Johnson & Johnson Ltd, vs Department Of Income Tax

[Cites 37, Cited by 0]

Income Tax Appellate Tribunal - Mumbai

Johnson & Johnson Ltd, vs Department Of Income Tax

आयकर अपील य अ धकरण,
धकरण, मंुबई यायपीठ 'जे
जे' मंुबई

IN THE INCOME TAX APPELLATE TRIBUNAL
"J" BENCH, MUMBAI

ी आर.एस
आर एस.
एस याल,
याल लेखा सद य,
य एवं ी अ मत शु ला, या यक सद य के सम

BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER AND
SHRI AMIT SHUKLA, JUDICIAL MEMBER

आयकर अपील सं. / ITA no. 145/Mum./2001
( नधारण वष / Assessment Year : 1997-98)

Addl. Commissioner of Income Tax ....................... अपीलाथ /
Special Range-23, Aayakar Bhavan Appellant
101, M.K. Road, Mumbai 400 020

बनाम v/s

M/s. Johnson & Johnson Ltd. ................... यथ /
30, Forjett Street Respondent
Mumbai 400 036
थायी लेखा सं./ Permanent Account Number - AAACJ0866E

या ेप सं. / C.O. no. 88/Mum./2001
(आयकर अपील सं. 145/Mum./2001 से उ त
ू )
(Arising out of ITA no. 145/Mum./2001
( नधारण वष / Assessment Year : 1997-98)

M/s. Johnson & Johnson Ltd.
30, Forjett Street ....................... या ेपक /
Mumbai 400 036 Cross Objector

बनाम v/s

Addl. Commissioner of Income Tax
Special Range-23, Aayakar Bhavan ................... यथ /
101, M.K. Road, Mumbai 400 020 Respondent
M/s. Johnson & Johnson Ltd.

आयकर अपील सं. / ITA no. 349/Mum./2001
( नधारण वष / Assessment Year : 1997-98)

M/s. Johnson & Johnson Ltd. ....................... अपीलाथ /
30, Forjett Street Appellant
Mumbai 400 036

बनाम v/s

Jt. Commissioner of Income Tax ................... यथ /
Special Range-23, Aayakar Bhavan Respondent
101, M.K. Road, Mumbai 400 020
थायी लेखा सं./ Permanent Account Number - AAACJ0866E

आयकर अपील सं. / ITA no. 2679/Mum./2003
( नधारण वष / Assessment Year : 1998-99)

M/s. Johnson & Johnson Ltd. ....................... अपीलाथ /
30, Forjett Street Appellant
Mumbai 400 036

बनाम v/s

Addl. Commissioner of Income Tax ................... यथ /
Special Range-23, Aayakar Bhavan Respondent
101, M.K. Road, Mumbai 400 020
थायी लेखा सं./ Permanent Account Number - AAACJ0866E

आयकर अपील सं. / ITA no. 2054/Mum./2003
( नधारण वष / Assessment Year : 1998-99)

Asstt. Commissioner of Income Tax ....................... अपीलाथ /
Circle-5(2), Aayakar Bhavan Appellant
101, M.K. Road, Mumbai 400 020

बनाम v/s

M/s. Johnson & Johnson Ltd. ................... यथ /
30, Forjett Street Respondent
Mumbai 400 036
थायी लेखा सं./ Permanent Account Number - AAACJ0866E
M/s. Johnson & Johnson Ltd.

आयकर अपील सं. / ITA no. 2055/Mum./2003
( नधारण वष / Assessment Year : 1999-2000)

Asstt. Commissioner of Income Tax ....................... अपीलाथ /
Circle-5(2), Aayakar Bhavan Appellant
101, M.K. Road, Mumbai 400 020

बनाम v/s

M/s. Johnson & Johnson Ltd. ................... यथ /
30, Forjett Street Respondent
Mumbai 400 036
थायी लेखा सं./ Permanent Account Number - AAACJ0866E

आयकर अपील सं. / ITA no. 675/Mum./2009
( नधारण वष / Assessment Year : 1999-2000)

M/s. Johnson & Johnson Ltd. ....................... अपीलाथ /
30, Forjett Street Appellant
Mumbai 400 036

बनाम v/s

Asstt. Commissioner of Income Tax ................... यथ /
Circle-5(2), Aayakar Bhavan Respondent
101, M.K. Road, Mumbai 400 020
थायी लेखा सं./ Permanent Account Number - AAACJ0866E

आयकर अपील सं. / ITA no. 2680/Mum./2003
( नधारण वष / Assessment Year : 1999-2000)

M/s. Johnson & Johnson Ltd. ....................... अपीलाथ /
30, Forjett Street Appellant
Mumbai 400 036

बनाम v/s

नधा रती क ओर से / Assessee by : Mr. Rajan Vora a/w
Mr. Nikhil Tiwari
राज व क ओर से / Revenue by : Mr.i S.D. Srivastava
M/s. Johnson & Johnson Ltd.

सनवाई
ु क तार ख / आदे श घोषणा क तार ख /
Date of Hearing - 19.11.2012 Date of Order - 18.01.2013

आदे श / ORDER

येक पीठ / PER BENCH These cross appeals as well as the cross objection preferred by the assessee are directed against the impugned orders passed by the learned Commissioner (Appeals) for various assessment years cited above. Since most of the grounds raised by either party are common and the assessee being same in all these appeals, therefore, these appeals were clubbed together and, as a matter of convenience, were heard together and are being disposed off by way of this consolidated order. We now proceed to dispose off all these appeals on merit one by one.

We first take up assessee's appeal in ITA no.349/Mum./2001, for assessment year 1997-98.

2. Ground no.1, relates to addition on account of sales made to Johnsons & Johnsons Exports Ltd., which is a 100% subsidiary of the assessee company.

3. Brief facts of the case are that, the assessee is 75% subsidiary of Johnsons & Johnsons, U.S.A., and it also holds 100% share in one of the company namely - Johnsons & Johnsons Exports Ltd. (for short "JJE"). Thus, the JJE is a 100% subsidiary of the assessee company. The assessee is engaged in the business of manufacturing and marketing of various consumer care, health care and diagnostic products as well as surgical instruments & material, etc. The assessee has disclosed its total turnover from its various divisions at ` 450.60 crores out of which, sale of M/s. Johnson & Johnson Ltd.

4,31,82,151, represents the sale of finished products to JJE. During the course of assessment proceedings, the assessee was required to disclose details of rate at which the products were sold to the subsidiary company vis-a-vis the rate at which these products were sold to the other third parties. The Assessing Officer also required to provide printed price list of these products. From the perusal of the details, it was found that sales to JEE were made at the rates much lower than the printed price list of the products i.e., the rate at which these products were sold to the third parties. In response to the show cause notice, the assessee submitted and stated as under:-

"Please find enclosed herewith the statement showing the pack wise sales of products to J& J Exports India Ltd and to othei parties as desired by you. We draw your attention to the following:

1. The average sales price for each pack has been worked out on the basis of total sales realisation divided by the quantity of sales.

2. Sale price for J& J Exports India Ltd is based on the Standard cost of production cost + 15%.

3. Sale price to parties within India is decided after considering the following factors:

a. Cost of production b. Excise duty c. Advertisement and sales promotion expenses.

d. Bonus & trade offers e. Selliig and distribution expenses.

f. Transportation cost.

g. Trade discounts h. Competition from other brands.

i. Price that market can bear j. Price sensitivity of the product.

M/s. Johnson & Johnson Ltd.

Except for item a) above none of the other factors are relevant for sales made to J&J Exports India Ltd.

You would observe from the list attached that for certain products the price charged to J&J Exports is higher than the price realised from other parties.

We would like to emphasize that any comparison between the prices can only be for statistical purposes and one may get mislead by such comparisons as the two prices are no way comparable."

4. The Assessing Officer observed that through the charging of preferential price from a customer either by its subsidiary or by a third party, is not the point of dispute, but the preferential treatment has to be given by way of discount on sale price and not by way of reducing the cost of production. It has to be disclosed in the accounts for the reason that - firstly; to the extent of slashing of the cost, the subsidiary becomes a debtor and the debt being written off as a matter of routing which is built-in- feature,. however, the way the assessee is preparing its account, it does not give a true picture; secondly; slashing of the cost leads to lowering of the turnover of the assessee and thereby also lowering of the profit and the chargeable income of the year. In other words, the increase in the books generate loss without disclosing the same; and thirdly; such a technique of accounting as adopted by the assessee is against the principles laid down by the Hon'ble Supreme Court in CIT v/s British Paints India Ltd., [1991] 188 ITR 044 (SC). Insofar as the elements of excise duty and trade discount are concerned, the Assessing Officer accepted that the same will not have material effect as the subsidiary is 100% export unit and goods and merchandise exported by that unit is not liable for excise duty and trade discount is also acceptable because the sale to the subsidiary does not take place in competitive market. However, other cost factors like advertisement and sales promotion expenses, bonus, sales and distribution expenses, competition from other brands, price sensitivity of the product and price that market can bear are very vital inputs which cannot be segregated from the manufacturing process and total trading expenses. The Assessing Officer M/s. Johnson & Johnson Ltd.

further observed that the assessee has adopted two different techniques of accounting with regard to the costing of stock-in-trade, one in respect of goods sold to third parties and other in respect of goods sold to subsidiary. Such a technique is not feasible without deliberate and pre-plan intervention in the accounting of various expenses in the books of account that includes the manufacturing accounts. Such a technique of accounting has been disapproved by the Hon'ble Supreme Court in British Paints India Ltd (supra). The splitting of cost will also lead to distortion of valuation of stock- in-trade, to the extent that cost remained imbedded in the closing stock of the year i.e., valuation of the opening stock of the following year. Further, the assessee reduced the excise duty and trade discount from its average selling price to arrive at a figure of net realisation of its sale to third parties. The net realisation represents the assessee's internal working of the amount which the assessee actually received by way of its net cash turnover vis-a- vis the gross turnover of the sale to the third parties.

5. The Assessing Officer further required the assessee to furnish comparative statements of sales realisation from the subsidiary and the net sales realisation from the third parties on the same products. On a perusal of the same, he found that out of 216 products sold to the subsidiary, 204 products were sold on the price which was far below "net realisable price" of such products realised from third parties. The total difference as per the working furnished by the assessee worked out to ` 1,61,70,643. From this, the Assessing Officer deduced that as per the assessee's own working, it has under-priced the sale of various products to the subsidiary by this amount as compared to what it would have received if the sales have been made to the third parties. The assessee's main contention before the Assessing Officer was that the sale price of the products sold to the subsidiary was based on cost plus 15% margin which was rejected by the Assessing Officer. Because in calculating the cost of production, one has to take into account not only the direct cost of the raw material and labour but also the proportionate cost of various over heads. The Assessing Officer required the assessee to furnish M/s. Johnson & Johnson Ltd.

working of the value of goods sold mainly in three broad categories, which was furnished by the assessee vide its letter dated 16th February 2000. As per this working, the assessee has sold adhesive tape and sanitary pads to the subsidiary at ` 52,69,869 and ` 22,013 respectively over and above the cost of production of these items. It, however, sold the "sutures" to its subsidiary at ` 3,72,69,567 below the cost of production. Therefore, according to the Assessing Officer, the assessee has generated net loss of ` 3,1,77,685 on its sales to the subsidiary during the year. The Assessing Officer has also dealt upon the capital structure of the subsidiary company, that the subsidiary company made its purchases over whelmingly from the assessee company and also that the subsidiary company being 100% export company gets full income tax exemption under section 80HHC and its profits flow back to the assessee company by way of dividend which is also exempt from income tax under section 80M in the hands of the assessee company. It was thus observed that the assessee company has under priced the sale of its products to the subsidiary to the total exclusion of the third party from such concessions. It thus, generated loss which lowered the chargeable income. The subsidiary company being 100% export company increased its profits which was exempt under section 80HHC and then the dividends received by the assessee from the subsidiary company got exemption under section 80M.

6. Thus, the Assessing Officer concluded that the assessee has borne loss which is not out of any genuine commercial or trading but by deliberate under-pricing of the sale price to the subsidiary and the consequent deduction of the profits of the assessee company. He referred to the various case laws on colorable devices and tax evasion, more specifically in the judgment rendered by the Hon'ble Supreme Court in Mc Dowels & Co. Ltd. v/s CTO, [1985] 154 ITR 148 (SC). He, thus, made an addition of ` 3,19,77,685, as per the working given in Para-3(c)(2) / Page-10.

