Income Tax Appellate Tribunal - Mumbai
Wockhardt Veterinary Ltd.( Now ... vs Department Of Income Tax on 26 June, 2008
1
ITA No.5496/MUM/2008
M/s. Wockhardt Veterinary Ltd.
(Now known as Wockhardt Ltd.)
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES "G", MUMBAI
BEFORE SHRI D. MANMOHAN, HON'BLE VICE PRESIDENT
AND
SHRI R.K. PANDA, A.M.
ITA No.5496/MUM/2008
Assessment Year : 1999-2000
The A.C.I.T. Cent. Cir. - 14. M/s. Wockhardt Veterinary Ltd.
Room No.1102, 11th floor, (Now known as Wockhardt Ltd.)
Old CGO Annexe Bldg., Wockhardt Towers,
Mumbai-400 020 Vs. Bandra Kurla Complex,
Bandra East, Mumbai-400 051
PAN NO: AAACW0524C
(Appellant) (Respondent)
Appellant by : Shri A.K. Nayak
Shri Kanchaun Kaushal,
Shri Dhanesh Bafana,
Respondent by :
Shri Aliasger Rampurwala &
Ms. Shital Bhandekar
ORDER
PER R.K. PANDA, A.M.
This appeal filed by the Revenue is directed against the order dated 26.06.2008 passed by the CIT(A) Central - III, Mumbai relating to assessment year 1999-2000.
2. The grounds appeals no. 1 & 2 by the Revenue reads as under :-
"1. The Ld. CIT(A) has erred in law and on facts in allowing deduction u/s.80IA as claimed by the assessee. Whereas the A.O. had allocated only Rs.69.57 lakhs as employee costs attributable to 2 ITA No.5496/MUM/2008 M/s. Wockhardt Veterinary Ltd.
(Now known as Wockhardt Ltd.) Daman Unit, the Ld. CIT(A) has reduced this figure of Rs.69.57 lakhs to Rs.32.16 Lakhs, enhancing the figure of eligible profit for deduction u/s.80IA.
2. The Ld. CIT(A) has erred in law and in facts by accepting the assessee's claim of operating and other expenses attributable to Daman Unit at Rs.94.74 lakhs, as against Rs.168.46 lakhs determined by the AO. This has enhanced the figure of eligible profit for purposes of benefit u/s.80IA."
3. Facts of the case, in brief, are that the assessee company is engaged in the business of Pharmaceutical Products. It has two units, one situated at Daman and the other one at Chikalthana (Aurangabad). The assessee in respect of its manufacturing done at the Daman Unit has claimed deduction u/s. 80IA, the unit being an eligible Industrial Undertaking under the provisions of the said Section. The other unit i.e. at Chikalthana is a non- eligible unit for the purpose of the said section. Besides the manufacturing activities at these places, the assessee is also getting products manufactured on loan and license basis through its sister concerns. The assessee has also shown receipt from trading of the Pharmaceutical products. The AO noted that the assessee during the impugned assessment year has claimed deduction u/s.80IA at Rs.2,25,59,938/-. He noted that a search and seizure action in case of various group concerns of M/s. Wockhardt Ltd. was conducted which includes the assessee also. The assessee agreed that the deduction u/s. 80IA was not correctly worked out and in fact an excess amount of Rs.86.36 lakhs was claimed as deduction, whereas this amounts should not have been claimed as deduction. The assessee thereafter, furnished a revised working of computation of the profit of the Daman Unit, according to which the asessee is eligible to deduction u/s. 80IA on Rs.125.58 lakhs.
4. In order to verify the revised working furnished by the assessee, the AO asked the assessee to furnish the break up of sales material consumed and the various expenses incurred separately in respect of Daman Unit, Chikalthana 3 ITA No.5496/MUM/2008 M/s. Wockhardt Veterinary Ltd.
