TaxTMI 
TaxTMI 
2018 (8) TMI 754
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....aw. 2. On the facts and in the circumstances of the case, the learned Pr.C.I.T. erred in setting aside the assessment order dated 26th December, 2016 and directing the Assessing Officer to pass a fresh assessment order." 3. The assessee, as per grounds of appeal, essentially challenges the foundation of jurisdiction assumed by the Pr.CIT under s.263 of the Act and contends that the subject assessment order framed under s. 143(3) of the Act passed by the AO cannot be termed as erroneous and prejudicial to the interest of the Revenue which is a condition precedent for usurption of revisional jurisdiction. 4. The relevant facts in brief are that the return of the assessee was subjected to scrutiny assessment for AY 2014-15 and the assessment was completed by the AO under s. 143(3) of the Act vide order dated 26.12.2016 whereby the total income of the assessee was assessed at Rs. 715.01 Crores as against the returned income of Rs. 584.13 Crores. Thereafter, the Pr.CIT in exercise of his revisionary power, issued show cause notice dated 18.08.2017 under s.263 of the Act requiring the assessee to show cause as to why assessment so framed u/s.143(3) is not liable to be set ....
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....n of mind in this matter by the A.O. has rendered the impugned order as erroneous and prejudicial to the interest of revenue iii) You have debited a total expenses of Rs. 137,41 crores on account of R & D expenses on which a weighted deduction has been claimed. The A.O. has not enquired as to whether separate expenses have been incurred by you on account of quality control & regulatory approvals or whether they have been grouped Into R & D expenses. Non application of mind in this matter by the A.O. has rendered the impugned order as erroneous and prejudicial to the interest of revenue. You have claimed an expenditure of Rs. 475,32 lakhs on account of patent expenses/patent related expenses outside India as eligible for weighted tax u/s.35 (2AB) of the I.T. Act, The explanation inserted under clause 1D to Sec.35(2AB) stated that; Explanation - for the purposed of this clause, "Expenditure on scientific research", in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the Pate....
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....of "business advancement expenses" allegedly incurred on gift articles distributed to various persons. The assessee was intimated that the aforesaid amount included Rs. 24.32 crores on gift items exceeding Rs. 1000 each. The learned Pr. CIT alleged that the Assessing Officer did not make inquiry regarding the persons to whom gifts were given and the record maintained for the same. (ii) The assessee has shown turnover of Rs. 52126.83 lacs from Baddi unit yielding profit of Rs. 12296.55 lacs and the Assessing Officer failed to apply his mind to this issue and to make meaningful inquiry regarding the manufacturing process, and goods being manufactured. The learned Pr. CIT has alleged that similar is the position with regard to Sikkim unit. (iv) The assessee has debited expenditure of Rs. 137.41 crores for R & D expenses on which weighted deduction has been claimed. He has observed that the Assessing Officer has not inquired as to whether separate expenses have been incurred on account of quality control and regulatory approvals or whether these expenses are grouped under R & D expenses. The learned Pr. CIT assumed that there was non-application of mind on the part of....
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....t para of the said notice is reproduced as under: "i). You have debited a total amount of Rs, 55,14 Cr. on account of business advancement expenses, which have been allegedly incurred on gifts items distributed to various persons. Out of this Rs. 55.14 Cr., you have incurred on expenditure of Rs. 24.32 Cr. on gift items exceeding Rs. 1,000/- each. On perusal of the records, it is seen that the A.O. has not made any inquiry as regards to whom such gift items were distributed and what was the record maintained. The A.O. has also not enquired as to the proof/evidence of such distribution made to various stake-holders. Non inquiry in the matter has rendered the impugned order erroneous and prejudicial to the interest of Revenue." II. In this connection, the assessee company submits following details in respect of records available with the Assessing Officer, inquiries made by him and replies /details submitted by the assessee company. (a). Vide submission dated 17.06.2016 the assessee company submitted copy of Audit Report. Based on the verification of the financial statements, the Assessing Officer asked to provide break-up of Selling, publicity and medical ....
