M/S ASTRAZENECA PHARMA INDIA LIMITED ,BANGALORE vs. THE DEPUTY COMMISSIONER OF INCOME TAX LARGE TAX PAYERS UNIT (LTU) CIRCLE-1 , BANGALORE

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

This appeal by assessee is directed against the final assessment order passed by DCIT LTC Circle-1 u/s 143(3) r.w.s. 144C and section 154 of the Act dated 22.10.2018 for the assessment year 2014-15. The grounds raised by the assessee are reproduced below:-

IT(TP)A No.3250/Bang/2018 M/s. Astrazeneca Pharma India Limited, Bangalore

Page 2 of 29 appreciation of facts and incorrect interpretation of law and therefore, are bad in law. Ld. AO erred in assessing total income of the Appellant at INR 2. 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.

Disallowance of travel and conveyance, selling, marketing 4. 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.

4.5 Ld. AO/DRP have erred, in law and in facts, in disallowing travel and conveyance, selling, marketing and distribution expenses without considering the submissions made and judicial precedents relied on by the Appellant. 4.6 Without prejudice to above grounds, the Ld. AO/DRP have erred, in law and in facts, in disallowing the amount of INR 56,00.526 in respect of selling, marketing and distribution expenses on the basis of the CBDT Circular without appreciating the fact that selling, marketing and distribution expenses are not covered within the ambit of the IMC Regulations or the CBDT Circular.

IT(TP)A No.3250/Bang/2018 M/s. Astrazeneca Pharma India Limited, Bangalore

Page 3 of 29 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 samples as held by the Hon'ble Income Tax Appellate Tribunal, Mumbai in the decision of Johnson and Johnson Ltd v CIT(I.T.A No 83/ Mum/ 2011).

Deduction under section 80G of the Act 6.

Ld. AO/ DRP have erred, in law and in facts, in not considering the deduction under section 80G of the Act available on the donation amounting to INR 3,00,000 made to TATA Memorial Hospital while determining the taxable income for AY 2014-15.

Subvention receipt 7.

7.1 Ld AO/DRP erred in adding a sum of INR 86,24,00,000 to the total income of the appellant 7.2 Impugned order erred in considering receipt of subvention amounting to INR 86,24,00,000 as revenue receipt without citing any 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.

IT(TP)A No.3250/Bang/2018 M/s. Astrazeneca Pharma India Limited, Bangalore

Page 4 of 29 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 subvention 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.

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.

IT(TP)A No.3250/Bang/2018 M/s. Astrazeneca Pharma India Limited, Bangalore

Page 5 of 29 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 erred, in law and in facts, by treating the subvention receipt of INR 13.88.89,547, representing loss incurred by the Appellant for FY 2013-14 and credited to the statement of P&L, as non- operating 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) 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 comparables (whether or not mentioned specifically herein above),

IT(TP)A No.3250/Bang/2018 M/s. Astrazeneca Pharma India Limited, Bangalore

Page 6 of 29 and whether or not included by the Appellant or the Ld. TPO/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. Recovery of expenses 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. 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. 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.

Others 12.

12.1 Ld. AO/TPO/DRP have erred, in law and facts, by not making suitable adjustments to account for differences in the risk profile of the Appellant vis-a-vis the comparables. 12.2 Ld. AO/TPO/DRP have erred, in law and in facts, in computing the ALP without giving benefit of +/-3 percent under the proviso to section 92C(2) of the Act.

IT(TP)A No.3250/Bang/2018 M/s. Astrazeneca Pharma India Limited, Bangalore

Page 7 of 29 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.

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. Ld. AO erred in assessing total income of the Appellant at INR 2. 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.

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.

IT(TP)A No.3250/Bang/2018 M/s. Astrazeneca Pharma India Limited, Bangalore

Page 8 of 29 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.

4.5 Ld. AO/DRP have erred, in law and in facts, in disallowing travel and conveyance, selling, marketing and distribution expenses without considering the submissions made and judicial precedents relied on by the Appellant. 4.6 Without prejudice to above grounds, the Ld. AO/DRP have erred, in law and in facts, in disallowing the amount of INR 56,00.526 in respect of selling, marketing and distribution expenses on the basis of the CBDT Circular without appreciating the fact that selling, marketing and distribution expenses are not covered within the ambit of the IMC Regulations or the CBDT Circular.

