9911796707
TMI Blog2023 (3) TMI 1339X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.800 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 incurred wholly for the purpose of business and not for the purpose which is prohibited by law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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/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 taxa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... just 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) Indian Tourism Development Corporation Ltd, and ii) Concept Public relations and including I) BVG India Ltd. as comparables, based on unreasonable criteria. The Appellant craves leave to contest selection of other co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 food in hotels, local car conveyance etc. for prescribing medicines of the assessee is akin to giving commission and certainly in contravention of the public policy. Courses are arranged by many technical bodies such as Institute of Chartered Accountants, engineers where participants register themselves- by paying a fee but here all the expenses are borne by the Pharma companies on behalf of some doctors so as to encourage them to atten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 judicial pronouncements had held that MCI Regulations are not applicable on pharmaceutical companies and expenses incurred by such companies are not violative of CBDT Circular. During this phase of assessment, there were only adhoc summary basis evaluation of expenditure. In the present case also there is no critical evaluation of the expenses and post the Hon'ble Supreme Court judgment, the dictum laid down, same needs to be followed and each of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and AY 2013-14. without considering the submissions made and judicial precedents relied on by the Appellant. 5.4 Without prejudice to the above grounds, the Ld. AO/DRP have erred in disallowing the entire cost of samples of INR 1,92,49,140 without appreciating the fact that the Appellant has actually manufactured/ imported samples after paying necessary duties to the Government of India and hence the disallowance may have been restricted to 2% of the cost of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipt 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 law that was presented before the High Court, namely, whether subvention was capital or revenue receipt, was sought to be answered by the High Court by making a reference to two decisions of this Court in Sahney Steel & Press Works Ltd., Hyderabad versus Commissioner of Income Tax, AP-I, Hyderabad and Commissioner of Income Tax, Madras versus Ponni Sugars and Chemicals Limited. The view expressed by this court that unless the grant-in-aid received by an assessee is utilized for acquisition of an asset, the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 whether or not included by the Appellant or the Ld. TPO/DRP in the comparable set. 9.3 Ld. TPO have erred. in law and facts, by arriving at different operating margins for the following 6 comparable companies while giving effect to DRP directions vis-a-vis the operating margins arrived in the order under section 92CA(5) read with Section 154 of the Act: - Ajanta Pharma Ltd. - Alpa Laboratories Ltd. - BDH Industries Ltd. - Colinz Laboratories Ltd. - Gennex Laboratories Ltd. - Themis Medicare Ltd. 9.4 Ld. AO/TPO/DRP have er ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation. 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, the AR submitted that while computing the mark-up for coordination of clinical trial segment, the TPO out of the total cost of Rs.277,345,918, has wrongly considered recovery of expenses at Rs.146,521,126 as part of the cost base for the purpose of mark-up . The AR explained that the total cost Rs.277,345,918 comprised of Rs. 130,824,792 pertaining to co-ordination of clinical trial segment & Rs.146,521,126 pertaining to Manufacturing and trading segment. The amount pertaining to co-ordination of clinical trial segment comprised internal cost of Rs. 15,943,856 & external cost of Rs. 114,880,935. The assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture 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 for the assessment year 2014-15 dated 19.1.2022, wherein held as under: "10. We have gone through the orders of the Ld. DRP in assessee's own case for the assessment year 2007-08 and 2010-11 passed on 20.7.2011 and 25.9.2014 and also the order dated 2.8.2016 of the Hon'ble High Court in assessee's own case for the assessment yar 2005-06 in ITA No.616/2015. Having gone through such orders, 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, ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent 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 Consulting Services Ltd' as 5.10% on operating cost vis-a-vis 4.31% on operating cost as per the Appellant. 22.1 After hearing both the parties, 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. 23. Ground No.11.1 is reproduced as under: 11.1 Ld. AO/TPO/DRP have erred, in law and in facts. by holding that the Appellant's 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 of INR 2.60,27,931. 24. The ld DR submitted that the ld DRP in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted 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 it and not on the cost of services sourced from the third party in India. The relevant extract of the decision of the Hon'ble High Court as relied on by the Tribunal is given below - 39. The TPO‟s determination enhanced LFIL‟s cost base for applying the operating profit over total cost margin. LFIL‟s compensation model is based on functions performed by it and the operating costs incurred by it and not on the cost of goods sourced from third party vendors in India. Allotting a margin of the value of goods sourced by third party customers from Indian exporters/vendors to compute the appellant's profit is unjustified. This Court is of opinion that to apply the TNMM, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 marking. In the said case the issue involved was not a pure reimbursement of cost but cost sharing exercise in implementing ERP systems in the group and therefore is distinguishable from assessee's case. In assessee's case our attention was drawn to the fact that the services are rendered by the third party and the assessee raises a back to back debit notes supported by the relevant third party invoices which goes to evidence that it is merely a pass through cost. It is also submitted that the expenses such communication expenses, Conference and symposium expenses, printing & stationery, salary cost, Travel and conveyance, legal and professional fees are paid by the assessee to third party and recovered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 was seen that the assessee has not raised any objection as regard to Tenon Facility Management India Pvt Ltd. However, on-going through the information available in the web site, this company appears to be in Building completion [which Includes activities that contribute to the completion or finishing of a construction. Repairs of the same type are also included in the corresponding sub-classes]. Therefore, this company is into different activity altogether and can't be taken as a comparable. This is functionally different and the TPO was directed to remove this as a comparable. 30. We have heard the rival submissions and perused the materials available on record. This comparable has been included by the TPO in the list of compa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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