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TMI Blog2021 (4) TMI 474X X X X Extracts X X X X X X X X Extracts X X X X ..... e. In the instant case, neither the Ld. CIT(A) nor the Department have held/argued that the expenses incurred towards payments to the doctors is not a business expenditure. The only question is whether the expenditure is disallowable under the Explanation to section 37(1) of the Act, being violative of MCI Guidelines or not. We are of the considered view that when an expenditure is an allowable business expenditure as per the provisions of the Act, then by invoking the provisions of MCI Guidelines, ad-hoc disallowance cannot be made to the total income without any basis. In this regard, we rely on the order of the Tribunal in the case of Johnson Johnson Ltd [ 2013 (4) TMI 228 - ITAT MUMBAI] accepted by the Department before the Hon ble Bombay High Court [ 2016 (7) TMI 1272 - BOMBAY HIGH COURT] wherein it has been held that after the expenditure is held to be for the purpose of business, then ad-hoc disallowances cannot be made treating the same as non-business expenditure. In view of the above factual scenario and position of law, we direct the AO to delete the disallowances of expenses upheld by the CIT(A). - Decided in favour of assessee. Weighted deduction u/s 35(2AB) - HELD THA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ational transaction pertaining to sale of pharmaceutical products by the assessee to its AE and confirming an adjustment - assessee has adopted TNMM as the most appropriate method, selecting itself as the tested party and adopting OP/OC as the profit level indicator (PLI) - HELD THAT:- We find merit in the contentions of the Ld. counsel that the Ld. CIT(A) has confirmed the adjustment made by the AO/TPO in respect of only part of the total products and accepted the remaining exports made by the assessee at arm s length and thus he cannot accept TNMM for only part of the same transaction. Thus it is incongruous on the part of the Ld. CIT(A) accepting the international transaction of sale of pharma products (portion pertaining to sale of other products) to be at arm s length, however rejecting the remaining portion (sale of Metformin product) and confirming TP adjustment on such portion after allowing certain adjustment with adoption of CUP as the most appropriate method. In the instant case, we find that the TPO has straight proceeded to apply CUP method. The TPO has not examined the applicability and relevance of TNMM. Thus well-settled principles delineating the ingredients of TNM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of various drugs, dosage forms, active pharmaceutical ingredients (APIs) and other products. It manufactures bulk drugs, drug intermediates, tablets & capsules, cream liquids and powders. It's focus is in the areas of branded generics, APIs and bio-similars. The therapeutic segments covered in India by it include diabetes, cardiovascular, nutritional, respiratory, dermatology, gynecology, pediatrics and CNS. The assessee filed its Return of Income for AY 2010-11 on 29.09. 2010 declaring total income of ₹ 95,84,64,170/-. Thereafter, it revised the same on 14.02.2011, reporting a total income of ₹ 87,30,88,182/- under normal provisions of the Act and ₹ 2,66,38,60,976/- under MAT. 3. The 1st, 2nd and 3rd ground of appeal relate to disallowance of expenditure u/s 37(1) of the Act and raise the following: 1 The Ld. CIT(A) has erred in not appreciating that the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 ('MCI Regulations') were not applicable to the Appellant and accordingly, no disallowances under Circular no. 05/2012 dated 1 August 2012 issued by the CBDT can be made; 2 Without prejudice to the above, The Ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder the authority of an Act of Parliament and hence, have the force in law, (iv) MCI regulations were introduced on 14.10.2009 and are effective from the date of their publication in the Gazette of India ; the Board's Circular is merely a clarificatory Circular elaborating certain issues with reference to these regulations. 6. Before us, the Ld. counsel for the assessee submits that no expenditure has been incurred by the assessee for a purpose which is an offence or which is prohibited by law. It is explained by him that the code of conduct laid down in the MCI Regulation applies only to medical practitioners and not to pharmaceutical companies or allied health sector industries. In this regard, reliance is placed by him on the decisions of the Tribunal in the case of DCIT v. PHL Pharma P Ltd (ITA No. 4605/Mum/2014) (Mumbai Tribunal); India Medtronic Private Limited v. DCIT (ITA 1600/Mum/2015); Mumbai Tribunal, India Medtronic Private Limited v. DCIT (ITA No. 601/Mum/2018) (Mumbai Tribunal); India Medtronic Private Limited v. DCIT (ITA 7263/Mum/2018) (Mumbai Tribunal) ; Aristo Pharmaceutical Pvt. Ltd (ITA No. 5563 & 6129/Mum-2014) (Mumbai Tribunal) ; Aristo Pharmaceutical Pvt. