Indian companies cannot claim DTAA benefits for dividend distribution tax under section 115O

The ITAT Mumbai ruled on multiple issues involving a pharmaceutical company. The tribunal held that Indian companies cannot invoke DTAA provisions for dividend distribution tax under section 115O, rejecting the assessee's arguments. Following the Supreme Court's Apex Laboratories precedent, the tribunal disallowed payments to doctors for medical books, journals, and conference fees as these violated IMC regulations prohibiting freebies from pharmaceutical companies. The tribunal remanded issues regarding undisclosed income based on AIR data discrepancies and depreciation on goodwill from amalgamation for fresh examination by the assessing officer. The bad debt write-off was upheld, while section 35DD deduction claims were partially dismissed due to insufficient supporting evidence.

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Issues Involved:

1. Addition of unreconciled transactions.
2. Depreciation on goodwill arising from amalgamation.
3. Deduction under Section 35DD for amalgamation expenses.
4. Disallowance of expenses related to gifts to medical practitioners.
5. Write-off of bad debts.
6. Applicability of Dividend Distribution Tax (DDT) under Double Taxation Avoidance Agreement (DTAA).

Detailed Analysis:

1. Addition of Unreconciled Transactions:
The assessee faced an addition of Rs. 338,302 due to unreconciled transactions in the Annual Information Return (AIR). The assessee argued that it could not reconcile these transactions due to a lack of response from third parties. The CIT (A) partially accepted the assessee's contention, deleting Rs. 206,277 where ICICI Bank admitted an error. The remaining addition was confirmed due to insufficient evidence. The tribunal remanded the issue back to the AO to verify responses to notices under Section 133(6) and reassess based on any contrary evidence.

2. Depreciation on Goodwill Arising from Amalgamation:
The assessee claimed depreciation on goodwill amounting to Rs. 2,716,300,000 from the amalgamation of Wyeth Ltd. The CIT (A) disallowed this, citing the sixth proviso to Section 32(1), which restricts depreciation claims in amalgamations. The tribunal noted that the Supreme Court in CIT v. Smif Securities Ltd recognized goodwill as a depreciable intangible asset. However, the tribunal remanded the issue to the AO to determine the actual cost of goodwill and verify compliance with tax provisions, particularly focusing on whether the goodwill included other intangible assets.

3. Deduction Under Section 35DD for Amalgamation Expenses:
The assessee claimed a deduction under Section 35DD for amalgamation expenses amounting to Rs. 290,372. The CIT (A) allowed a partial deduction based on substantiated invoices. The tribunal upheld the CIT (A)'s decision, denying the deduction for expenses lacking supporting evidence.

4. Disallowance of Expenses Related to Gifts to Medical Practitioners:
The AO disallowed expenses of Rs. 116,034,713 related to brand reminders and medical books provided to healthcare professionals, citing the Indian Medical Council (IMC) regulations and CBDT Circular prohibiting such gifts. The CIT (A) allowed the deduction, referencing a prior tribunal decision that the IMC regulations apply to doctors, not pharmaceutical companies. However, the tribunal reversed this decision, aligning with the Supreme Court's ruling in Apex Laboratories Pvt. Ltd., which disallowed such expenses under Section 37(1) as they violate public policy.

5. Write-off of Bad Debts:
The AO contested the CIT (A)'s allowance of a bad debt write-off without proper verification. The tribunal found that the AO had an opportunity to verify the claim during remand proceedings and upheld the CIT (A)'s decision, dismissing the AO's appeal on this ground.

6. Applicability of Dividend Distribution Tax (DDT) under DTAA:
The assessee raised an additional ground concerning the applicability of a lower DDT rate under DTAA for dividends paid to non-resident shareholders. The tribunal admitted this ground, noting sufficient information was available on record. However, it dismissed the claim on merits, following the special bench decision in TOTAL OIL LTD, which held that DDT is a tax on the company, not the shareholder, and thus not subject to DTAA provisions.

In conclusion, the tribunal partly allowed the appeals of both the AO and the assessee, while dismissing the assessee's cross-objections. The tribunal remanded certain issues for further examination by the AO, ensuring compliance with legal provisions and adequate opportunity for the assessee to present its case.

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