3.1 The facts of the issue are that the AO has disallowed the following expenses in view of the CBDT Circular No.5/2012, which considers freebies provided to doctors by pharmaceutical companies as expenses incurred for any purpose which is prohibited by law: Amount Particulars (Rs.) Selling Marketing and distribution 56,00,526 Travelling and conveyance expenses 2,43,438 Total 58,43,964 3.2 The Ld. DRP has decided this issue against the assessee in AY 13-14 and 12-13 as well. Thus, the expenditure made by the assessee towards selling and marketing as well as travelling and conveyance has to be held to be in contravention of the Circular No.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

IT(TP)A No.3250/Bang/2018 M/s. Astrazeneca Pharma India Limited, Bangalore

Page 9 of 29 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 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 attend the seminar or conferences. This can be seen as the incentive to make them prescribe the medicines manufactured or marketed by them which has to be held to be not allowable in view of the CBDT Circular cited supra and section 37(1). Another argument put forward by the assessee before ld. DRP is that it is disallowable under the hands of the medical professionals but not in the hands of Pharma Companies. The intention of the prohibition imposed by the Medical council of India (statutory body) in exercise of its statutory powers amended the Indian medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (the

IT(TP)A No.3250/Bang/2018 M/s. Astrazeneca Pharma India Limited, Bangalore

Page 10 of 29 Regulations)on 10-12-2009 imposing a prohibition on the medical practitioner & their professional associations from taking any gift travel facility, hospitality, cash of monetary grant from the pharmaceutical and allied health sector industries and it was affirmed by CBDT in the form of the circular cited supra. This practice can't stop unless these expenses are also disallowed in the hands of the pharma companies otherwise, they will have to disclose the names of the doctors and full address so as the sum equivalent to value of freebies enjoyed by the aforesaid medical practitioner or professional associations is also taxable as business income or income from the other sources, as the case may be, depending on the facts of each case. The assessing officers of such medical practitioners or professional associations, once the details are furnished by the pharma companies, will be able to examine the same and take an appropriate action as per law. Against this assessee is in appeal before us.

“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 -

IT(TP)A No.3250/Bang/2018 M/s. Astrazeneca Pharma India Limited, Bangalore

Page 11 of 29 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 the expenditure needs to be evaluated to see if the disallowance is justified. It is also important to note that for the assessment year 20162017, the A.O. had raised query in relation to the expenditure incurred on the Doctors by the assessee. The assessee filed detailed response to such notice and the A.O. after analyzing the nature of expenses (which is claimed by the assessee similar to the expenditure incurred for the relevant assessment year) in the context of MCI Guidelines and CBDT Circular No.5/2012 dated01.08.2012 accepted the claim of the assessee. Copy of the order in assessee’s own case for assessment year 2016-2017, is placed on record as additional evidence. Therefore, it was claimed that even if the criteria as laid down in CBDT Circular and also the MCI Regulation (as now affirmed by the Hon’ble Apex Court is applied), the expenditure incurred towards contractual obligation with Doctors and employees of pharmaceutical companies does not call for disallowance. In the present case, the A.O. had primarily made disallowance by referring the CBDT Circular No.5/2012 dated 01.08.2012. The A.O. has not critically examined the nature of expenditure incurred by the assessee. In the larger interest of justice, in view of the latest judgment of the Hon’ble Apex Court, which has examined the very same issue, it becomes necessary to examine the exact nature of expenses incurred by the assessee for Doctors from all angles. Therefore, for substantial question and cause, the additional evidence are taken on record. Since the additional evidence is taken on record, necessarily, 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 (supra). For the aforesaid purpose, the issues raised in grounds 4 to 8 are allowed for statistical purposes. It is ordered accordingly. 29 It is submitted that for 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.”

IT(TP)A No.3250/Bang/2018 M/s. Astrazeneca Pharma India Limited, Bangalore

Page 12 of 29 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. 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 samples as held by the Hon'ble Income Tax Appellate Tribunal, Mumbai in the decision of Johnson and Johnson Ltd v CIT(I.T.A No 83/ Mum/ 2011).

5.1 These grounds are akin to ground Nos.4.1 to 4.6. In view of this, we remit this issue to the file of AO as discussed in earlier para Nos.4 & 4.1 above. These grounds of appeal are partly allowed for statistical purposes.

6. Next ground in ground No.6 is reproduced as under:

6. Deduction under section 80G of the Act Ld. AO/ DRP have erred, in law and in facts, in not considering the deduction under section 80G of the Act available on the donation amounting to INR 3,00,000 made to TATA Memorial Hospital while determining the taxable income for AY 2014-15.