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....ing Officer has made disallowance of 10% of the the entire expenses of Rs. 55.14 crores, after satisfying himself of the fact that the expenses are incurred also for the persons other than Doctors and medical professionals such as associates, business associates, suppliers and such other professionals, etc. as already discussed in the submissions made before the Assessing Officer. IV. In this connection, it is also important to note that small items costing below Rs. 1000/- in each case are also of substantial amount and the balance of the total expenditure comes to Rs. 24.32 crores. Further, it is submitted that the small items costing below Rs. 1000/- in each case, given as a memento, would not be hit by the CBDT circular no. 5/2012. even if they are given to medical practitioners (as per MCI Regulation amended by Notification dated 01-02-2016). Therefore, it can be said that the Assessing officer has made disallowance of Rs. 5,51,37,427 out of expenditure of Rs. 24.32 crores, being expenditure on items exceeding Rs. 1000/- in each case. Apart from above, the Assessing Officer has also made disallowance of entire expenditure of Rs. 25,99,87,036, being expenses on Academi....
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....at para 6 on page no. 20-21. Further, as stated above, the Assessing Officer has also made disallowance of entire expenditure of Rs. 25.99.87.036/-. being expenses on Academic / Scientific Grants to Doctors etc. 5.2 Regarding Business of Baddi and Sikkim Units: I. Vide para no. (ii) of the above referred notice, your honor has observed that the assessment order passed by the AO is erroneous and prejudicial to the interest of Revenue by stating that AO has failed to make meaningful inquiry as to: - What kind of medicines being manufactured there (whether API or formulations) - Source of getting chemistry of molecules, if API is manufactured - Source of formula / composition, if formulation is manufactured - Whether the said units required approval from PDA / other regulatory authorities and if yes, who incurred expenses for such approvals? - Whether unit is manufacturing generic or branded medicines? If branded, whether these old brands belong to company? - Expenses incurred for business advancement (in India and abroad) - Expenditure debited to Baddi and Sikkim unit for salary / remuneration t....
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....ted on the basis of turnover ratio of Baddi & Sikkim Unit, instead of allocation of such expenses made by the assessee company on the basis of number of employees; > why the donation should not be allocated to Baddi & Sikkim unit; > to justify the basis of allocation of R & D expenses (Development cost) to Baddi & Sikkim unit; and > explain as to why the Discovery cost of R & D and Capital expenditure on R & D are not allocated to Baddi and Sikkim units In response to this, the assessee company submitted its detailed explanation vide three replies filed on 13.12.2016 on each of the question raised by the assessing officer. Copies of those replies are annexed herewith vide Annexure-2(B)(i), 2(B)(ii) and 2(B)(iii). (d) Claim for deduction u/s. 80IC and 80IE of the Act: From the copy of Form 10CCB submitted by the assessee company, the Assessing Officer verified the basic details, regarding eligibility of claim u/s. 80IC and 80IE of the Act viz. a. location of the undertaking, b. commencement of commercial production, c. articles manufactured or produced i.e. pharmaceutical products (schedule XIV, part C,....
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....ment order: - Reduced the claim of deduction u/s. 80G of the Act by Rs. 1,73,65,884/- and 80GGB of the Act by Rs. 1,90,25,206/- by allocating the said donations to Baddi & Sikkim Unit - para no. 18 at page no. 73-77 of the assessment order. The amount of expenses / donation allocated by the assessee company and adjustment made by the assessing officer to expense and the other income claimed by the assessee company u/s 80IC / 80IE and the amount allowed by the assessing officer are summarized as under. Particulars Disallowanc es made in relation to Baddi Unit Disallowance s made in relation to Sikkim Unit Reallocation of administrative expenses 27,74,99,662 Reallocation of Development Cost of R&D 1,01,69,860 18,95,26,218 Allocation of Discovery cost of R&D 13,48,79,464 16,53,57,112 Allocation of Capital exp. of R&D 4,34,78,248 5,33,02,684 Exclusion of other income from eligible profit 6,97,68,075 30,81,029 Deduction claimed u/s. 80G out of Donation allocated to eligible unit 78,30,043 95,35,841 Deduction claimed u/s. 80GGB out of 85,78,209 1,04,46,997 Donation allocated to eligible un....
