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TMI Blog2023 (3) TMI 1339X X X X Extracts X X X X X X X X Extracts X X X X ..... ily, 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NR (12.76,80,751). 3. Ld. AO erred in determining a sum of INR 19,79.05.800 as balance tax payable by the Appellant. 4. Disallowance of travel and conveyance, selling, marketing and distribution expenses 4.1 Ld. AO/DRP have erred. in law and in facts. in disallowing an amount of INR 58,43.964 in respect of travel and conveyance, selling, marketing and distribution expenses. 4.2 Ld. AO/DRP have erred, in law and in facts, in applying the CBDT Circular No 5/2012 ('CBDT Circular ) dated 01 August 2012 without considering the fact that there has been no violation of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 ( IMC Regulations ) or the regulations issued by Medical Council of India. 4.3 Ld. AO/DRP have erred, in law and in facts, in applying the CBDT Circular without appreciating that the IMC Regulations are only applicable to medical practitioners and shall not extend to pharmaceutical and allied healthcare companies. 4.4 Ld. AO/DRP have erred, in law and in facts, in considering the travel and conveyance. selling. marketing and distribution expenses as freebies to doctors when such expenses were inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y valid basis. 7.3 Ld AO/DRP erred in not providing proper opportunity of being heard/ for filing submissions in relation to taxability of subvention fee. 7.4 Ld. AO/TPO/DRP have erred in bringing to tax entire amount of subvention, voluntarily paid by Appellant's parent company, by citing self-contradictory reasons and by presuming facts and misinterpreting law on the subject. 7.5 Ld. TPO erred in exercising power beyond lawful jurisdiction to determine nature of particular transaction i.e., capital vs. revenue and Ld. DRP erred in approving the same. 7.6 Ld. AO/TPO/DRP have erred in benchmarking subvent ion receipt using Comparable. Uncontrolled Price ( CUP ) as the most appropriate method and further erred in arbitrarily determining arm's length price ( ALP ) as INR 86,24,00.000 on the pretext of applying such most appropriate method, contrary to provisions of law. 7.7Ld. TPO and Ld. DRP erred in bringing subvention receipt to tax on presumptions and contrary to relevant documents/ material on record. Ld. DRP further erred in directing disallowance of such receipt under Section 37 of the Act. 7.8Without prejudice to the above, Ld. AO/T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng loss incurred by the Appellant for FY 2013-14 and credited to the statement of P L, as nonoperating in nature. 9.5 Without prejudice to the above, Ld. AO/TPO/DRP, have failed to offset/adjust the subvention receipt to the extent of INR 13.88.89.547 declared as income and offered to tax by the Appellant, with the TP adjustment for the manufacturing segment. 9.6 Ld. AO/TPO/DRP have erred, in law and in facts, in not providing any adjustment towards unabsorbed capacity and Drugs Price Control Order, 2013 ( DPCO ) impact on prices of products while computing the operating margin of the Appellant for the manufacturing segment. 10. Co-ordination of clinical trial Segment 10.1 Ld. AO/TPO/DRP have erred. in law and in facts, by holding that the Appellant's international transaction relating to co-ordination of clinical trial segment is not at arm's length and thereby making an adjustment of INR 72.72,172 10.2 Ld. AO/TPO/DRP have erred, in law and in facts, in computing the operating margin of the Appellant for this segment on total cost vis-a-vis internal costs. 10.3 Ld. TPO/AO/DRP have erred, in law and in facts. in rejecting i) India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 92C(2) of the Act. 13. Ld. AO have erred, in law, and in facts, in levying interest of INR 7,02,24,639 under Section 234B of the Act. 14. Ld. AO has erred, in laws and in facts, in initiating penalty proceedings under section 274 read with section 271(1)(c) of the Act. 2. The first grounds for our consideration are ground Nos.1, 2 3, which reads as follows:- 1. Impugned order of learned ( Ld. ) AO/Transfer Pricing Officer ( TPO ) and directions of Ld. DRP are based on incorrect appreciation of facts and incorrect interpretation of law and therefore, are bad in law. 2. Ld. AO erred in assessing total income of the Appellant at INR 49,93,13.576 as against returned income/ (loss) of INR (12.76,80,751). 3. Ld. AO erred in determining a sum of INR 19,79.05.800 as balance tax payable by the Appellant. 2.1 These grounds are general in nature, which do not require any adjudication, as such not considered. 