M/s. Johnson & Johnson Ltd.

7. Before the Commissioner (Appeals), the assessee contended that it is not obliged to sell the products to the subsidiary at a price which is charged to the third parties as there are number of reasons because of which the price charged from the subsidiary is lower. On this submission, the Commissioner (Appeals) observed that insofar as the sales made to the subsidiary and connected parties are concerned, it is within the power of the Assessing Officer to examine, as to whether the sales have been made at a price which is being charged from third parties and the transactions with the subsidiary or connected party should be at arm's length. Regarding various other observations made by the Assessing Officer, the assessee made very detail objections before the Commissioner (Appeals) which has been dealt in detail in Paras-3.10 to 3.18. One of the main arguments of the assessee was that the method adopted by the Assessing Officer to work out the amount of disallowance is wholly erroneous, as the Assessing Officer has considered the products which has sold to the subsidiary and has compared the cost of production vis-à-vis the price at which goods are sold to the subsidiary. The Assessing Officer has considered per dozen cost of particular category of goods. In one category, there is a huge price range and the Assessing Officer has taken the average sale price. For e.g., he submitted that the main item sold to the subsidiary was "sutures" which itself has many sub-products the cost of which varies from ` 91 to ` 8,501 per dozen. If the average sale price of the entire category sutures is taken into consideration, then it will give absurd results. If any disallowance is called for, then cost has to be worked out after considering the individual cost of products per item actually sold to the subsidiary and not on the basis of average cost of all the products. The other main argument was that the disallowance, if at all needed cannot exceed, ` 1,61,70,643, as per the working given before the Assessing Officer. Further, from this working certain expenditure which would have been incurred in relation to the sales made to the other parties are not required for making a sale to the subsidiary and the same should be deducted. Such types of expenses were illustrated as under:-

M/s. Johnson & Johnson Ltd.


                                                                                    10




     Freight Transportation & Shipping expenses @ 2.83% of sales      ` 16,81,668

     Selling expenses @ 8.10% of sales                                ` 48,12,968

     Merchandising Expenses @ 1.31% of sales                           ` 7,78,694

     Advertising and sales promotion expenses @ 12.04% of sales       ` 71,54,090

     Other Administrative Expenses @ 5.28% of sales                   ` 31,37,342

8. The above calculation has been worked out on the basis of actual percentage of expenses of sales. While apportioning the various expenses, it has been observed by the Commissioner (Appeals) that the assessee has also allocated expenses like salary / allowances, stores & spares parts, light & power, rent, rates and taxes, repairs and maintenance of machinery and building, sales tax, directors' fee, depreciation, etc. Thus, as per the working of the assessee, the net impact after considering the various manufacturing expenses, the profit will come to ` 13,93,719, on the sales made to subsidiary company. The Commissioner (Appeals), after considering the various observations of the Assessing Officer and the submissions of the assessee, gave a detail analysis as to how the method adopted by the Assessing Officer and allocation of expenses made by the assessee are not correct, which has been discussed from Paras-3.19 to Para-3.22, and held that the disallowance of ` 3,19,27,685, is not called for.

9. As regards the question of what should be the proper method of valuation of products sold to the subsidiary company, he held that one has to start from the amount of ` 1,62,37,205 (wrongly worked out by the assessee at ` 1,61,70,643) as per the working provided by the assessee at the assessment stage as well as the appellate stage. The cost of the goods sold to the subsidiary is shown at ` 5,94,19,356, while it has realised sale proceeds of ` 4,31,82,151. The difference of the two comes to ` 1,62,37,205. For working out the disallowance, the Commissioner (Appeals) gave the direction to the Assessing Officer to work out the disallowance in M/s. Johnson & Johnson Ltd.

the following manner which has been given from Paras-3.24 to 3.27, which for the sake of ready reference, is reproduced herein below:-

"3.24 As mentioned earlier, the assessee has submitted that on its sales made to the subsidiary company, it does not have to incur various post manufacturing expenses which have been given in Para- 3.17 of this order and that if set off is give for these expenses, the assessee has really earned profit on the sales made by it to the subsidiary company. It is submitted that it does not have to incur freight, transportation and shipping expenses on the sales made to the subsidiary company as the subsidiary company is responsible for collection of the sold goods from the appellate company's respective units. I have considered this claim and it is acceptable to the extend that as the goods are collected by the subsidiary from the units (as claimed by the assessee) only direct freight expenses in the same proportion as incurred for transporting the goods from the assessee's unit to the premises of the other parties to whom the sales are made need to be set-off. The A.O. may, therefore, allow set-off for only direct freight expenses on the sales made to the subsidiary and this set-off may be calculated by first calculating percentage of such expenses to the sales in respect of the sales made to the other parties and then applying the same percentage to the sales made by the assessee to the subsidiary company. For this purpose, the sales figure will have to be taken at ` 5,94,19,356. For this purpose, the sales figure will have to be taken at ` 5,94,19,356. If the assessee is not able to provide the relevant information in this regard as required by the A.O. he may make a fair and just estimate to the freight expenses in respect of sales to other parties on the basis of available information. So far as the advertisement expenses are concerned, it is understandable that for sales made to the subsidiary, the assessee would not have to incur any advertisement expenses which are sold to the subsidiary company which in turn exports those products. As such no advertisement expenses need to be incurred in India. Therefore, the claim of the assessee for set off of advertisement expenses is acceptable. These may be calculated by first calculating the advertisement expenses as percentage of sales to the other parties and then applying the same percentage to the sales made by the assessee company to the subsidiary. Here too, only direct advertisement expenses in respect of sales to other parties will be considered for making the aforesaid calculations and in case the assessee is not able to furnish the relevant information as required by the A.O., he may make fair and just estimate of these expenses on the basis of available information.

3.25 However, as far as the set-off for the other expenses namely sales promotion, sales expenses, merchandising expenses and other administrative expenses are concerned, I have gone through the nature of these expenses as explained by the assessee and I do not agree with the assessee that in respect of sales made to the M/s. Johnson & Johnson Ltd.

subsidiary, such expenses are not required to be incurred. After all for making sales to the subsidiary company, the assessee company is required to maintain various staff and also incur expenditure on their salary and other infrastructure required for the sales to the subsidiary company. Merchandising expenses are stated to include office staff expenses. Even for the sales made to the subsidiary company, the assessee company is required to incur these expenses. Same is the case for other administrative expenses.

3.26 Therefore, to sum up, from the aforesaid amount of ` 1,62,37,205, which the assessee is receiving less on its sales made to its subsidiary company set-off is required to be given for expenditure which it would have incurred on freight and advertisement. The assessee may give set-off for these expenses from ` 1,62,37,205 and the resulting amount will be added to the total income of the assessee in place of addition of ` 3,19,77,685. This addition is definitely called for as these transactions are not at arm's length and the sales have been made to the subsidiary company at a price which is less than the price which is charged for similar products from the other parties.

3.27 Thus, for the reasons given in the assessment order, I agree with the A.O. that the assessee has taken a number of steps by which taxable profits in the hands of the company have been artificially and unduly reduced. However, I do not agree with the quantum of loss which has been calculated in the assessment order at ` 3,19,77,685 and for the reasons given in the preceding paras, it is directed that this loss may be calculated by allowing set off for freight and advertisement expenses in respect of the sales to the subsidiary companies from ` 1,62,37,205. Accordingly, against disallowance of ` 3,19,77,685 I uphold disallowance calculated in the aforesaid manner."

10. Learned Counsel, appearing on behalf of the assessee, submitted that the assessee had no export division, therefore, it has made a wholly owned subsidiary company dealing in 100% exports. The total exports of the assessee company were around ` 4.39 crores, which was through the subsidiary company JJE. The assessee has, in fact, earned a dividend of ` 2.58 crores from this company and, therefore, the assessee was within his right to open a 100% export subsidiary for claim of deduction under section 80HHC. Thus, there was no colourable device for tax evasion, as alleged by the Assessing Officer. In support of this contention, he relied upon various case laws including that of Vodafone International Holdings B. V. v/s Union of India, [2012] 341 ITR 001 (SC) and CIT v/s Walfort Share and Stock Brokers Pvt. Ltd., [2010] 326 ITR 001 (SC). A list of such compilation of case M/s. Johnson & Johnson Ltd.

laws has been filed separately in the paper book. Further, such a set-up of subsidiary was part of a business strategy to export its product to an export house i.e., JJE. Regarding various expenses which are not required for the sale of subsidiary company, he submitted that such deduction of expenses are necessary to work out the actual profit made to the subsidiary as these expenses are not relatable to sales made to its subsidiary. Thus, he submitted that various deduction of expenses, as given before the Commissioner (Appeals), which has been incorporated in the forgoing paragraphs, none of them were actually required for making the sales in the subsidiary company, as neither sales expenses is required nor merchandizing expenses.

11. Insofar as working of disallowance made by the Assessing Officer is concerned, he pointed out the same is wholly erroneous as held by the Commissioner (Appeals) himself in the appellate order because he has taken the average sale price of various products rather than the rates of individual packs of a product. The assessee has made its full disclosure of its related party transaction in Form 3CD and has charged cost plus 15% on such transaction which cannot be said to be very low.

12. He further submitted that on the issue of deduction under section 80IA, in the earlier years, the Revenue has adopted the yardstick of cost plus 15% while allocating the income of the unit in the earlier years, therefore, there cannot be two parameters in such a case. Even in this year, the Assessing Officer has adopted the same formula which is evident from Para-10 of the assessment order given at Pages-24 and 25. Alternatively, he submitted that the Assessing Officer can verify the actual expenditure related to the sales to the subsidiary and then if at all any disallowance is called for, then the same can be made.

13. The learned Departmental Representative, on the other hand, submitted that it is not disputed in this case that in respect of pricing of 204 M/s. Johnson & Johnson Ltd.

items sold to the subsidiary company, there is a difference between sale price charged from the subsidiary company and from the other third parties. The assessee itself has worked out the difference of ` 1.61 crores. He submitted that there cannot be a differential pricing between the third party and subsidiary because it militates the very principle of accounting. All the expenses debited in the Profit & Loss account are subject to deduction under section 37(1) and it goes to reflect in all the products. For e.g., he submitted that the learned Commissioner (Appeals) went wrong in allowing the expenses relating to advertisement expenses because the same is embedded in the brand value. Even when the subsidiary is making an export, it is exporting a product which has a brand value and in which advertisement expenses are most essential part. The preferential rate adopted by the assessee is against the tents of law and accounting principle as the loss is incidental and it cannot be pre-arranged or pre-determined. By under- pricing the products to the subsidiary, the assessee is in fact pre-arranging its loss. Therefore, the Assessing Officer was within the law to examine as to whether the price charged by the subsidiary is at arm's length. He submitted that none of the expenses can be segregated for working out the cost of the price in the sale price charged by the assessee from its subsidiary. He, thus, strongly relied upon the detail reasoning and the conclusion drawn by the A.O and also part of the learned Commissioner (Appeals)'s order.

14. In the rejoinder, the learned Counsel for the assessee submitted that the assessee has not pre-arranged or pre-ordained the loss as the assessee has itself shown cost +15% margin on the sales made to its subsidiary. It cannot be held that all the expenses which are attributable to sale of third parties are applicable on the sales of the products made to the subsidiary. There has to be some kind of adjustment of expenses.

