (2) TMI 1114 - SUPREME COURT Ground Nos. 4 to 7 are allowed for statistical purposes. Disallowance of contribution towards gratuity funds - HELD THAT - We noticed that the AO has not examined the details as per the directions of the DRP and has admitted that gratuity payment required further enquiry. AO has made disallowance considering the provisions of Section 144C(8) of the Act and sustained the disallowance. Since the AO has not verified the details of gratuity based on the details furnished by the assessee we remit the issue back to the AO with a direction to examine the details of payment of gratuity and decide the allowability accordingly. This ground is allowed for statistical purposes. Disallowance of expenditure incurred under Voluntary Retirement Scheme (VRS) - assessee in the original return inadvertently claimed deduction of entire VRS payment instead of 1/5th of the amount as per section 35DDA and filed revised return rectifying the same - AO disallowed the same on the reason that same was not disclosed in the tax audit report - HELD THAT - We noticed that the AO has not examined the details as per the directions of the DRP and has made disallowance considering the provisions of Section 144C(8) and sustained the disallowance. Since the AO has not verified the details of spends towards VRS payments based on the details furnished by the assessee we remit the issue back to the AO with a direction to examine the details of and decide the allowability accordingly. These grounds are allowed for statistical purposes. TP adjustments @ 5% of the expenses reimbursed by the AE - HELD THAT - In our view whether the mark-up of the cost of the services rendered by the Third Party can be applied for determining the ALP in the hands of the assessee should be examined from the angle of whether by making the payment on behalf of AE the assessee is performing any function or deploying any assets or has born any risks. DRP has not examined these facts based on the details furnished and has calculated an adhoc margin of 5% without any bench marking analysis and without attributing any reasons as to why the reimbursement is a separate international transaction. DRP has not considered the assessee s submission that the entire expenses incurred on behalf of AE does not pertain to coordination of clinical trial segment since the AEs who have reimbursed the expenses are not those to whom clinical trial services are rendered by the assessee. The issue should be remitted back to the DRP to examine the various details and submissions furnished by the assessee and decide the issue in accordance with law. The DRP is directed to keep in mind the decision of the Hon ble Delhi High Court in the case of Li and Fung India Pvt Ltd 2014 (1) TMI 501 - DELHI HIGH COURT while deciding the issue. Accordingly this ground is allowed in favour of the assessee for statistical purposes

Summary

Issues Involved:

1. Transfer Pricing (TP) adjustments and re-characterisation of activities.
2. Disallowance of expenses related to doctors.
3. Disallowance of contribution towards gratuity fund.
4. Disallowance of expenditure incurred under Voluntary Retirement Scheme (VRS).
5. Disallowance under Section 40(a)(ia) of the Income Tax Act.
6. Interest computation under Section 234C and 234D.
7. Additional legal ground regarding refund of excess taxes paid on distribution of dividend.

Detailed Analysis:

1. Transfer Pricing (TP) Adjustments and Re-characterisation of Activities:
The TPO re-characterised the assessee's activities as a Clinical Research Organisation (CRO) and included "Lotus Labs" as a comparable, leading to a TP adjustment. The DRP excluded Lotus Labs, citing significant related party transactions (RPT) and different financial year filters. The Tribunal upheld the DRP's decision, noting that Lotus Labs had significant RPTs, making it unsuitable as a comparable. The Tribunal also addressed the issue of reimbursement of expenses from AE, directing a 5% markup based on the DRP's reliance on the ITAT Hyderabad decision in M/s Kirby Building Systems India Limited. However, the Tribunal remitted the issue back to the DRP for a detailed examination of whether the reimbursement was a pass-through cost or if the assessee rendered any services warranting an ALP adjustment.

2. Disallowance of Expenses Related to Doctors:
The AO disallowed expenses related to doctors, including travel, conveyance, conference expenses, and gifts, based on the CBDT Circular No. 5/2012 and the IMC Regulations. The DRP provided partial relief, deleting disallowances for cost of samples and literature. The Tribunal remitted the issue back to the AO for a fresh examination in light of the Supreme Court's decision in Apex Laboratories Pvt. Ltd. vs. DCIT, which upheld the validity of the CBDT circular. The Tribunal directed the AO to critically evaluate each expense to determine if it violated the IMC regulations.

3. Disallowance of Contribution Towards Gratuity Fund:
The AO disallowed Rs. 72,87,811 towards the gratuity fund, citing non-disclosure in the tax audit report. The DRP directed the AO to verify the payment details. The Tribunal remitted the issue back to the AO for verification, noting that the contribution was made before the due date for filing the return and should be allowed as per the Supreme Court's decision in Goetze (India) Ltd. v. CIT.

4. Disallowance of Expenditure Incurred Under Voluntary Retirement Scheme (VRS):
The AO disallowed one-fifth of the VRS payment, citing non-disclosure in the tax audit report. The DRP directed the AO to verify the facts. The Tribunal remitted the issue back to the AO for verification, noting that the auditor's inadvertent mistake in the tax audit report should not lead to the denial of the deduction.

5. Disallowance Under Section 40(a)(ia):
The assessee did not press this ground, and it was dismissed as not pressed.

6. Interest Computation Under Section 234C and 234D:
The Tribunal directed the AO to verify and compute the interest under Section 234C based on the income declared in the revised return. The issue under Section 234D was not specifically addressed.

7. Additional Legal Ground Regarding Refund of Excess Taxes Paid on Distribution of Dividend:
The Tribunal admitted the additional legal ground regarding the refund of excess taxes paid on distribution of dividend, relying on the decision in Giesecke & Devrient India Pvt Ltd Vs ACIT. However, noting conflicting views on the issue and a pending reference to a larger bench, the Tribunal set aside the issue to the AO for fresh consideration in light of the law and the outcome of the larger bench's decision.

Conclusion:
The Tribunal dismissed the revenue's appeal and partly allowed the assessee's appeal, remitting several issues back to the AO for fresh examination and verification. The Tribunal emphasized the need for detailed scrutiny of expenses and adherence to legal precedents in determining the allowability of deductions and TP adjustments.