IT(TP)A No.3250/Bang/2018 M/s. Astrazeneca Pharma India Limited, Bangalore 6.1 After hearing both the parties, 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. Ordered accordingly.

7.1 Ld AO/DRP erred in adding a sum of INR 86,24,00,000 to the total income of the appellant 7.2 Impugned order erred in considering receipt of subvention amounting to INR 86,24,00,000 as revenue receipt without citing any 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 subvention 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.

IT(TP)A No.3250/Bang/2018 M/s. Astrazeneca Pharma India Limited, Bangalore Page 14 of 29 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 same musts be understood to be in the nature of a revenue receipt was held by the High Court to be a principle of law applicable to all situations. The aforesaid view tends to overlook the fact that in both Ponni Sugars (supra) and Sahney Steel (supra) the subsidies received were in the nature of grant-in-aid from public funds and not by way of voluntary contribution by the parent company as in the present cases. The above part, the voluntary payments made by the parent company to its loss making Indian company can also be understood to be payments made in order to protect the capital investment of the Assessee Company. If that is so, we will have no hesitation to hold that the payments made to the Assessee company by the parent company for Assessment years in question cannot be held to be revenue receipts. We also find such a view in a recent pronouncement in Commissioner of Income Tax versus Handicrafts and Handlooms Export Corporation of India Ltd. (Delhi High Court) with which we are in respectful agreement.

4. For the aforesaid reasons, we allow the present appeals, set aside the order of the High Court and answer the liability of the Assessee for the assessment years in question in the above manner.”

Accordingly, this issue is remitted to the file of AO for fresh consideration.

9. Ground Nos.8.1 to 8.2 are reproduced below:

IT(TP)A No.3250/Bang/2018 M/s. Astrazeneca Pharma India Limited, Bangalore

Page 15 of 29 8. Rejection of transfer pricing study of the Appellant Ld. AO/TPO/DRP have erred, in law and in facts, by holding that the Appellant’s international transaction relating to manufacturing segment, coordination of clinical trial segment, subvention receipt and recovery of expenses is not at arm’s length based on the following: 8.1 Rejecting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Rules. 8.2 Conducting a fresh economic analysis for 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:

9.1 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.

IT(TP)A No.3250/Bang/2018 M/s. Astrazeneca Pharma India Limited, Bangalore

Page 16 of 29 - Colinz Laboratories Ltd. - Gennex Laboratories Ltd. - Themis Medicare Ltd.

9.4 Ld. AO/TPO/DRP have erred, in law and in facts, by treating the subvention receipt of INR 13.88.89,547, representing loss incurred by the Appellant for FY 2013-14 and credited to the statement of P&L, as non- operating 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.

10.1 These grounds are remitted to AO to decide the issue as the ground Nos.7.1 to 7.8 herein above in para 8 have bearing on this issue.

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 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.

IT(TP)A No.3250/Bang/2018 M/s. Astrazeneca Pharma India Limited, Bangalore

Page 17 of 29 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.

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 already earned a mark-up of 9% for the internal costs. The external cost of Rs. 114,880,935, considered by the TPO as part of coordination of clinical trial segment, pertains to the Healthcare segment, they are already accounted in the Healthcare segment and has been duly verified by the auditor in the financial statements, as per page 26 of the Paperbook. They are recovered for the expenses incurred

IT(TP)A No.3250/Bang/2018 M/s. Astrazeneca Pharma India Limited, Bangalore

Page 18 of 29 towards communication expenses, conference and symposia, printing and stationery, marketing expenses, repairs and maintenance, salary costs, workmen and staff welfare, rent, travel and conveyance, power and fuel, legal and professional fees, etc , as per Page 1039 and 1040 of the Paperbook. In view of that the internal costs should be considered as a pass through cost as they are paid to third parties which already factors the arm's length margin in the costs charged by them. In this regard, the AR relied on the decision of Mumbai ITAT and Supply Chain Services India Private Limited Vs. Dy. Commissioner of Income Tax Range 8(1), Mumbai dt 10.12.14.

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.

IT(TP)A No.3250/Bang/2018 M/s. Astrazeneca Pharma India Limited, Bangalore

Page 19 of 29 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 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, accordingly hold it to be a good comparable and direct the ld TPO/ Assessing Officer to include it in the final list of comparable to bench mark the international transactions.

