TaxTMI 
TaxTMI 
2022 (8) TMI 129
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....he Income Tax Act, 1961. " 2) "that the Ld. C1T(A) has erred in law and on the facts in deleting the disallowance of deduction u/s 80IC of the Act amounting to Rs. 1,31,63,890/-." 3) "that ihe Ld. CIT(A) has erred in law and on the facts in allowing additional claim raised during the assessment proceedings relating to expenses of Rs. 1,17,18,989/- incurred outside the approved facility. " 4) "that the Ld. CIT (A) has erred in law and on the facts in deleting Disallowance of depreciation on electric installation of Rs. 8,15,987/-. " 5) "that the Ld. CIT(A) has erred in law and on the facts in deleting the disallowance of foreign commission expenses of Rs. 57,07,6751-. " 3. The first issue raised by the Revenue is that the learned CIT-A erred in deleting the addition of Rs. 9,70,63,667/- on account of disallowance of business promotion expenses under section 37(1) of the Act. 4. The facts are in brief that the assessee is a public company and engaged in the business of manufacturing of drugs & Pharmaceuticals. During the year, the assesse has claimed certain expenditures under the head business promotions, detailed as under: Sr. No. Particulars Amount Claimed as expend....
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....cts, in the course of assessment proceedings, AO has not doubted the veracity of the expense but disallowed the same for the reasons that these are violative of the MCI Guidelines referred supra and hence, are hit by Explanation 1 to section 37 (1) of the Act. In the course of appellate proceedings a letter was received from the AO in No. DCIT(OSD) Circle-8/high demand /2014-15 dated 23.05.2014 requesting for representing the case in the appellate proceedings. In the appellate proceedings my Predecessor forwarded the submission of the appellant which included the ledger account copy ot the impugned expenses to the AO on 26.08.2014 for comments. It is seen from the assessment order more specifically para 5.3 which have been reproduced in the earlier part of this order that no doubts as regards the genuineness of the expenses have been raised by the AO in the Assessment Order. In the course of appellate proceedings, appellant furnished complete factual details of the expenses amounting to Rs.9.70 crores in the form of ledger account vide letter dated 20.08.2014 (supra). These details were forwarded to the AO for comments. AO upon carrying out the verification submitted his report (he....
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....It is also not the case that any expense is incurred in cash or the ledger account does not give the details of expense incurred also appellant has furnished the copies of bills obtained from the vendors which were randomly verified by the AO as evident from the remand report reproduced hereinabove. Appellant contended that they have obtained the duplicate bills of large number of expenses as mentioned in the remand report and submitted to the AO out of which AO could point out only a few instances ,of wrong classification only and no bill was found to be false nor expense therein was found to be i incurred for any personal purpose. Three such invoices amounting to / Rs.51:713/- are mentioned by the AO which are a part of patron networking/ expenses. A look at the observations will make it clear that though there is/ difference in narration in relation to some expenses but the nature of expense remain same. In some cases narration given by the appellant shows purchase of technical books but actually the same are stethoscope in some cases it is paper weight but the same is "zykaa paper weight". It shows that though there may be difference in narration in the ledger account and in th....
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....d under the Medical Council Act, 1956, 2. The council in exercise of its statutory powers amended the Indian Medical Council {Professional Conduct, Etiquelle and Ethics) Regulations, 2002 (the regulations) on 10-12- 2009 imposing a prohibition on the medical practitioner and their professional associations from taking any Gift, Travel facility, Hospitality, Cash or monetary grant from the pharmaceutical and allied health sector Industries. 3. Section 37(1) of Income tax Act provides for deduction of any revenue expenditure (other than those failing under sections 30 to 36) from the business Income if such expense is laid out/expended wholly or exclusively for the purpose of business or profession. However, the explanation appended to this sab-section denies claim of any such expense, if the same has been incurred for a purpose which is either an offence or prohibited by law. Thus, the claim of any expense incurred in providing above mentioned or similar freebees in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible under section 37(1) of the Income Tax Act being an expense prohibited by th....
