Income Tax Appellate Tribunal - Kolkata
Organon (India) Pvt. Ltd., Mumbai vs Dcit, Circle-12(1), Kolkata, Kolkata on 6 September, 2019
IN THE INCOME TAX APPELLATE TRIBUNAL "C", BENCH KOLKATA BEFORE SHRI A. T. VARKEY, JM &DR. A.L.SAINI, AM आयकरअपीलसं./ITA Nos.982/Kol/2017 (िनधारणवष / Assessment Year:2007-08) Organon (India) Pvt. Ltd. Vs. DCIT, Circle-12(1), Kolkata Platina, 7th Floor, Plot No. C-59, G-
Block, Bandra Kurla Complex, Bandra (East), Mumbai-400098 थायीले खासं ./जीआइआरसं ./PAN/GIR No.: AAACI 6949 R (Appellant) .. (Revenue) आयकरअपीलसं./ITA Nos.892/Kol/2017 (िनधारणवष / Assessment Year:2007-08) DCIT, Circle-12(1), Kolkata Vs. Organon (India) Pvt. Ltd.
Platina, 7th Floor, Plot No. C-59, G-
Block, Bandra Kurla Complex, Bandra (East), Mumbai-400098 थायीले खासं ./जीआइआरसं ./PAN/GIR No.: AAACI 6949 R (Assessee) .. (Revenue) Assessee by :Shri J. P. Khaitan, Sr. Advocate Revenue by : Dr. P.K. Srihari, CIT(D.R.) & Shri Sankar Halder, JCIT, Sr. D.R. सुनवाईकीतारीख/ Date of Hearing : 11/06/2019 घोषणाकीतारीख/Date of Pronouncement : 06/09/2019 आदे श / O R D E R Per Dr. A. L. Saini:
These cross appeals filed by the Assessee and Revenue are directed against the order passed by the ld. CIT(A)-22,Kolkata dated 16.02.2017, for assessment year 2007-08, which in turn arise out of an assessment order passed by the assessing officer under section 143(3)/144C of the Income Tax Act, 1961, ( In short, the 'Act,), dated 28.01.2011.
Organon (India) Pvt. Ltd.
ITA Nos.982 & 892/Kol/2017 Assessment Year:2007-08
2. Since the issues involved in these cross appeals are common and identical therefore, these appeals have been heard together and are being disposed of by this consolidated order.
3. First we take up the assessee's appeal in ITA No.982/Kol/2017,for A.Y.2007-
08. The only ground in the assesse's appeal is against the action of the ld. CIT(A) in confirming the disallowance of Rs.14,34,232/- made by the assessing officer u/s 40A(a)(i) of the Act on account of payment made to Microsoft license fee by the assessee.
4. Brief facts qua the issue are that during the relevant previous year under consideration the assessee company had incurred expenditure amounting to Rs. 2,03,36,851/- which has been reported as part of Note G- Expenditure in Foreign Currency' in the financial statement [Refer Pg. 21 of the PB]. The same included inter alia an amount of Rs. 14,34,232/- paid on account of Microsoft License Fees. The aforesaid amount of Rs.14,34,232/- represents payment made to Organon NV, a Netherlands based Associated Enterprise (AE) of the assessee in respect of a software license from Microsoft. M/s Organon NV had purchased the software license from Microsoft to be used by all the group entities and the license fees paid by Organon NV for the software was apportioned at actual to such group entities based on the number of employees. The share of the assessee worked out to Rs.14,34,232/- which was reimbursed to Organon NV. This claim for deduction was not accepted by the Assessing Officer, since according to him, the amount has to be disallowed for non-deduction of TDS. The Assessing Officer did not find any merit in the contention of the assessee that this amount represented purely reimbursement of expenses to M/s Organon NV and since it did not include any income element, the assessee was not liable to deduct tax at source from the payment of the same. The Assessing Officer did not agree and according to him the amount in question was paid by the assessee for the use of software and since it was taxable as royalty as per the provisions of the Act as well as DTAA between India and USA. The assessee was required to deduct tax at source u/s 195 of the Act from the payment made to Organon NV. As the assessee Page | 2 Organon (India) Pvt. Ltd.
ITA Nos.982 & 892/Kol/2017 Assessment Year:2007-08 had failed to comply with the said requirement, the Assessing Officer invoked section 40(a)(i) of the Act and disallowed the sum of Rs. 14,34,232/-.
5. Aggrieved by the order of ld AO, the assessee carried the matter in appeal before the ld CIT(A), who has confirmed the order passed by the ld AO. Aggrieved the assessee is in appeal before us.
6.When this appeal was called out for hearing, learned counsel for the assessee invited our attention to the order dated 15.05.2019, passed by the Division Bench of this Tribunal in assessee's own case in ITA No.1335/Kol/2010 for the Assessment Year 2005-06 whereby the issue of Royalty on Microsoft license fees have been discussed and adjudicated in favour of assessee. Learned counsel for the assessee submitted that the present appeal is squarely covered by the aforesaid order of the Tribunal, a copy of which was also placed before the Bench.