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee is in the nature of an item covered by the MCI regulations, then such expenditure is made for a purpose prohibited by law; it is not relevant that it is the doctor who is committing the offence or unlawful activity by accepting the consideration; the amount should not be treated as expense for the purpose of business. Referring to the order of the CIT(A), it is stated by him that MCI regulations have been issued under the authority of an Act of Parliament and hence, have the force in law. Further, it is argued by him that MCI regulations have been introduced on 14.10.2009 and are effective from the date of their publication in the Gazette of India; the Board's Circular is merely a clarificatory Circular elaborating certain issues with reference to these regulations and hence the date of issue of Board's Circular or its content is immaterial. In this regard, reliance is placed by him on the judgment of the Hon'ble Himachal Pradesh High Court in the case of Confederation of Pharmaceutical Industry v. CBDT, wherein it is held that Board's Circular is valid and MCI guidelines governing professional ethics of Doctors is salutary which is in the interest of public and pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces cannot be made treating the same as non-business expenditure. In view of the above factual scenario and position of law, we direct the AO to delete the disallowances of expenses upheld by the CIT(A). Thus the 1st, 2nd and 3rd grounds of appeal are allowed. 9. The 4th, 5th, 6th, 7th ground of appeal relate to weighted deduction u/s 35(2AB) of the Act. These grounds of appeal read as under : 4 The Ld. CIT(A) erred in not allowing weighted deduction of expenditure of ₹ 19,93,51,575/- claimed by the Appellant under section 35(2AB) of the Act; 5 The Ld. CIT(A) erred by inadvertently referring to para 6 of the order of Income Tax Appellate Tribunal ('ITAT') in the Appellant's own case in AY 2009-10 [which is in context of certain eligible expenses of ₹ 21,87,858/-(i.e. setting-up of effluent treatment plant, etc.) incurred by the Appellant but not considered by Department of Scientific and Industrial Research (DSIR)], while adjudicating the issue of weighted deduction for expenditure incurred on clinical trials, foreign patent filing fees and foreign consultancy fees which are discussed by ITAT in para 3.4, 4 and 4.1 of the said order, 6 The Ld. CIT( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther commercial sale of larger batch sizes. Such income is recorded under this head. It is submitted by the Ld. counsel that the same issue was adjudicated upon by the Tribunal in assessee's own case for AY 2008-09 and AY 2009-10. Based upon an assessment of all facts, the Tribunal in Para 9 of the order has restored back the matter to the AO for statistical purposes. The Tribunal held as under : "The AO is directed to verify the claim of the assessee and allow the same after verification in the light of the decision of the Tribunal in the case of ACIT v. Wockhardt Ltd. in ITA No. 71/M/07. The additional grounds are treated as allowed for statistical purpose." Pursuant to the direction of the Tribunal, the order giving effect for AY 2008-09 and AY 2009-10 was passed. After, the directions provided by the ITAT, the Department has not preferred an appeal before the High Court. Thus it is stated that in view of the finality of the issue, the assessee's appeal for allowing expenditure on gross basis may be allowed. 12. On the other hand, the Ld. DR relies on the order of the AO and submits that in its claim statement with DSIR, the assessee has claimed similar amount as reflecte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fect for the above assessment years. After the directions provided by the Tribunal, the Department has not preferred an appeal before the High Court. Thus the issue having attained finality in assessee's own case, we direct the AO to allow expenditure on gross basis. We make it clear that this finding is specific to the present appeal only. Thus the 4th and 7th grounds of appeal are allowed. 