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....ited to P&L account of Baddi & Sikkim unit of the assessee company, the basis of allocation of various expenses and amount claimed as deduction u/s. 80IC and 80IE of the Act. Thereafter, not being satisfied by the replies of the assessee company, the Assessing Officer has proceeded to modify the claim of deduction u/s. 80IC & 80IE of the Act on account of other operating incomes and rejected the basis of allocation of expenses of the assessee company to both the eligible units and allocated the expenditure as per his calculations and made certain disallowance in this matter in his assessment order at various para mentioned in point 5.2(111) supra. On the basis of the above, the assessee company submits that the notice u/s 263 of the Act issued by your honor on this issue is devoid of any merits as the order passed by Assessing Officer is not prejudicial to the interest of revenue. 5.3 Regarding details of expenses on account of Quality Control & Regulatory Approvals. Claim u/s. 35(2AB) for R&D expenses on account of Patent or related expenses outside India. Clinical Research Expenses and Other expenses (being labour, job work charges, professional fees, legal expe....
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....The A.O. has not made any meaningful inquiry with respect to these expenses as to determine whether all such expenses were related to R&D because of which the impugned order has been rendered erroneous and prejudicial to the interest of revenue." II. In this connection, the assessee company submits following details of records available with Assessing Officer, inquiries made by him and replies and details submitted by the assessee company: (a) As per the provisions of section 35(2AB)(3) of the Act read with Rule 6(7A) of the Income tax Rules, in order to claim the deduction u/s. 35(2AB) of the Act, the assessee company needs to maintain separate books of account for its approved R&D facility and the same is required to be audited annually by a Chartered Accountant and a report for the same is required to be submitted to the prescribed authority i.e. DSIR for each year. It is also provided that the DSIR shall issue its report in relation to the approval of in-house R&D facility in Form No. 3CL. Hence, the assessee company had claimed the deduction u/s. 35(2AB) after complying with all the statutory requirements and the expenditure incurred by the assessee company o....
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....wing Disallowances were made by the Assessing Officer on the ground that only the expenditure approved by DSIR is allowable u/s. 35(2AB) of the Act: Particulars Rs. (in lacs) Amount certified by DSIR as expenses incurred outside approved R&D facility Clinical Research Expenses 1,214.01 Patent Expenses (Official Fees) outside India 57.32 Patent Expenses (Consultancy Fees] outside India 4,09.41 Interest on Loan 44.72 Labour charges / contract manpower / consultancy charges / retainer ship Labour & Job work charges 1,76.32 Professional Fees in and outside India (Rs. 81.89 lacs spent in India and Rs. 8.59 spent outside India) 90.48 Fees and Legal Expenses 14.73 Other Studies Expenses 2,01.32 (A) 2,208.31 Other expenditure not approved by DSIR Building related recurring expenses 104.88 Municipal Taxes 12.84 Salary to Dr. C. Dutt 274.19 Employees not having degree in science 338.55 (B) 730.46 Total [C= (A+B)] 2,938.77 200% of capital expenditure (other than building of Rs. 137.50 lacs) (D) 275.00 Total amount of Di....
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....llowed by the Assessing Officer in the order passed u/s. 143(3) of the Act Therefore, the said order is neither erroneous nor prejudicial to the interest of the revenue. IV. Further, regarding your honor's observation that the Assessing Officer has not made inquiry as to whether separate expenses have been incurred on quality control & regulatory approvals and whether these expenses have been grouped into R&D expenses, the assessee company submits as under: (a) As stated in para 5.2(II)(c)(i) supra, the assessee company has vide submission dated 10.12.2016, explained that all manufacturing & other direct expenses incurred for each unit have been accounted directly in the respective unit's books of accounts. In this context, it may also be noted that the R&D center of the assessee company is situated at Village Bhat, Dist. Gandhinagar in Gujarat, whereas the manufacturing facilities of the assessee company are situated at the following locations: - Village Indrad, Taluka Kadi, Dist. Mehsana, Gujarat; - Village Bhud, Nalagarh, Baddi, Dist. Solan, Himachal Pradesh; - - 32 No. Middle Camp, NH-31A, East District, Gangtok (Sik....
