Income Tax Appellate Tribunal - Delhi
Dcit, New Delhi vs M/S. Boston Scientific India Pvt. Ltd., ... on 31 May, 2018
In the Income-Tax Appellate Tribunal,
Delhi Bench 'A', New Delhi
Before : Shri Bhavnesh Saini, Judicial Member And
Shri L.P. Sahu, Accountant Member
ITA No. 6241/Del./2014
Assessment Year: 2010-11
DCIT, Circle 3(1), vs. Boston Scientific India Pvt. Ltd.,
New Delhi. C-40/41, Okhla Industrial Area,
Phase-II, New Delhi.
PAN - AABCG9446Q
(Appellant) (Respondent)
Revenue by Sh. Ravi Kant Gupta, Sr. DR
Assessee by Sh. K.M. Gupta, Advocate
Date of Hearing 21.05.2018
Date of Pronouncement 31.05.2018
ORDER
Per L.P. Sahu, A.M.:
This is an appeal filed by the Revenue against the order dated 22.07.2014 of ld. CIT(A)-XV, New Delhi for the assessment year 2010-11 on the following grounds :
1) On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in -
i) Restricting the addition to of Rs. 27,68,242/- out of Rs. 29,31,002/- made by the AO by disallowing advertisement & sale expenses when the assessee had no trading/sale activity during the year and also the assesee had failed to furnish like bills/vouchers etc. to substantiate that the expenses were incurred for business purposes.ITA No. 6241/Del/2014 2
ii) Deleting the addition made by disallowance of Rs. 34,48,090/- out of legal & professional charges when there had been no trading activity during the year and the expenses had no nexus with the business of the assessee.
iii) Deleting the disallowances of Rs. 9,83,387/- representing depreciation on plant & machinery when there had been no manufacturing activity during the year."
2. Brief facts of the case are that the assessee, was engaged in the business of promotion, sales, marketing and distribution of the cardio vascular medical products & equipments of 'Guidant Group' and related post sales support services. During the assessment proceeding, the Ld. AO noticed that the assessee had shown negative turnover of Rs.22,35,700/-. The AO was, therefore of the opinion that the assessee had completely suspended its business but had claimed certain expenses as under:
S.No. Head of expenses Amount (in Rs.)
1. Personal expenses 32,15,884/-
2. Operating & other expenses 1,05,23,215/-
3. Financial expenses 61,35,016/-
4. Depreciation/immortalization 3,16,218/-
The Ld. AO was also of the opinion that the assessee had restarted its business activities in subsequent years. In view of this, the AO was of the view that only fixed type of expenses were allowable for the year, while the expenses which were incurred for betterment of the business, ought to be capitalized being pre- operative expenses. In view of this, the Assessing Officer held that travelling and conveyance expenses of Rs.4,25,166/-, advertisement & sales promotion (Rs.21,31,002/-) and legal & professional fees (Rs.49,36,090/-) are not fixed expenses in nature and by holding that the same were for setting up of new ITA No. 6241/Del/2014 3 business activity and that the appellant could not furnish bills/vouchers, the said expenses aggregating to Rs.74,92,258/- were disallowed and added back to the total income of the assessee. The Assessing Officer also disallowed claim of depreciation allowance of Rs.9,83,387/- on the premise that the assessee had not performed any business activity during the year.
3. In appeal filed before the ld. CIT(A), the assessee made extensive submissions and the first appellate authority after considering the detailed submissions of the assessee and relying on various case laws, restricted the additions made, observing as under :
6. I have carefully considered the facts of the case in the light of the above submissions and applicable law in this regard. Accordingly, my decision on various grounds of appeal is as under:
6.2 On careful consideration of the facts of the case, I find that appellant company is part of a global group, which is engaged in the business of trading, market support and other related activities relating to medical devices, was subjected to a scheme of business reorganization, whereby globally the 'Guidant' Group was taken over by that 'Boston Scientific' group. However, this reorganization did not have any effect on the company's main business objectives, which continued to be the same as per the Memorandum of Association. The appellant company, however, had stopped trading in medical equipments during the year, but has claimed to have provided market support service to its parent company and other AEs till the new contract came into force. The company undoubtedly resumed the trading activity from AY 2012-13 onwards and has offered significant revenues for taxation. For AY 2012-13, it has offered for taxation, income of Rs.71,38,31,416/-, while for AY 2012-13, it had offered for tax, income of Rs.237.82 Crores. During the current year, however, the appellant has not shown any turnover in respect of trading of medical equipments and has claimed that the market support services were provided without charge.
6.3 W.e.f.25.11.2008, another group company M/s Boston Scientific Clonmel Limited, Ireland had entered into an exclusive distribution show agreement with another distributor for sale, marketing and distribution of products, which were earlier marketed by the appellant company. However, factually from 6.12.2010, the holding company of the appellant has allowed the appellant company the right to resume trading of 'Boston Scientific1 device in AY 2012-13.