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....ompanies. The Appellant has also argued that CBDT circular relied upon by Assessing Officer was issued on 1S| August, 2012 hence such circular cannot have retrospective effect in current Assessment Year for which heavy reliance was placed on decision of Hon'ble Mumbai ' ITAT in the case of Syncon Formulations Limited V/s DCIT, Sunflower Pharmacy (supra) and Cadila Pharmaceutical Ltd. (supra). Hon'ble ITAT Mumbai in the case of PHL Pharma after discussing the judgment of Hon'ble Himachal High Court in the case of Confederation of Indian Industries Vs. CBDT have held as under: 7. Being aggrieved by the order of the learned CIT-A, the Revenue is in appeal before us. 8. The learned DR before us vehemently supported the stand of the AO by reiterating the findings contained in the assessment order which we have already adverted to in the preceding paragraph. Therefore we are not repeating the same for the sake of brevity. 9. On the other hand, the learned AR before us filed a chart explaining the issue involved, his argument on the issue and various case laws in support of his argument which are on record. The learned AR submitted that the issue on hand is covered in f....
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....incurred on distribution of articles to the stockists, distributors, dealers and doctors. The relevant findings of the Tribunal are as under:- '21. We have deliberated at length on the issue under consideration and after perusing the regulations issued by the Medical Council of India, find that the same lays down the code of conduct in respect of the doctors and other medical professionals registered with it, and are not applicable to the pharmaceuticals or allied health sector industries. Rather, a perusal of the provisions of the Indian Medical Council Act, 1956, reveals that the scope and ambit of statutory provisions relating to professional conduct of registered medical practitioners under the Indian Medical Council Act, 1956 is restricted only to the persons registered as medical practitioners with the State Medical Council and whose name are entered in the Indian Medical Register maintained under Sec. 21 of the said Act. We are of the considered view that the scheme of the Indian Medical Council Act, 1956 neither deals with nor provides for any conduct of any association/society and deals only with the conduct of individual registered medical practitioners. In the back....
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....e on distribution of "freebies" to doctors and medical practitioners, the same though may not be in conformity with the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (as amended on 10.12.2009), however, as the same only regulates the code of conduct of the medical practitioners/doctors, therefore, in the absence of any prohibition on the pharmaceutical companies in incurring of such sales promotion expenses, the latter cannot be held to have incurred an expenditure for a purpose which is an offence or is prohibited by law. In this regard we are reminded of the maxim "Expressio Unius Est Exclusio Alterius", which provides that if a particular expression in the statute is expressly stated for a particular class of assessee, then by implication what has not been stated or expressed in the statute has to be excluded for other class of assesses. Thus, now when the MCI regulations are applicable to medical practitioners registered with the MCI, then the same cannot be made applicable to pharmaceutical companies or other allied healthcare companies. 22. We shall now advert to the CBDT Circular No. 5/2012, dated 01.08.2012. We find that the afore....
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....te action. This may be brought to the notice of all the officers of the charge for necessary action." We may herein observe that a perusal of the aforesaid CBDT Circular reveals that the "freebies" provided by the pharmaceutical companies or allied health sector industries to medical practitioners or their professional associations in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) regulations, 2002 shall be inadmissible under Sec. 37(1) of the Income-Tax Act, 1961, as the same would be an expense prohibited by the law. We are of the considered view that as observed by us hereinabove, the code of conduct enshrined in the notifications issued by MCI though is to be strictly followed and adhered by medical practitioners/doctors registered with the MCI, however the same cannot impinge on the conduct of the pharmaceutical companies or other healthcare sector in any manner. We find that nothing has brought on record which could persuade us to conclude that the regulations or notifications issued by MCI would as per the law also be binding on the pharmaceutical companies or other allied healthcare sector. Rather, the concession made ....