3. Ground Nos.4.1 to 4.6 are reproduced as under: 4. Disallowance of travel and conveyance, selling, marketing and distribution expenses 4.1 Ld. AO/DRP have erred. in law and in facts. in disallowing an amount of INR 58,43.964 in respect of tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .5/2012 issued by the CBDT, clearly applicable for the present assessment year. As per the explanation to Section 37(1) of the I.T. Act, any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. This provision is in the statute w.e.f. 01.04.1962. The CBDT Circular cited supra brings to the notice of all concerned that expenditure incurred towards freebies to doctors by the Pharma Agencies is disallowable u/s.37(1) of the I.T. Act as the Medical council of India (statutory body) imposed prohibition on medical practitioners inter alia accepting gifts etc. from pharma agencies on 10.12.2009. Hence, any expenditure incurred w.e.f.10.12.2009 towards freebies to doctors is disallowable ujs.37(1) of the I.T. Act. The validity of the CBDT Circular was upheld by the Himachal Pradesh High Court in Confederation of Indian Pharmaceutical Industry (SSI) v. CBDT [20141 44 taxmann.com 365/120131 353 ITR 388. The expenses incurred by the Pharma Companies in providing free air travel, stay and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2022 in assessment year 2011-12 in assessee s own case wherein held as under: 28 We have heard the rival contentions and perused the material on record. The additional evidence furnished by the assessee providing the details of expenditure and the breakup incurred on doctors goes to the root of the dispute, therefore for substantial justice the same is admitted and taken on record for adjudication. We notice that the similar issue is considered by the coordinate bench in assessee s own case and held that - 19. We have heard rival submissions and perused the material on record. The assessee has filed additional evidence under Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963 for admission of additional evidence. The additional evidence is details of break-up of expenses, such as travelling, conveyance, gift and donations provided to Doctors aggregating to Rs.1,22,44,326. It was stated that though the assessee had submitted before the lower authorities such details, were not segregated under various heads. It is pertinent to note that prior to the judgment of the Hon ble Apex Court in the case of M/s.Apex Laboratories Pvt. Ltd. v. DCIT (supra), many of the judici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year under consideration also the facts are identical and accordingly, respectfully following the above decision of the coordinate bench we remit the issue back to the AO to examine the nature of expenditure incurred by the assessee and to verify the issue afresh in the light of the recent judgement of the Hon'ble Supreme Court in the case of Apex Laboratories Pvt. Ltd. (supra). Ground Nos. 4 to 7 are allowed for statistical purposes. 4.1. In view of the above order of the Tribunal, we inclined to remit this issue to the file of AO on similar directions. These grounds of assessee are partly allowed for statistical purposes. 5. Next ground Nos. 5.1 to 5.4 which are reproduced as follows: 5. Disallowance of samples 5.1 Ld. AO/DRP have erred, in law and in facts, in disallowing the cost of samples distributed amounting to INR 1,92,49,140. 5.2 Ld. AO/DRP have erred in disallowing cost of samples without appreciating the fact that the sample details pertaining to doctors to whom samples were distributed had been submitted. 5.3 Ld. AO/DRP have erred, in law and in facts, in disallowing samples, by relying on the directions of the DRP for AY 2012-13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in benchmarking subvent ion receipt using Comparable. Uncontrolled Price ( CUP ) as the most appropriate method and further erred in arbitrarily determining arm's length price ( ALP ) as INR 86,24,00.000 on the pretext of applying such most appropriate method, contrary to provisions of law. 7.7Ld. TPO and Ld. DRP erred in bringing subvention receipt to tax on presumptions and contrary to relevant documents/ material on record. Ld. DRP further erred in directing disallowance of such receipt under Section 37 of the Act. 7.8Without prejudice to the above, Ld. AO/TPO/DRP have erred, in law and in facts, in considering INR 86,24,00,000 as income ignoring that INR 13,88,89,547 was already included in the taxable income while filing return of income for AY 2014-15. 