(Now known as Wockhardt Ltd.) Unit and the products manufactured through sister concern on loans and license basis. The assessee in response to the same furnished separate figures for sales and cost of material consumed and the bifurcation of expenses. The AO studied the various details furnished before him and noted that the assessee allocated the expenses in such a way that the expenses are minimized for the eligible unit to maximize the profit from such unit for claiming higher deduction u/s.80IA. In respect of non-eligible business, the assessee has allocated higher expenses so as to minimize the tax liability. The method adopted by the assessee is baseless and, therefore, cannot be accepted. The AO thereafter recasted the profit of the Daman Unit and Chikalthana Unit and the supporting manufacturers through whom the assessee gets its products manufactured, and calculated the loss of Rs.10.64 lakhs from Daman unit, as against profit of Rs.125.58 lakhs determined by the assessee on the basis of the revised calculation. While doing so he allocated the employee cost at Rs.69.57 lakhs for the Daman unit and Rs.168.46 lakhs as other expenses of Daman Unit. The details of the same are as follows :-
(Rs. In Lacs) Daman Chikalthana Trading/leave Total licensing Sales 673.23 246 1,289.58 2,208.81 Less : Expenses -
Cost of material consumed 412.79 157.04 753.17 1,323 Employee cost 69.57 34.71 10.56 114.84 Other expenses 168.46 61.56 227.7 457.72 Interest & Bank charges 26.64 9.74 51.03 87.41 PBT (-)4.43 (-)17.05 247.12 225.84 Add: Depreciation as per books 1.75 4.74 6.49 Less: Depreciation as per I.T. 8.21 16.68 24.89 Act Add: Items considered 0.25 0.57 0.82 separately Less : Dividend Exempt 0.6 Profit available for deduction (-)10.64 (-)28.42 247.06 208.2 4 ITA No.5496/MUM/2008 M/s. Wockhardt Veterinary Ltd. (Now known as Wockhardt Ltd.)
5. In appeal before the Ld. CIT(A), apart from detailed arguments, the assessee furnished certain additional evidences to substantiate the justification of the revised working for claim of deduction u/s.80IA of the Daman unit. The Ld. CIT(A) sent the additional evidences to the AO and called for a remand report. After obtaining the same the Ld. CIT(A) confronted the same to the assessee. After obtaining the comments of the assessee he held that the deduction u/s.80IA to the extent of Rs.105 lakhs should have been allowed to the assessee. The relevant observations of the Ld. CIT(A) reads as under :-
"3.7 I have gone through the facts of the case, the remand report of the AO and the oral and written submissions made by the appellant's representative. It is evident that the AO has, in arriving at his conclusions, disregarded the revised workings submitted by the appellant in the course of the assessment proceedings. Further, there is no basis on which the AO has :
(a) Allocated a mere 10% of the employee costs to the other business while allocating 90% (on turnover basis) to the manufacturing businesses;
(b) Allocated the operating and other expenses on turnover basis, disregarding the actual expenses incurred in each of the units.
The appellant has placed on record the basis on which the expenditure was claimed by it in the revised workings in the course of the assessment proceedings. The undisputed facts are that:
(i) The appellant had, in its revised working submitted in the course of the assessment proceedings, allocated 30.47% of employee costs on turnover basis to the Daman Unit while only 30 out of the total 130 (i.e. 23%) employees worked in the Daman Unit.
(ii) The appellant had, in its revised working submitted in the course of the assessment proceedings, claimed an expense of Rs.94.74 lakhs as operating and other expenses. Of these, those expenses which pertained to only a particular business were claimed on actual basis, while the rest were claimed on turnover basis.
(iii) There was no cogent basis on which the reallocation was made by the AO.
(iv) The AO, in his remand report, has, in respect of the additional evidence sought to be submitted by the appellant, stated that the copies of the documents provided by the appellant are in order being copies of the documents from its records.5 ITA No.5496/MUM/2008
M/s. Wockhardt Veterinary Ltd.
(Now known as Wockhardt Ltd.) 3.8 In view of the above, I find that the deduction under Section 80-IA to the extent of Rs.125.58 lakhs ought to have been allowed to the appellant on the basis of the revised workings filed in the course of the assessment proceedings."
6. Aggrieved with such order of the Ld. CIT(A), the Revenue is in appeal before us.
7. The Ld. DR while opposing the order of the Ld. CIT(A) submitted that the basis of calculation of employee cost of Daman Unit by the Ld. CIT(A) is incorrect. According to the Ld. DR the various manufacturing expenses which are directly attributable cannot be adjusted on turnover basis. The Ld. CIT(A) has not pointed out any distinguishable feature and merely accepted the contention of the assessee. The employees were mainly engaged in the manufacturing activity. Therefore, the order of the Ld. CIT(A) being not in accordance with law should be reversed and the order of the AO be restored.