14. The 8th to 11th ground of appeal deal with applicability of section 50C of the Act on transfer of lease hold lands. These grounds of appeal read as under: 8 The Ld. CIT(A) erred in confirming that the provisions of section 50C of the Act was applicable while computing capital gains on transfer of leasehold rights in land by the Appellant; 9 The Ld. CIT(A) failed to appreciate that the provisions of section 50C of the Act would be applicable only to transfer of a capital asset being land or building, or both and not to leasehold rights/assignment of leasehold rights; 10 The Ld. CIT(A) failed to appreciate that the sale consideration of ₹ 2,87,00,000/- determined for transfer of leasehold rights in land was as per the rates prescribed by the Maharashtra Industrial Development Cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le and accordingly adopted stamp duty valuation as sales consideration amounting to ₹ 3,87,97,500/- instead of ₹ 2,87,00,000/- as considered by the assessee. 16. In appeal, the Ld. CIT(A) relying on the order of the Tribunal, Mumbai Bench in the case of Shavo Norgren Pvt. Ltd. (2013) 33 taxmann.com 491 held that the provisions of section 50C are applicable to the assessee on transfer of leasehold rights. 17. Before us, the Ld. counsel refers to copy of deed of assignment between the assessee and MIDC and submits that the provisions of section 50C are applicable in case of transfer of property, being land or building or both. However, these provisions will not come into play in a case where only leasehold rights are assigned. In this context reliance is placed by him on the decision in Kancast (P) Ltd. (ITA No. 1265/PN/2011) dated 19 January 2015 (Pune Trib.); Heatex Products Pvt. Ltd. (ITA No. 270/2014) dated 26 July 2016; Greenfied (389 ITR 68) (Bom HC) ; Everest Industries Ltd. (ITA No. 815/M/2017) dated 15 September 2017 (Mumbai-Trib.) ; Atul Puranik (132 ITD 499) (Mum Trib.); Farid Gulmohamed (46 CCH 300) (Mum). On the other hand, the Ld. DR relies on the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he property without obtaining the approval from MIDC and accordingly the assessee had limited rights in the leasehold property unlike the complete right for development of property available to the assessee in Shavo Norgren (P.) Ltd. (supra). Therefore, the present case is distinguishable from the above decision. In Atul G. Puranik (supra) the taxpayer who was allotted by CIDCO leasehold rights in respect of plot of land for 60 years transferred to third party for consideration of ₹ 2.5 crore. For AY 2006-07, the AO invoked section 50C and computed capital gains by adopting stamp duty value at ₹ 2.88 crore. ITAT accepted taxpayer's contention that transfer or assignment of leasehold rights is not transfer of land per se and hence provisions of section 50C will have no applicability to case of leasehold interest. ITAT also accepted the contention that section 50C being deeming fiction should be construed strictly to apply only to case of transfer of land or building per se. Department has not contested the aforesaid judgment before the High Court which is referred by Bombay High Court in Heatex Products Private Limited (ITA 270/2014) dated 26 July 2016. In the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d based on individual strength of product Metformin vis-a-vis the currently granted adjustment considering all strengths of product Metformin together; b profit attributable to entrepreneurial risk undertaken for sales made to Non-AEs vis-a-vis sales made to AEs; c quantity of product Metformin sold to AEs vis-a-vis Non-AEs. 20. The Ld. CIT(A) vide order dated 27.04.2017 has taken into consideration the claim of the assessee that transfer pricing adjustment should be restricted to₹ 1,08,37,845/- as computed below: Particulars Rate p/u Adjustment for Metformin 1000 mg Sale price per tablet to non-AEs used as CUP by the learned TPO A 1.17 Adjustment on account of marketing and other expenses B 0.16 Mark-up on marketing expenditure C = B*11% 0.0176 Adjustment on account of marketing personnel cost D 0.01 Therefore, adjusted CUP Price per tablet E = A-B-C-D 0.98 Price per tablet of AE F 0.85 5% as per section 92 (C) G = F*5% 0.04 Difference in the price per tablet charged to AE and adjusted CUP price per tablet H = E-F 0.13 Transfer Pricing adjustment (for 1000mg) I=0.13*3,61,61,900 47,01,047 Adjustment for Metformin 500 mg Sale price per tab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the drugs at lower margins in US because of higher competition is not found tenable as the margins of the AE in US is found to be significantly higher than that of the assessee itself, in spite of limited functions performed by the AE, (vi) the Rules allow use of a method, after making suitable adjustments while comparing the transactions; the adjustments effected by the AO are correct, (vii) the dossiers are prepared by the assessee and then passed on to the AE for registration in the country of sale ; the dossiers do not shift the risk of the assessee as they are integrally connected with the facility where the drugs are manufactured ; both the R&D, the clinical study and the manufacturing have been done by the assessee and it has entire onus with reference to the drug sold in the market; the