Income Tax Appellate Tribunal - Chandigarh
M/S Glaxosmithkline Asia Pvt. Ltd., ... vs Dcit, Chandigarh on 30 July, 2021
आयकर अपील य अ धकरण, च डीगढ़ यायपीठ "ए" च डीगढ़
IN THE INCOME TAX APPELLATE TRIBUNAL,
CHANDIGARH BENCH, 'A', CHANDIGARH
BEFORE: SMT. ANNAPURNA GUPTA, ACCOUNTANT MEMBER
AND SHRI R. L. NEGI, JUDICIAL MEMBER
आयकर अपील सं./ ITA No. 2453/Del/2016
नधा रण वष / Assessment Year : 2005-06
M/s GlaxoSmithKline Asia Pvt. Ltd., बनाम The D.C.I.T.(LTU) ,
24-25 Floor, One Horizon Centre, New Delhi.
Golf Course Road, DLF Phase-5,
Gurgaon.
थायी लेखा सं./PAN NO: A A B C S 3 2 3 7 R
अपीलाथ /Appellant यथ /Respondent
&
आयकर अपील सं./ ITA No.532/Chd/2014
नधा रण वष / Assessment Year : 2006-07
M/s GlaxoSmithKline Asia Pvt. Ltd., बनाम The D.C.I.T.,
DLF Plaza Towers, DLF City, Circle 4(1),
Phase I, Gurgaon. Chandigarh
थायी लेखा सं./PAN NO: AA A B C 3 2 3 7 R
अपीलाथ /Appellant यथ /Respondent
नधा रती क ओर से/Assessee by : Shri Ajay Vohra, Sr.Adv.,
Shri Neeraj Jain, Adv. &
Shri Abhishek Aggarwal, CA
राज व क ओर से/ Revenue by : Smt. C. Chandrakanta, CIT DR
सुनवाई क तार#ख/Date of Hearing : 15.06.2021
उदघोषणा क तार#ख/Date of Pronouncement: 30.07.2021
ITA No.2453/Del/2016 A.Y. 2005-06
&
ITA No.532/Del/2014 A.Y. 2006-07
2
(Hearing through webex)
आदे श/Order
Per Annapurna Gupta, Accountant Member:
The ab ove appeals relate to th e same assessee and pert ain to dif ferent assess men t year s. The appeal in ITA N o. 2453/D el/2016 relates to as sess me nt year( A.Y ) 2 005- 06 and is d ir ected again st th e order passed by the Co mmissi oner of Inco me Tax ( Ap peals)-2 , Chandigarh ( in sh o rt r efer red to as CI T(A ) dated 29. 02 .2016 , u/s 250( 6) o f the Inc ome Tax A ct, 196 1, (hereinafter ref er red to as 'A ct') . Th e ap peal in ITA N o.5 32/Chd /2 014, relates to assess ment year 200 6 -07 an d is directed ag ain st th e o rd er o f th e A ssessing Officer da ted 3 1- 03- 2014 , passed u /s 143 ( 3) r .w . s. 144C (5) & 254/15 3(2A ) o f th e A ct, passed in a cco rdance w ith th e d ir ectio n s of the D ispute R e solution P an el(D R P in sh ort), in sec ond r ound , on the direction s of th e ITA T. It w as common gr oun d th at th e i ssu es invo lved i n bot h the app eals w er e id ent ical, th ey w er e th er efor e heard to g et her and are being d isp osed o ff by a common conso lidated or der. ITA No.2453/Del/2016 A.Y. 2005-06
& ITA No.532/Del/2014 A.Y. 2006-07 3 Ld. C ounsel for th e assessee contend ed that A. Y 2 005- 06 w as the base year an d the add itions/ad ju stmen ts mad e ther ein had been reiter ated in the s ucceed ing year , i.e A.Y 2 006- 07. The app eal fo r A. Y 200 5-06 was th er efore first taken up for hearing .
ITA N o. 245 3/Del/2 016 A. Y 20 05- 06.
2. G rou nd N o. 1 raised b y th e assessee reads as un der:
"1. That the Commissioner of Income-tax (Appeals) erred on facts and in law in sustaining the disallowance of stock written-off of Rs. 50,79,000 allegedly holding that the appellant failed to produce evidence of (i) informing the excise authorities or other regulatory authorities for destruction of such goods and
(ii) intimating the dealers/ stockiest for not selling Aquafresh toothpaste, to substantiate the claim."