8. The Ld. Counsel for the assessee on the other hand, submitted that there is no basis on the part of the AO for allocating 90% of the employee cost to the manufacturing units and 10% to non-manufacturing units. He submitted that the assessee has allocated the expenses on the basis of turnover whereas the AO has not justified such reallocation. He submitted that out of the 130 employees working in the company, 80 employees were corporate and field force employees, employed outside Daman and Chikalthana i.e. the manufacturing units. The service rendered by the field force employees were in relation to the sales of the assessee and were in no manner related only to the manufacturing activity carried on by the assessee. Only 30 employees were in Daman unit. Maximum employee costs were incurred on the field force which was for the benefit of the business as a whole which also includes the non- manufacturing business of the assessee. Therefore, the allocation of employee's costs on the basis of turnover is fair. So far as research and development 6 ITA No.5496/MUM/2008 M/s. Wockhardt Veterinary Ltd.
(Now known as Wockhardt Ltd.) expenses is concerned, he submitted that the same does not relate to any item manufactured at the Daman unit, therefore, the allocation of the same to Daman unit is incorrect. For this proposition, he relied on the decision of the Tribunal in assessee's own case vide ITA No.3991/Mum/2005 order dated 24/02/2006 for the A.Y. 2001-02. He submitted that the expenses on account of Freight and forwarding have been allocated on actual basis, whereas the AO has allocated the same on turnover basis. Similarly, power & fuel, stores and spares, training and development have been allocated on turnover basis, whereas the AO has allocated the same on turnover of respective manufacturing units. The license fees, effluent treatment etc. have been allocated on actual basis. Since the method adopted by the assessee is scientific one, therefore, the same should be upheld. He however submitted that he has no objection if the allocation of expenditure on account of research and development is restored to the file of the AO for verification. He submitted that the expense relating to a particular unit has been allocated to the same and the AO has not been able to point out any mistake.
9. We have considered the rival submissions made by both the sides, perused the orders of the AO and the Ld. CIT(A) and the paper book filed before us. We have also considered the various decisions of the Tribunal in assessee's own case for the earlier years. The only dispute in the impugned assessment year is relating to the allocation of expenses between the eligible and non- eligible business units. We find the assessee in the original return of income has claimed the deduction of Rs.2,25,59,938/- u/s.80IA of the Act. Subsequently due to the search in the group concerns, the assessee revised its claim of deduction u/s.80IA claiming Rs.125.58 Lakhs u/s.80IA of the Act. We find the AO while computing the deduction u/s.80IA determined a loss of Rs.10.64 lakhs as against Rs.125.58 lakhs profit declared by the assessee on account of the Daman unit which is an eligible unit. The AO while doing such 7 ITA No.5496/MUM/2008 M/s. Wockhardt Veterinary Ltd.
(Now known as Wockhardt Ltd.) reconciliation has allocated a mere 10% of the employee costs to the other businesses and allocated 90% of the employee cost to the manufacturing businesses on the basis of turnover. Similarly he allocated the operating and other expenses on turnover basis as against the actual expenses incurred in each of the units as claimed by the assessee. According to the assessee since 30 out of the total 130 employees were in Daman unit and since it had allocated about 32% expenses on turnover basis to the Daman unit, therefore, the same is justified. Similarly it is the submission of the Ld. Counsel for the assessee that the operating and other expenses which pertain to a particular unit has been claimed on actual basis and rest of the expenses have been claimed on turnover basis which should have been accepted by the AO.