7. Learned Departmental Representative relied upon the orders of the authorities below.
8. We see no reasons to take any other view of the matter than the view so taken by the Division Bench of this Tribunal in assessee's own case vide order dated 15.05.2019. In this order, the Tribunal has inter alia observed as follows:
"8. We have considered the rival submissions and also perused the relevant material available on record. It is observed that a similar issue involving identical facts and circumstances was considered by the Tribunal in assessee's own case for A.Ys. 2003-04 and 2004-05 vide its common order dated September 20, 2017 and after considering all the relevant aspects including the provisions of DTAA, the case laws on the points etc. it was held by the Tribunal that the amount in question paid by the assessee was not in the nature of royalty. It was held that since the said amount was paid towards purchase of software, it would have been assessable as business profits in the hands of Netherland based Associated Enterprise and since the said Associated Enterprise did not have a permanent establishment in India, the business profits could not be taxed in India under Article 7 of the Indo Netherland DTAA. It was held by the Tribunal that there was Page | 3 Organon (India) Pvt. Ltd.
ITA Nos.982 & 892/Kol/2017 Assessment Year:2007-08 no element of profit involved in the transactions representing remittance made towards purchase of licence software for use by the assessee, which was taxable in India in the hands of the Associated Enterprise and the assessee, therefore, was not required to deduct tax at source from the said payment under section 195. It was further held by the Tribunal that the assessee was entitled for relief on this issue even on the basis of non-discrimination clause contained in Article 24(4) of the Indo-Netherland DTAA. The Tribunal accordingly deleted the disallowance made by the Assessing Officer under section 40(a)(i) of the Act and confirmed by the ld. CIT(Appeals) in both the years i.e. A.Ys. 2003-04 and 2004-05.
9. At the time of hearing before us, the ld. D.R. has not disputed the fact that this issue stands squarely covered in favour of the assessee by the decision of the Tribunal rendered in assessee's own case for A.Ys. 2003-04 and 2004-05. He, however, has relied on the decision of the Hon'ble Calcutta High Court in the case of CIT -vs.- Andaman Sea Food Pvt. Limited (ITAT No. 19 of 2013 dated 23.07.2014) which, according to him, supports the revenue's stand on this issue. However, as rightly contended by the ld. Counsel for the assessee, the said case decided by the Hon'ble Calcutta High Court is distinguishable on facts, inasmuch as, the transactions under consideration in the said case were not covered by the relevant DTAA, whereas the amount in question paid by the assessee in the present case to its Netherland based Associated Enterprise is not taxable in the hands of the Associated Enterprise in India as per the relevant clause of the DTAA as found by the Tribunal in the assessee's own case for A.Ys. 2003-04 and 2004-05. Moreover, as held by the Tribunal in its order for A.Ys 2003-04 and 2004-05, the assessee was entitled for relief on this issue even as per the benefit conferred under non-discrimination clause of the DTAA. We, therefore, respectfully follow the decision of the Tribunal rendered in assessee's own case for A.Ys. 2003-04 and 2004-05 vide its order dated September 20, 2017 (supra) and delete the disallowance made by the Assessing Officer under section 40(a)(i) and confirmed by the ld. CIT(Appeals). Grounds no. 1 to 5 of the assessee's appeal are accordingly allowed."
9. As the issue is squarely covered in favour of the assessee by the decision of the Coordinate Bench, in assessee`s own case (supra) and there is no change in facts and law and the Revenue is unable to produce any material to controvert the Page | 4 Organon (India) Pvt. Ltd.
ITA Nos.982 & 892/Kol/2017 Assessment Year:2007-08 aforesaid findings of the Division Bench. Respectfully, following the judgment of the Coordinate Bench in assessee`s own case (supra), we delete the impugned addition of Rs. 14,34,232/-.
10. Now, we adjudicate the additional grounds of appeal raised by the assessee. The additional ground raised by the assessee is against the action of the ld. CIT(A) in confirming the disallowance of conversion charges of Rs. 35,87,454/- as made by the Assessing Officer.
11. Brief facts qua the issue are that the assessee had incurred an expenditure of Rs. 35,87,454/- on account of conversion charges which was debited to the profit & loss account for the relevant F.Y. 2006-07 as prior period expenses. However, since the company follows mercantile method of accounting, the same was claimed during the course of assessment proceedings as a deduction in assessment year 2005-06, being the relevant year to which such deduction pertained. The Assessing Officer disallowed the claim of the assessee made in the course of assessment proceedings for AY 2005-06, relying on the decision of Supreme Court in the case of Goetz India Ltd. vs. CIT (2006) 282 ITR 323 (SC). On appeal, ( for A.Y. 2005-06) the ld CIT(A) confirmed the addition made by assessing officer. On appeal before the Tribunal, the Tribunal has upheld the order of the ld. CIT(A)/ Assessing Officer for A.Y 2005-06 by holding that conversion charges representing contractual liability was in dispute and the same was settled and crystallized only in the assessment year 2007-08. In this regard, the findings of the Coordinate Bench in assessee`s own case in ITA No.1335/Kol/2010, for A.Y.2005-06 are as follows:
"10. Grounds no. 6 to 8 involve a common issue relating to disallowance of conversion charges of Rs.35,87,454/- as made by the Assessing Officer and confirmed by the ld. CIT(Appeals) on account of prior period expenses.
11. The assessee-company during the relevant period had entered into an agreement with a third party manufacturer, who was required to manufacture goods on behalf of and under the license of the assessee-company. The assessee-company was Page | 5 Organon (India) Pvt. Ltd.