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....y issuing circulars for clarifying the statutory provisions, however, it is divested of its power to create a new impairment adverse to an assessee or to a class of assessee without any sanction or authority of law. We are of the considered view that the circulars which are issued by the CBDT must confirm to the tax laws and though are meant for the purpose of giving administrative relief or for clarifying the provisions of law, but the same cannot impose a burden on the assessee, leave alone creating a new burden by enlarging the scope of a regulation issued under a different act so as to impose any kind of hardship or liability on the assessee. We thus, are unable to persuade ourselves to subscribe to the rigours contemplated in the CBDT Circular No. 5/2012, dated 01.08.2012, which we would not hesitate to observe, despite absence of anything provided by the MCI in its regulations issued under the Medical Council Act, 1956, contemplating that the regulation of code of conduct would also cover the pharmaceutical companies and healthcare sector, however provides that in case a pharmaceutical or allied health sector industry incurs any expenditure in providing any gift, travel facil....
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....uestion how a beneficial circular is to be construed, has approached this question in the following manner. At paragraph 13 of the judgment, it is stated that the learned counsel further submitted that the circular being oppressive and against the respondent, has to apply only prospectively and cannot be applied retrospectively. In other words, a beneficial circular has to be applied prospectively. Thus, when the circular is against the assessee they have a right to claim the enforcement of the same prospectively. It is further submitted that for the period in question, trade notices had been issued classifying the circuit breakers under heading No. 85.35 or 85.36. When the approved classification was proposed to be revised to reclassify the single panel circuit breakers under heading No.85.37 of the tariff, such re-classification can take effect only prospectively from the date of communication of the show-cause notice proposing reclassification." We find that the aforesaid CBDT Circular No. 5/2012, dated 01.08.2012 had came up for consideration before a coordinate bench of the Tribunal in the case of DCIT v. PHL Pharma (P) Ltd. [2017] 49 CCH 124 (Mum), wherein the Tribunal afte....
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....te. At this stage, it is pertinent to visualize the provisions under the Income Tax Act for allowance of business expenditure. In order to claim expenditure under section 37(1) of the Income tax Act, the assessee is required to fulfill certain conditions viz. (a) there must be expenditure, (b) such expenditure must not be of the nature described in sections 30 to 36, (c) the expenditure must not be in the nature of capital expenditure or personal expenditure of the assessee, and (d) expenditure must be laid out or expended wholly and exclusively for the purpose of business or profession. The expression "wholly" employed in section 37 refers to quantification of expenditure while expression "exclusively" refers to the motive, objective and purpose of the expenditure. 14. Thus, if the nature of this expenditure is being viewed with angle of commercial organization, then it would reveal that these were essential expenditure for the purpose of a pharmaceutical industry. The only caveat for their non-disallowance is Explanation 1 appended to section 37, which is applicable on the expenditure which are incurred for infringement of any law. This aspect has been elaborately discussed by ....
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....r, the AO held that research and development activities are related to several products which are already manufactured at both the units i.e. Thol and Dehradun. The future product based on research and development will also be produced at both the units. Therefore, it is necessary to allocate the expenditure to the both the units. Accordingly, the AO attributed an amount of 1,31,63,890/- to the Dehradun unit which has resulted reduction in profit of Deharadun unit and increase in profit of Thol unit by an amount of Rs. 131,63,890/- only. 15. Aggrieved assessee preferred an appeal before the learned CIT-A. 16. The assessee before the learned CIT-A reiterated its submission that the expenditure incurred in connection with the in house research & development are separate from both the manufacturing units namely Thol and Dehradun. Therefore, the same should not be allocated. The weighted deduction under section 35(2AB) are allowable to the enterprises as a whole irrespective of different unit or claim of other deduction. Beside this the assessee further claimed that the AO for the AY 2010-11 in the assessment under section 143(3) of the Act accepted that the R&D expenditure should no....
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.... specifically rebutted nor accepted in DRP's directions. Nor is there any specific material quoted to disturb assessee's accounts separately maintaining each and every minute detail pertaining to these three units in question. It thus emerges that the authorities below have adopted adhocism in applying the above turnover formula for allocating the impugned expenditure. Hon'ble Bombay high court's decision in Zhandu Pharmaceutical Works Ltd. vs. CIT (2013) 350 ITR 366 (Bom.) deletes similar disallowance in absence of non establishment of any nexus between R&D facilities and other units. We find that the authorities below have nowhere arrived at such a nexus in instant case as well. We therefore delete the impugned allocation by adopting the above discussed reasoning. The assesses succeeds in its substantive ground," 6.6 In view of the aforestated facts and legal position it has to be held that in absence of any finding that the R & D unit has benefited the Dehradun unit; no part of the expense can be allocated to that unit and the is eligible for deduction qua the profits of entire enterprise. Accordingly, the consequent reduction in deduction u/s.35(2AB) is delete....
