2023 (4) TMI 186 - AT - Income Tax

TP Adjustment - Business Support Services - HELD THAT - AO is directed to re-compute ALP taking into consideration the comparable excluded by the Tribunal. Transfer Pricing Adjustment - Recovery of Expenses - DRP determined a 15% mark-up on the amount of such recovery treating the same to be support services rendered by the assessee to its AEs and computed an adjustment - HELD THAT - A mark-up of 8% instead of 15% is considered to be reasonable. The AO is directed to re-compute the ALP. The appeal of the assessee on this ground is allowed for statistical purpose. Disallowance u/s 37(1) - Expenditure on doctors - addition solely on application of CBDT Circular No. 5/ 2012 dated 1 August 2012 read with clause 6.8 of Medical Council of India (MCI) - HELD THAT - We find that the payments made by the assessee to the Doctors in a different form as training and consultancy is another form devised to camouflage the real purpose. The deduction of TDS doesn t give any credence or legalize the payments which are in contravention with the law laid down in M/S APEX LABORATORIES PVT. LTD 2022 (2) TMI 1114 - SUPREME COURT - Hence, we hold that the payments made by the assessee have been rightly disallowed by the Revenue. The appeal of the assessee on this ground is dismissed. Disallowance on account of Depreciation - mandation of ownership of such machines in name of the assessee - assessee has claimed depreciation on fixed assets lying with various hospitals/ distributors - disallowance of claim assessee is not the actual user of the machinery - HELD THAT - The said equipment in question is the property of the assessee is not meant for sale and is being issued for regular follow up of pacemakers and post implant programming support. Thus, the first condition i.e. the ownership of such machines in name of the assessee is clearly established and is in fact also not disputed by the tax department. As regards the second condition, it is clearly evident that these machines are used solely for the purposes of business of the assessee for providing pre-sales and postsales activities i.e. servicing/ follow-up monitoring/ feasibility evaluation etc. in relation to its products i.e. pacemakers and stents. A cursory reading of definition Section 2(c) of The Hire Purchase Act, 1972 makes it evident that a hire purchase agreement is one where the hirer has an option to purchase the goods in accordance with terms of the agreement and the property in the goods pass on to such person on the payment of the last installment. Thus the allegation of the revenue is on a totally wrong appreciation of facts. The appeal of the assessee on this ground is allowed. Clinical trial expenses - Allowable business expenses or not? - HELD THAT - We hold that clinical trials are an integral part of the feedback system on efficiency of the products of the assessee and hence it is intricately connected with the business of the assessee and hence it cannot be said that the expenses have not been incurred solely and exclusively for the business purpose.

Summary

Issues Involved:
1. Validity of the final assessment order.
2. Transfer pricing adjustments.
3. Corporate tax disallowances.
4. Depreciation disallowance.
5. Disallowance of clinical trial expenses.
6. Credit of advance tax.
7. Initiation of penalty under section 271(1)(c).

Summary:

Validity of the Final Assessment Order:
The assessee contested that the final assessment order dated 22 June 2021 under section 143(3) r.w.s. 144C(i) and s. 144B of the Income-tax Act, 1961, was bad in law.

Transfer Pricing Adjustments:

1. Trading Segment Adjustment:
The assessee objected to an upward adjustment of INR 11,22,76,671 in the trading segment, which was previously reduced to NIL by the TPO's rectification order dated 18 December 2019 and the TPO's order dated 16 April 2021.

2. Business Support Services:
The TPO selected comparables and determined an ALP margin of 15.81%, resulting in an adjustment of INR 1,75,15,590. The Tribunal directed the AO to re-compute ALP, excluding certain comparables.

3. Recovery of Expenses:
An adjustment of INR 3,33,740 was made on the recovery of expenses. The Tribunal reduced the mark-up to 8% from 15% and directed the AO to re-compute the ALP.

Corporate Tax Disallowances:

1. Disallowance under section 37(1):
The AO disallowed INR 3,27,74,708 incurred in relation to doctors, citing CBDT Circular No. 5/2012. The Tribunal upheld the disallowance, referencing the Supreme Court judgment in M/s Apex Laboratories P. Ltd. Vs DCIT, which prohibits such expenses as they are considered as prohibited by law.

2. Clinical Trial Expenses:
The AO disallowed INR 1,04,72,741 for clinical trial expenses, stating they were not solely for the assessee's business. The Tribunal allowed the expenses, recognizing them as integral to the business.

Depreciation Disallowance:
The AO disallowed depreciation of INR 1,38,45,026 on assets placed with hospitals, alleging the transactions were in the nature of hire purchase. The Tribunal allowed the depreciation, affirming the assets were used for business purposes.

Credit of Advance Tax:
The AO failed to grant credit for advance tax paid of INR 2,75,00,000. This issue was not elaborated upon in the judgment.

Initiation of Penalty under Section 271(1)(c):
The AO initiated penalty proceedings without appreciating that the assessee had neither concealed income nor furnished inaccurate particulars. This issue was not elaborated upon in the judgment.

Conclusion:
The appeal was partly allowed, with directions to re-compute ALP and allow certain expenses and depreciation claims. The disallowance under section 37(1) was upheld.