ITA Nos.982 & 892/Kol/2017 Assessment Year:2007-08 liable to pay conversion charges to the said party and as per the terms of the agreement, the assessee-company was committed to pay minimum amount of conversion charges every calendar year to the said party i.e. January to December called as "Minimum Conversion Charges". Accordingly if the actual conversion charges paid on the basis of actual production during the year was short of a minimum conversion charges, then the assessee-company was required to make the short-fall good. There was such a short-fall to the extent of Rs.35,87,454/- pertaining to Financial Year 2004-05 and Rs.4,51,83,246/- pertaining to Financial Year 2005-06. After settling and finalizing these amounts in the F.Y. 2006-07, a total amount of Rs.4,87,70,700/- was debited by the assessee to the Profit & Loss Account of F.Y. 2006-07 on account of prior period expenses. Since the assessee-company was following the mercantile system of accounting, it suo moto offered the entire amount of Rs.4,87,70,700/- in the computation of income for F.Y. 2006-07 relevant to A.Y. 2007-08 being the expenditure of prior period. During the course of assessment proceedings for the year under consideration, i.e. A.Y. 2005-06, the assessee claimed a deduction of Rs.35,87,454/- being the expenditure incurred on conversion charges pertaining to A.Y. 2005-06. Since the said deduction was not claimed by the assessee either in the original return or even in the form of revised return, the Assessing Officer did not entertain the claim of the assessee for the said deduction by relying on the decision of the Hon'ble Supreme Court in the case of Goetze India Limited [284 ITR 323] . On appeal, the ld. CIT(Appeals) upheld the action of the Assessing Officer on this issue by observing that the assessee was not entitled to make any fresh claim, which was not made either in the return of income originally filed or by way of filing a revised return.
12. The ld. Counsel for the assessee submitted that the assessee was liable to make good any short-fall in the minimum conversion charges payable as per the agreement entered into with a contract manufacturer. He submitted that such short-fall pertaining to the year under consideration i.e. A.Y. 2005-06 as well as for A.Y. 2006-07 was settled and finalized in the previous year relevant to A.Y. 2007-08. He submitted that the amount of such short fall accordingly was debited by the assessee to the Profit & Loss account for A.Y. 2007-08 and in the computation of total income for A.Y. 2007-08, the amount so debited was offered to tax being prior period expenses. He invited our attention to the Audit Note given on this issue placed at page no. 380 of the paper book and pointed out that the amount to the extent of Rs.35,87,451/- being pertaining to the year under consideration, i.e. A.Y. 2005-06 was claimed by Page | 6 Organon (India) Pvt. Ltd.
ITA Nos.982 & 892/Kol/2017 Assessment Year:2007-08 the assessee as deduction during the course of assessment proceedings. He contended that since the said amount undisputedly pertained to the year under consideration and even the debit notes for the same were raised by the concerned party during the year under consideration, the assessee was entitled for deduction of the same and the authorities below were not justified in disallowing the deduction claimed by the assessee merely on the ground that the same was not claimed either in the return of income originally filed or by way of revised return. He contended that since the amount in question was settled and finalized subsequently, it was not possible for the assessee to claim the same either in the original return or by way of revised return.
13. The ld. D.R., on the other hand, submitted that neither the Assessing Officer nor the ld. CIT(Appeals) has decided this issue on merit and the claim of the assessee for deduction of the amount under consideration was disallowed by them on the ground that the same was not claimed either in the return of income originally filed or by way of revised return. He contended that the assessee, however, is not entitled for this deduction on merit because even though the Debit Notes were raised by the concerned party in the year under consideration, there was a dispute about this contractual liability payable by the assessee which was finally settled in the subsequent year relevant to A.Y. 2007-08. By relying on the decision of the Hon'ble Kerala High Court in the case of CIT -vs.- Seshasayee Bros. (Travancore) [82 ITR 442] , he contended that the deduction on account of contractual liability can be claimed by the assessee only in the year in which it is finally settled and crystallized.
14. We have considered the rival submissions and also perused the relevant material available on record including the Audit Note on the issue under consideration as given at page no. 380 of the paper book. It is observed that there was a difference between the actual conversion charges and minimum conversion charges for the year under consideration as payable by the assessee to M/s. ASG Bio Chem Limited in terms of the Loan Licensing Agreement dated 1 s t January, 2005. It is also observed that Debit Notes for such difference were raised by M/s. ASG Bio Chem Limited during the year under consideration on 15.02.2005 and 15.03.2005. However, the amount raised in the said Debit Notes was not accepted by the assessee and the same was in dispute. The said dispute was finally settled in the financial year 2006-07 relevant to assessment year 2007-08 and accordingly the amount of difference payable by the assessee to M/s. ASG Bio Chem Page | 7 Organon (India) Pvt. Ltd.
ITA Nos.982 & 892/Kol/2017 Assessment Year:2007-08 Limited was debited to the Profit & Loss Account for the F.Y. 2006-07. It is thus clear that the amount in question payable by the assessee on account of difference between the actual conversion charges and minimum conversion charges for the year under consideration representing contractual liability was in dispute and the same was settled and crystallized only in the F.Y. 2006-07 relevant to A.Y. 2007-08. As rightly contended by the ld. D.R., the assessee, therefore, was not entitled for deduction on account of this contractual liability pertaining to the year under consideration as the same represented disputed liability and since this dispute was settled and the liability was crystallized only in the F.Y. 2006-07, the assessee was entitled for the deduction of the same only in A.Y. 2007-08. We, therefore, find no infirmity in the impugned order of the ld. CIT(Appeals) confirming the disallowance made by the Assessing Officer on this issue and upholding the same, we dismiss Grounds No. 6 to 8 of the assessee's appeal."
12. From the perusal of the aforesaid order of the Tribunal for A.Y. 2005-06, it is clear that the amount of Rs. 35,87,454/- was payable by the assessee on account of difference between the actual conversion charges and minimum conversion charges under A.Y. 2005-06 representing contractual liability which was in dispute and the same was settled and crystallized only in the relevant A.Y. 2007-
08. Since the dispute was settled and the liability got crystallized only in this A.Y. 2007-08, the assessee's claim need to be allowed and therefore we allow the claim of the assessee made in the additional grounds taking into consideration the fact as enumerated for A.Y. 2005-06. Therefore, we allow the additional ground raised by the assessee.