15. We have carefully considered the rival contentions of the parties, perused the orders of the authorities below and the material placed on record. In the present case, to sum up the controversy vis-à-vis, the facts M/s. Johnson & Johnson Ltd.

and contentions are that the assessee company has made sales of various products to its 100% subsidiary company JJE for sums amounting to ` 4,31,82,151. The Assessing Officer, on a verification of details of the rates at which products were sold to the subsidiaries vis-a-vis the rates at which the same products were sold to the third parties, found out that there are huge differences and concluded that the assessee has deliberately incurred losses on such sales and the same were made at a much lower rate. He has given a very detail reason as to how it affects the profitability of the assessee. On the other hand, the assessee's case before the Assessing Officer has been that the sale price to the third parties and rate at which it has been sold to subsidiary, there were various factors which has to be taken into consideration as most of the expenses are not directly attributable to the sales made to the subsidiary company. The Assessing Officer has worked out the loss incurred by the assessee in the sales made to the subsidiary were to the tune of ` 3,19,77,685. The assessee before the Assessing Officer without prejudice to its claim has worked out the difference at ` 1,61,70,643, as the working of the Assessing Officer by taking the average sale price of the entire products were erroneous. Before the learned Commissioner (Appeals), it was claimed that there were various expenses which needs to be deducted after working of the disallowance of ` 1,61,70,643, which were enumerated as under:-

Freight Transportation & Shipping expenses @ ` 16,81,668 2.83% of sales Selling expenses @ 8.10% of sales ` 48,12,968 Merchandising Expenses @ 1.31% of sales ` 7,78,694 Advertising and sales promotion expenses @ ` 71,54,090 12.04% of sales Other Administrative Expenses @ 5.28% of sales ` 31,37,342

16. The learned Commissioner (Appeals) has agreed that the expenses mentioned at serial no.1 and 4 i.e., freight, transportation and shipping M/s. Johnson & Johnson Ltd.

expenses and advertisement and sales promotion expenses are not required for making sales to the subsidiary companies. The case of the learned Counsel before us is that - firstly, cost plus 15% mark-up is sufficient to determine the actual sale price made to the subsidiary which takes care of all the necessary expenses in relation to the product sold; secondly, it is assessee's prerogative to sell the product at a mutual agreed price with its subsidiary and the Revenue cannot dispute for such sale price; and lastly, the adjustment of various expenses has to be made in reference to working out the sale price for the products sold to the subsidiary because these expenses are not required in case of sale made to the subsidiary which is otherwise necessary in case of sale made to the third parties. Learned Departmental Representative, before us, contended that it is very difficult to segregate the expenses while working out the sale price of the product because most of the expenses are inbuilt in the manufacturing of the product for e.g., in case of advertisement expenses it has a direct implication on the brand value which is embedded while making a sale of the product; secondly, differential pricing militates the principle accounting. The learned Commissioner (Appeals) has partly accepted the assessee's contentions that adjustment of certain expenses has to be made. However, he has rejected the working of the Assessing Officer specifically with regard to the adoption of average sale price of the product because under a particular category of a product, there is a wide range of price for e.g., in case "sutures" the price varies from ` 91 per dozen to ` 8,501 per dozen. Insofar as this aspect of the conclusion drawn by the Commissioner (Appeals) is concerned that the working of the Assessing Officer is erroneous, we agree with his findings that average sale price of the products cannot be worked out for calculating the loss on the sales made to the subsidiary. The figure of loss calculated by the Assessing Officer at ` 3,19,77,685, on a sale of ` 4,31,82,151, is highly unrealistic. Therefore, the same has rightly been rejected by the Commissioner (Appeals).

M/s. Johnson & Johnson Ltd.

17. Now coming to various types of expenses which as per the assessee, are not required for determining the sale price of a product sold to the subsidiary, we agree that certain adjustment of expenses do require to be made in case of sales made to the subsidiary company. However, the basis of such adjustment of expenses has to be demonstrated so far as possible on actual expenses whether they are directly or indirectly embedded in the cost of products. At the same time, it is undisputed that the assessee has under

priced its sales made to the subsidiary as there cannot be a huge differential of pricing of the same product sold to the subsidiary on one hand and to the other parties on the other hand. On perusal of the orders passed by the Assessing Officer as well as by the Commissioner (Appeals), it is seen that no one has examined as to what is the price margin on which the sales have been made to the other parties and what is the difference between the sale price made to the subsidiary. The assessee's contentions also cannot be brushed aside that certain adjustment of expenses are required to be made for determining the sale price made to the subsidiary vis-à-vis to the other parties. Therefore, looking to the entirety of the facts, we are of the opinion that the entire matter needs to be restored back to the file of the Assessing Officer for examining the price difference which has been sold to the third parties as per the actual sales of the products and the sale price made to the subsidiary company. Secondly, the Assessing Officer should verify the actual expenditure attributable to the products and the sale made to the subsidiary and lastly, the adjustment of expenditure should be made on some reasonable basis while working out the sale price charged from the subsidiary as there are certain expenses which are not required for making the sales to the subsidiary as compared to the other parties. While doing so, the Assessing Officer will also take into consideration the fact that the assessee had shown cost plus 15% mark-up. The assessee is also required to furnish all the necessary details and the actual expenses relating to sales to the subsidiary. Thus, the entire matter has to be examined afresh in the light of the above observation after giving due and effective opportunity of M/s. Johnson & Johnson Ltd.

hearing to the assessee for presenting its case. Thus, ground no.1, is allowed for statistical purposes.

18. In ground no.2, the assessee has challenged the disallowance of ` 1,56,59,547, on account of provisions for Executive Retirement Scheme (ERS) on the ground that such provisions made for ERS liability is only contingent liability.

19. Rival contentions heard. As agreed by both the parties, this issue has come up for consideration before a co-ordinate bench of the Tribunal in ITA no.4738/Mum./1988, wherein the Tribunal has held that ERS is to be allowed on payment basis as against provision basis as claimed by the assessee.

20. After carefully going through the orders passed by the authorities below and also the decision of the Tribunal in assessee's own case, we find that the Tribunal has dealt and discussed this issue in the following manner:-

"Ground No. 12 relates to the disallowance of Rs.1,72,013/- under Executive Retirement Scheme. Shri H. S.Krishnamurthy was the Chief Executive. He joined the company in the year 1959 & retired in 1982. He rendered 23 years of service. The amount was paid to him in terms of agreement dated 21.7.72, 29.12.78 & 23.10.1981. The liability of the company was based on specific computation & the amount was paid in equal installments. Shri A. K. Marfatia, General Manger of Consumer Product Division rendered 10 years of service. Shri Harish submitted that although ad-hoc provisions made on account of Executive Retirement Scheme is not on allowable expenditure, the actual payments made should be allowed as a deduction. According to Id. counsel, during the previous year, the assessee added back Rs.1,99,971/- in computation of total income since it represents ad- hoc provisions made. It was therefore, submitted that since as and when the provision is made, the sum is offered for taxation, the payment of Rs.1,72,013/- made out of much provision should be allowed as the said expenditure is incurred by the assessee wholly and exclusively for the purposes of the business as laid down in sec. 37 (1) of the act. Shri Mansukhani submitted that expenses of agreement does not bound the Assessing Officer to allow the expenditure. It is the duty of the assessee to prove the bonafide of the claim and to establish clear out nexus between the payment and the business expediency. To support the contention, he relied on some precedents.

M/s. Johnson & Johnson Ltd.

We have heard the rival submissions in the light of material placed before us and the precedents relied upon. In regard to the disallowance of the claim, we do not find any sufficient discussion in the impugned order. However, on perusing the details, we find that the liability to the assessee is based on the specific modus of computation & since 1972 year after year, provisions were made in the accounts and added back in the total income. The Payments were made out of those provisions. We are, therefore, inclined to agree with Id. Counsel for the assessee that actual payment made during the relevant assessment year is allowable business expenditure. Accordingly, we direct the Assessing Officer to allow the claim of the assessee on this count."

21. Thus, respectfully following the precedence of the aforesaid order, we direct the Assessing Officer to allow the said expenses on the basis of actual payment made during the relevant assessment year as business expenses. Accordingly, ground no.2, is partly allowed.

22. Ground no.3, relates to disallowance of foreign travel expenses of ` 1,68,597, incurred on the wife of the Executive Officer of the assessee.

23. Rival contentions heard. As agreed by both the parties, this issue has come up before the co-ordinate bench of the Tribunal in earlier years in assessee's own case wherein identical issue has been allowed and in subsequent years, the same was decided against. The Commissioner (Appeals) has confirmed the said addition after observing and holding as under:-

"7.2 I have considered the facts of the case and the submissions of the appellant. In the case of Glaxo Laboratories, the company's application to RBI for release of foreign exchange for chairman and his wife indicated that they were proceeding abroad for business purposes. In that case, it was also brought on record that chairman and chief executive of Glaxo Holding had extended invitation to the chairman and his wife. Thus, in that case, it was brought on record that the wife accompanied the husband for business considerations. Even in the case of Apollo Tyres Ltd. the necessity of bringing material on record to show that the wife traveled for business purposes has been discussed. However, in the case of the appellant, no such material as has been discussed particularly in the case of Glaxo Laboratories has been brought on record and the appellant has only put forward general arguments that it was not only customary that M/s. Johnson & Johnson Ltd.

necessary for the spouses to attend the business meeting and social gatherings. The appellant has therefore, not been able to bring its case at par with that of Glaxo Laboratories. However, it is not proper to disallow total foreign travel expenses for both Mr. Mallar & Mrs. Mallar. Foreign travel expenses only in respect of Mrs. Mallar need to be disallowed. As such, disallowance is restricted to ` 1,68,597 (i.e., half of ` 3,37,194)."

24. After considering the findings of the Assessing Officer as well as of the Commissioner (Appeals) and also various orders passed by the Tribunal, we find that in assessment years 1984-85 and 1991-92, the Tribunal has decided the issue in favour of the assessee whereas in the assessment years 1985-86 and 1988-89, this issue has been decided against the assessee and in assessment year 1993-94 in ITA no.6477/Mum./1998, which is the latest order, this issue has been decided against the assessee after considering the earlier years' decision o the ground that in the earlier years, the Tribunal has followed Special Bench decision in Glaxo (supra), which is no more relevant in view of the subsequent decision of the Jurisdictional High Court in Bhor Industries Ltd., 284 ITR 319 (Bom.). The relevant observations and findings of the Tribunal in ITA no.6477/Mum./1998, assessment year 1993-94, are as follows:-

"The next issue, pertaining to assessment year 1993-94 relates to disallowance of ` 1,34,929/- incurred on the foreign trip of Mrs. Lata Palekar, w/o Mr. V.S. Palekar. The Assessing Officer disallowed the claim since it was not incurred for the purpose of business. However, the learned CIT(A) has deleted the same following the Special Bench decision in the case of Glaxo Laboratories Ltd., 18 ITD 226. Aggrieved by the same, the Revenue is in appeal before the Tribunal.

After hearing both the parties, we find that the decision of the Special Bench mentioned above is no more relevant in view of the recent decision of the Hon'ble Bombay High Court in the case of Bhor Industries Ltd., 284 ITR 319, wherein it has been held that such claim of the assessee cannot be allowed unless it is shown that the tour of the spouse of the employee was for the purpose of business. A query was raised as to whether there was any invitation for the purpose for the spouse. In response to the same, the answer was in negative. Therefore, it cannot be said that the trip of the wife was for the purpose of business particularly when no material / evidence has been furnished before either of the authorities. Therefore, the claim of the M/s. Johnson & Johnson Ltd.

assessee cannot be accepted. The order of the Learned CIT (A) is, therefore, reversed on this issue and consequently, the disallowance made by the Assessing Officer is restored."

25. Keeping in view the aforesaid decision of the Tribunal in assessee's own case, which is based on the judgment of the Jurisdictional High Court, we decide this issue against the assessee. This ground is, thus, dismissed.

26. Ground no.4, relates to disallowance of various entertainment expenses. Under this head, various disallowances have been challenged like entertainment expenses, conference expenses on meals of ` 22,31,541, (35% of conference expenses); (ii) entertainment expenses on conference - ` 8,30,476; (iii) entertainment expenses - training and learning expenses - ` 3,92,905; (iv) expenditure on account awards and complementary - ` 63,59,540, misc. business expenses on food / beverages - ` 15,65,633.

27. The Assessing Officer has made the following disallowances under the head "Entertainment Expenses" in the following manner:-

Expenditure Head Expenditure Basis Disallowed by Incurred (` ) JCIT (` ) Conference Expenses on meals 63,75,832 35% 22,31,541 Conference Expenses on give 8,30,476 100% 8,30,476 aways & complementary Training & Learning Expenses on 22,45,176 50% of 35% 3,92,905 meals Misc. Business Exp. 20,87,511 100% 20,87,511 Give aways and complements 63,59,540 100% 63,59,540

28. The Commissioner (Appeals) has confirmed most of the disallowances after following the order passed for assessment year 1995-96 in assessee's own case after observing and holding as under:-

8.2 I have considered the facts of the case and the submissions of the appellant and have also gone through order dated 31.3.1998 passed by the CIT(A) in the case of the appellant for A.Y. 1995-96. In M/s. Johnson & Johnson Ltd.

agreement with the same, it is held that disallowances made with regard to :-

      i)     Conference expenses meals;
      ii)    Various expenses on give aways and complementaries
      iii)   Training and learning expenses meals; and
      iv)    Give away and complements.

are in order and upheld. So far disallowance on account of ` 20,87,511 is concerned, as in A.Y. 1995-96, it is directed that the disallowance may be restricted to 75% of this amount and consequent disallowance under section 37(2) may be worked out afresh.