3. Br ie f facts relati ng to th e issu e are that the a s sessee co mpany is in th e business o f manu f acturing an d tradi ng o f d rug s and oral health car e pr oduct s. D ur in g th e ye ar it claimed d ed ucti on of Rs. 50, 79, 00 0/- on accoun t o f w r ite o f f sto ck s on t he gro und that it had dis co ntinu ed d ealing in o ne o f its pr o ducts i. e. Aq uafresh To oth B rush and v accine stocks nearin g ex pir y w er e no t capable o f b eing sold in th e mar ket. Th e A ssessing o f fice r disallo wed the sa me statin g that t he assess ee w as unable to su bstan tiat e its claim. Th e L d. CIT(A ) u pheld th e disa llow ance at par a 6. 3 o f his o rder as u nder:
ITA No.2453/Del/2016 A.Y. 2005-06
& ITA No.532/Del/2014 A.Y. 2006-07 4 "6.3 The submission of the appellant have been considered.
The Assessing Officer asked the precise evidence related to destruction of stock, reconciliation of unsold goods lying at depot, how it was destroyed and evidence related to closer of business. However, no definite findings of the AO on the disallowance of write off stocks is available in the assessment order. It is seen, that similar disallowances were made by the AO in the case of the appellant company in assessment year 2004-05 on the ground that no evidence that these goods were destroyed were submitted by the assessee to substantiate its claim. I have carefully considered the submission of the assessee and various evidence on record. There is no evidence to substantiate the claim, that the appellant company informed the excise authorities and other regulatory authorities with regard to the destruction of stock of Rs. 59,79,000/-. There is also no evidence to suggest that the appellant intimated the dealers/ stockiest not to sale Aquafresh Toothpaste w.e.f. the date of discontinuation of business of Aqua Toothpaste. Therefore, in the absence of any evidence to support the claim of the assessee for write off stock, the disallowance is sustained. Ground of appeal No.2 is dismissed."
4. Befor e us th e Ld. Cou nsel for the assessee co nten d ed that identical di sallo w ance made in ass ess ment ye ar 200 3-04 in th e case o f the asses s ee h ad been delete d b y the ITAT. Our attention was draw n to the r elevant fi ndings o f the ITA T i n its o r der passe d in the said case in ITA N o. 132 3/Chd /201 2 date d 28- 09 - 1 8, at p ar a 10-1 1, as und er :
"10. We have gone through the entire history of the case and the facts on record. On the issue of whether the expenditure incurred on destruction of the goods be treated as capital expenditure as held by the Revenue, we are not in agreement with any of the points taken up by the Revenue mentioned above. While the issue before us is destruction of the stock and claiming consequently the expenditure as revenue expenditure, the Revenue's submission that it is an item of disbursement and hence may be regarded as capital in nature cannot be accepted. Similarly this expenditure as pointed out in point no. 3 of the Revenue's submission cannot ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 5 be considered as relates to any frame work of business or as mentioned in the point no. 1 doesn't bring out any new asset. The Revenue's reliance that this write off be treated as capital expenditure based on the contention that the action of recalling of the product amounts to termination of agency and purely voluntary for obtaining substantial benefit cannot be accepted in the facts of the case. Based on the settled position of law as to what constitutes a capital expenditure, this write off of stock cannot be treated as capital expenditure. We are also not in agreement with the contention of the Ld. DR that these expenditures were not related with particular previous year but were related to many earlier years cannot be accepted as these products constitute a part of the closing stock for the instant year.
11. Now coming to the issue whether this expenditure has been incurred by the assessee indeed or not, the matter was referred back to the Assessing Officer to examine this specific issue in the first round of appeal by this Tribunal. The assessee could establish documentarily the fact of destruction of the off shelved products and the Assessing Officer has absolutely not discussed this issue to prove anything contra, we hereby allow the appeal of the assessee on the issue that the value of the goods destructed be treated as Revenue expenditure for the year in appeal. The Assessing Officer is hereby directed to determine the "actual cost" incurred in manufacturing of the product and allow the amount accordingly."