13. In the result, appeal of the assessee is allowed.
14. Now, we take Revenue's appeal in I.T.A. No. 892/Kol/2017, for A.Y. 2007-
08. The grounds of appeal raised by the Revenue are as under:
1. That on the facts and in circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of Rs. 4,31,18,206/- made by the A.O. on account of expense of raw material and packing material.
2. That on the facts and in circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance u/s 40(a)(ia) of Rs.4,07,34,947/- on Page | 8 Organon (India) Pvt. Ltd.
ITA Nos.982 & 892/Kol/2017 Assessment Year:2007-08 account of non-deduction of TDS against the payment of travelling expenses local and medical staff fortnight expenses.
3. That on the facts and in circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance u/s 40(a)(ia) of Rs.17,11,393/- on account of non-deduction of TDS against the payment of car expenses reimbursement.
4. That on the facts and in circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance u/s 40(a)(ia) of Rs. 24,02,234/- on account of non-deduction of TDS against the payment of cycle meeting expenses.
5. That on the facts and in circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance u/s 40(a)(ia) of Rs. 1,50,28,008/- on account of non-deduction of TDS against the payment of freight & transport expenses.
6. That on the facts and in circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance u/s 40(a)(ia) of Rs.1,61,01,291/- on account of non-deduction of TDS against the payment of legal & professional expenses.
7. That on the facts and in circumstances of the case, the Ld. CIT(A) has erred in accepting the new evidence of the assessee company.
8. That on the facts and in circumstances of the case, the Ld. CIT(A) has erred in violating Rule 46A of the Act.
9. That on the facts and in circumstances of the case, the Ld. CIT(A) has erred by not directing the A.O. to verify the new evidences which was placed before the Ld. CIT(A).
15. First of all, we take up ground nos. 7 , 8 and 9 raised by the Revenue, as mentioned above.
Since the main grievance in Ground No. 7 , 8 and 9 is that the ld. CIT(A) has accepted new evidences from the assessee company by violating Rule 46A of the Income Tax Rules, 1962 (in short the 'Rules').In respect of ground nos. 7 , 8 and 9, the ld. Senior Counsel representing the assessee, drew our attention to the fact that there were no additional evidences in respect of ground no. 2 and for ground no. 3.(vide evidences placed at page 252 to 259 of the Paper Book).Ld Counsel submitted before the Bench that the documents placed at page 252 to 259 of the Page | 9 Organon (India) Pvt. Ltd.
ITA Nos.982 & 892/Kol/2017 Assessment Year:2007-08 Paper Book, show that the car expenses of the employees are included in their respective salary and TDS was deducted. About ground No. 4, the ld. Senior counsel also drew our attention to the fact that no additional evidences were filed before the ld. CIT(A).
16. Per contra, ld DR for the Revenue submitted before us that in ground No.2 the amount involved is to the tune of Rs.4,07,34,947/- for which assessee has filed inaccurate particulars. Ld DR pointed out that expenses of Rs. 4,07,34,947/- is not actually travelling expenses but commission paid to medical staff for night duty as per assessee`s statement. Therefore, there was obligation on the assessee to deduct TDS on commission of Rs.4,07,34,947/-.
About ground No. 3 which relates to payment of car expenses of Rs.17,11,393/-, Ld DR submitted that these expenses were not part of salary therefore, TDS ought to have been deducted on these expenses. About ground No. 4 which relates to payment of Cycle meeting expenses of Rs.24,02,234/- Ld DR submitted that these expenses were not incurred for the purpose of business, as there is no concept of Cycle Meeting Expenses in the business senecio. These expenses were neither examined by the Assessing Officer nor by CIT(A) in a proper perspective. Therefore, ld DR for the Revenue prayed the Bench that disputed amount pertaining to ground Numbers 2, 3 and 4 should be remitted back to the file of the Assessing officer for fresh examination.
17. We have heard both the parties and perused the material available on record. We note that at the time of hearing, the ld. Senior counsel argued that the expenses claimed under the head travelling, fortnight expenses of medical staff, car expenses and cycle meeting expenses were reimbursed by the assessee to various sales representatives, medical staff and employees. It is the contention of ld. Senior counsel`s that in connection with canvassing orders for the assessee's medical products, its representatives undertook extensive travelling and in connection with the travelling so undertaken, they incurred expenses on lodging, boarding, local conveyance and travel etc. According to ld. Counsel, on completion of the visits, the claims were made by these medical Page | 10 Organon (India) Pvt. Ltd.
ITA Nos.982 & 892/Kol/2017 Assessment Year:2007-08 staff/representatives seeking reimbursement of costs defrayed by them in the course of travelling undertaken for the business purposes. The ld. Counsel therefore further submitted that the amounts debited under these heads being in the nature of 'pure reimbursement', no income element was embedded in these payments and consequently, the assessee had no obligation to deduct tax at source while making payments to medical staff / sales representatives towards reimbursements.