assessee has not provided copy of dossiers or any document filed with USFDA, which indicates transfer of risks as claimed by the assessee ; (viii) having a USFDA complaint manufacturing facility is expensive and critical for US markets and hence it is wrong to conclude that testing requirements are higher in EU as compared to such US requirements and hence the pricing of EU markets would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on such portion after allowing certain adjustments in connection with adoption of CUP as most appropriate method. In this regard, it is stated that the Ld. CIT(A) cannot compare the export sales of Metformin made to AE (i.e. US market) vis-à-vis non-AE (i.e. non-US market). In this regard, it is explained by him that there are key differences between the AE and non-AE markets (i.e. US and Europe respectively) like difference in business models, channel distribution, ANDA/Market authorization approvals, pricing and market risk. Elaborating further, the Ld. counsel draws our attention to (i) differences in functions performed by the assessee in connection with sale of products in the US vis-à-vis European markets, (ii) differences in risks assumed by assessee in connection with sale of products in the US vis-à-vis European markets, (iii) difference in functions undertaken for the US and European markets, (iv) difference in quantity of sales to AE and non-AE markets, (v) difference in the products sold by the assessee to the US and Europe markets. Thus it is stated by the Ld. counsel that for the purpose of applying CUP, minor differences in contractual terms o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ethod as proposed by the TPO/Ld. CIT(A) various adjustments on account of significantly higher functions and risks undertaken by the assessee in Europe versus US market should be allowed. In this connections, reliance was placed on the decision by the Hon'ble Delhi High Court in the case of Rolls Royce PLC v. DIT (339 ITR 147), wherein 35% of the total profit has been attributed to market activities undertaken. Also it is stated that the volume of products sold have a direct impact on the sale price i.e. the higher the volume of sales, the lower the sale price. Again it is stated that there are huge differences in the quantity sold to non-AEs in Europe visà- vis in US. To sum up, the Ld. counsel submits that CUP cannot be applied in case of the assessee given that there is significant product, functional risk, geographical, quantity, price etc. differences and accordingly, the analysis undertaken by the assessee considering TNMM as the most appropriate method and comparing its net margins with other comparable companies in India should be upheld. However, without prejudice to the above, the Ld. counsel submits that even if CUP is to be adopted as MAM, the assessee should b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lations. 22. On the other hand, the Ld. DR submits that the assessee has not produced before the TPO any evidence to substantiate that marketing and overhead expenses were incurred only for the non-AE. Referring to the order of the Ld. CIT(A), it is stated by him that the assessee has failed to adduce any evidence that the chemical variations or use of different bulk drugs result in higher price for the drug sold in European markets vis-a-vis those sold in US markets. Thus it is stated that the products manufactured for sale in the US market is similar to the products manufactured for sale in the European market. As per him the basic chemical composition as well as process for manufacturing is similar and mere deviation in printing or some additional ingredients would not result in increase in cost of the drug ; the registration of dossiers may have different processes but that does not require any additional process which would result in increasing cost. Further, the Ld. DR submits that the assessee has not brought any evidence on record to substantiate that the variation in volume between the amounts sold to AE and non-AEs would invite volume discounts. Explaining that the drug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 92C, the arm's length price in relation to an international transaction or a specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (e) Transactional net margin method, by which,- i. the net profit margin realised by the enterprise from an international transaction or a specified domestic transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; ii. the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; iii. the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parables are also equally subjected to the influence of such factors as the tested party. This would, obviously, include business environment; the nature and functions performed by