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.... your honor has observed that the assessment order passed by the AO is erroneous and prejudicial to the interest of Revenue by stating as under: "vi) You have claimed expenses on academic/scientific get together of Rs. 9.44 Cr., sales promotion expenses of Rs. 1.48 Cr., business advancement expenses of Rs. 1.48 Cr. (other than on domestic). The A.O. has not made any enquiry as regards the incurring of such expenses nor has he applied his mind as to whether such or part of such expenses fell foul of local regulations prevailing in those countries regarding gifting/other payments/ expenses incurred on Doctors and Medical practitioners. Further, the A.O. has also not examined if such expenses incurred were rightfully belonging to the assessee company and not its foreign subsidiaries which were also engaged in marketing of formulations in other countries. Non application of mind and non inquiry in this regard has rendered the impugned order as erroneous and prejudicial to the interest of revenue." II. In this connection, the assessee company submits following details of records available with Assessing Officer, inquiries made by Assessing Officer and replies and detai....
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....isallowance shall be made in the hands of such pharmaceuticals or allied health sector industries or other assessee which has provided such freebies and claimed it as a deductible expense in its accounts against income. In this context, the assessee company submits that the said regulations of Indian Medical Council (MCI) has been issued as per the powers conferred u/s 20A r.w.s 33(m) of the Indian Medical Council Act, 1956 and the said Act is applicable to whole of India, as provided in section \ of the said Act. Accordingly, it can be said that the aforementioned regulation of 2002 are not applicable and binding to medical practitioners outside India. Therefore, there are no provisions which denies the deduction of business expenditure relating to Business Advancements, which is allowable u/s. 37(1) of the Act. Hence, there is no nonapplication of mind or non-enquiry on the part of the Assessing Officer on this issue. (b) Further, your honor has observed that the Assessing Officer has not examined if such expenses incurred were rightfully belonging to the assessee company and not its subsidiaries which were also engaged in marketing or formulations in othe....
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....tated that it could not be said that inquiry was inadequate as complete details were provided to AO and the accounts of the assessee (a listed company) were duly audited and detailed disclosures of various aspects of the financial statements were made and annexed to the audited statement. It was thus contended by the assessee that proposed action of the Pr.CIT is not permissible under s.263 of the Act. 4.5 The Pr.CIT, however, did not accept the defence raised by the assessee on issues raised in the show cause notice. The Pr.CIT, in essence, observed that the assessment was completed by the AO in haste without proper inquiries and verification which were necessary for the purpose of making assessment. Consequently, the Revisional Commissioner set aside the assessment framed under s.143(3) of the Act with directions to re frame the assessment after conducting requisite inquiries on the issues involved as noticed by him. 5. Aggrieved by the aforesaid Revisionary order of the Pr.CIT under s. 263 which sought to cancel the assessment order, the assessee preferred the appeal before the Tribunal. 6. The learned counsel for the assessee reiterated the aforementioned pleas earlier....
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....of the AO in each and every type of situation where the inquiry was not made in the manner expected by the Revisional Officer from a perfectionist point of view. It was contended that the quasi-judicial action of the AO cannot be lightly struck down without showing it to be erroneous and prejudicial to the interest of the Revenue. The AO has concluded the issue having regard to the totality of the facts and thus cannot be branded as erroneous in the name of alleged inadequacy of inquiry. 6.3 The learned AR thereafter referred to the next issue namely inquiry regarding manufacturing process. The learned AR in this regard submitted that a bare reading of show-cause in this regard points out to the fact that the inquiry expected itself is obscure. The learned AR submitted that what kind of inquiry regarding manufacturing process and goods being manufactured was needed, which allegedly lead to erosion of taxes, has not been spelt at all. 6.4 Adverting to item no.3 of the show cause notice, the learned AR for the assessee submitted that requisite details of expenses on account of quality control and regulatory approvals were placed on the records of the AO and necessary inquiries ....