29. Before us, the learned Counsel for the assessee submitted that these issues have come up for consideration before the Tribunal in the earlier years in assessee's own case in which a detailed chart is given with reference to the findings of the Tribunal in various years.

30. After carefully considering the findings of the Commissioner (Appeals) as well as of the Assessing Officer and also the order passed by the Tribunal, we find that in assessee's own case for assessment year 1995-96 in ITA no. 6633/Mum./1998, the Tribunal has upheld the 80% of the disallowance confirmed by the Commissioner (Appeals) which was at 35% of the disallowance made by the Assessing Officer. Consistent with the view taken therein, we hold that 80% of the disallowance should be confirmed out of the disallowance made by the Commissioner (Appeals). In case of disallowance on account of conference expenses of ` 8,33,476, the learned Counsel submitted that this issue has been decided in favour of the assessee by the Tribunal in assessee's own case for assessment year 1984-85, wherein the Tribunal has followed Special Bench decision in Chemay Pvt. Ltd., ITA no. 430/Bom./1984. Consistent with the view taken therein, we also allow the said expenses incurred on account of conference expenses as business expenses. We order accordingly.

31. With regard to the disallowance on account of training and learning expenses of ` 3,92,905, it has been admitted by both the parties that this M/s. Johnson & Johnson Ltd.

issue has been decided in favour of the assessee by the Tribunal in earlier years and the latest being assessment year 1995-96 in ITA no.6633/Mum./ 1998, wherein the same has been allowed completely.

32. After going through the said decision, we find that the Tribunal in the said order has deleted the similar addition which was made in the similar fashion in the following manner:-

"There is one more aspect regarding entertainment expenses. The assessee has shown the sum of Rs 33,64,733 under the head "Training and learning expenses". The AO observed that that the most of the expenses were incurred on hotel expenses and very little expense was incurred on actual training of the employees. He estimated 35% of the total expenses on account of entertain-ment. This issue arises in the AY 1995-96. In our opinion, no disallowance is warranted since the entire expenditure is related to the training of the employees. The entertainment expenditure in respect of employees is otherwise allowable deduction. Therefore the disallowance made by the AO and sustained by the learned CIT(A) on this account is deleted."

33. Consistent with the aforesaid view taken by the Tribunal in assessee's own case, we set aside the impugned order passed by the Commissioner (Appeals) and allow the ground raised by the assessee.

34. With regard to the disallowance of expenditure incurred on account of "give-aways" and "complimentary" of ` 63,59,540, it has been submitted by the learned Counsel that the same has been allowed by the Tribunal in assessee's own case for assessment year 1948-85, 1985-86 and 1988-89.

35. After going through the decision of the Tribunal in assessment year 1984-85 in assessee's own case in ITA no.6738/Bom./1988, we find that similar addition has been deleted by the Tribunal after following the decision of the Special Bench in Chemay Pvt. Ltd. (supra) and also in ITA no.6393/ Bom./1988 and ITA no.7491/Bom./1990, wherein, in both the cases, the Tribunal has made following observations:-

M/s. Johnson & Johnson Ltd.

"Expenditure on giveaways and complementaries amount to ` 2,03,033. We find that the issue is squarely covered by the decision of the Special Bench in the case of Chapman Pvt. Ltd. (supra). Respectfully following the decision of the Tribunal, we decide this issue in favour of the assessee and against the revenue.

With regard to the expenditure on Giveaways and Complementaries, assessee submitted that identical issue was decided by the appellate Tribunal in its own case for the assessment year 1984-85. As we find that the issue is separately covered by the decision of the Tribunal cited supra, we decide the same in favour of the assessee against the Revenue."

36. Consistent with the aforesaid view taken by the Tribunal in assessee's own case, we set aside the impugned order passed by the Commissioner (Appeals) and allow the ground raised by the assessee.

37. With regard to the disallowance of miscellaneous business expenses on food and beverages of ` 15,65,633, it has been admitted by the learned Counsel that the Tribunal in earlier years has upheld 80% of the disallowance confirmed by the Commissioner (Appeals).

38. After going through the order passed by the Tribunal in assessment year 1995-96 in assessee's own case in ITA no.6633/Mum./1998, we find that the Tribunal has further allowed 20% of the expenses sustained by the Commissioner (Appeals) after observing and holding as under:-

"Coming now to the disallowance on account of misc. business expenditure, we find that the issue is separately covered by the order of the Tribunal in ITA. No.1601/Bom/82 dated l2 April 1984 in assessee own case for the assessment year 1978-79. The Tribunal held that "the disallowance was under sec. 37(2A). The same issue arose for consideration before the Tribunal in the case of the very same assessee for the assessment years 1976-77 and 1977-78, by the order dated 16.5.1981 in the I.T.A. Nos. 1728, 1729, 2137 & 2138/ Bom/1980, the Tribunal held that only 50% of the expenditure is allowable."

"As far as conference expenses and Miscellaneous expenses are concerned the disallowance sustained by the learned CIT(A) appears to be reasonable. However, some amount of deduction is allowable on account of employees participation. The tribunal is taking the view that 20% to 25% of the expenditure is allowable in this regard. On the M/s. Johnson & Johnson Ltd.

facts of the case, we further allow 20% of the expenditure sustained by the Learned CIT(A) in respect of Misc. expenses and conference expenses. The order of CIT(A) is therefore modified accordingly. The AO is directed to recompute the disallowance considering the provisions of 37(2)/37(2A) of the Act."

39. Thus, consistent with the view taken therein, ground no.4 is partly allowed as per the observations made herein above.

40. Ground no.5, relates to deduction under section 80IA of the Act.

41. Rival contentions heard. Both the parties agree before us that this issue has been decided against the assessee in assessee's own case by the Tribunal for assessment year 1993-94 and 1995-96.

42. After carefully going through the order passed by the Tribunal in assessment year 1995-96 in ITA no.6633/Mum./1988, we find that this issue has been decided in the following manner:-

"The only question which remains to be considered is, whether 15% profit on the supplies made by the Dharavi unit can be said to be reasonable. The perusal of the assessment order shows that the profit of Aurangabad unit was to the tune of Rs 6,13,57,963 out of which the profit of Rs 42,43,644 was reduced from the above figure being the profit on supplies made by Dharavi Unit and the net amount of the profit of Aurangabad unit was determined at Rs 5,71,14,119/-. This shows that profit attributed to Dharavi unit compared to total profit was merely 7% of the total profit of the Aurangabad unit which appears to be reasonable. Accordingly, the orders of the learned CIT(A) are upheld on this issue."

43. Consistent with the view taken by the Tribunal in assessee's own case cited supra, this issue is decided against the Assessee. Thus, this ground is dismissed.

44. Ground no.6, relates to ad-hoc disallowance of 2% of dividend income on account of expenditure for earning the dividend income.

M/s. Johnson & Johnson Ltd.

45. Before us, the learned Counsel for the assessee has relied upon the judgment of Jurisdictional High Court in CIT v/s Emrald Co. Ltd. [2006] 284 ITR 586 (Bom.).

46. On the other hand, the learned Departmental Representative relied upon the order passed by the Commissioner (Appeals).

47. After carefully considering the facts of the case and the observations and findings given by the Commissioner (Appeals) as well as by the Assessing Officer, we find that the Commissioner (Appeals) has decided this issue after observing and holding as under:-

The appellant had claimed deduction under section 80M at ` 7,58,99,000 on account of dividend income from subsidiary company. The appellant claimed this deduction on the gross amount while as per the assessment order it should be allowed after deducting the expenses incurred for earning this income, As per the assessment order for managing such a large investment portfolio and taking care of return thereon, certain managerial and administrative time and expenditure must have been spent or devoted by the appellant. However, since no details in this regard have been filed by the appellant, the A.0. estimated 2% of the gross dividend of Rs. 7,58,99,000/- being Rs. 15,17,980/- to be the proportionate expenditure for earning the dividend income out of total administrative and overhead expenses claimed by the appellant. Accordingly, deduction u/s. SCM was reduced by Rs.15,17,980J.

10.1. Against the aforesaid disallowance, the appellant had submitted that during the year they have not incurred any expenditure for the purpose of investment in the subsidiary company. It has therefore, been submitted that the disallowance is not warranted. But on without prejudice basis it has been submitted that the reduction from the dividend income for computation of income u/s. 80M is on the higher side and should be substantially reduced.

10.2. I have considered the facts of the case and the submissions of the appellant. The appellant is entitled to reduction u/s 80M not on the gross dividend but on the dividend after deducting the expenditure incurred for earning the dividend income. Therefore, the main submission of the appellant for deduction u/s. 80M for gross amounts of dividend cannot be accepted. As the appellant is not maintaining any accounts separately for managing the investment portfolio, such expenses have to be estimated as has been done by the AO.

M/s. Johnson & Johnson Ltd.

Keeping in view the facts of the case, ad-hoc estimate of expenses at 2% of the gross dividend is fair and just and no interference in this matter is called for."

48. Thus, the Commissioner (Appeals) has decided the issue against the assessee on the ground that the assessee is entitled to deduction under section 80M not on the gross dividend but on the dividend after deducting expenditure incurred for earning dividend income. The Jurisdictional High Court in CIT v/s Emrald Co. Ltd. [2006] 284 ITR 856 (Bom.), held that deduction under section 80M has to be granted with reference to the gross dividend. The relevant observation of the Jurisdictional High Court in Emerled Co. Ltd. (supra) are reproduced herein below:-

"Business income is broken up under the different heads only for the purpose of computing the total income, but the income does not cease to be income of the business. Therefore, in the case of a dealer in shares, the dividend retains the character of business income though assessed under section 56 of the Income-tax Act, 1961. The interest on the borrowings is paid for the purpose of business and therefore allowable under section 36(1)(iii). The court in the case of CIT v. Maganlal Chhaganlal P. Ltd. [1999] 236 ITR 456 (Bom) following the ratio of the decision of the Supreme Court in the case of Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120 held that deduction under section 80M(1) of the Act has to be calculated with reference to the amount of dividend computed in accordance with the provisions of the Act and forming part of the gross total income, i.e, after deducting interest on monies borrowed for earning such income and not with reference to the full amount of dividend received by the assessee. The Calcutta High Court in CIT v. National and Grindlays Bank Ltd. [1993] 202 ITR 559 had held that the relevant section 80M is admissible on the gross amount of dividend income without deducting therefrom the interest paid for earning the dividend. The decision of the Supreme Court in the case of Distributors (Baroda) P. Ltd. [1985] 155 ITR 120 was not brought to the notice of the Calcutta High Court and therefore, the decision of the Calcutta High Court is inconsistent with the decision of the Supreme Court in Distributors (Baroda) P. Ltd. [1985] 155 ITR 120.

The assessee was a company dealing in shares. It earned dividend of Rs.1,34,984. The assessee-company had utilised an overdraft facility for purchase of shares and had paid interest of Rs. 45,469 on the overdraft and incurred other expenses to the tune of Rs. 24,900 which were debited to the profit and loss account and taken into account for arriving at a profit of Rs. 81,718. The Income-tax Officer computed the net dividend income in accordance with the provisions of sections M/s. Johnson & Johnson Ltd.

56, 57 and 58 and proceeded to allow 60 per cent. deduction under section 80M on the income so computed. The Commissioner (Appeals) held that the assessee was a dealer in shares. Both the interest paid on the amount borrowed for the purchase of shares and other expenses incurred by the company and allocated to the dividend income were held to be allowable under the head "Business" and not under the head "Other sources". He accordingly directed the Income- tax Officer to allow deduction under section 80M on the gross dividend. The Tribunal confirmed this order. On a reference :

_Held,_ that the interest on the overdraft and the expenses were related to the business of trading in shares and ought to be allowed as computed income under the head "Business". The said expenses could not once again be deducted from the dividend income for the limited purpose of computing the deduction under section 80M of the Act. There was no statutory provision requiring the Assessing Officer to deduct the same expenses under two different heads of income. Since the income by way of dividend included in the gross total income was Rs.1,34,984 the deduction under section 80M had to be granted with reference to the said amount of Rs.1,34,984."