10. In our opinion, whenever any expenditure is attributable to a particular unit, the same has to be allocated to that particular unit on the basis of its actual expenses and no resort should be taken for the allocation on the basis of the turnover. However, if any, particular expenditure does not relate to any particular unit and is common for all the units and no particular method can be arrived at to allocate the expenditure, then the same, in our opinion, has to be allocated on the basis of the turnover. However the same in the instant case appears to have not been followed. In our opinion, the matter requires fresh adjudication at the level of the AO. The employee cost for the employees employed at Daman unit has to be considered on actual basis. At the same time, some proportionate head office expenditure on account of employee cost has also to be allocated to the Daman unit. Similarly the expenditure for research and development needs to be allocated to the particular manufacturing unit. Freight and forwarding expenses in our opinion, has to be allocated to the respective unit on actual basis. We do not find any force in the submission of the Ld. Counsel for the assessee that power and fuel expenditure should be allocated on the basis of the turnover. In our opinion, the same has 8 ITA No.5496/MUM/2008 M/s. Wockhardt Veterinary Ltd.
(Now known as Wockhardt Ltd.) to be allocated on actual basis, since it can be correctly determined. Similarly, whole stores and spares for the manufacturing unit can be allocated on actual basis. Training and development expenditure in our opinion, has to be allocated on turnover basis since it is for the entire business. Similarly, licensee fee, loan and license charges and effluent treatment in our opinion, has to be allocated on actual basis. Since the allocations of expenses require verification at the level of AO in the light of our above observation, we deem it proper to restore the matter to the file of the AO for fresh adjudication of the issue. The AO while deciding the issue afresh shall give due opportunity of being heard to the assessee and decide the issue as per law. We hold and direct accordingly. The ground nos. 1 & 2 raised by the Revenue are accordingly allowed for statistical purpose.
11. The grounds of appeal no. 3 reads as under :-
"3. The Ld. CIT(A) erred in law and on facts in deleting the addition made by the A.O. on account of bogus purchases on protective basis considering that the issue has been taken up on substantive basis in the block assessment, whereas no addition on this account had been made in the block assessment."
12. Facts of the case, in brief, are that the AO asked the assessee to produce the parties from whom purchases over Rs.10,000/- have been made. He also asked the assessee to produce M/s. Vitara Chemicals Ltd. and M/s. Vintage Pharmaceuticals Ltd. Since the assessee expressed its inability to produce the above parties, the AO made an addition of Rs.35,58,042/- to the total income of the assessee u/s.69C of the I.T. Act on protective basis, on the ground that the same will have to be considered on substantive basis in the block assessment.
13. In appeal, the Ld. CIT(A) deleted the same on the ground that the issue has been taken up on substantive basis in the block assessment.
9 ITA No.5496/MUM/2008M/s. Wockhardt Veterinary Ltd.
(Now known as Wockhardt Ltd.)
14. Aggrieved with such order of the Ld. CIT(A) the Revenue is in appeal before us.
15. After hearing both the sides, we find the assessee admittedly has not compiled to the direction given by the AO for production of the parties from whom it has purchased goods worth more than Rs.10,000/-. We find the Ld. CIT(A) has not adjudicated the issue on merit and deleted the addition on the ground that the issue has been taken up on substantive basis in the block assessment. It is the case of the Revenue that no such addition on this account has been made in the block assessment and, therefore, the issue has to be decided on merit independent of the block assessment.
16. We find merit in the above argument of the Revenue. Since the assessee has not compiled to the requirements of the AO and since the Ld. CIT(A) has not decided the issue on merit, therefore, we in the interest of justice deem it proper to restore the same to the file of AO for fresh adjudication. The AO shall give due opportunity of being heard to the assessee and decide the issue as per law. We hold and direct accordingly. The ground no.3 raised by the Revenue is accordingly allowed for statistical purpose.
17. In the result, the appeal filed by the Revenue is allowed for statistical purpose.
Order pronounced on this 30th day of June, 2011.
Sd/- Sd/-
(D. MANMOHAN) (R.K. PANDA)
VICE PRESIDENT ACCOUNTANT MEMBER
Mumbai, Dated : 30/06/2011
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ITA No.5496/MUM/2008
M/s. Wockhardt Veterinary Ltd.
(Now known as Wockhardt Ltd.)
Copy forwarded to :
1. The Appellant,
2. The Respondent,
3. The C.I.T.
4. CIT (A)
5. The DR, G - Bench, ITAT, Mumbai
//True Copy//
BY ORDER
ASSISTANT REGISTRAR
ITAT, Mumbai Benches, Mumbai
Roshani