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....2010-11 in the assessment framed under section 143(3) of the Act has not allocated the research and development expenses to the eligible unit for the purpose of computing the deduction under section 80-IC of the Act. Admittedly, there is no change in the facts and circumstances of the year under consideration viz a viz the earlier assessment year i.e. 2010-11, thus we are of the view that the principles of consistency should be adopted. 22.2 We also draw support and guidance from the judgment of Hon'ble Delhi High Court in the case of CIT Vs. Muthoot M. George Bankers reported in 159 taxman 22 wherein it was held as under: "7. This Court has time and again taken the view that there must be some consistency in the stand of the revenue and they cannot pick and choose cases in which to file an appeal in respect of some assessee and not to file an appeal in respect of identical orders in respect of another assessee. This view has also been expressed by the Supreme Court on several occasions and despite that we find that the revenue insists upon taking such arbitrary decisions for which there is no iota of justification. If the revenue puts forward some reason for its differential tr....
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....ssee is pari-materia with the facts of Cadila Health Care Ltd. where ITAT has decided the issue in favour of the assessee and Hon'ble Gujarat High Court subsequently confirmed the finding of the Tribunal reported in 31 taxmann.com 300. 28. The learned CIT-A after considering the facts in totality accepted the additional claim of the assessee by placing reliance on the judgment of Hon'ble Gujarat High Court in case of CIT vs. Miteshh Impex reported in 270 CTR 66. Thereafter, the ld. CIT-A allowed the weighted deduction under 35(2AB) of the Act by observing that the issue has been covered in favour of the assessee by the order of the Hon'ble jurisdictional High Court in case of Cadila Health Care P. Ltd. (supra). 29. Being aggrieved by the order of the learned CIT-A the Revenue is in appeal before us. 30. The learned DR before us vehemently supported the stand of the AO by reiterating the findings contained in the assessment order which we have already adverted to in the preceding paragraph. Therefore we are not repeating the same for the sake of brevity. 31. On the other hand learned AR before us submitted that issue has been covered in favour of the assessee by the order of thi....
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....on for a patent under the Patents Act, 1970. [Para 15] -The whole idea appears to be to give encouragement to scientific research. By the very nature of things, clinical trials may not always be possible to be conducted in closed laboratory or in similar in-house facility provided by the assessee and approved by the prescribed authority. Before a pharmaceutical drug could he put in the market, the regulatory authorities would insist on strict tests and research on all possible aspects, such as possible reactions, effect of the drug and so on. -Extensive clinical trials, therefore, would be an intrinsic part of development of any such new pharmaceutical drug. It cannot be imagined that such clinical trial can be carried out only in the laboratory of the pharmaceutical company. If one gives such restricted meaning to the term expenditure incurred on in house research and development facility, one would on one hand be completely diluting the deduction envisaged under sub-section (2AB) of section 35 and on the other, making the Explanation quite meaningless. -As noticed earlier that for the purpose of the said clause in relation to drug and pharmaceutical, the expenditure on sc....
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....earned CITA and hereby dismissed the ground of appeal raised by the Revenue. 34. The next issue raised by the Revenue is the learned CIT-A erred in allowing the depreciation @ 15% on electrical installations instead of @10% as provided under income tax rule. 35. The assessee during the year under consideration has shown addition in the block of assets of plant and machinery on account of Electrical Installations and claimed depreciation on the same @ 15% amounting to Rs. 13,38,416/- and also claimed additional depreciation of Rs. 3,69,848/- only. However, the AO proposes to restrict the depreciation to the extent of 10% being rate applicable for furniture and fixture which includes electrical fitting. 35.1 The assessee in response to such notice submitted that the Electrical Installations was part and parcel to the plant and machinery which can be used only along with plant and machinery. Therefore, the same is depreciable along with the block of plant and machinery. The assessee further claimed that electrical fitting like fan etc. was also installed but same was added to the block of furniture and fixture. However, these electrical installations are used along with plant and m....