49. Respectfully following the aforesaid judgment of the Jurisdictional High Court, we hold that no such ad-hoc disallowance of expenditure can be made for computing deduction under section 80M. This ground is, thus, allowed.

50. प रणामतः नधा रती क अपील सां यक य उ े य के लए आं शक वीकत ृ क जाती है ।

49. In the result, assessee's appeal is partly allowed for statistical purposes.

51. We now take up Revenue's appeal in ITA no.145/Mum./2001, for assessment year 1997-98.

52. In ground no.1, the Revenue has challenged deletion of addition on account of Johnson & Johnson Exports Ltd.

53. Rival contentions heard. Both the parties agree before us that this issue is similar to ground no.1, raised in assessee's appeal in ITA no.349/Mum./2001 and consistent with the view taken therein, we set aside the impugned order passed by the Commissioner (Appeals) and restore the M/s. Johnson & Johnson Ltd.

issue back to the file of the Assessing Officer for denovo adjudication. This ground is, thus, allowed for statistical purposes.

54. In ground no.2, the Revenue has challenged the deletion of addition of ` 2,32,94,702, on production of add films treating it as revenue expenditure by the Commissioner (Appeals).

55. The Commissioner (Appeals) has decided the issue in favour of the assessee on the ground that in the earlier years, the Commissioner (Appeals) has decided this issue in favour of the assessee.

56. Before us also, both the parties agree that this issue stands covered by the decision of the Tribunal in assessee's own case right from the assessment year 1991-92 to 1995-96.

57. After carefully considering the findings of the Commissioner (Appeals) as well as of the Assessing Officer, we find that the advertisement expenses claimed by the assessee includes expenses towards purchase cost of films and production expenses for producing advertisement, films and commercials to be used as TV spots for advertisement. The Assessing Officer held that these commercials and TV films have life span of number of years as they continued to be exhibited in various TV channels along with various TV serials, etc. These advertisements create a brand awareness which has enduring benefit and, therefore, they cannot be treated as revenue expenditure and disallowed the same by treating it as capital expenditure. The Tribunal, in assessee's own case for assessment year 1991-92, in ITA no.1146/Mum./1997, has discussed this issue in detail and allowed the claim of the assessee as revenue expenditure after observing and holding as under:-

"Coming to the next ground (Ground No. 10) it is directed against the order of the CIT (A) in deleting the addition made to the tune of Rs.1 crore out of TV advertisement cost of Rs.3,81,13,673 for the reason that the expenses incurred on the production of advertisement film is Revenue expenditure and further cinematographic films are entitled for M/s. Johnson & Johnson Ltd.

100% depreciation, oveiworking the fact that the expenditure incurred on production of advertisement films are capital in nature resulting enduring benefit and further only raw stock is entitled for 100% depreciation and not the films produced.

This issue has been dealt with by the CIT (A) vide para 53 at page 24 of his order. Assessing Officer noticed assessee claimed expenditure on TV advertisement to the tune of Rs.3,81, 13,673/- following the Bombay High Court decision in the case of the CIT V/s Patel International films 102 ITR 219. He disallowed and estimated expenditure of Rs. 1 crore about 25% of the total expenditure claimed. Before the CIT (A), the assessee submitted such expenditure is allowable even if it is capital in nature in view of the decision of the Hon'ble Himachal Pradesh High Court in the case of Mohan Meakin Breweries 118 ITR 101 (HP). Assessee also relied the case of CIT V/s Raj Brothers 171 ITR 249 (HP), 42 TTJ 259 in the case of Shri Joshi Formulabs Pvt. Ltd, the decision of the Tribunal, Ahmedabad Bench. CIT (A) accepted assessee's contention and held "the addition on account of advertisement films being of capital nature does not survive as the amount in any case cannot form part of the appellant's income.

Aggrieved by the above order the Revenue is in appeal before the Tribunal.

The contenting parties reiterated their respective stand. Relying upon the decision of the Jurisdictional High Court in the case reported in 1001 ITR 219 in the case of CIT Bombay City V/s Pate! International Films Ltd., the Ld. DR submitted that expenditure on films for advertisement is to be treated as capita! expenditure. On the other hand, the Ld Counsel for the assessee relied upon the decision of Hon'b!e Himachal Pradesh High Court in the case of Mohan Meakin Breweries (supra) and Submitted, this being expenditure on advertisement need to be allowed. He further submitted, this being expenditure I furtherance of business, the expenditure whether in the form of film or not is to be treated as business expenditure. The film as such has no enduring character. This will last only as long as the product is in market, on which the advertisement is made, submitted the Counsel. Again relying upon the decision of Hon'ble Supreme Court in the case of Empire Jute Co. v/s CIT 124 ITR 1, learned Counsel submitted, this is to be treated as Revenue expenditure. Hearing the rival submission, we are of the view that the issue has to go in assessee's favour. The expenditure on films (advertisement) has no existence of its own. The film could be used and will last only as long as the product itself continues to exist I the market. In the case reported in 124 ITR I (Supra) the Hon'ble Supreme Court held "there may be where expenditure even if incurred for obtaining an advantage of enduring benefit may nonetheless, be on Revenue account and the test of enduring benefit may broke down. It is not an advantage of enduring nature agreed by the assessee that bring the case within the principal laid down in this test. What is material to consider is the nature of advantage in and it is only whether the advantage is in the M/s. Johnson & Johnson Ltd.

capital field that the expenditure would be disallowable on an application of this test. If the advantage consisted merely in facilitating assesses trading operations or enabling the management and conduct of assesses business to be carried on more efficiently or more profitably while leaving fixed capital untouched, the expenditure would be on Revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is therefore, not a certain or conclusive test and it can't be applied blindly and mechanically with regard to particular facts and circumstances of a given case. Their Lordships further held "what is on going of capital and what is outgoing on account of Revenue depends on what the expenditure is calculated to effect from a practical business point of view rendered upon the juristic classification of legal rights, if any, secured, employed or exhausted in the process. The question must be viewed I the larger context of business interest or expedience".

Coming to the instant case of the assessee the outgoing is on account of revenue and no new asset has been brought. What is capital in one assesses hand may not be capita! in case of another assessee. Assessee is trying to increase by these advertisements, accessibility to the general public to boost the sales and existence in the market. Assessee is not in the line of producing films. For a producer of a film it may be a capital asset but not for the company like the assessee who had no interest in the film as such. This ground by the Revenue fails and dismissed."

58. Thus, following the aforesaid decision which has been followed in other years also, this issue is decided in favour of the assessee by treating the same to be allowed as revenue expenditure. Thus, ground no.2, raised by the Revenue is dismissed.

59. In ground no.3, the Revenue has challenged the disallowance of ` 66,34,000, made on account of MODVAT credit.

60. The Assessing Officer found that unutilized MODVAT credit receivable by the assessee, as per the balance sheet, comes to ` 66,34,320, which has not been added for the purpose of valuation of closing stock. Accordingly, the same was added in the total income of the assessee.

61. Before the Commissioner (Appeals), it was argued that the valuation of closing stock adopted by the assessee is in accordance with the Accounting Standards prescribed by the ICAI and the same has been consistently M/s. Johnson & Johnson Ltd.

followed by it. The Commissioner (Appeals) held that since this issue has been decided in favour of the assessee in the earlier years, therefore, the same stands deleted.

62. Before us also, the learned Counsel submitted that this issue stands covered by the decision of the Tribunal in assessee's own case in the earlier years. Moreover, it was pointed out that this is prior to insertion of section 145A, which has been brought in statute w.e.f. 1st April 1999.

63. After carefully considering the orders of the authorities below and the decision of the Tribunal in assessee's own case in the earlier years, we find that this issue has been consistently allowed in favour of the assessee in assessment year 1991-92 in ITA no.1146/Mum./1997, the Tribunal has decided this issue after observing and holding as under:-

"Second Ground by the assessee is directed against the order of the CIT(A) in confirming the action of the AO in not allowing a separate claim of the assessee company in respect of excise duty which was actually paid during the year under consideration but included in the valuation of finished stock of Rs 30,24,814. It is submitted that a separate claim made by the assessee in the return of income in respect of excise duty which was actually paid during the year but included in the valuation of the finished stock be allowed. This issue has been dealt with CIT(A) vide page 4 para 10 of his order. It is seen that this issue is covered in assessee's favour of the decision of tribunal in assessee's own case for AY 1990-91 in ITA no.3976/Mum/ 94 vide page 13 para 19 of its order."

64. Moreover, this issue also stands covered in favour of the assessee and against the Revenue by the judgment of Hon'ble Supreme Court in CIT v/s Indo Nippon Chemicals Co. Ltd. [2003] 261 ITR 275 (SC). Respectfully following the aforesaid judgment, ground no.3, raised by the Revenue stands dismissed.

65. Ground no.4, relates to allowance of 25% of miscellaneous business expenses under the head "Entertainment Expenses".

M/s. Johnson & Johnson Ltd.

66. This issue is similar to ground no.4 of assessee's appeal in ITA no.349/ Mum./2001, for assessment year 1997-98, and in view of the findings given therein, wherein, following the earlier year's order passed by the Tribunal, the disallowance made by the learned Commissioner (Appeals) to the extent of 75% has been upheld. Consequently, 25% deduction allowed by the learned Commissioner (Appeals) is hereby upheld. Thus, ground no.4, raised by the Revenue is dismissed.

67. प रणामतः राज व क अपील सां यक य उ े य के लए आं शक वीकत ृ क जाती है ।

66. In the result, Revenue's appeal is partly allowed for statistical purposes.

We now take up Assessee's Cross Objection no.88/Mum./2001, which is arising out of Revenue's appeal in ITA no.145/Mum./2001, for assessment year 1997-98.

68. In this cross objection, the assessee stated that in case the expenditure on account of production of advertising films is treated as capital expenditure, then 100% depreciation should be allowed.

69. Since we have already allowed the said expenditure as revenue expenditure, therefore, the ground raised in the cross objection become infructuous and the same is dismissed as such.

70. प रणामतः नधा रती क या ेप खा रज क जाती है ।

69. In the result, assessee's cross objection is dismissed.

We now take up assessee's appeal in ITA no.2679/Mum./2003, for assessment year 1998-99.

71. In ground no.1, the assessee has challenged the addition on account of sales made to Johnson & Johnson Exports Ltd., a subsidiary of the assessee company.

M/s. Johnson & Johnson Ltd.

72. Rival contentions heard. As admitted by both the parties, this issue is similar to ground no.1, in assessee's appeal in ITA no.349/Mum./2001, for assessment year 1997-98. In view of our decision given therein which applies mutatis mutandis to this issue also, we set aside the impugned order passed by the learned Commissioner (Appeals) and restore the issue back to the file of the Assessing Officer to decide the same afresh in accordance with the directions given therein. Thus, ground no.1, raised by the assessee is allowed for statistical purposes.

73. In ground no.2, the assessee has challenged the provision made for ERS.

74. Rival contentions heard. Both the parties agree before us that this issue is similar to the issue raised in ground no.2, in assessee's appeal in ITA no.349/Mum./2001, for assessment year 1997-98. In view of our findings given therein, we set aside the impugned order passed by the learned Commissioner (Appeals) and direct the Assessing Officer to allow the said expenses on the basis of actual payment made during the relevant assessment year as business expenses. Accordingly, ground no.2, raised by the assessee is partly allowed.

75. In ground no.3, the assessee has challenged the action of reducing ` 4,05,72,619 to ` 3,95,23,602 under section 80IA.

76. Rival contentions heard. As admitted by both the parties, this issue is similar to the issue raised in ground no.5, by the assessee in its appeal in ITA no.349/Mum./2001, for assessment year 1997-98. Thus, in view of the decision given therein, wherein the issue has been decided against the assessee, following the earlier year's order passed by the Tribunal in assessee's own case, we dismiss this ground no.3, of the assessee also.

