2024 (4) TMI 18 - AT - Income Tax

Accrual of income - Reimbursement of expenses treated as income of the Assessee - HELD THAT - We observe that the AO in the assessment order by specifically mentioning that the Assessee failed to provide party wise details of clinical research and development expenses and support service charges work orders for major parties copies of debit note/invoice/vouchers for support service charges clinical research and development expenses and actual rendering of such income and expenditure and reimbursement details of expenses and evidence in order to show that the expenses have actually been incurred by the Assessee and therefore the same were reimbursed treated the said amount allegedly claimed as reimbursement of expenses as income of the Assessee. Commissioner though approved the action of the Assessee in treating the expenses incurred which have been reimbursed from Wyeth and its affiliates for clinical trials and not routing the same as pass through cost incidental or ancillary to the primary business activities of the service provider and non- deduction of tax at source however as it appear from impugned order it is a fact which though refuted specifically by the AR that Ld. Commissioner failed to examine the party wise details of clinical research and development expenses and support service charges work orders for major parties copies of debit note/ invoice/vouchers for support service charges clinical research and development expenses and actual rendering of such expenditure and any other documentary evidence such as bank details etc. qua reimbursement of expenses that such amount represents reimbursement of cost and does not have any profit element hence for the limited purpose for examination of such parameters as noted above we are inclined to remand the instant issue to the file of the Ld. Commissioner with a direction to verify the aforesaid details/documents as noted above and/or any other corroborative material which the Assessee intends to rely in order to substantiate its claim and recompute the claim of reimbursement accordingly. Resultantly the Appeal filed by the Revenue department is partly allowed for statistical purposes. Direction given by the Commissioner to the AO to charge a markup of 13% on the said amount on account of payment received from the said entities - HELD THAT - We observe that though the Assessee on the one side has claimed that Assessee s duty is to approach and identify the third party investors who would be willing to perform clinical trial activities and thereafter the Wyeth group is entitled to decide qua the appointment of investors and once such a decision is made and the identified third party investors are assigned the job of performing clinical research the Assessee shall co-ordinate and supervise the work of such identified third party investors and report the status of work and data collected to the Wyeth group entities. Assessee on the contrary claimed that the Assessee has not performed any value added activities and the role of the Assessee is in the nature of facilitator and/or conduit between the third party Institutions (Investors) and Wyeth group. We also observe that the OECD has also laid down certain guidelines qua mark-up on the cost of the services as reproduced and considered by the Hon ble Co-ordinate Bench of the Tribunal in the case of Vedanta Limited Vs. ACIT 2020 (9) TMI 1010 - ITAT DELHI We are in agreement with the Assessee that if no services have been provided except playing the role of conduit only then no mark up would be applicable however where the Assessee has played an active/main role in identifying and selecting the third parties making the arrangements controlling and supervising their work and reporting their working to the principal and charged for such services from the alleged reimbursement/external costs then in our considered opinion mark-up would be necessitated hence for the just decision of the case and for substantial justice we deem it appropriate to remand this issue to the file of Ld. Commissioner for decision afresh.

Summary

Issues Involved:
1. Delay in filing the appeal.
2. Addition of reimbursement of expenses as income.
3. Applicability of markup on reimbursement of expenses.

Summary:

1. Delay in Filing the Appeal:
The appeal was delayed by 531 days due to the Covid-19 period. The delay was condoned based on the Hon'ble Apex Court's order in SUO MOTU WRIT PETITION (C) NO. 3 OF 2020, which waived the limitation period for all judicial or quasi-judicial proceedings during the pandemic.

2. Addition of Reimbursement of Expenses as Income:
The Assessee declared an income of Rs. 1,92,02,104/- for the AY 2011-12. The AO observed that the Assessee received Rs. 6,14,25,224/- as reimbursement from its Associated Enterprises (AEs) but did not declare this amount as income in the Profit & Loss A/c. The AO added this amount to the Assessee's income, stating that the Assessee failed to provide adequate evidence that the expenses were actually incurred and reimbursed. The AO also noted the non-deduction of TDS on these expenses.

The Ld. Commissioner, however, accepted the Assessee's claim, stating that the costs were pass-through costs and not debited in the Profit & Loss A/c. The Commissioner rejected the AO's view that these costs should be treated as income due to non-deduction of TDS, as these were pass-through costs and not the Assessee's own expenses.

3. Applicability of Markup on Reimbursement of Expenses:
The Ld. Commissioner directed the AO to charge a markup of 13% on the reimbursement amount of Rs. 6,14,25,224/-. The Assessee argued that these costs were pass-through costs and should not be subject to a markup. The Commissioner held that these costs were integral to the clinical trials facilitated by the Assessee and therefore, a markup was justified.

The Tribunal remanded the issue back to the Ld. Commissioner for verification of details such as party-wise expenses, work orders, and other documentary evidence to substantiate the Assessee's claim. The Tribunal also directed the Commissioner to reassess the applicability of the markup based on the exact role played by the Assessee in facilitating the clinical trials.

Conclusion:
The appeals and cross objections were partly allowed for statistical purposes, with directions for further verification and reassessment by the Ld. Commissioner.