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....ation that the AO acted perfunctorily on the issue is without any basis. 6.6 With reference to expenses claimed on academic/scientific get-together of Rs. 9.44 Crores as well as sales promotion expenses of Rs. 19.57Crores and business advancement expenses of Rs. 1.48 Crores, the learned AR responded to by stating that relevant details and records made available to the AO was pointed out to the Pr.CIT in its written reply. It was pointed out to the Pr.CIT that the breakup of such expenses was duly provided. Breakup of business advancement expenses was provided giving details of items costing more than Rs. 1000/- and those less than Rs. 1000/- also vide submissions dated 10.12.2016. The assessee was also show caused by the AO in the matter with reference to CBDT Circular No. 5/2012. It is after taking into account the reply of the assessee dated 15.12.2016 and after taking note of documentations relating to transfer pricing, the AO concluded on the expenses incurred. This belies the allegation of Pr.CIT. 6.7 The learned AR after addressing us on the factual aspects as noted above, exhorted that the Revisional Commissioner has totally mis-directed himself in law and has wrongly ....
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.... the Act. The learned AR relied upon the decision of the co ordinate bench in the case of Narayan Tatu Rane vs. ITO [2016] 70 taxmann.com 227 (Mum) to throw light on the scope and ambit of Explanation 2 as understood judicially. The learned AR submitted that in view of the decision of the co-ordinate bench (supra) Explanation 2 shall apply only if the assessment order has been passed without making inquiry or verification which a reasonable and prudent Officer would have carried out in such cases. Law does not provide to stretch the inquiries and verification to an extent which may tantamount to oppression and harassment of a tax payer. The AO, in the instant case, has arrived at conclusion after making several rounds of inquiries and therefore the action of the AO cannot be impugned under s.263 of the Act. 6.9 The learned AR next relied upon the decision of the Hon'ble Gujarat High Court in the case of CIT vs. Arvind Jwellers 259 ITR 502 (Guj) to paddle a plea that provisions of Section 263 of the Act cannot be invoked to correct each and every type of mistake or error committed by the AO. It was claimed that the Revisional Authority has neither demonstrated incorrect assumptio....
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.... referred to and relied upon by the respective parties and case laws cited. 8.1 Supervisory jurisdiction vested under Section 263 of the Act enables the concerned Pr.CIT/CIT to review the records of any proceedings and order passed therein by the AO. It empowers the Revisional Commissioner concerned to call for and examine the records of another proceeding under the Act and if he considers that any order passed therein by the AO is erroneous in so far as it is prejudicial to the interest of the Revenue, then he may (after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary), pass such order thereon as the circumstances of the case justify, including the order enhancing or modifying the assessment or cancelling the assessment and directing afresh assessment. Thus, the revisional powers conferred on the Pr.CIT/CIT under s.263 of the Act are of very wide amplitude with a view to address the revenue risks which are objectively justifiable. 8.2 In the facts and circumstances of the case, the substantive issue that emerges for adjudication is whether the Pr.CIT under the umbrella of revisonary powers is entitle....
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....ged in excess of Rs. 3200/- Crore. The profit before tax is in the vicinity of Rs. 850 Crores. Therefore, expecting an AO to examine each and every item of income and expenditure and other transactions to the hilt is fraught with serious constraints and does not appear feasible. Noticeably, the assessee is a listed company and accounts are subjected to multiple audits by expert professionals. The assessment is also carried out on year-to-year basis. In such a scenario, where the AO has rejected substantial amount from the claim of expenditure after reasonably verifying bills and vouchers, the allegation of the Pr.CIT appears misconceived. Ordinarily, it is only in a very gross case of inadequacy in inquiry and lack of application of mind that the order of AO is open to attack as erroneous. In the context of a turnover and scale of operation of this magnitude, the expenditure incurred on business advancement of such amount do not indicate any visible abnormality. This apart, the AO did take cognizance of the issue and made substantial disallowance. Thus, it cannot be outrightly alleged that the AO has omitted to apply its mind to the issue. The allegation thus appears unintelligible....