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.... 14. Ground no. 3 is also dismissed. 41.1 The issue on hand is squarely covered by the order of the coordinate bench in the own case of the appellant. Before us, no material has been placed on record by the Revenue to demonstrate that the decision of Tribunal as discussed above has been set aside / stayed or overruled by the Higher Judicial Authorities. Before us, the Revenue has not placed any material on record to point out any distinguishing feature in the facts of the case for the year under consideration and that of earlier years nor has placed any contrary binding decision in its support. Therefore, respectfully following the same we uphold the finding of the learned CITA and hereby dismissed the ground of appeal raised by the Revenue. 42. The next issue raised by the Revenue is that the learned CIT-A erred in deleting the disallowances of commission expenses of Rs. 57,07,675/- under section 40(a)(i) of the Act. 43. The AO during the assessment proceedings found that the assessee made payment of commission expenses of Rs. 57,07,675/- to foreign agents without deducting withholding tax under section 195 of the Act. On question, the assessee submitted that commission was pai....
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....the Excel Chemicals (supra). 4. As learned counsel rightly points out, the issue, as to whether the commission paid to non resident agents could be disallowed when it was paid without deduction of tax at source under section 195, came up for consideration in the case of Excel Chemicals (supra). Rejecting the contentions of the revenue, the coordinate bench, inter alia, observed as follows: 3. To adjudicate on this appeal, only a few material facts need to be taken of. The assessee before us is a resident company engaged in the business of trading in chemicals. During the course of the scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has claimed deduction of Rs 58,73,635 in respect of the commission paid, out of which sums aggregating to Rs 51,79,355 were paid to be non-resident entities without any tax withholding at source. In response to the Assessing Officer's requisition to show cause as to why these payments not be disallowed under section 40(a)(i), for want of appropriate tax withholding at source, it was explained by the assessee that the sale commission was paid in respect of services rendered abroad, and, as such, no tax was deductible a....
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....ranted from the remittances for commission, the Assessing Officer relied upon decision of the Tribunal, in the case of DCIT Vs Rediff.com India Limited [(2011) 47 SOT 310 (Mum)] in support of the proposition that such a certificate cannot be conclusive determination of taxability in the hands of the recipient. As regards all the judicial precedents cited by the assessee, the Assessing Officer rejected the same by observing that "various decisions cited by the assessee, CBDT circular no. 786 by way of new circular 7 of 2009 dated 22/10/2009 whereby all the payments to non-residents without deduction of tax at source have been withdrawn". On the basis of this line of reasoning, the Assessing Officer held that the commission paid to nonresident agents, amounting to Rs 51,79,355, is to be disallowed under section 40(a)(i). Aggrieved, assessee carried the matter in appeal before the CIT(A) who deleted the disallowance by holding that the income was not taxable in India, as no operations were carried out in India, and that, since no income was taxable in India, there could not have been any occasion to deduct tax at source from the remittances in question. Learned CIT(A) further held tha....
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....t the impact of Explanation 1 to Section 9(1)(i) properly. That was a case in which the non-resident commission agent worked for procuring participation by other non-resident entities in a food and wine show in India, and the claim of the assessee was that since the agent has not carried out any business operations in India, the commission agent was not chargeable to tax in India, and, accordingly, the assessee had no obligation to deduct tax at source from such commission payments to the nonresident agent. On these facts, the Authority for Advance Ruling, inter alia, opined that "no doubt the agent renders services abroad and pursues and solicits exhibitors there in the territory allotted to him, but the right to receive the commission arises in India only when exhibitor participates in the India International Food & Wine Show (to be held in India), and makes full and final payment to the applicant in India" and that "the commission income would, therefore, be taxable under section 5(2)(b) read with section 9(1)(i) of the Act". The Authority for Advance Ruling also held that "the fact that the agent renders services abroad in the form of pursuing and soliciting participants and th....