15.1 In view of the above order, the AO has to re-examine the issue in the light of above order of the Tribunal.

Concept Public Relations: 16. The Ld. A.R. submitted that this comparable has been included by DRP also.

IT(TP)A No.3250/Bang/2018 M/s. Astrazeneca Pharma India Limited, Bangalore

Exclusions: 19. The assessee wants exclusion of BVG India Ltd. as it won’t satisfy the filter adopted by the TPO.

Page 21 of 29 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.

22.1 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.

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.

Page 22 of 29 communication expense, conference and symposia, printing and stationery, salary costs, travel and conveyance and legal and professional fees etc., for and on behalf of its AE. The issue remains to be decided that what should be the correct mark up? The ld DRP decided that 5 % would be appropriate as the mark up. However, the TPO has referred to the substantial services rendered corresponding to an amount of Rs.28.80 crores and hence, did fresh search and has arrived at a markup which is 10.92%. The ld DRP concurred with the view of the TPO that substantial services have been rendered by the assessee and it needs to be compensated for that by the AE and mere reimbursement will not be enough.

49 We have heard the rival contentions and perused the material on record. 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 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 –

IT(TP)A No.3250/Bang/2018 M/s. Astrazeneca Pharma India Limited, Bangalore Page 23 of 29 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, the assessee’s net profit margin realized from international transactions had to be calculated only with reference to cost incurred by it, and not by any other entity, either third party vendors or the AE. Textually, and within the bounds of the text must the AO/TPO operate, Rule 10B(1)(e) does not enable consideration or imputation of cost incurred by third parties or unrelated enterprises to compute the assessee’s net profit margin for application of the TNMM. Rule 10B(1)(e) recognizes that "the net profit margin realized by the enterprise from an international 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 ..." (emphasis supplied). It thus contemplates a determination of ALP with reference to the relevant factors (cost, assets, sales etc.) of the enterprise in question, i.e. the assessee, as opposed to the AE or any third party. The textual mandate, thus, is unambiguously clear.

Page 24 of 29 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 on cost-cost basis from AEs. Following table is the breakup of the expenses as submitted by the assessee below the lower authorities –

51 In our view whether the mark- up of the cost of the services rendered by the Third Party can be applied for determining the ALP in the hands of the assessee should be examined from the angle of whether by making the payment on behalf of AE the assessee is performing any function or deploying any assets

IT(TP)A No.3250/Bang/2018 M/s. Astrazeneca Pharma India Limited, Bangalore

Page 25 of 29 or has born any risks. It is also important to examine whether the services are rendered by the third party to the AEs and the assessee’s role is limited the extent of only routing the payments and that there is no service rendered by the assessee to the AE warranting an ALP adjustment. The DRP has not examined these facts based on the details furnished and has calculated an adhoc margin of 5% without any bench marking analysis and without attributing any reasons as to why the reimbursement is a separate international transaction. We also notice that the DRP has not considered the assessee’s submission that the entire expenses incurred on behalf of AE does not pertain to coordination of clinical trial segment since the AEs who have reimbursed the expenses are not those to whom clinical trial services are rendered by the assessee. In view of these discussions we are of the considered view that the issue should be remitted back to the DRP to examine the various details and submissions furnished by the assessee and decide the issue in accordance with law. The DRP is directed to keep in mind the decision of the Hon’ble Delhi High Court in the case of Li and Fung India Pvt Ltd (supra) while deciding the issue. Accordingly this ground is allowed in favour of the assessee for statistical purposes.

27.1 The assessee wants inclusion of following comparable: IT(TP)A No.3250/Bang/2018 M/s. Astrazeneca Pharma India Limited, Bangalore Page 26 of 29 Tenon Facilities Management India Pvt. Ltd.

IT(TP)A No.3250/Bang/2018 M/s. Astrazeneca Pharma India Limited, Bangalore

Page 27 of 29 are included in the list of comparables by DRP that they are not available in the public domain but these companies are selected by the TPO by using capital loan or prowess data base. In our opinion, if the data of these companies are not available in the public domain it cannot be included in the list of comparables. Accordingly, we remit these companies to the file of AO/TPO if the data of these companies are available in the public domain then only include it in the list of comparables. Ordered accordingly.

Faber Sindoori Management Service Pvt. Ltd.

IT(TP)A No.3250/Bang/2018 M/s. Astrazeneca Pharma India Limited, Bangalore

Page 28 of 29 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.

40. No argument has been put before on this additional ground. Accordingly, dismissed as not pressed.