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....tion since AY 2012-13 and thus, this is not the first year of operation. We also note that the assessment made on similar basis was accepted in the earlier year as well as in subsequent assessment years. In such a scenario, it is equally plausible that racking up already settled aspects year after year may not have been found necessary to the wisdom of AO. Although, desirable from the idealistic point of view of Revisional Commissioner, the records suggest that the AO cannot be blamed to have acted in a perfunctory manner. Where the AO has examined the expenditure concerning these units and restricted the deductions claimed thereon, one cannot possibly say that the AO has sleepwalked on the issue. Owing to continuity of operations and in the absence of any strong circumstance which may provoke inquiry as desired by Pr.CIT, conclusion drawn by the AO should not be ordinarily disturbed. Needless to say, the Pr.CIT ought to have make inquiry on the issue himself if so considered expedient to at least prima facie demonstrate in action of the AO which rendered the order erroneous which also caused prejudice to the Revenue. Merely because the expectations of the Revisional Commissioner a....
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....ore), labour and job work charges (Rs.1.76 Crore), professional fee (Rs.90.48 Lakhs), legal charges (Rs.14.73 Lakhs) and salary to Dr. C. Dutt (Rs.2.72 Crores) as well as salary to employees not having degree in science (Rs. 3.38 Cores) was disallowed by the AO out of R&D expenses. Therefore, the concern raised by the Pr.CIT as per para (iv) & (v) also was addressed by the AO and allegation of the Pr.CIT on mechanical acceptance of such aspects by AO is on tenuous grounds. 8.7 Vide para (vi) of the show cause notice, the Pr.CIT also alleged deficiency in examination of academic / scientific get together expenses of Rs. 9.44 Crores, sales promotion expenses of Rs. 19.57 Crores and business advancement expenses of Rs. 1.48 Crore (other than an domestic). In this regard, as noticed, it is the case of the assessee that queries were duly raised in this connection and responded to by the assessee vide its submission dated 10.12.2016 before the AO. The eligibility of expenses were examined on the touchstone of CBDT Circular 5/2012 dated 01.08.2012 which provides for disallowance of deduction pertaining to freebies given to medical practitioners. Further, reply dated 15.12.2016 was also....
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....uires to be objectively justifiable and cannot be a mere ipse dixit. The Pr.CIT ought to have made some elementary inquiry himself to unearth alleged error in the order of the AO which caused prejudice to the Revenue. Instead, the Pr.CIT has merely alleged absence of fuller inquiry and non-application of mind without showing any systematic efforts on his part to support the allegations. We are of the firm view that the Pr.CIT was expected to do more in the totality of the facts and context. Thus, it is difficult to agree with the allegation of the Pr.CIT on any of the issues raised in the show cause notice and the revisional Order. 9. The Pr.CIT has drawn support from newly inserted Explanation 2 below Section 263(1) of the Act introduced by Finance Act, 2015 w.e.f. 01.06.2015 for his action. The Explanation 2 inter alia provides that the order passed without making inquiries or verification 'which should have been made' will be deemed to be erroneous in so far as it is prejudicial to the interest of the Revenue. It is on this basis, the assessment order passed by the AO under s.143(3) of the Act has been set aside with a direction to the AO to pass a fresh assessment order. It ....
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....ion 263 although appears to be of a very wide amplitude and more particularly after insertion of Explanation 2 but cannot possibly mean that recourse to Section 263 of the Act would be available to the Revisional Authority on each and every inadequacy in the matter of inquiries and verification as perceived by the Revisional Authority. The Revisional action perceived on the pretext of inadequacy of enquiry in a plannery and blanket manner must be desisted from. The object of such Explanation is probably to dissuade the AO from passing orders in a routine and perfunctory manner and where he failed to carry out the relevant and necessary inquiries or where the AO has not applied mind on important aspects. However, in the same vain where the preponderance of evidence indicates absence of culpability, an onerous burden cannot obviously be fastened upon the AO while making assessment in the name of inadequacy in inquiries or verification as perceived in the opinion of the Revisional Authority. It goes without saying that the exercise of statutory powers is dependent on existence of objective facts. The powers outlined under s.263 of the Act are extraordinary and drastic in nature and th....