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....e, tax deduction source requirements under section 195(2) do not come into play at all. Hon'ble Supreme Court, in the case of G E India Technology Centre Pvt Ltd Vs CIT [(2010) 327 ITR 436 (SC)], has inter alia observed as follows: In our view, Section 195(2) is based on the "principle of proportionality". The said sub-Section gets attracted only in cases where the payment made is a composite payment in which a certain proportion of payment has an element of "income" chargeable to tax in India. It is in this context that the Supreme Court stated, "If no such application is filed, income-tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such 'sum' to deduct tax thereon before making payment. He has to discharge the obligation to TDS". If one reads the observation of the Supreme Court, the words "such sum" clearly indicate that the observation refers to a case of composite payment where the payer has a doubt regarding the inclusion of an amount in such payment which is exigible to tax in India. In our view, the above observations of this Court in Transmission Corporation case (supra) which is put in italics has been completely....
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....ident agents have neither business connection in India nor they have permanent establishment in India, they are liable to be taxed in India. 5.1 Yet another contention of the learned counsel for the assessee is that: (a) the assessee paid the amount by way of commission to foreign agents for the services rendered outside India; (b) the Tax Deduction at Source (TDS) is required to be made on all payments to non-residents, only if such payments are liable to be taxed in India. (c) following the decision of this Court, CIT v. Faizan Shoes (P.) Ltd. [2014] 367 ITR 155/226 Taxman 115/48 taxmann.com 48 (Mad.), the assessee is not liable to deduct tax at source, when the non-resident agent provides services outside India on payment of commission. 5.2 The contention of the Revenue is that such services are attracted by Explanation (2) to Section 9 (1) (vii) of the Act and therefore TDS certificate is essential. 6. Whether this contention is correct, is the issue to be decided. 7. In order to appreciate this contention, it is necessary to consider the relevant provisions of the Act:- (i) Section 40(a)(i) of the Act :- "Section 40 - Amounts not deductible: Notwithstanding anyth....
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....of income by the resident payee referred to in the said proviso.' (ii) Explanation 2 to Section 195(1) of the Act :- 'Section 195 - Other sums: (1) Any person responsible for paying to a non-resident not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC) or section 194LD or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force : Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode : Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-O. [Explanation 1] :...........
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....5(2) is an enabling provision, enabling an assessee to file an application before the Assessing Officer to determine the appropriate proportion of the sum chargeable and upon such determination, the tax has to be deducted under Section 195(1) of the Act. The payment is made credited to the account of the payee. 8. The question now is, whether the assessee ought to have deducted tax at source as contemplated under Section 195 of the Act, when the assessee paid commission to foreign agent. 9. This question has been answered by the Hon 'ble Supreme Court, in the case of G.E.India Technology Centre (P.) Ltd. (supra), in which, it is very categorically held that the tax deducted at source obligations under Section 195(1) of the Act arises, only if the payment is chargeable to tax in the hands of the non-resident recipient. 9.1 Therefore, merely because a person has not deducted tax at source or a remittance abroad, it cannot be inferred that the person making the remittance, namely, the assessee, in the instant case, has committed a default in discharging his tax withholding obligations because such obligations come into existence only when the recipient has a tax liability in....
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....services to the assessee, as held above and as held by the Commissioner of Income Tax (Appeals), the commission payment made to them does not fall into the category of "fees of technical services" and therefore, explanation (2) to Section 9(1)(vii) of the Act, as invoked by the Assessing Officer, has no application to the facts of the assessee's case. 13. In this case, the commission payments to the non resident agents are not taxable in India, as the agents are remaining outside, services are rendered abroad and payments are also made abroad. 14. The contention of the learned counsel for the Revenue is that the Tribunal ought not to have relied upon the decision G.E.India Technology's case, cited supra, in view of insertion of Explanation 4 to Section 9(1)(i) of the Act with corresponding introduction of Explanation 2 to Section 195(1) of the Act, both by the Finance Act, 2012, with retrospective effect from 01.04.1962. 15. The issue raised in this case has been the subject matter of the decision, in the recent case, CIT v. Kikani Exports (P.) Ltd. [2014] 369 ITR 96/[2015] 232 Taxman 255/49 taxmann.com 601 (Mad.) wherein the contention of the Revenue has been rejecte....