Astra Zeneca Pharma India Ltd. Vs DCIT (LTU) (ITAT Bengaluru)
ITAT Bangalore held that disallowance merely considering the provisions of section 144C(8) of the Income Tax Act without verification of details furnished by the assessee is unsustainable in law.
Facts- The assessee incurred Rs.4,63,24,847 (4,63,24,847 – 72,87,811) towards contribution to gratuity fund and paid to the said funds before the due date for filing return of income. The same was also disclosed in the tax audit report. It was therefore submitted that the entire amount is eligible for deduction u/s. 36(1)(va) of the Act. However, the assessee by inadvertence claimed only Rs.3,90,37,036 while filing the return which was rectified by filing revised return where the entire amount of Rs.4,63,24,847 was claimed as a deduction.
AO noted that Rs.72,87,811 pertaining to contribution towards gratuity fund has not been specifically disclosed in the tax audit report and accordingly disallowed the same. The DRP directed that amount paid before the due date for filing the return was allowable deduction. The AO, however, upheld the disallowance on the ground that no further enquiry can be made by the AO in view of section 144C(8) of the Act.
Conclusion- We noticed that the AO has not examined the details as per the directions of the DRP and has admitted that gratuity payment required further enquiry. The AO has made disallowance considering the provisions of Section 144C(8) of the Act and sustained the disallowance. Since the AO has not verified the details of gratuity based on the details furnished by the assessee we remit the issue back to the AO with a direction to examine the details of payment of gratuity and decide the allowability accordingly. This ground is allowed for statistical purposes.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
These cross appeals by the assessee and the revenue are against the final order of assessment passed by the DCIT (LTU), Circle-1, Bengaluru under Section 143(3) r.w.s. 144C of the Income Tax Act, 1961 (the Act) dated 20.01.2016 for AY 2011-12.
2. The assessee is part of the Astra Zeneca group based in U.K. The activities of the assessee are broadly classified into manufacturing and trading of pharmaceutical products. The assessee as per the Transfer Pricing (TP) study is engaged in the coordination business of clinical trial activities on behalf of the Associated Enterprise (AE) namely Astra Zeneca AB Sweden. For the assessment year 2011-12, the assessee filed the return of income on 30.11.2011 admitting a total income of Rs.103,50,22,080/-. The case was selected for scrutiny under CASS and a notice under Section 143(2) of the Act was duly served upon the assessee. Since the assessee had several international transactions, a reference was made to the Transfer Pricing Officer (TPO) for determination of arm’s length price (ALP). The TPO re-characterised the activities of the assessee as Clinical Research Organisation (CRO) doing clinical trial activity on its own account and not coordination of clinical trial activity. Accordingly, the TPO arrived at the TP adjustment of Rs.2,66,60,541/-. The AO while passing the draft assessment order, besides the TP adjustments, made the following disallowances: –
a) Cost of samples – Rs. 3,47,65,606
b) Literature provided to doctors Rs. 10,41,09,945
c) Conference expenses of doctors Rs. 16,86,162
d) Travelling & Conveyance to doctors Rs. 14,70,500
e) Gifts and donations to doctors Rs. 17,30,335
3. On further objections raised, the DRP gave partial relief to the assessee whereby the disallowance towards cost of samples and literature provided to the doctors were deleted. In respect of TP adjustments, the directions of the DRP reduced the TP adjustment to Rs.46,99,767/-.
4. Aggrieved by the final order of assessment the assessee is in appeal before the Tribunal. The Revenue is in appeal against the relief given by the DRP which is given effect in the final order of assessment.
5. We will first adjudicate the Revenue appeal (IT(TP)ANo. 446/Bang/2016).The revenue raised the following grounds
1. The directions of DRP is opposed to law and facts of the case.
2. The Hon’ble DRP has erred in giving decision in favour of the assessee without giving opportunity of being heard to the revenue as per provision of sec. 144C(11).
3. The Hon’ble DRP has erred in excluding AE as well AS Non AE segments on the ground of RPT when RPT is non AE segment is zero.
4. The Hon’ble DRP has erred in excluding M/s. Lotus Labs Pvt. Ltd as a comparable on the ground that it fails RPT filter when the TPO has considered only the non-AE segment of the comparable wherein RPT is zero and hence qualifies RPT filter.
5. The Hon’ble DRP has erred in facts and laws in rejecting M/s. Lotus Labs Pvt. Ltd as a comparable when the TPO has considered the revenue, costs and profit margins of non-AE segment which has no RPT.
6. The Hon’ble DRP has erred in giving relief to the taxpayer on the basis of taxpayer’s submission that the comparable is following December end FY ignoring the fact that the TPO has provided March 2011 financials to the taxpayers along with show cause notice.
7. Whether the decision of Hon’ble DRP is within the purview of Sec.144C of the IT Act.
8. Out of the 7 grounds raised by the revenue the effective grounds contended are Ground Nos. 4 & 5 with regard to the exclusion of Lotus Labs as comparable by the DRP. The rest of the grounds are either general or not pressed and dismissed accordingly.
9. One of the international transactions provided by the assessee is “provision of global clinical trial services”. The profile of the assessee in respect of global clinical trial coordination is detailed in the TP study of the assessee which is placed on record at pages 217 to 803 of the paper book filed by the assessee. The FAR analysis is also placed on record at page 246 to 250 of the paper book I. The list of comparable finally selected by the assessee in its TP study and its average margin is in the range of 4.85% to 15.79% with a median of 9.71% (page 289 to 292 of the paper book-I). Since the assessee’s margin as per the TP study was determined at 16.50% (page 290 of the paper book-I filed by the assessee), the assessee sought to justify the ALP of the international transactions undertaken by the assessee in respect of “provision for global clinical trial services”.
10. The TPO re-characterised the activities of the assessee as CRO and accordingly based on fresh research of comparables added “Lotus Labs” to the list of comparables. Further the TPO reworked the margin of the assessee by considering the reimbursement of expenses received from AE as part of revenue, the workings of which is given below: –