8. We have heard the rival submissions and perused the materials available on record. In our opinion, this issue required to be re-examined by the AO after considering relevant clauses of the agreement along with judgement of Hon ble Supreme Court in the case of Siemens Public Communication Network Pvt. Ltd. in Civil Appeal No.11934/16 dated 7.12.2016, wherein held as follows: 3. The question of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or determination of the ALP for manufacturing segment, coordination of clinical trial segment, subvention receipt and recovery of expenses, and determining the arm's length margin/price using only FY 2013-14 data which was not entirely available to the Appellant at the time of complying with the transfer pricing documentation requirements. 9.1 These grounds are remitted to the file of AO as the ground Nos.7.1 to 7.8 in para 8 above, which are having bearing on this issue. 10. Ground Nos.9.1 to 9.6 are reproduced as under: 9. Manufacturing Segment 9.1 Ld. AO/TPO/DRP have erred, in law and in facts, by holding that the Appellant's international transaction relating to manufacturing segment is not at arm's length and thereby making an adjustment of INR 13.15.42,767. 9.2 Ld. TPO/AO/DRP have erred, in law and in facts, in rejecting i) Omega Biotech Ltd. and including i) Aarti Drugs Ltd., ii) Anuh Pharma Ltd., iii) Nectar Lifesciences Ltd. and iv) Neuland Laboratories Ltd. as comparables. based on unreasonable criteria. The Appellant craves leave to contest selection of other comparables (whether or not mentioned specifically herein above), and w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O/DRP in the comparable set. 10.4 Ld. AO/TPO have erred, in law and facts, in not rejecting the company `APITCO Ltd. as comparable while giving effect to DRP directions. As per the Ld. DRP, this is a government company and hence should be excluded from the comparable set. 10.5 Ld. AO/TPO have erred, in law and in facts, in 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. 11.1 Ground No.10.1 is general in nature, which do not require any adjudication. 12. Ground No.10.2 is reproduced below: 10.2 Ld. AO/TPO/DRP have erred, in law and in facts, in computing the operating margin of the Appellant for this segment on total cost vis-a-vis internal costs. 13. After hearing both the parties, we are of the opinion that this issue came for consideration before this Tribunal in assessee s own case in assessment year 2009-10 in IT(TP)A No.107/Bang/2014. The Tribunal vide order dated 27.12.2016 has held as under: 05.With regard to the issue of inclusion of reimbursed expenses in the cost base for the purpose of mark-up, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suitably and to dispose the petition u/s 154 within 15 days of receipt of its order. It appears that the TPO/AO has not given effect to the directions of the DRP. In the facts and circumstances, this issue also needs to be remi tted back to the TPO for proper examination and due adjudicat ion. Thus, both these issues re remi t ted to the TPO who after af fording due opportuni ty to the assessee would decide them in accordance wi th law. To this extent , the appeal grounds are treated as allowed. 13.1 In view of the above order of the Tribunal, we remit this issue to the file of AO to examine whether the said expenditure is operating expenditure or pass through expenditure. Ordered accordingly. 14. In ground No.10.3, the assessee wants inclusion of following two comparables: 1) Indian Tourism Development Corporation Ltd. (ITDC) 2) Concept Public Relations Inclusions:- ITDC Limited: 15. We have heard the rival submissions and perused the materials available on record. 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. in ITA No.4608/Del/2018 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d from the order of the TPO that it is coming under the category of other Consultancy. Therefore, although this company is engaged in various activities but all of them have been classified under the head of consultancy which is the activity of the assessee ld DRP wants to compare with. Thus, the question to be decided is whether it can be taken as a comparable and whether the we can differ with the view of the DRP in AY 2012-13. 21. We have heard the rival submissions and perused the materials available on record. 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. 