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2019 (4) TMI 1429 - AT - Income TaxDisallowance of expenditure incurred towards gift and sales promotions - reason for making an ad hoc disallowance of 40% is, CBDT Circular no.5/2012, dated 1st August 2012, wherein, the prohibition imposed by Indian Medical Council with regard to acceptance of gift by medical practitioner / doctor was imposed w.e.f. 10th December 2009 - HELD THAT - Prohibition imposed by Indian Medical Council against acceptance of gift is on the medical practitioner and doctor and not on the pharmaceutical companies. The applicability of the aforesaid CBDT Circular as well as prohibition imposed by Indian Council on Pharmaceutical companies came up for judicial scrutiny before the Tribunal in DCIT v/s PHL Pharma Pvt. Ltd. 2017 (1) TMI 771 - ITAT MUMBAI after examining the regulation issued by the Medical Council of India as well as the CBDT Circular referred to above, ultimately concluded that the prohibition imposed by the Indian Medical Council Regulation are not applicable to pharmaceutical companies. The said view was again reiterated by the Co ordinate Bench in Solvay Pharma India Ltd. 2018 (1) TMI 797 - ITAT MUMBAI . The Co ordinate Bench has also held that the CBDT Circular referred to by the Departmental Authorities will not apply retrospectively. No contrary decision on the issue has been brought to our notice by the learned Departmental Representative. In view of the aforesaid, following the ratio laid down by the Co ordinate Bench in the decisions referred to above, we allow assessee s claim of expenditure Disallowance u/s 14A under rule 8D(2)(ii) - sufficient interest free funds - HELD THAT - Assessee had sufficient interest free funds available with it to take care of the investments. That being the case, disallowance of interest expenditure under rule 8D(2)(ii) cannot be made. However, to keep track of its investments and manage the funds, the assessee must be incurring certain administrative expenditure .Reasonable disallowance under section 14A r/w rule 8D(2)(iii) has to be made. Accordingly, we direct the Assessing Officer to compute the disallowance of administrative expenditure under rule 8D(2)(iii) after excluding from the average value of investment, the investments which have not yielded any exempt income during the financial year relevant to assessment year under dispute. This ground is partly allowed. Determination of arm's length price of corporate guarantee given to the AE - assessee has provided corporate guarantee to its overseas AE without charging any fees - show cause notice to the assessee to explain why arm's length price of corporate guarantee fee should not be determined - HELD THAT - In many of the cases, the assessees have accepted provision of corporate guarantee as international transaction under section 92B of the Act. In one of such cases viz. Everest Kanto Cylinders Ltd., 2015 (5) TMI 395 - BOMBAY HIGH COURT has upheld the decision of the Tribunal in computing the arm's length price of corporate guarantee fee @ 0.5%. Following the aforesaid decision we direct the Assessing Officer to determine the arm's length price of corporate guarantee fee by applying the rate of 0.5%. This ground is partly allowed. Deduction claimed u/s 10B on the turnover of scrap sales - HELD THAT - While deciding similar issue in assessee s own case for the preceding assessment years, the Tribunal has held that since the sale of scrap is integrally connected to the business activity of the assessee, it should form part of the turnover for computing deduction under section 80IB/10B. Commissioner (Appeals) accepting the aforesaid legal position has directed the AO to allow deduction under section 80IB / 10B of the Act. However, he has wrongly quantified the amount which is the scrap sales relating to 80IB unit, while leaving out the scrap sales of 10B unit. We direct the Assessing Officer to allow assessee s claim of deduction under section 10B / 80IB on the respective sales turnover of scrap relating to the aforesaid units. This ground is allowed.
Issues Involved:
1. Disallowance of expenditure on gifts and sales promotions. 2. Disallowance under section 14A of the Income Tax Act. 3. Determination of arm's length price for corporate guarantee. 4. Deduction claimed under section 10B on the turnover of scrap sales. Issue-wise Detailed Analysis: 1. Disallowance of expenditure on gifts and sales promotions: The assessee, engaged in manufacturing and sales of pharmaceutical products, claimed an expenditure of ?2,26,34,864 towards gifts and sales promotions. The Assessing Officer (AO) disallowed ?50,17,890, reasoning that gifts to doctors are prohibited under the CBDT circular no.5/2012 and Indian Medical Council regulations. The assessee argued that the prohibition applies to doctors, not pharmaceutical companies, and the circular is not retrospective. The Tribunal agreed with the assessee, referencing prior decisions (DCIT v/s PHL Pharma Pvt. Ltd. and Solvay Pharma India Ltd.), and deleted the disallowance, allowing the expenditure as sales promotion. 2. Disallowance under section 14A of the Income Tax Act: The AO disallowed ?7,36,702 under section 14A r/w rule 8D for expenses related to earning exempt income (dividends). The assessee contended sufficient interest-free funds were available, and no administrative expenses were incurred for old investments. The Tribunal found the assessee had sufficient interest-free funds and directed the AO to compute administrative expenses disallowance under rule 8D(2)(iii), excluding investments not yielding exempt income. 3. Determination of arm's length price for corporate guarantee: The AO added ?17,18,941 to the assessee’s income, determining an arm's length price for a corporate guarantee given to an overseas AE at 1.5% per annum. The assessee argued that corporate guarantees are not international transactions under section 92B. The Tribunal noted differing views but followed the jurisdictional High Court decision in Everest Kanto Cylinders Ltd., directing the AO to apply a 0.5% rate for the arm's length price. 4. Deduction claimed under section 10B on the turnover of scrap sales: The AO disallowed deductions on scrap sales turnover under sections 80IB and 10B, which the Commissioner (Appeals) partially allowed for ?3,92,091. The assessee argued for inclusion of ?51,51,738 related to the 10B unit. The Tribunal upheld the assessee's claim, referencing prior Tribunal decisions that scrap sales are integrally connected to business activities, directing the AO to allow deductions on the full turnover of scrap sales for both units. Revenue’s Appeal: The Revenue’s appeal contested the allowance of deductions under sections 10B/80IB for scrap sales. The Tribunal dismissed the appeal, consistent with its decision on the assessee's appeal, confirming the eligibility for deductions on scrap sales. Conclusion: The assessee's appeal was partly allowed, with the Tribunal providing relief on disallowances related to gifts and sales promotions, section 14A disallowance, and the determination of the arm's length price for corporate guarantees. The Tribunal also directed the allowance of deductions on the full turnover of scrap sales. The Revenue's appeal was dismissed.
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