We note that the submissions of the ld. Counsel appears logical at the first glance but having perused the details furnished in the paper book at page No.251 to 259, we find that there is no relevant material available before us on the basis of which the submissions of the ld. Counsel could be corroborated with relevant evidence. There is no dispute with regard to the principle that in the event of pure reimbursement of expenses, no tax is required to be deducted because such payments do not include element of any income. However, the onus is on the assessee to substantiate with relevant details and documentations to prove that what was being paid by the assessee was in the nature of 'pure reimbursements'. The ground-wise evidences/additional evidences, submitted before the Bench ( in paper book) by the ld Counsel, are explained below:
(i). In Ground No. 2, the amount disallowed by the AO is to the tune of Rs.
4,07,34,947/- which is claimed by the assessee to be incurred on payment of local travelling expenses and medical staff fortnight expenses. The assessee submitted only detail of these expenses,( vide page119 of the Paper Book) and no any expense bill or voucher of expenses were submitted. Therefore, the veracity of these expenses cannot be verified. Again, vide paper book page No. 120 to 165 the assessee submitted the ledger copy of "Travelling Expenses, Medical Representative Fort Night Exp & Local Conveyance", The total of ledger account comes at Rs. 4,07,34,947"/-. In this ledger account expenses for Air Tickets, Rail Tickets, IST F.N Exp., WHC ASMS expenses, IIND F.N Expenses, etc are mentioned. However, we note that expenses bills, like Air Boarding Pass, rail ticket, bill and vouchers for WHC expenses and other expenses were not available in paper book. The assessee has merely submitted before us ledger copy of these Page | 11 Organon (India) Pvt. Ltd.
ITA Nos.982 & 892/Kol/2017 Assessment Year:2007-08 expenses which is nothing but summary of these expenses. The assessee could not furnish before the Bench expense bills and expense vouchers, even for test check basis therefore, we are of the view that veracity of these expenses were neither examined by CIT(A) nor by AO. Hence, we think it fit and proper to remit this issue back to the file of the assessing officer for examination. Therefore, we set aside the order of ld CIT(A) and remit this issue back to the file of the AO to adjudicate the issue in accordance to law. We direct the assessee to submit the expense bills, voucher of expenses/evidences and explanation to prove bona fide of these expenses. Therefore, we allow ground No. 2 raised by the Revenue for statistical purposes.
(ii) In Ground No. 3, the amount disallowed by the AO is to the tune of Rs. 17,11,393/- which is claimed by the assessee to be incurred on payment of car expenses. We note that the evidences in respect of ground no. 3.are furnished by the assessee, vide evidences placed at page 251 to 259 of the Paper Book. Ld Counsel submitted before the Bench that the documents placed at page 251 to 259 of the Paper Book, show that the car expenses of the employees are included in their respective salary and TDS was deducted. The details of these car expenses are as follows:
Mr. Papas Chakarborty Rs.1,39,339 Mr. Amit Sen Rs. 1,62,000 Mr. Sudpia kumar Biswas Rs. 1,38,000 Total Rs.4,39,339
We note that assessee has claimed car expenses at Rs. 17,11,393/- whereas he submitted details of car expenses only at Rs. 4,39,339/-. Therefore, we are of the view that this issue should be remitted back to the file of the AO to examine the balance car expenses of Rs. 12,72,054/- ( Rs. 17,11,393-Rs.4,39,339). Therefore, we set aside the order of ld CIT(A) and remit this issue back to the file of the AO to adjudicate the issue in accordance to law. We direct the assessee to submit the expense bills, evidences and explanation to prove bona fide of these expenses. Therefore, we allow ground No. 3 raised by the Revenue for statistical purposes.
Page | 12 Organon (India) Pvt. Ltd.
ITA Nos.982 & 892/Kol/2017 Assessment Year:2007-08
(iii). In Ground No. 4, the amount disallowed by the AO is to the tune of Rs. 24,02,234/- which is claimed by the assessee to be incurred on payment of cycle meeting expenses. We note that in the paper book submitted before the Bench, the assessee has not submitted any evidence in respect of the cycle meeting expenses. We note that it was obligatory on the part of the assessee to prove with cogent material and with supporting evidence that the amounts paid by the assessee were against specific expenses which the representatives / medical staff/ employees incurred in the course of travelling/cycle meeting. For this purpose, it was obligatory for the assessee to bring on record evidences to substantiate its case of 'pure reimbursement'. We, however, note that apart from giving a person-wise statement of payments made, no further details or evidences were produced before us on the basis of which we can satisfy ourselves that the payments made to the named persons were in the nature of 'pure reimbursements' requiring no tax deduction at source. In the circumstances therefore, and to meet the ends of justice for both the parties, this disallowance of Rs. 24,02,234/-is restored to the file of the Assessing Officer who is directed to grant opportunity of hearing to the assessee for bringing on record relevant materials & evidences to prove its case that since the payments were made in the nature of 'pure reimbursements', it required no deduction of tax at source. The Assessing Officer shall accordingly pass a speaking order on the issue. Therefore, we are of the view that this issue should be remitted back to the file of the AO to examine the cycle meeting expenses. Therefore, we set aside the order of ld CIT(A) and remit this issue back to the file of the AO to adjudicate the issue in accordance to law. Hence, we allow ground No. 4 raised by the Revenue for statistical purposes.