22. Ground No.10.5 is reproduced as under: 10.5 Ld. AO/TPO have erred, in law and in facts, in determining the operating margin of the comparable company 'I C R A Management Consult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. The DRP has accepted the contention of the assessee that the receipts from AE towards reimbursement of expenses should not be part of the total revenue of the assessee. However the DRP has attributed a margin of 5% by stating that the assessee has rendered some service and therefore the payments needs to be marked up. The contentions of the assessee with regard to the receipts are that this is a cost to cost recovery of expenses paid i.e. pass through cost and that the payments are made on behalf of and recovered from certain group companies which were different from the one to which coordination of clinical trial services are rendered. It is also noticed that the assessee has not routed the payments and the recovery through the Profit and loss account. In the case of FedEx Express Transportation and Supply Chain Services India Private Limited (supra) the Mumbai Bench of ITAT has relied on the decision of the Delhi High Court in the case of Li and Fung India Pvt Ltd vs CIT in Income Tax Appeal No.306 of 2012, judgment and order dated 16.12.2013, to hold that the compensation paid to the assessee is based on functions performed by it to the AE on the operation costs incurred by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... percentage of the free on board value of export made by unrelated party venders. xxx xxx xxxx 50. In light of the above circumstances, this Court is of the opinion that the TPO‟s addition of the cost plus 5% markup on the FOB value of exports among third parties to LFIL‟s calculation of arm s length price using the TNMM is without foundation and liable to be deleted. The appeal is allowed and the order dated 25/11/11 of the ITAT Tribunal, Delhi Branch is liable to be and is accordingly set aside. The questions of law framed are answered in favour of the assessee, and against the revenue. The appeal is allowed in the above terms. 50. It is not in dispute that the payments received by the assessee from AE towards reimbursement of expenses incurred on behalf AE should not be part of the operating cost. In revenue s appeal this issue as held by the DRP has not been contended. We notice that the DRP has arrived at the margin of 5% by relying on the judgement in the case of Kirby Building Systems (supra) without going into the details of how the same is applicable to assessee s case in terms functions, assets and risk (FAR) analysis and without any bench ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly this ground is allowed in favour of the assessee for statistical purposes. 26. In view of the above, we remit this issue to the file of AO/TPO to examine this issue in the light of above order of the Tribunal. 27. Ground No.11.2 of the assessee s appeal is reproduced as under: 11.2 Without prejudice to the above, Ld. TPO/AO/DRP have erred, in law and in facts, in rejecting i) Tenon Facility Management India Pvt. Ltd and including i) CGI Information Systems Management Consultants Pvt. Ltd., ii) GE Capital Business Process Management Services Pvt. Ltd., and iii) Faber Sindoori Management services Pvt. Ltd. as comparables, based on unreasonable criteria. The Appellant craves leave to contest selection of other comparables (whether or not mentioned specifically herein above), and whether or not included by the Appellant or the Ld. TPO/DRP in the comparable set. 27.1 The assessee wants inclusion of following comparable: Tenon Facilities Management India Pvt. Ltd. 28. The Ld. A.R. submitted that it satisfies all the filters adopted by the TPO. 29. The Ld. D.R. stated that the ld DRP observed in his report that coming to some other comparables, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween enterprises are often reflected in variations in operating expenses. Consequently, this may lead to a wide range -of profit margins but still broadly similar levels of net operating profit indicators. In view of the above, the ld DRP upheld this as a comparable. 33. We have heard the rival submissions and perused the materials available on record. In our opinion, segmental data of this company to be considered and accordingly we remit this issue to the file of AO/TPO to recomputed the margin of this company by taking out only segmental data relevant to the assessee company. Ordered accordingly. 34. Ground No.11.3 is reproduced as under: 11.3 Ld. AO/TPO have erred, in law and facts, in not rejecting the company 'APITCO Ltd' as comparable while giving effect to DRP directions. As per the Ld. DRP, this is a government company and hence should be excluded from the comparable set. 35. After hearing both the parties, we remit the issue to the file of AO to follow the direction of the DRP on this issue and decide accordingly. 36. Ground No.12 is not pressed and accordingly dismissed as not pressed. 37. Ground No.13 is consequential in nature and does not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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