6.4 I find that the learned Assessing Officer has neither disputed the genuineness of the claim of expenses nor has, at any point of time, pointed out that the same was to be ITA No. 6241/Del/2014 4 incurred for the purposes other than business. The activities of the Assessee Company of providing Market Support Services are covered by Point No.20, Para-B of the Objects in the Memorandum and Articles of Association (MOA), which was claimed to have been filed before the Assessing Officer. The said point No. 20 of the Memorandum & Articles of Association reads asunder:-
"20. To purchase or otherwise acquire and undertake the whole or any part of the business, property, rights, assets and liabilities of any person, firm or company carrying on any business which the Company is authorized to carry on, or possessed of property or rights suitable for any of the purposes of this Company".
In the light of the above, I hold that the observations of the Assessing Officer in Point 1(e) of the assessment order that the company has not continued its business as per the Main Objects or ancillary objects, was factually incorrect and the appellant continues to be engaged in its business activities as per objects in the MOA. It is evident that, once the business of the appellant company has been set up, expenditure incurred in the course of said business is an eligible expenditure. In other words, the finding of the Assessing Officer that the appellant company had not continued its business and therefore, expenditure is not allowable, is not based on correct appreciation of law. In coming to above conclusion, I carry strength from the judgement of the Apex Court in the case of CIT vs. Amalgamations Pvt. Ltd. reported in 226 ITR 188, wherein at page 208 has held as underlie High Court, in our opinion, has rightly pointed out that the business of the assessee-company is the holding of investments and if with reference to the business of holding investments, any expenditure had been incurred that could have been allowed as deduction. The expenditure incurred in payment of managerial remuneration to the directors of the subsidiary companies cannot be said to be expenditure incurred in carrying on the business of the assessee-company of holding its investments. The assessee-company could hold its investments and earn its dividends without incurring this expenditure. Since the subsidiary company was not obliged to distribute by way of dividends the- entire profits earned on account of their managerial remuneration paid by the assessee-company and the assessee-company was only entitled to dividend from the subsidiary company as and when declared, it cannot be said that there was a direct and immediate connection between the expenditure incurred and the business of the assessee company.
In view of the above discussions, I hold that the appellant continues to be engaged in the business of providing Market Support Services and hence was eligible to claim various expenses.
6.5 Keeping in view the above facts, 1 hold that the appellant's business had not closed during the year though there was a temporary lull due to the extensive business reorganization taking place in the 'Guidant' Group Globally. But soon thereafter, the appellant resumed the trading and distribution activity as well. Moreover, even in the current year, the appellant was engaged in providing market support service to its clients and on careful examination of the details of the expenses claimed by the ITA No. 6241/Del/2014 5 appellant, it is evident that these expenses were for the purpose of extending marketing support services in respect of the products of Boston Scientific Group to its parent company & AEs. In view of the same, it cannot be held that the appellant's business had been closed and accordingly, the action of the Ld. AO of disallowing the entire amount of expense on account of 'travelling and conveyance', 'advertisement & sales promotion1 and 'legal & professional fee1, was not justified. The expenses under the head 'advertisement & sales promotion' and 'travelling & conveyance' are very much in the nature of expense having nexus with the business of providing market support service. Similarly, as the business has been held to be continued in the current year, the depreciation of Rs.9,83,387/- is also held to allowable.
In view of the above, the Ground No.2 and 3 are allowed in favour of the appellant.
6.7 On careful consideration of the details of expenses furnished by the appellant, I find that out of the total expenses disallowed by the AO, the appellant had already added back an amount of Rs.10,20,017/- on account of non-deduction of Section 40(a)(ia) and an amount of Rs. 13,28,0007- was added back being penal in nature. Therefore, the disallowance to this extent, certainly was in the nature of double addition. Therefore, without prejudice to my decision above, the appellant was still eligible for relief to the extent of Rs.23,48,017/-, should the addition be confirmed on Ground No.2 & 3. However, as I have allowed Ground No.2 & 3, no further relief can be given.
6.7.2 On merit of the expenses, I find that out of 'travelling and conveyance1 expense of Rs.4,25,160/-, an amount of Rs.2,94,991/- was towards travelling charges and further an amount of accommodation charges of Rs.37,001/- was for the purpose of India visit of Ms. Janet Lange. It was informed that the said person is an employee of the Australian Group company of the appellant, who is a trainer at Guidant Australian and specializes in Cardio Rhythm Management (CRM) line of products. It was informed that her visit was on account of a training, which was conducted for the education and training of the employees of the distributors of the appellant for its CRM line of products. Since during the current year, the appellant was not mandatory to engage in the distribution of sale of Guidant (later Boston Scientific) products and the fact that the appellant was not required to make trading of the Guidant products, claim of expenses in respect of Ms. Lange's India visit does not have any justification as there was no business expediency of such expense. In view of this, the Ld. AO is directed to verify all expenses relating to Ms. Lange's visit to India and disallow the same, as the necessary conditions that such expenses were wholly and exclusively for the purpose of the appellant's business, are not met.