18. So far ground No. 1, 5 and 6 are concerned, we note that there were no additional evidences filed by the assessee before the ld CIT(A). In respect of ground No. 5, the ld. Sr. counsel drew our attention to page no. 262 to 267 which were details of TDS deducted by the assessee. In respect of ground no. 6, the TDS details were filed which can be seen from the perusal of paper book pages 268 to
272. Page | 13 Organon (India) Pvt. Ltd.
ITA Nos.982 & 892/Kol/2017 Assessment Year:2007-08 Coming to ground No. 1, we note that evidences were filed by assessee which can be seen from page No. 242 to 249 of Paper Book, which are manufacturing invoices of conversion charges. Since Assessing Officer disallowed the expenses incurred on raw material and packing material consumed, hence, it was brought to our notice by the ld. Sr. Counsel that all these documents were filed before the ld. CIT(A) vide letter dated 19.07.2011 which is found place at Pg. 238 to 241 of the Paper Book. According to ld. Counsel, the copy of the sale invoices were provided to the Assessing Officer in remand proceedings. The ld. Sr. Counsel drew our attention to page 273 of the Paper Book, where we note that a letter written by the Assessing Officer dated 13.09.2011 is placed wherein AO has cancelled the additional evidences that has to be submitted before the ld. CIT(A). In the letter, he in his own words states that 'undersigned has no objection to the same being admitted under Rule 46A(4), if ld. CIT(A) decided to admit these evidence under Rule 46A(4). However, the undersigned would like to examine the issue of non- deduction of TDS on payment details.' Thereafter, AO has given a chart wherein certain payments were noted. It was brought to our notice that these payments mentioned in the chart, have nothing to do with ground Nos. 1,5 and 6 raised by the revenue. So therefore, in the facts narrated above, we note that Assessing Officer has been put to notice about the additional evidences and after going through the same as has not objected to the same being considered by the ld. CIT(A) and therefore objection raised by Revenue as a ground of violation of Rule 46A does not survive in respect of ground Nos.1,5 and 6 and therefore we adjudicate the ground Nos.1,5 and 6 on merits in subsequent para of this order.
19. Now coming to ground No. 1 raised by the Revenue, which is against the action of the ld. CIT(A) in deleting the disallowance of Rs. 4,31,18,206/- made by the Assessing Officer on account of expenses of raw material and packing material.
Page | 14 Organon (India) Pvt. Ltd.
ITA Nos.982 & 892/Kol/2017 Assessment Year:2007-08
20. Brief facts qua the issue are that during the relevant previous year under consideration the assessee company had incurred expenditure amounting to Rs. 21,55,91,028/- on account of 'Raw and Packing Materials consumed'. In the books of accounts, the cost of raw and packing materials accounted for, represents the raw and packing materials supplied by the assessee company to such third party manufacturers. During the course of assessment proceedings, the assessee vide its letter dated 10thDecember, 2010 filed complete details in respect of raw materials and packing material consumed. The assessee vide a separate letter on even date filed,the copies of agreement entered into with some of the loan licensees of the company. It was brought to the notice of Assessing Officer that the assessee company does not have its own manufacturing facility and has been allotted a loan license by the licensing authority to avail the manufacturing facilities of various third party producers. Under the said arrangement, the company avails the manufacturing facilities of third party producers on loan license basis for the purpose of conversion of raw materials along with packing materials in to specific produce as per requirement of the company. For this purpose, the third party producers are paid conversion charges whereas, the assessee company is responsible for supplying the raw and packing material free of cost at the third party producer's premises. However, disregarding the submission made by the assessee, the Assessing Officer in the impugned assessment order dated 28thJanuary, 2011, disallowed 20% of the said expenditure amounting to Rs. 4,31,18,206/- on the following contentions:
(i).Examination of the loan license agreement dated 01-07-2004 between Organon India Limited and Rugby Pharma Pvt. Ltd. clearly indicates that respondent's contention is not totally correct since the agreement filed clearly indicates that the company is supplying certain raw packing and other materials for the manufactures.
(ii).The assessee company has not substantiated its claim with proper documentary evidence (agreement).
21.Aggrieved by the order of AO, the assessee company carried the matter in appeal before the ld. CIT(A). The ld. CIT(A) in his order dated 16thFebruary,2017 Page | 15 Organon (India) Pvt. Ltd.
ITA Nos.982 & 892/Kol/2017 Assessment Year:2007-08 deleted the impugned disallowance made by the Assessing Officer on account of raw and packing materials consumed.
22.We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials available on record. We note that the assessee company does not have its own manufacturing facility. The assessee company get the goods manufactured through third party producers by using their manufacturing facility. The assessee company is responsible for purchase of raw materials and packing materials which is supplied to third party producers, who processes them to finished goods. Thus, the cost of raw materials and packing materials to the extent consumed in manufacturing finished goods is considered as an expense by the company in addition to the conversion/ manufacturing charges paid to third party producers, on the strength of loan license agreement basis for the purpose of conversion of raw materials.
However, the Assessing Officer has not agreed to the fact that the assessee has incurred the cost of raw and packing materials since the assessee did not have any manufacturing facilities and after going through the loan license agreement dated 01.07.2004 between the assessee and M/s Rugby Pharma Pvt. Ltd, the AO was of the opinion that the assessee need to give only certain raw materials and not all the materials and therefore he disallowed 20% of the claim. We note from the loan license agreement that the assessee company is responsible for purchase of raw material and packing materials which is supplied to the third party producers who processes them to finished goods. We note that cost of raw materials and packing materials to the extent consumed in manufacturing finished products considered as expenditure by the assessee company in addition to the conversion charges paid to the third party producers. Our attention was drawn to page 180 of the paper book, which contains agreement between assessee and M/s Rugby Pharma Pvt. Ltd. wherein at page 181 of pb, we note that M/s Rugby Pharma provides the man power, manufacturing license, technical expertise, capability infrastructure and facilities required for manufacturing of pharmaceutical products at its Kolkata Page | 16 Organon (India) Pvt. Ltd.