5. The Ld . Coun s el fo r the a ssessee f urther poi nted o ut that wr ite of f o f Rs. 50. 79 lacs pertained to stock o f aq u afr esh tooth brush o f Rs. 12. 46 lacs a nd the balan ce per tai ned to w rite of f o f stock of vaccin e. The Ld. C ounsel fo r the assessee conten ded that majo r po rtio n o f th e w r ite off related to vaccines an d w hich had been duly sub mitt ed to the author ities belo w that they w er e nearing expir y an d hence not capab le o f b ei ng sold i n the market. ITA No.2453/Del/2016 A.Y. 2005-06
& ITA No.532/Del/2014 A.Y. 2006-07 6 The Ld. Cou nsel f or the ass essee co n tend ed th at this fact has no t been con trov erted by th e R evenue and, th er efore, w hen th e vaccin es it sel f were n ot capable of bein g used, th ey h ad n o realizable va lue and the w rite o ff there for e o f th e same w as justi fied . With reg ar d to the c lai m o f w rite o f f o f to oth bru sh th e Ld. Cou nsel fo r th e assessee pointed out th at it had bee n explained that the ass essee c ompan y ha d d ecid ed to disco ntin ue th is line o f business find in g it co mmercially u nv iab le and h ence th e stock w as withdr aw n fr o m th e mar ket. H e po in ted out th at evid e nce in th e for m o f w r ite o ff sh eets app ro ving the w rite of f o f th e pro ducts, and cop y o f B oar d Resolutio n date d 11 -03- 200 4 ap p rov in g th e wr ite o ff had been filed . That ther efor e, it w as incor rect on th e par t o f the Reven ue A uthor ities to hold that th e w r it e off w as unsub stant iated . The Ld. Cou nsel fo r the assessee fu rt her p oin ted out th at the D . R.P. in assessee's ow n case h ad h eld th e claim o f the assessee on i mp air men t o f the stock as allo wable r ev enu e exp en ditur e. A bri ef sub mis sio n o f its argu men ts in t his regard was filed befo re u s and are being rep rod uced hereun der :
"The appellant is engaged in the business of manufacture and sale of OTC products, viz., Eno. Crocin and oral healthcare products, etc. The appellant is also engaged in resale / distribution of vaccine. The appellant has in the relevant previous year written off in the profit and loss account stock amounting to Rs. 50.79.000 comprising of the following:ITA No.2453/Del/2016 A.Y. 2005-06
& ITA No.532/Del/2014 A.Y. 2006-07 7
(a) During the relevant previous year, the appellant has written off the stock of following vaccine aggregating to Rs.38.33 lacs, which were nearing expiry:
(Rs. in lacs) Brand Quantity Value Fluarix 13.820 17.28 Mencevax 5.884 20.07 Priorix. 246 0.34 Tvpherix 653 0.64 38.33
(b) The appellant had discontinued its business of manufacture of Aquafresh Tooth Brush and the said product was withdrawn from the market. Therefore, the entire inventory of Aquafresh Tooth Brush, related raw material and packing material were withdrawn and destroyed. Accordingly, the appellant has written off stock of Aquafresh toothbrush amounting to Rs. 12.46 lacs. The write off of such stock is supported by (i) stock write off sheet approving the write off of such products, (n) Copy of resolution of the meeting of the Board of Directors held on 11-03-2004 for discontinuation of Aquafresh toothbrush business [Pg. 269-
308 of PB - Merits (Reply dated 14.06.2013)1- The loss aggregating to Rs. 50,79,000 on account of write off of such stock of vaccine and Aquafresh toothbrush was claimed as revenue deduction in the relevant previous year [Pg. 1 of PB - Merits (Audited Accounts)].
The assessing officer, while completing the assessment, made disallowance of such stock written off. The assessing officer did not record any finding I reason for making the said disallowance. The action of the assessing officer in making disallowance of write off of stock amounting to Rs.59,79,000 as aforesaid is unlawful and is not sustainable for the reasons submitted as follows:
In our respectful submission, the appellant as per the consistent method of valuation of stock values the closing stock at cost or net realisable value, whichever is lower as mandated by Accounting Standard -- 2 on 'Valuation of inventories' prescribed by the Institute of Chartered Accountants of India. Since such stocks could not be sold in the market, the net realizable value of such stock was taken as 'Nil'. The market price in the instant case being Nil, In accordance with the consistent method of valuation of inventory followed by the appellant, the value of these items was written down to Nil and was reduced from the value of the inventories.ITA No.2453/Del/2016 A.Y. 2005-06
& ITA No.532/Del/2014 A.Y. 2006-07 8 The method of valuation of stock, it is respectfully submitted, is in accordance with the accepted principles of accounting propounded by the institute of Chartered Accountants of India. The Courts in India, too, have accepted the method of valuation of obsolete/defective stock at net realisable value being lower than cost.