M/s. Johnson & Johnson Ltd.

77. In ground no.4, the assessee has challenged the disallowance of expenditure for earning the dividend income on ad-hoc basis being 2% of the dividend income.

78. Rival contentions heard. As admitted by both the parties, this issue is similar to the issue raised in ground no.6, by the assessee in its appeal in ITA no.349/Mum./2001, for assessment year 1997-98. Thus, in view of the decision given therein, wherein the issue has been decided in favour of the assessee, consistent with the view taken therein, we allow the ground no.4, raised by the assessee.

79. In ground no.5, the assessee has challenged non-grant of credit for TDS and self-assessment tax.

80. Learned Counsel for the assessee contended before us that he did not wish to press this ground. Learned Departmental Representative, on the other hand, also did not object to the submissions made by the learned Counsel for the assessee. Consequently, this ground is dismissed as "not pressed".

81. प रणामतः नधा रती क अपील सां यक य उ े य के लए आं शक वीकत ृ क जाती है ।

80. In the result, assessee's appeal is partly allowed for statistical purposes.

We now take up Revenue's appeal in ITA no.2054/Mum./2003, for assessment year 1998-99.

82. Ground no.1, relates deletion of addition on account of sales made Johnson & Johnson Exports Ltd.

83. Rival contentions heard. After hearing both the parties, we find that this issue is similar to the issue raised in ground no.1, by the assessee in its appeal in ITA no.849/Mum./2001, for assessment year 1997-98, wherein M/s. Johnson & Johnson Ltd.

the issue as a whole has been restored back to the file of the Assessing Officer for denovo adjudication. Consequently, we set aside the impugned order passed by the learned Commissioner (Appeals) and restore the issue back to the file of the Assessing Officer for adjudication afresh in the light of the observations made therein. Thus, ground no.1, is allowed for statistical purposes.

84. Ground no.2, relates to disallowance of expenditure on production of advertising films by treating the same as revenue expenditure by the learned Commissioner (Appeals).

85. Rival contentions heard. Both the parties agree before us that this issue is similar to the issue raised in ground no.2, in ITA no.145/Mum./2001, for assessment year 1997-98, wherein the ground raised by the Revenue is dismissed for the reasons given therein. Consistent with the view taken by us, the ground no.2, raised by the Revenue is dismissed.

86. Ground no.3, relates to deletion of addition to the closing stock on account of MODVAT credit.

87. Rival contentions heard. As admitted by both the parties, the issue raised in ground no.3, is similar to the issue raised in ground no.3, by the Revenue in ITA no.145/Mum./2001, for assessment year 1997-98, wherein, the same is dismissed for the reasons given therein. Consistent with the view taken by us, ground no.3, raised by the Revenue stands dismissed.

88. Ground no.4, relates to exclusion of excise duty and trade discount from the total turnover for deduction under section 80HHC.

89. Rival contentions heard. Both the parties agree before us that this issue is covered in favour of the assessee and against the Revenue by the judgment of Hon'ble Supreme Court in CIT v/s Lakshmi Machine Works, M/s. Johnson & Johnson Ltd.

[2007] 290 ITR 667 (SC), wherein, Their Lordships observed and held as follows:-

"Section 80HHC of the Income-tax Act, 1961, is a beneficial section : it was intended to provide incentive to promote exports. The intention was to exempt profits relatable to exports. Just as commission received by the assessee is relatable to exports and yet it cannot form part of "turnover" for the purposes of section 80HHC, excise duty and sales tax also cannot form part of "turnover". Just as interest, commission, etc., do not emanate from the "turnover" so also excise duty and sales tax do not emanate from such turnover. Since excise duty and sales tax did not involve any such turnover such taxes had to be excluded. Commission, interest, rent, etc., do yield profits, but they do not partake of the character of turnover and therefore they are not includible in the "total turnover". If so, excise duty and sales tax also cannot form part of the "total turnover" under section 80HHC(3). One cannot interpret the words "total turnover" with reference to the definition of the word "turnover" in other laws like the Central sales tax or as defined in accounting principles.

Excise duty and sales tax are indirect taxes. They are recovered by the assessee on behalf of the Government.

By the Court : The principal reason for enacting a formula in section 80HHC of the Income-tax Act, 1961, is to disallow a part of the concession thereunder when the entire deduction claimed cannot be regarded as relating to exports. Therefore, while interpreting the words "total turnover" in the formula in section 80HHC one has to give a schematic interpretation. The various amendments made therein show that receipts by way of brokerage, commission, interest, rent, etc., do not form part of business profits as they have no nexus with the activity of export. The amendments made from time to time indicate that they became necessary in order to make the formula workable. If so, excise duty and sales tax also cannot form part of the "total turnover" under section 80HHC(3) : otherwise the formula becomes unworkable.

Decisions of the Madras High Court in CIT v. Sundaram Clayton Ltd. [2006] 281 ITR 425 (Mad) and CIT v. Sri Jayajothi and Co. Ltd. [2007] 290 ITR 660 (Mad) affirmed.

[The Supreme Court made it clear that the reasoning in this case is confined to the workability of the formula in section 80HHC as it stood in the assessment year 1993-94.]

90. Respectfully following the aforesaid law settled by the Hon'ble Supreme Court which has been followed in various cases, this issue is M/s. Johnson & Johnson Ltd.

decided against the Revenue and in favour of the assessee. Thus, Revenue fails on this ground.

91. प रणामतः राज व क अपील सां यक य उ े य के लए आं शक वीकत ृ क जाती है ।

92. In the result, Revenue's appeal is partly allowed for statistical purposes.

We now take up assessee's appeal in ITA no.2680/Mum./2003, for assessment year 1999-2000.

93. Ground no.1, relates to addition of ` 3,57,77,774, on account of sales made to Johnson & Johnson Exports Ltd.

94. Rival contentions heard. As admitted by both the parties, this issue is similar to the issue raised in ground no.1, by the assessee in its appeal in ITA no.349/Mum./2001, for assessment year 1997-98. Thus, in view of the decision given therein, wherein the issue has been set restored to the file of the Assessing Officer, similar directions are issued on this ground also. We order accordingly. Thus, ground no.1, raised by the assessee is allowed for statistical purposes.

95. Ground no.2, relates to disallowance of ` 1,80,92,623, on account of MODVAT credit.

96. Rival contentions heard. After hearing both the parties, we find that though this issue is similar to the issue raised in earlier years, however, provisions of section 145A, has been brought on statute w.e.f. 1st April 1999. Therefore, the same will be applicable in the assessment year 1999-2000. Consequently, we set aside the impugned order passed by the learned Commissioner (Appeals) and restore the issue back to the file of the Assessing Officer for denovo adjudication in the light of the provisions of section 145A. The Assessing Officer is also directed to give corresponding benefit in the opening stock in view of the judgment of Jurisdictional High M/s. Johnson & Johnson Ltd.

Court in CIT v/s Mahalaxmi Glass Works P. Ltd., [2009] 318 ITR 116 (Bom.) and the judgment of Delhi High Court in Mahavir Alluminium Ltd., [2008] 297 ITR 077 (Del.). Thus, ground no.2, is allowed for statistical purposes.

97. In ground no.3, the assessee has challenged non-grant of relief on account of MODVAT relating to opening stock.

98. This ground is analogous to ground no.2, above and since the matter has been restored to the file of the Assessing Officer for adjudication afresh in the light of the judgments of the Jurisdictional High Court in Mahalaxmi Glass Works P. Ltd. (supra) and Delhi High Court in Mahavir Alluminium Ltd., (supra). Thus, ground no.3, is partly allowed for statistical purposes.

99. Ground no.4, relates to addition on account of provisions made for ERS.

100. Rival contentions heard. Both the parties agree before us that this issue is similar to the issue raised in ground no.2, in assessee's appeal in ITA no.349/Mum./2001, for assessment year 1997-98. In view of our findings given therein, we set aside the impugned order passed by the learned Commissioner (Appeals) and direct the Assessing Officer to allow the said expenses on the basis of actual payment made during the relevant assessment year as business expenses. Accordingly, ground no.4, raised by the assessee is partly allowed.

101. Ground no.5, relates to deduction under section 80IA.

102. Rival contentions heard. Both the parties agree before us that this issue is similar to the issue raised in ground no.5, in assessee's appeal in ITA no.349/Mum./2001, for assessment year 1997-98, wherein this ground is dismissed for the reasons given therein. Consistent with the view taken by us, this ground of the assessee is dismissed.

M/s. Johnson & Johnson Ltd.

103. In ground no.6, the assessee has challenged the provisions of cash discount of ` 20,43,091.

104. The case of the assessee was that it has made provisions for cash discount aggregating to ` 88,04,000, which was a provision for the month of March 1999. This cash discount is offered to those customers who pass the amount within 21-25 days depending upon the terms of the contract from the date of invoice. The discount ranges between 1% and 3%. The assessee also submitted that discount to the extent of ` 67,62,012, has actually been availed by the customers and the assessee has been consistently following the said accounting system which was never in dispute. However, the Assessing Officer disallowed the entire amount.

105. The learned Commissioner (Appeals) held that insofar as the actual payment to the extent of ` 67,61,136, the same should be allowed and the balance amount of ` 10,43,091 should be disallowed.

106. Before us, the learned Counsel for the assessee, relying upon the judgment of Hon'ble Supreme Court in Rotork Controls India Pvt. Ltd. v/s CIT, [2009] 314 ITR 062 (SC), submitted that such a provision should be allowed as deduction under section 37 of the Act.

107. On the other hand, the learned Departmental Representative relied on the order passed by the learned Commissioner (Appeals).

108. After carefully considering the findings of the learned Commissioner (Appeals) as well as by the Assessing Officer, it is seen that the assessee has been making the provisions for discount to the customers who makes the payment within the stipulated time. These provisions are mostly made in the month of March. If these observations have also arisen in the past, such a provisions can be allowed if the assessee has actually incurred such a liability and has made the payment. The learned Commissioner (Appeals) has not given any finding as to when the balance amount of ` 20,43,091, has been M/s. Johnson & Johnson Ltd.

paid. Whatever the discount which has actually been paid by the assessee should be allowed in this year. Accordingly, we set aside the impugned order passed by the Assessing Officer and restore the issue back to the file of the Assessing Officer. He is directed to examine this matter afresh and allow such cash discount which has been actually paid by the assessee. This ground is, thus, partly allowed for statistical purpose.

109. Ground no.7, relates to disallowance of expenditure for earning dividend income.

110. Rival contentions heard. Both the parties agree before us that this issue is similar to the issue raised in ground no.6, in assessee's appeal in ITA no.349/Mum./2001, for assessment year 1998-99. Consistent with the view taken therein, we allow this ground no.7, raised by the assessee.

111. Ground no.8, relates to the disallowance of ` 13,91,536, on account of deduction under section 80HHC of the Act.

112. Before us, the learned Counsel for the assessee submitted that this issue may be restore to the file of the Assessing Officer for netting-off in view of the judgment of Hon'ble Supreme Court in ACG Associated Capsules Pvt. Ltd. v/s CIT, [2012] 343 ITR 089 (SC).

113. Learned Departmental Representative fairly admitted that the matter can be restored to the file of the Assessing Officer to decide the issue in the light of the said judgment of the Hon'ble Supreme Court.

114. After going through the orders passed by the learned Commissioner (Appeals) as well as by the Assessing Officer, we find that the assessee has claimed 90% of the net rental which ought to have been reduced while working out the deduction computed under section 80HHC. The learned Commissioner (Appeals) has decided this issue against the assessee after following various case laws. Now the issue has been settled by the Hon'ble M/s. Johnson & Johnson Ltd.