the tested party and the comparable entities; the value addition in respect of products and services provided by parties; the business model; and the assets and resources employed. It cannot be disputed that the functions performed by an entity would have a material bearing on the value and profitability of the entity. It is, therefore, obvious that the comparables selected and the tested party must be functionally similar for ascertaining a reliable ALP by TNMM. Rule 10B(2) of the Income Tax Rules, 1962 also clearly indicates that the comparability of controlled transactions would be judged with reference to the factors as indicated therein. Clause (a) and (b) of Rule 10B(2) expressly indicate that the specific characteristics of the services provided and the functions performed would be factors for considering the comparability of uncontrolled transactions with controlled transactions." [Emphasis underlined by us] Further, their Lordships concluded that : "43. In our view, the aforesaid approach w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the difference in services/products offered has no material bearing on the profitability." [Emphasis underlined by us] 23.4 In UCB India (P.) Ltd. (supra) relied on by the Ld. counsel, the Tribunal has quoted at length the following paragraphs of TP Guidelines for Multinational Enterprises and Tax Administrations issued by OECD: "70. Section 92C(1) refers to arm's length price in relation to an international transaction. Rule 10B(1)(e) read with section 92C deals with TNMM, and it refers to only net profit margin realized by an enterprise from an international transaction or a class of such transaction, but not operational margins of enterprises as a whole. Paragraph 3.26 of Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations issued by OECD reads as follows : "3.26 The transactional net margin method examines the net profit margin relative to an appropriate base (e.g., costs, sales, assets) that a taxpayer realizes from a controlled transaction (or transactions that are appropriate to aggregate under the principles of Chapter I). Thus, a transactional net margin method operates in a manner similar to the cost plus and resale price metho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er afresh as per Rule 10B. We hold that TNMM is the most appropriate method in the present case and while using TNMM, the search for comparables may be broadened by the assessee as well as revenue by including comparables. However, this can be done only if (a) the functions performed by the tested party and the selected comparable entity are similar including the assets used and the risks assumed; and (b) the difference in services/products offered has no material bearing on the profitability. We direct the assessee to file the relevant documents/evidence before the TPO/AO. As the above grounds of appeal are restored to the file of the TPO/AO, we are not adverting to the case laws referred by the Ld. counsel. Thus the 12th to 17th grounds of appeal are allowed for statistical purposes. 24. The assessee has filed an additional ground stating the following : "On the facts and circumstances of the case and in law, the appellant submits that deduction in respect of education cess on income tax paid during the year ought to be allowed as a deduction while computing the total income". The above additional ground is a purely legal one and following the decision in NTPC v. CIT (1998) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and therefore allowable as deduction u/s 37(1) of the Act. In view of the above facts, we affirm the order of the Ld. CIT(A) and dismiss the 1st ground of appeal. 30. The 2nd and 3rd ground of appeal relate to weighted deduction u/s 35AB of the Act. These grounds read as under: 2. Whether the Ld. CIT(A) has erred in facts and law in allowing the claim of weighted deduction under section 35(2AB) of the IT Act made by the assessee company during the course of assessment proceedings (and not in the return of income) in respect of expenditure not approved by the DSIR and incurred by the assessee on foreign patent filing fees and clinical trials conducted outside the R & D facility. 3. Whether the Ld. CIT(A) has erred in facts and law in allowing the claim of weighted deducting u/s 35(2AB) of the IT Act made by the assessee company in respect of expenditure not approved by the DSIR and incurred by the assessee on foreign consultancy obtained from outsider the R & D facility. 31. As mentioned earlier, the Tribunal in assessee's own case for AY 2008- 09 and AY 2009-10 vide order dated 28.02.2015 had held that expenses incurred on clinical trial, patent filing fees and foreign cons ..... X X X X Extracts X X X X X X X X Extracts X X X X
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