2023 (3) TMI 1339 - AT - Income Tax

Expenses by pharma companies - expenditure incurred towards freebies to doctors by the Pharma Agencies as disallowable u/s.37(1) - expenditure made towards selling and marketing as well as travelling and conveyance as held to be in contravention of the Circular No.5/2012 issued by the CBDT - HELD THAT - After hearing both the parties, we are of the opinion that this issue required to be re-examined by the AO in the light of the earlier order of the Tribunal in the assessee s own case 2023 (3) TMI 1299 - ITAT BENGALURU wherein held A.O. has not critically examined the nature of expenditure incurred by the assessee. In the larger interest of justice, in view of the latest judgment of the Hon ble Apex Court, which has examined the very same issue, it becomes necessary to examine the exact nature of expenses incurred by the assessee for Doctors from all angles. Therefore, for substantial question and cause, the additional evidence are taken on record. Since the additional evidence is taken on record, necessarily, the matter needs fresh verification by the A.O. especially in the light of the recent judgment of the Hon ble Supreme Court in the case of M/s.Apex Laboratories Pvt. Ltd. v. DCIT 2022 (2) TMI 1114 - SUPREME COURT Deduction u/s 80G - donation made to TATA Memorial Hospital while determining the taxable income - HELD THAT - We are of the opinion that the AO has to examine the receipt issued by Tata Memorial Hospital and if that assessee duly approved u/s 80 G of the Act, the exemption u/s 80G of the Act is to be granted to the assessee. TP Adjustment - comparable selection - HELD THAT - ITDC Limited - In our opinion, it is appropriate to remit the issue to the file of AO/TPO to consider the order of the Tribunal in the case of Funda R D India Pvt. Ltd. 2022 (1) TMI 1045 - ITAT DELHI we find it difficult to accept the observation of Ld. DRP that because it is a Govt. company, it is not a good comparable. For such years also the ITDC was a Government owned company and no change of facts and circumstances is brought to our notice. We, accordingly hold it to be a good comparable and direct the ld TPO/ AO to include it in the final list of comparable to bench mark the international transactions. Concept Public Relations has been included by the TPO, however, it has been excluded by the Ld. DRP without giving any notice to the assessee, which is incorrect. Accordingly, we vacate this findings of the Ld. DRP. Exclusion of BVG India Ltd. as it won t satisfy the filter adopted by the TPO - The contention of the ld AR is that it has been excluded in assessment year 2012-13 on same principle by ld DRP and it has to be excluded in this assessment year also. In our opinion, in this assessment, the FAR analysis is to be done and it has to be seen if the FAR analysis is to be done in assessment year if it is same in assessment year 2012-13, it should be excluded from the list of comparables. Accordingly, the issue is remitted to the file of AO/TPO for our consideration. Determining the operating margin of the comparable company 'I C R A Management Consulting Services Ltd' as 5.10% on operating cost vis-a-vis 4.31% on operating cost as per the Appellant - We remit this issue to the file of AO/TPO to ascertain the correct margin in case of ICRA Management Consulting Services Pvt. Ltd. and decide accordingly. International transaction relating to recovery of expenses is not at arm's length by regarding the same as the administrative support services and thereby making an adjustment - We remit this issue to the file of AO/TPO to examine this issue in the light of above order of the Tribunal.

Issues Involved:
1. Incorrect appreciation of facts and incorrect interpretation of law.
2. Assessment of total income and balance tax payable.
3. Disallowance of travel and conveyance, selling, marketing, and distribution expenses.
4. Disallowance of samples.
5. Deduction under section 80G of the Act.
6. Taxability of subvention receipt.
7. Rejection of transfer pricing study.
8. Manufacturing segment adjustments.
9. Coordination of clinical trial segment adjustments.
10. Recovery of expenses adjustments.
11. Other adjustments related to risk profile and ALP computation.
12. Levying of interest under Section 234B.
13. Initiation of penalty proceedings under section 274 read with section 271(1)(c).

Detailed Analysis:

1. Incorrect Appreciation of Facts and Incorrect Interpretation of Law:
The Tribunal noted that the grounds related to incorrect appreciation of facts and incorrect interpretation of law were general in nature and did not require adjudication.

2. Assessment of Total Income and Balance Tax Payable:
The Tribunal did not consider these grounds as they were general in nature.

3. Disallowance of Travel and Conveyance, Selling, Marketing, and Distribution Expenses:
- The AO disallowed INR 58,43,964 based on CBDT Circular No. 5/2012, which considers freebies to doctors by pharmaceutical companies as disallowable under Section 37(1) of the Act.
- The Tribunal remitted the issue back to the AO for re-examination in light of the Tribunal's earlier order in the assessee's own case for AY 2011-12, requiring a detailed evaluation of the nature of expenses.

4. Disallowance of Samples:
- The AO disallowed INR 1,92,49,140 as the cost of samples distributed.
- The Tribunal remitted the issue back to the AO for re-examination in light of the earlier orders and judicial precedents, allowing for a detailed evaluation of the nature of expenses.

5. Deduction under Section 80G of the Act:
- The Tribunal directed the AO to examine the receipt issued by Tata Memorial Hospital and grant exemption under Section 80G if the donation was duly approved.

6. Taxability of Subvention Receipt:
- The AO added INR 86,24,00,000 as revenue receipt.
- The Tribunal remitted the issue back to the AO for fresh consideration, instructing to examine relevant clauses of the agreement and the Supreme Court judgment in Siemens Public Communication Network Pvt. Ltd.

7. Rejection of Transfer Pricing Study:
- The Tribunal remitted the issue back to the AO for re-examination in light of the remand on subvention receipt and other related grounds.

8. Manufacturing Segment Adjustments:
- The AO/TPO made an adjustment of INR 13,15,42,767.
- The Tribunal remitted the issue back to the AO for re-examination in light of the remand on subvention receipt and other related grounds.

9. Coordination of Clinical Trial Segment Adjustments:
- The AO/TPO made an adjustment of INR 72,72,172.
- The Tribunal remitted the issue back to the AO for re-examination, directing to ascertain whether the expenses were operating or pass-through costs.

10. Recovery of Expenses Adjustments:
- The AO/TPO made an adjustment of INR 2,60,27,931.
- The Tribunal remitted the issue back to the AO for re-examination in light of the Tribunal's earlier order in the assessee's own case for AY 2011-12, requiring a detailed evaluation of the nature of expenses.

11. Other Adjustments Related to Risk Profile and ALP Computation:
- The Tribunal did not provide specific adjudication on these grounds, as they were consequential to other remanded issues.

12. Levying of Interest under Section 234B:
- The Tribunal noted this ground as consequential and did not require separate adjudication.

13. Initiation of Penalty Proceedings under Section 274 Read with Section 271(1)(c):
- The Tribunal dismissed this ground as preposterous.

Additional Ground:
- The Tribunal dismissed the additional ground related to the subvention receipt of INR 13,88,89,547 as not pressed.

Conclusion:
The Tribunal remanded most of the issues back to the AO for re-examination and fresh consideration, emphasizing the need for detailed evaluation and adherence to judicial precedents. The appeal was partly allowed for statistical purposes.

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