Supreme Court in ACG Associated Capsules Pvt. Ltd. (supra), wherein Their Lordships have observed and held as under:-

"Held, accordingly, that ninety per cent. of not the gross rent or gross interest but only the net interest or net rent, which had been included in the profits of business of the assessee as computed under the head "Profits and gains of business or profession", was to be deducted under clause (1) of Explanation (baa) to section 80HHC for determining the profits of the business. Decision of the Bombay High Court reversed. Decision of the Delhi High Court affirmed. Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120 (SC) relied on. CIT v. Shri Ram Honda Power Equip [2007] 289 ITR 475 (Delhi) approved. CIT v. Asian Star Co. Ltd. [2010] 326 ITR 56 (Bom) impliedly overruled. The decisions of the Bombay and Delhi High Courts are printed below. Civil Appeal No. 1914 of 2012 is from the judgment and order dated August 6, 2010, of the Bombay High Court in I. T. A. (L.) No. 1276 of 2010. Civil Appeal No. 4534 of 2008 is from the judgment and order dated January 19, 2007, of the Delhi High Court in I. T. A. No. 541 of 2006. The judgment of the Bombay High Court (Dr. D. Y. Chandrachud and J. P. Devadhar JJ.) ran as follows :

"JUDGMENT This appeal by the Revenue arises out of an order of the Income-tax Appellate Tribunal dated December 15, 2009, for the assessment year 2003-04, Four questions of law have been formulated by the Revenue, which are as follows :

'1. Whether, on the facts and in the circumstances of the case, the Tribunal, in law, was justified in holding that the entire amount received on the sale of the DEPB entitlements does not represent profit chargeable under section 28(iiid) of the Income-tax Act, 1961, and it requires an artificial cost to be interpolated?

2. Whether, on the facts and in the circumstances of the case, the Tribunal, in law, was justified in holding that the face value of the DEPB as covered under section 28(iiib) and the profit on transfer of the DEPB, i.e., excess of sale price, over the face value of the DEPB as falling under section 28(iiid) is to be considered in computation of deduction under section 80HHC as held in the case of Topman Exportsin I. T. A. No. 5769/M/06 by the Income-tax Appellate Tribunal, Special Bench, vide its order dated August 11, 2009-since reported in [2009] 318 ITR (At) 87 (Mumbai) [SB] ?

3. Whether, on the facts and in the circumstances of the case, the Tribunal, in law, was justified in ignoring the decision of the hon'ble Bombay High Court in CIT v. Asian Star Company Limitedin I. T. A. No. 200 of 2009, dated March 18/19, 2010-since reported in [2010] 326 ITR 56 (Bom), and directing the Department to apply the decision of the Income-tax Appellate Tribunal, Special Bench, Mumbai, in the case of Lalsons Enterprises v. Deputy CIT[2004] 89 ITD 25 and the decision M/s. Johnson & Johnson Ltd.

of the Delhi High Court in the case of CIT v. Shri Ram Honda Power Equip [2007] 289 ITR 475 (Delhi)?

4. Whether, on the facts and in the circumstances of the case, the Tribunal, in law, was justified in directing to reduce the rent paid from the rent received while considering the rental income for the purpose of exclusion of business income for computing deduction under section 80HHC of the Act by ignoring the decision of the hon'ble Bombay High Court in CIT v. Asian Star Company Limitedin I. T. A. No. 200 of 2009, dated March 18/19, 2010-since reported in [2010] 326 ITR 56 (Bom) ?' The learned counsel appearing on behalf of the Revenue and the learned counsel appearing on behalf of the assessee are agreed in stating before the court that since the Tribunal has remanded the proceedings back to the Assessing Officer, this court may not be inclined to interfere with the order of remand, save and except to clarify that upon remand the Assessing Officer shall have due regard to the judgment of the court delivered on June 29, 2010, in CIT v. Kalpataru Colours and Chemicals(Income-tax Appeal (L) No. 2887 of 2009)-since reported in [2010] 328 ITR 451 (Bom). According to the Assessing Officer shall on remand decide the issue before him after having due regard to the judgment of this court in the case of Kalpataru Colours and Chemicals [2010] 328 ITR 451 (Bom).

As regards the third and fourth questions, the Tribunal has remanded the proceedings back to the Assessing Officer. In view thereof, it is not necessary for this court to entertain the appeal, save and except to clarify that upon remand the Assessing Officer shall dispose of the issue in accordance with law, having due regard to the judgment of this court in CIT v. Asian Star Company Limited(Income-tax Appeal No. 200 of 2009 decided on March 18/19, 2010-since reported in [2010] 326 ITR 56 (Bom)).

Both the learned counsel are agreed to the aforesaid direction The appeal is accordingly disposed of. There shall be no order as to costs."

The judgment of the Delhi High Court (Vikramajit Sen and Dr. S. Muralidhar JJ.) ran as follows :

"JUDGMENT By order dated August 18, 2006, after hearing counsel for both parties, the following only substantial question of law was framed for determination by this court (in place of the earlier order dated April 19, 2006) :

As regards question No. (i), we find that before the Tribunal has answered the issue thus :

M/s. Johnson & Johnson Ltd.

Although the Tribunal has followed Lalsons and held that netting should be allowed, it has remitted the matter to the Assessing Officer "to enable him to examine the assessee's claim that there is factually a nexus between the interest paid and received and take a fresh decision".

We find no reason to interfere with the directions given by the Income- tax Appellate Tribunal, which is consistent with the decision rendered by us today in the batch of the appeals of which the present appeal forms part. Needless to add, the Assessing Officer will proceed in accordance with our judgment. The appeal is accordingly dismissed."

115. Respectfully following the aforesaid judgment of the Hon'ble Supreme Court, we set aside the impugned order passed by the learned Commissioner (Appeals) and restore the issue back to the file of the Assessing Officer who shall decide the same afresh in the light of the aforesaid judgment of the Hon'ble Supreme Court and only 90% of the net amount of rent should be reduced in view of the provisions of Explanation (baa) to section 80HHC. Accordingly, this ground is partly allowed for statistical purposes.

116. Ground no.9, relates to non-grant of credit of TDS.

117. Learned Counsel for the assessee contended before us that he did not wish to press this ground. Learned Departmental Representative, on the other hand, also did not object to the submissions made by the learned Counsel for the assessee. Consequently, this ground is dismissed as "not pressed".

118. प रणामतः नधा रती क अपील सां यक य उ े य के लए आं शक वीकत ृ क जाती है ।

117. In the result, assessee's appeal is partly allowed for statistical purposes.

We now take up Revenue's appeal in ITA no.2055/Mum./2003, for assessment year 1999-2000.

119. Ground no.1, relates deletion of addition on account of sales made Johnson & Johnson Exports Ltd.

M/s. Johnson & Johnson Ltd.

120. Rival contentions heard. Both the parties agree before us that the issue arising out of this ground is similar to the issue raised in ground no.1, by the Revenue in its appeal in ITA no.2054/Mum./2003, for assessment year 1998-99. Consistent with the view taken therein, we set aside the impugned order passed by the learned Commissioner (Appeals) and restore the issue back to the file of the Assessing Officer for adjudication afresh. Thus, ground no.1, is allowed for statistical purposes.

121. Ground no.2, relates to disallowance of expenditure on production of advertising films by treating the same as revenue expenditure by the learned Commissioner (Appeals).

122. Rival contentions heard. Both the parties agree before us that this issue is similar to the issue raised in ground no.2, in ITA no.145/Mum./2001, for assessment year 1997-98, wherein the ground raised by the Revenue is dismissed for the reasons given therein. Consistent with the view taken by us, the ground no.2, raised by the Revenue is dismissed.

123. Ground no.3, relates to allowance of provisions of cash discount of ` 67,61,136.

124. After hearing both the parties, we find that this issue is similar to the issue raised in ground no.6, raised by the assessee in its appeal in ITA no.2680/Mum./2003, for assessment year 1999-2000, wherein it has been held that the actual amount paid should be allowed. The learned Commissioner (Appeals) has given a very categorical finding that the sum of ` 67,61,136, has been actually paid in this year. In view of this categorical finding, ground no.3, raised by the Revenue is dismissed.

125. Ground no.4, relates to exclusion of excise duty and trade discount from the total turnover for deduction under section 80HHC.

M/s. Johnson & Johnson Ltd.

126. Rival contentions heard. Both the parties agree before us that this issue is similar to the issue raised in ground no.4, by the Revenue in its appeal in ITA no.2054/Mum./2003, for assessment year 1998-99. Therefore, consistent with the view taken therein, which is based on the law settled by the Hon'ble Supreme Court in Lakshmi Machine Works (supra), this issue is decided against the Revenue.

127. प रणामतः राज व क अपील सां यक य उ े य के लए आं शक वीकत ृ क जाती है ।

126. In the result, Revenue's appeal is partly allowed for statistical purposes.

We now take up assessee's appeal in ITA no.675/Mum./2009, for assessment year 1999-2000, vide which the assessee has raised following revised grounds of appeal:-

"1. Ground no.1: Validity of re-assessment, erred in confirming the action of the ACIT, in reopening the assessment under section 147 of the Act.

2. Ground no.2: Disallowance of payment to NPPA, erred in upholding the disallowance of the payment of ` 1.5 crores made to the National Pharmaceuticals Pricing Authority (NPPA) as per the directions of Hon'ble Delhi High Court

3. Ground no.3: levy of interest under section 220(2) of the Act, erred in up holding the levy of interest of ` 12,88,881 under section 220(2) of the Act."

128. Brief facts of the case are that the assessee has filed its return of income on 31st December 1999, showing total income of ` 37,46,41,580, and has claimed deduction of ` 19,08,778, under section 80HHC and ` 4,22,07,736 under section 80IA. The said return of income was subject to scrutiny assessment and the assessment was made under section 143(3) at an income of ` 49,35,80,370, vide order dated 28th February 2002 and deduction under sections 80HHC and 80IA were allowed at ` 20,50,868 and ` 4,17,19,022, respectively. The said assessment had been re-opened under M/s. Johnson & Johnson Ltd.

section 147 on the ground that certain deduction under section 80HHC and 80IA was not made properly in accordance with law. The said re-assessment order was passed under section 143(3) r/w section 147 on 28th January 2005 at an income of ` 43,57,87,471. Thereafter, in view of the information received vide letter dated 17th May 2005, from NPPA, it came to be noticed by the Assessing Officer that the assessee has deposited an amount of ` 1.50 crores with the NPPA as per the directions of the Delhi High Court and such an amount did not reflect in the details of deposit. In view of this, the case was re-opened for the second time vide notice dated 23rd March 2005.

129. With regard to the addition of ` 1.50 crores made by the Assessing Officer, the facts noted by the learned Commissioner (Appeals) in Para-1.1, which are very relevant, are reproduced herein below:-

"1.1 The relevant facts relating to this addition are that the appellant is a company engaged in the manufacturing of drugs. In order to control the prices of certain drugs, Central Govt. has passed act called Essential Commodity Act, 1955 (ECA). Under ECA Act, Central Govt. has the power to control the prices of certain drugs which are known as scheduled drugs. Under the provisions of ECA, Central Government has issued Drug prices and control order 1995 (DPCO). National Pharmaceutical Pricing Authority (NPPA) is the authority responsible for the implementation of various provisions of DPCO. Under para 8 of DPCO, NPPA is competent to fix the sale price of scheduled drug by taking into consideration certain cost parameters as prescribed in para 7 of the DPCO. Para 13 of the DPCO authorizes the NPPA to recover overcharged price by a person in excess of price fixed by DPCO under para 8 of the DPCO. In para 22 of the DPCO there is provision to review the price fixed on representation from the drug manufacturers. The appellant is manufacturing Raricap tablets, which is a scheduled drug under the DPCO. The NPPA vide order dated 07.01.96 issued under para 8 of DPCO fixed the price of Raricap at Rs.16.24. In spite of this order, the appellant continued to charge price of Raricap from customers at Rs.25.01. Accordingly NPPA, vide order dated 29.9.98 issued under para 13 of the DPCO, asked the appellant to deposit the excess price charged amounting to Rs.5.32 crores (provisional) along with interest with it. The appellant challenged the fixation of price of the scheduled drug on the ground that cost parameters taken into consideration for fixing the price of the drugs was not correct and requested the NPPA to review the price fixed vide order dated 07.01 .96. The appellant was not successful and filed writ petition before the Delhi High Court on 15.10.98. During the Pendency of writ petition, Delhi High Court directed the appellant to deposit Rs.1.5 crore, which M/s. Johnson & Johnson Ltd.

the appellant deposited on 10.12.98. Writ petition of the appellant was disposed by the Delhi High court on 01.07.2008 directing the NPPA to pass fresh order for fixing the price of the scheduled drug after considering the submissions of the appellant. Delhi High Court also directed that the amount of Rs.1.5 crore deposited with the NPPA will remain with the NPPA as deposit till the matter is finally settled.