6.8 Regarding the advertisement and sales expenses of Rs.29,31,002/-disallowed by the AO, I find that the bill of this expense comprising of donation for various events organized by relevant association, in which the appellant had given donation of Rs.21,60,000/-. Since the appellant is engaged in providing marketing support services to its parent company, such expenses which are for providing sponsorship to the events related to the business of the parent company are held to have business nexus. As the company was providing market support service such expense are held to be held direct nexus with the activities to provide market support service. Accordingly, ITA No. 6241/Del/2014 6 these are allowed as business expenses. However, with regard an amount of Rs.1,62,760/- relating to registration and consultancy cancellation charges, in the absence of any details, business nexus of such a claim does not stand prove ever, the above claim is disallowed.
6.8.2 The appellant has furnished the details of legal and professional charges, out of which an amount of Rs.13,28,000/- was already added back in the computation of income on account of ROC fee provision. The same is accordingly cannot be added again. Out of balance amount the bill claimed in respect of payment made to M/s Price water house Coopers Pvt. Ltd. in respect of tax consultancy/ return filing/ TP study & certification of Rs.15,87,052/- which is held as allowable. Further, it is also observed that the appellant paid Rs.4,80,000/- to M/s Sino Care Surgical Pvt. Ltd. Therefore, such expenses have direct business nexus are being held as allowed. An amount of Rs.9,51,813/- was towards Assistance in accounts department paid to Rahul Kapoor & Associates. Being of direct nexus with business, the same are also allowed.
6.8.3 However, it is observed that the appellant had paid Rs.1,60,000 to Dr. Anil Saxena, Escort Heart Institute and Research Centre, New Delhi. On examination of the details of such expenses, it is observed that this claim pertains to the FY 2006-07 and therefore, being in the nature of prior period expenses, the same is held as not allowable in the current year. Subject to the above observation, the appellant gets part relief in the matter."
4. The learned Departmental representative, assailing the impugned order, submitted that the ld. CIT(A) was not justified in restricting the addition to Rs.27,68,242/- out of Rs.29,31,002/- made by the Assessing Officer ignoring the fact that the assessee did not carry out any trading activity during the year. It was also submitted that the legal and professional charges claimed by the assessee had no business nexus and the ld. CIT(A) has not considered the fact that that once no manufacturing activities were carried out by assessee, the assessee was not eligible for depreciation on the plant and machinery.
5. On the other hand, the Authorized Representative of the assessee, relying on the decision reached by the ld. CIT(A), reiterated the detailed submissions made before the first appellate authority. It was submitted that temporary lull in the business would not go to disallow the legitimate expenses relating to the ITA No. 6241/Del/2014 7 business of the assessee, as done by the Assessing Officer. It was further submitted that the ld. CIT(A) has passed a reasoned order which needs no interference.
6. Having considered the rival submissions in the light of relevant record before us, we find no justification to interfere with the order of the ld. CIT(A). From the facts narrated in the orders of the authorities below, we find that the ld. CIT(A) was quite justified to observe that temporary lull in the business would not go to disallow the expenditure claimed by the assessee. There is no evidence on record to justify complete closure of business and therefore, the ld. CIT(A) has rightly observed that even during the suspension of business, the assessee has to incur expenses to keep the business continue. The ld. CIT(A) has also considered the facts that the assessee kept one of its business segment continued during the year under consideration and from 06.12.2010, the assessee company was allowed to resume the right of trading of its new holding company, i.e., 'M/s. Boston Scientific' devices. This goes to show that there was no complete suspension of business. Moreover, the Assessing Officer has not doubted the genuineness of the expenses incurred by the assessee, but has doubted that the same were not incurred for the purpose of business. In view of the facts narrated by the ld. CIT(A) we concur with its finding that there was a temporary lull due to the extensive business reorganization taking place in the 'Guidant' group globally, but soon thereafter, the assessee resumed the trading and distribution activity as well and during the year under consideration the assessee continued to provide market support service to its clients. We also do not find any material on record to rebut the findings of the ld. CIT(A) that out of legal and professional charges, the assessee itself added back the amount of Rs.13,28,000/- in the computation of income on account of RoC fee provision. He ITA No. 6241/Del/2014 8 also observed that remaining such expenses had direct nexus with the business of assessee against which there is no cogent material from the side of Revenue before us. On perusal of the impugned order, we find that the ld. CIT(A) has made detailed discussion on each and every grievance of the Revenue and has recorded cogent findings thereon after relying on various decisions in the impugned order. Therefore, there being no contrary material on record, we do not find any justification to interfere with the impugned order, which is based on plausible reasons. We, accordingly, find no merit in the appeal of the Revenue and the same deserves to be dismissed.
7. In the result, the appeal is dismissed.
Order pronounced in the open court on 31st May, 2018.
Sd/- Sd/-
(Bhavnesh Saini) (L.P. Sahu)
Judicial member Accountant Member
Dated: 31st May, 2018
*aks*
Copy of order forwarded to:
(1) The appellant (2) The respondent
(3) Commissioner (4) CIT(A)
(5) Departmental Representative (6) Guard File
By order
Assistant Registrar
Income Tax Appellate Tribunal
Delhi Benches, New Delhi