ITA Nos.982 & 892/Kol/2017 Assessment Year:2007-08 factory for which service / conversion charges are paid by the assessee company along with raw materials and packing materials supplied fully by the assessee company. This is evident from page 182 of paper book, where clause 8 of the loan license agreement clearly explains that assessee shall supply of raw and packing materials and other materials to M/s Rugby Pharma Pvt. Ltd.
23.We note that profit and loss account of the assessee company shows the raw material expenses ( page No. 3 of PB). Our attention was drawn to page No. 18 of paper book, notes to accounts vide Schedule 28B, which contains the detailed account of the raw material, Chemicals, packing materials and ingredients consumed along with quantity and value. Our attention was drawn to page 39 of paper book from which we note that in the audited financials at Schedule 28B, the assessee has given the entire details of the raw materials in annexure XIB and XIC of the tax audit report. Thus, we note that the assessee has discharged its onus about expenditure on raw materials, packing materials and other materials. We note that ld. CIT(A) has deleted the addition by holding as under:
" I have carefully considered the submission and evidences filed by the appellant-company in this regard. After carefully examining the loan license and invoices filed during the course of the appeal proceedings, it is observed that the appellant-company is responsible for purchase of the raw materials and packaging materials which are being supplied to the third party producers who in turn process the same to finished goods. The third party producer acts as a contract manufacturer and charges for conversion amounts. It is seen that the appellant company is responsible for supplying raw material and packing materials and remains the owner of the goods supplying raw materials supplied throughout the manufacturing process and till the goods are sold to third parties. Therefore, the cost of raw and packing materials purchased and consumed to produce finished goods is a legitimate expense in the hands of the company. It is to be observed that the ld. Assessing Officer appears not to have appreciated the entire gamut of facts as emanating from the case. The ld. Assessing Officer, moreover, has not brought forth any tangible evidence on record that the expenses did not pertain to the business of the appellant-company.
4. Moreover, it is seen that the ld. Assessing Officer has disallowed 20% of the claim of the expenses on an ad hoc basis and that nothing has been said in the remand report to bolster the addition either. Hon'ble Court's have frowned upon any disallowances being made in an ad hoc fashion without examining ledgers and expense related vouchers. In the said matter of ad Page | 17 Organon (India) Pvt. Ltd.
ITA Nos.982 & 892/Kol/2017 Assessment Year:2007-08 hoc disallowances, various hon'ble courts, including the Hon'ble Jurisdictional ITAT have observed as under:
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ITA Nos.982 & 892/Kol/2017 Assessment Year:2007-08 Page | 19 Organon (India) Pvt. Ltd.
ITA Nos.982 & 892/Kol/2017 Assessment Year:2007-08
5. Based on the above judicial pronouncements it appears that such action by the ld. Assessing Officer does not warrant confirmation, especially in a situation where the books are audited, and the assessee has been able to produce the books vouchers and ledgers before the ld. Assessing Officer.
After considering all matters, I find that the disallowance of 20% for the expenditure to be excessive and unjustified. I am of the considered view, that the disallowance made by the ld. Assessing Officer is unsustainable in the facts and circumstances of the case, and therefore, the same is ordered to be deleted. The ground therefore stands allowed."
Therefore, we find no infirmity in the order passed by the ld. CIT(A) on this issue. That being so, we decline to interfere in the order passed by the ld CIT(A), his order on this issue is hereby accepted and grounds of appeal raised by the revenue is dismissed.
24. Ground No. 5 raised by the Revenue relates to deletion of addition of Rs. 1,50,28,008/- made by the Assessing Officer on account of non-deduction of TDS under section 40(a)(ia) of the Act on freight and Transport expenses.
25. Brief facts qua the issue are that during the year, the company have shown to have incurred an amount of Rs.1,50,28,008/- on freight and transport expenses. The same included expenses incurred by the company on account of freight inward and outward of materials and export of materials. When the Assessing Officer asked for details, the assessee company vide letter dated Page | 20 Organon (India) Pvt. Ltd.
ITA Nos.982 & 892/Kol/2017 Assessment Year:2007-08 10thDecember,2010 provided full details of freight and Transport expenses viz. voucher number, voucher date, description and amount of expenses. After considering the reply of the assessee, the Assessing Officer vide notice dated 16thDecember, 2010 asked the assessee company to show cause why the said expenses should not be disallowed u/s 40(a)(ia) of the Act. In response to the same, the assessee company vide its letter dated 24thDecember, 2010, filed a detailed submission on TDS on 'freight and transport' charges. However, disregarding the submissions made by the assessee, the Assessing Officer disallowed the entire amount of Rs. 1,50,28,008/- on account of freight and transport expenses based on the contention that assessee company had failed to substantiate its claim of expenditures with any proof of evidence as well as proof of tax deduction. Further, that the assessee has not properly complied with the show cause notice and has not been able to offer any satisfactory explanation in its written submission under reference.
26. Aggrieved by the order of ld CIT(A), the assessee carried the matter in appeal before the ld CIT(A), who has deleted the addition.During the course of hearing before the ld. CIT(A) the assessee duly filed a detailed written submission as well as evidences being TDS deducted on Freight and Transport expenses. During the remand proceedings, these evidences were examined by AO,and he did not furnish any adverse report.Therefore, ld. CIT(A) deleted the impugned disallowance made by the Assessing Officer on account of freight and transport expenses.Aggrieved, the Revenue is in appeal before us.
27.Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity. On the other hand, ld Counsel for the assessee defended the order passed by ld CIT(A).