1.2 In the assessment proceedings, the appellant claimed deduction of Rs.1.5 crore deposited with the NPPA on 10.12.98 in accordance with the directions of Delhi High Court. The appellant had claimed before the Assessing Officer that the amount of Rs.1.5 crore is deposited under para 13 of the DPCO and is not in the nature of penalty and deduction is required to be allowed u/s 37(1) of the income tax Assessing Officer held that the deduction claimed by the appellant can not be allowed as deduction in view of explanation to section 37(1) of the income tax act. Since the expenditure is prohibited by law, it is not to be allowed as deduction.

130. Before the learned Commissioner (Appeals), the assessee submitted that the same is to be allowed under section 37(1) of the Act as the liability to pay the amount crystallized during the year under consideration, the moment the order of the DPCO was passed by the NPPA during the year under consideration and alternatively the same should be allowed as business loss under section 28. The learned Commissioner (Appeals) rejected the assessee's contentions and upheld the findings of the Assessing Officer after detail discussion and came to the conclusion as under:-

"In view of above, it is held that deduction claimed by the appellant can not be allowed for following reasons:-

(i) the liability to pay the amount crystallizes in the earlier year and not in the year under consideration

(ii) during the year under consideration, by charging price over and above the amount fixed by the NPPA under Para 8 of the DPCO, appellant has violated the provisions of law and expenditure is not allowable as deduction u/s 37(1) of the income tax act.

(iii) The amount deposited can not be allowed as deduction as business loss under section 28 of the income tax act as there is actually no loss to the appellant during the year under consideration.

Accordingly, this ground of appeal of the appellant is not allowed."

M/s. Johnson & Johnson Ltd.

131. Learned Counsel for the assessee submitted before us that the following dates and events in support of his contentions that liability has crystallized in this year and the same is not in the nature of any penalty and infringement of law:-

1. 31st December 1999 Return of income filed declaring income of ` 37,46,41,580.

2. 28th February 2002 Order passed under section 143(3) determining an income of ` 49,35,80,370.

3. 28th January 2005 Re-assessment (on 80HHC issue) completed determining income of ` 43,57,87,471.

4. 17th May 2005 Letter received by the learned ACIT from the NPPA wherein it was mentioned that J&J India made payment of ` 1.5 crores in December 1998 to NPPA as per the directions of the Hon'ble Delhi High Court.

5. 23rd March 2006 Initiated re-assessment proceedings on NPA issue after the expiry of four years from end of the relevant A.Y.

6. 15th December 2006 Re-assessment order passed making a disallowance of ` 1.5 crores on account of NPPA.

7. 3rd November 2008 Hon'ble CIT(A) disposed off the appeal by confirming the addition made in re-assessment order - Appeal filed before Hon'ble ITAT which is pending."

"Events before NPPA and Delhi High Court

1. 7th August 1996 NPPA order issued under Drug Price Control Order, 1995, fixing revised price of Raricap Tablets at ` 16.24.

2. 19th August 1996 Reply of appellant informing that the price of Raricap (40's) was approved at ` 25.01, undre DPCO 1987 and requesting the Govern-ment to furnish cost data to submit review application.

3. 30th March 1997 J&J India discontinues manufacturing of Raricap Tablets.

4. 24th September 1998 Notice from the NPPA determining total overcharged amount of ` 5.32 crores from the period of August 1996 to August 1998.

5. 14th October 1998 Filed a Writ Petition with the Delhi High Court.

6. 15th October 1998 Delhi High Court asked J&J India to file submissions with NPPA.

M/s. Johnson & Johnson Ltd.

7. 23rd November 1998 Delhi High Court passed interim order and directed J&J India to deposit a sum of ` 1.5 crores with the NPPA till the disposal of the petition.

8. 10th December 1998 Payment of ` 1.5 crores to NPPA based on the interim order of Dlehi High Court.

9. 1st November 2002 Revised order from NPPA determining total overcharged amount of ` 1,56,06,224 for the period 28th August 1998 to 31st March 1997 and interest of ` 50,38,024.

10. 1st July 2008 Delhi High Court disposed off writ petition quashing the earlier order passed by NPPA and directing NPPA to pass fresh order for fixing price.

11. 18th February 2009 NPPA again passed an order on similar lines confirming the demand of ` 1,56,06,224 and asked J&J India to pay the balance demand of ` 6,06,224, which was paid in May 2009.

132. He further submitted that similar issue had come up before the Tribunal in Glaxo India Ltd. v/s CIT, ITA no.959/Bom./1990 and ITA no.4308/ Bom./1991 and Ranbaxi Laboratories Ltd. v/s ACIT, [2009] 124 TTJ 771 (Del.). He further clarified that the amount of ` 1.50 crores was to be refunded back to the Government which as per the NPPA order, the assessee had charged more amount for the sale of Raricap drug. It was not the case of a penalty or interest as there was a separate provisions for levy of penalty or interest. Therefore, whatever has been paid by the assessee in this year, is to be allowed under section 37(1).

133. Learned Departmental Representative submitted that there was a violation of notified price of Raricap tablet and the Government fixes the price for such kind of scheduled drug. The assessee has overcharged from the said price which is a clear violation of Government order and the excess price is, therefore, not allowable under section 37(1) of the Act. He strongly relied upon the findings of the learned Commissioner (Appeals).

134. In the rejoinder, the learned Counsel for the assessee, in the wake of a query raised by the Bench, clarified that the amount of ` 1.50 crores is the M/s. Johnson & Johnson Ltd.

principal amount which was actually paid by the assessee and there is no components of interest or penalty in the said amount.

135. We have considered the rival contentions, perused the orders of the authorities below and the material available on record. The assessee, which is also engaged in the manufacturing of drugs, was selling scheduled drugs. The NPPA which is a Government authority is responsible for implementation of the provisions of drug price and control and/or is competent to fix the price of scheduled drugs by taking into consideration certain cost parameter. The assessee was charging ` 25 per strip of Raricap tablet. Later on, the NPPA, vide order dated 7th August 19996, fixing the revised price of Raricap tablet at ` 16.24. Immediately thereafter, the assessee on 19th August 1996, filed a detail reply that price of ` 25, was approved under DPCO, 1987 and, therefore, requested the Government to furnish the cost data so that the revised application can be filed. Subsequently, on 30th March 1997, the assessee discontinued to manufacture Raricap tablet. On 24th September 1998, a notice was issued from NPPA determining the total over charged amount of ` 5.32 crores from the period of August 1996 to August 1998. Against the said notice, the assessee filed Writ Petition before the Delhi High Court. The Delhi High Court, vide its judgment dated 23rd November 1998, passed an interim order and directed the assessee to deposit ` 1.50 crores with NPPA till the disposal of the Petition. On 10th December 1998, payment of ` 1.50 crores was paid to NPPA based on such interim order of the High Court. From the records, it is seen that the assessee has been regularly filing replies to the NPPA for giving justification for reducing the price and the working of the cost. However, without reverting to the assessee's reply on 1st November 2002, a revised order was passed by the NPPA whereby it determined the total overcharged amount of ` 1,56,06,224, for the period from 20th August 1998 to 31st March 1997 and further interest of ` 50,38,024. On 1st July 2008, the Delhi High Court disposed off the Writ Petition quashing the earlier order of the NPPA and directed to pass order afresh for fixing the price. On 18th December 2009, NPPA again passed an M/s. Johnson & Johnson Ltd.

order on similar lines confirming the demand of ` 1,56,06,224 and asked the assessee to pay the balance demand by May 2009, as the assessee had already deposited ` 1.50 crores. In the assessment year 1999-2000, what the assessee has claimed is a sum of ` 1.50 crores only which has been deposited to the NPPA in view of the interim order passed by the High Court in its Profit & Loss account. After going through various notifications and relevant provisions of The Essential Commodities Act, 1955, we find that there are separate provisions for penalty and interest and the sum of ` 1.50 crores, which has been paid is the refund of excess price paid by the assessee to NPPA. Hence, there is no violation and infringement of any law or Government's order. The assessee has been kept on representing before the NPPA for the justification of the cost for which no reply or order was passed by the NPPA in respect to the same. Finally, the amount was determined at ` 1.56 crores which only include the principal amount of the refund. Thus, the payment of ` 1.50 crores made on 10th December 1998, which falls in assessment year 1999-2000, is an allowable expenditure under section 37(1) and, therefore, the same is allowed as revenue expenditure. Various case laws relied upon by the learned Counsel are not dealt with as on the facts of the case itself, we allow the assessee's ground on merit.

136. Since we have allowed assessee's appeal on merits, the issue regarding validity of re-assessment under section 147, has become purely academic and the same is left un-adjudicated.

137. In ground no.3, relates to levy of interest under section 220(2).

138. Since no arguments have been putforth by either party, the same is left un-adjudicated. However, the Assessing Officer is directed to compute the interest component in accordance with law, if at all the same is leviable.

139. प रणामतः नधा रती क अपील आं शक वीकत ृ क जाती है ।

138. In the result, assessee's appeal is partly allowed.

M/s. Johnson & Johnson Ltd.

139. नणय के सारांश व प, नधा रती क अपील सं. 349/Mum./2001, सां यक य उ े य के लए आं शक वीकत ृ क जाती है । राज व क अपील सं.145/Mum./2001, सां यक य उ े य के लए आं शक वीकत ृ क जाती है । नधा रती क या ेप सं.

88/Mum./2001, खा रज क जाती है ।              नधा रती क अपील सं. 2679/Mum./2003,
सां यक य उ े य के       लए आं शक           वीकत
                                              ृ क      जाती है ।   राज व   क   अपील सं.
2054/Mum./2003, सां यक य उ े य के लए आं शक वीकत
                                              ृ क जाती है । नधा रती क
अपील सं. 2680/Mum./2003, सां यक य उ े य के लए आं शक                   वीकत
                                                                         ृ क जाती है ।

राज व क अपील सं. 2055/Mum./2003, सां यक य उ े य के लए आं शक वीकत ृ क जाती है एवं नधा रती क अपील सं. 675/Mum./2009, आं शक वीकत ृ क जाती है ।

139 To sum up, assessee's appeal in ITA no.349/Mum./2001, is partly allowed for statistical purposes; Revenue's appeal in ITA no.145/Mum./2001, is partly allowed for statistical purposes; Assessee's cross objection no.88/Mum./2001, is dismissed; Assessee's appeal no.2679/Mum./2003, is partly allowed for statistical purpose; Revenue's appeal in ITA no.2054/Mum./2003, is partly allowed for statistical purposes; Assessee's appeal in ITA no.2680/Mum./2003, is partly allowed for statistical purposes; Revenue's appeal in ITA no.2055/Mum./2003, is partly allowed for statistical purposes; and Assessee's appeal in ITA no.675/Mum./2009, is partly allowed.



         आदे श क धोषणा खले
                        ु      यायालय म दनांकः 18th January 2013 को क गई ।

Order pronounced in the open Court on 18th January 2013 Sd/- Sd/-

आर.

आर.एस.

             एस.      याल                                             अ मत शु ला
            लेखा सद य                                                  या यक सद य
        R.S. SYAL                                                    AMIT SHUKLA
   ACCOUNTANT MEMBER                                               JUDICIAL MEMBER




मंुबई MUMBAI,        दनांक DATED: 18th January 2013
                                                           M/s. Johnson & Johnson Ltd.

                                                                                   54



आदे श क    त ल प अ े षत / Copy of the order forwarded to:

(1)    नधा रती / The Assessee;
(2)   राज व / The Revenue;
(3)   आयकर आयु (अपील) / The CIT(A);
(4)   आयकर आयु       / The CIT, Mumbai City concerned;
(5)    वभागीय    त न ध, आयकर अपील य अ धकरण, मंुबई / The DR, ITAT, Mumbai;
(6)   गाड फाईल / Guard file.
                                              स या पत    त / True Copy
                                                आदे शानसार
                                                       ु   / By Order
 द प जे. चौधर / Pradeep J. Chowdhury
वर    नजी स चव / Sr. Private Secretary
                                     उप / सहायक पंजीकार / (Dy./Asstt. Registrar)
                                   आयकर अपील य अ धकरण, मंुबई / ITAT, Mumbai

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Income Tax Appellate Tribunal - Mumbai

Johnson & Johnson Ltd, vs Department Of Income Tax