Reliance in this regard is also placed on the following decision:
- Chainrup Sampatram vs. CIT : 24 1TR 48 (SC)
- K. Mohammad Adam Sahib v. CIT : 56 1TR 360 (Madras HC)
- India Motor Parts and Accessories (P) Ltd. v. CIT : 60 ITR 531 (Madras HC)
- CIT v. Dalmia Cement (Bharat) Ltd.: 215 ITR 4411 (Delhi HC)
- CIT vs. Bharat Commerce & industries Limited : 240 ITR 256 (Delhi HC)
- Hotline Tele Tube and Components Limited: 175 Taxman 286 (Delhi HC)[Pg. 35-36 of PB-CL for AY 2004-05 & 2005-06]
- C1T v. Hughes Communication India Ltd.: 215 Taxman 136 (Delhi HC) [Pg. 37-39 of PB-CL for AY 2004-05 & 2005-06]
- CIT v Becton Dickinson India (P.) Ltd.: 214 Taxman 636 (Delhi HC) [Pg. 40-42 of PB-CL for AY 2004-05 -& 2005-06]
- CIT v Bharat Commerce & Industries Ltd.: 107 Taxman 135 (Delhi HC) [Pg. 43-45 of PB-CL for AY 2004-05 & 2005-06]
- IAC v. Consolidated Pneumatic Tool Co. (India) Ltd.: 14 1TD 564 (Bom. Tribunal)
- Wipro Limited vs. DCIT : 96 TTJ 211 (Bangalore Tribunal).
- Samsung India Electronics Limited (ITA No. 3734/Del/2002) (Delhi Tribunal)
- Jet Airways India (P) Ltd. vs CIT (in 4228/M/2000 for assessment year 1997-98;
3349/M/2002 for assessment year!998-99; 2682/M/2003 for assessment year 1999-2000;
5945/M/2003 for assessment year 2000-01; 7389/M/2004 for assessment year 2001-02;
4087/M/05 for assessment year 1997-98; 3691/M/02 for assessment year 1998-99; 3201/M/03 for assessment year 1999-2000; 6084/M/03 for assessment year 2000-01; 7390/M/04 for assessment year 2001-02) (Mumbai Tribunal) ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 9
- Emersons Process Management India (P) Ltd. vs Addl. CIT: IT Appeal No. 8118 (Mum.) of 2010 [Pg. 46-66 of PB-CL for AY 2004-05 & 2005-06)
- Digital Equipment India Ltd. vs CIT: ITA No. 6623 and 6624(Bom.)/2008 Assessment Years 1990-91 and 1991-92 ITA Nos. 7466, 6707 and 6708(Bom.)/1995 Assessment Years 1989- 90, 1990-91 and 1991-92 [Pg. 67-80 of PB-CL for AY2004-05 & 2005-06]
- CIT v Nuware India Ltd,: 118 ITD 70 (Del) [Pg. 81-93 of PB-
CL for AY 2004-05 & 2005-06] The ld. CIT(A), however, sustained the disallowance holding that:
3. The submission of the appellant have been considered. The assessing officer asked the precise evidence related to destruction of stock, reconciliation of unsold goods lying at depot, how it was destroyed and evidence related to closer of business. However, no definite findings of the AO on the disallowance of write off stocks is available in the assessment order It is seen, that similar disallowances were made by the AO in the case of the appellant company in assessment year 2004-05 on the ground that no evidence that these goods were destroyed were submitted by the assessee to substantiate Us claim. I have carefully considered the submission of the assessee and various evidence on record. There is no evidence to substantiate the claim, that the appellant company informed the excise authorities and other regulatory authorities with regard to the destruction of stock of Rs. 59, 79,000/-. There is also no evidence to suggest that the appellant intimated the dealers/stockiest not to sale Aquafresh Toothpaste w.e.f the date of discontinuation of business of Aqua Toothpaste.
Therefore, in the absence of any evidence to support the claim of the assessee for write off stock, the disallowance is sustained. Ground o appeal No. 2 is dismissed.
It is submitted that the appellant, vide letter dated 14.06.2013 filed before the Id. CIT(A) additionally submitted the sample copies of stock write off sheets and email approvals, etc. related to write off of vaccines along with copy of hoard resolution dated 25.1S.2013, in order to support its claim of provision made for write off of stock [Pg. 269-308 of PB - Merits (Reply dated 14.06.2013)]. The C1T(A), merely on the ground that there is no evidence to show that, the assessee has informed the excise authorities and other regulatory authorities with regard to the destruction of stock, sustained the aforesaid disallowance, when, in fact, there is no requirement to inform the excise authorities and other regulatory authorities for creating provision of obsolete stock.