28. We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld Page | 21 Organon (India) Pvt. Ltd.
ITA Nos.982 & 892/Kol/2017 Assessment Year:2007-08 CIT(A) and other materials available on record. We note that the company had shown to have incurred expenditure of Rs. 1,50,28,008/- on freight and transport expenses. It was brought to our notice by the ld. Sr. Counsel that this amount included expenses incurred by the company on account of freight inward and outward of materials and export of materials. According to ld. Sr. Counsel, all the details were furnished to the Assessing Officer which is evident from a perusal of point no. 20 at page 52 of paper book, and annexure 14 vide page 93 to 110 of paper book. We note that the Assessing Officer placed all the evidences and has disallowed entire amount of Rs. 1,50,28,008/- on the reason that the assessee has failed to substantiate its claim of expenditure with any proof of evidence as well as proof of tax deduction. On appeal, the additional evidence filed by the assessee which was available at page 239 and 240 of the paper book and annexure 3 at 260 of the paper book. After taking note of evidences furnished, in respect of freight and transport expenses, the ld. CIT(A) has given relief to the assessee. We note that the ld. CIT(A) has given the following reasons for giving relief to the assessee, which are as follows:
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ITA Nos.982 & 892/Kol/2017 Assessment Year:2007-08 Page | 23 Organon (India) Pvt. Ltd.
ITA Nos.982 & 892/Kol/2017 Assessment Year:2007-08 Page | 24 Organon (India) Pvt. Ltd.
ITA Nos.982 & 892/Kol/2017 Assessment Year:2007-08
29. Thus, we note that ld. CIT(A) after going through the reply of the assessee noted that assessee has deducted TDS on freight and transport expenses, and therefore deleted the addition. That being so, we decline to interfere in the order passed by the ld CIT(A), his order on this issue is hereby accepted and grounds of appeal raised by the revenue is dismissed.
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ITA Nos.982 & 892/Kol/2017 Assessment Year:2007-08
30. Ground No. 6 raised by the Revenue relates to deletion of addition of Rs. 1,61,01,291/- made by the Assessing Officer invoking section 40(a)(ia) of the Act, in respect of legal and professional expenses.
31. Brief facts qua the issue are that during the year, the company have shown to have incurred an amount of Rs. 1,61,01,291/- on account of legal and professional expenses. When asked by the Assessing Officer, the assessee company, vide letter dated 10th December, 2010 provided details of legal and professional fees viz. voucher number, voucher date, description and amount of expenses. Not satisfied with the reply of the assessee, the Assessing Officer vide notice dated 16thDecember, 2010 asked the respondent to show cause why the said expenses should not be disallowed u/s 40(a)(ia) of the Act. In response to the same, the assessee company, vide its letter dated 24th December, 2010 filed a detailed submission on TDS on 'legal and professional exp'. However, disregarding the submissions made by the assessee company, the Assessing Officer disallowed the entire amount of Rs. 1,61,01,291/- on account of legal and professional fees based on the contention that assessee company had failed to substantiate its claim of expenditures with any proof of evidence as well as proof of tax deduction.
32. Aggrieved by the impugned disallowance, the assessee company filed an appeal before the ld. CIT(A).During the course of hearing before the ld. CIT(A), the assessee company filed a detailed submissions, which were placed before the Assessing Officer, who did not offer any adverse comments on the same,therefore, ld. CIT(A) deleted the impugned disallowance made by the Assessing Officer on account of legal and professional fees.
33. Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity. On the other hand, ld Counsel for the assessee defended the order passed by ld CIT(A).
Page | 26 Organon (India) Pvt. Ltd.
ITA Nos.982 & 892/Kol/2017 Assessment Year:2007-08
34. We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials available on record. We note that the assessee company incurred expenditure of Rs. 1,61,01,291/- on account of legal and professional expenses. When asked by the Assessing Officer, the assessee had filed details of legal and professional fees along with voucher number, voucher date, description and amount of expenses which is placed at page 52 of paper book vide Point no. 24 and annexure 18 at page 111 to 118 of paper book. However, the Assessing Officer was not satisfied with the documents furnished before him and he disallowed the entire amount. On appeal, before the ld. CIT(A), the assessee had filed the evidence to show that TDS was deducted on the legal and professional fees which is evident from page 240 of the paper book and annexure 4 of page 268 to 272 of paper book. These additional evidences were also filed before the Assessing Officer who has not given any adverse comment on these evidences/documents. Therefore, the ld. CIT(A) after going through the materials placed before him has deleted the addition. Therefore, we do not find any infirmity in the order of the ld. CIT(A). That being so, we decline to interfere in the order passed by the ld CIT(A), his order on this issue is hereby accepted and grounds of appeal raised by the revenue is dismissed.
35. In the result, the appeal of the assessee is allowed and the appeal of the Revenue is partly allowed for statistical purposes.
Order pronounced in the Court on 06.09.2019
Sd/- Sd/-
(A.T. VARKEY) (A.L.SAINI)
या यकसद य / JUDICIAL MEMBER लेखासद य / ACCOUNTANT MEMBER
दनांक/ Date: 06/09/2019
(SB, Sr.PS)
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Organon (India) Pvt. Ltd.
ITA Nos.982 & 892/Kol/2017
Assessment Year:2007-08
Copy of the order forwarded to:
1. Organon (India) Pvt. Ltd.
2. DCIT, Circle-12(1), Kolkata
3. C.I.T(A)- 4. C.I.T.- Kolkata.
5. CIT(DR), Kolkata Benches, Kolkata.
6. Guard File.
True copy
By Order
Assistant Registrar
ITAT, Kolkata Benches
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