ITA No.2453/Del/2016 A.Y. 2005-06
& ITA No.532/Del/2014 A.Y. 2006-07 10 Further, the DRP, in appellant's own case for assessment year 2006- 07 held the claim of the appellant for deduction of expenses on impairment of stock as allowable revenue expenditure [Page 26 of PB
-CL for AY 2004-05 and 2005-06].
In view of the aforesaid, it is respectful submission of the appellant that any disallowance of the expenses in respect of the impairment of stock amounting to Rs. 50.79 lacs is not sustainable and is liable to be deleted."
The Ld . D R on the other han d r elied on th e order o f th e Ld. CIT(A ).
6. We ha ve hear d bo th the parties and h ave also gone thr o ugh the do cu ments an d decisio ns rel ied /re ferred to b efo re us. Th e clai m o f w rite o ff of sto ck amou n tin g to Rs. 5 9, 79, 00 0/- h as been den ied for w ant o f ev iden ce. Th e w rite-o ffs clai med b y th e assessee relate to th e fo llow ing:
Va cc in es 3 7. 3 3l a cs Aq ua f r e s h t o ot hb ru sh 12 . 46 la c s .
T ot a l 57 . 79 la c s The major w rite off clai m e vidently p er tains to v accine s wh ich, w e fin d, the assessee co nsistently cla imed had been nearing expiry and thu s had n o realizable v alu e. C opies o f emails exchanged within the asses see co mpany seeki n g appro val for r el ease, w rite off an d destr uction of sto ck o f vaccin es nearing expir y me ntionin g sp eci fically the s to ck of s uch vaccin es, mails g ranti n g appro val grantin g f or th e s ame, as also samp le co pies o f sto ck w rite o ff ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 11 sh eets o f t he vacci nes w ere fil ed to the CIT(A ). Th er efo re it is no t that the claim w as en tirely unsu bst antiated. F urther desp ite th e rep eated assert io n of the as sessee t hat th e v accines w ritten o ff were nearing expiry , ev id enced w ith ema ils so exchang ed and th e stock w rite o ff she ets so menti oning, th e Reven ue h as n ot br ough t any th in g on reco rd to con tr overt the said clai m. With ou t po intin g out any in fir mity i n the ex p lanatio n o f th e assessee d uly evidenced with do cument s, we ho ld , the claim cou ld not be denied for w an t of fur th er evidence. N o thing h as been po in ted out reg ar ding th e insu fficienc y o f ev idences filed b y th e assessee. Then wh y fu rther evidences were needed to substantiat e the claim w e ar e unable to understand. I n th e light o f the sa me, w e h old , the claim o f th e assessee as fu lly ju sti fied vi s a v is wr ite of f o f v ac cines sinc e undo ubted ly such vaccin es were not cap able o f b eing u sed b eyo n d exp ir y period and had no realizab le value ther eafter.
A s for the wr ite o ff o f Aq uafres h to ot h brush the as sessee w e fin d had explaine d to the C IT( A ) th e r easons for disco ntin uatio n of the bu s in ess an d th e conse quent wi thdr aw al of the to o thbru shes, fro m th e mark et, b eing co mmercially un viable an d h ad a s evidenc e file d cop y o f th e Board resolutio n dat ed 2 5-1 1-20 03 to t his effec t.
Thu s, w e fin d th at th e assessee has been able to establish docu mentar ily the fa ct o f wr ite o f f o f the said pr od uct and th e ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 12 Rev en ue has not p r oved anything to th e con tr ar y. F or the r easons stated ab o ve in th e context o f w rite o f f o f v accin es w e see no reason to disall ow th e claim o f the assessee. M oreov er identical clai m o f the assess ee, w e have noted, w as allow ed by th e ITAT in identical facts and circu mstance s in A .Y 200 3-04 . The cl aim o f th e assessee to w rite off of too th b rush also is therefor e allow ed In e ffect the e ntir e clai m to w rite of f a mo unt in g to Rs.
59, 79, 00 0/- is allow ed.
Gr ound No .1 raised by the assessee is allow ed.
7. G rou nd N o. 2 raised b y th e assessee reads as un der:
"2. That the Commissioner of Income-tax (Appeals) erred on facts and in law in sustaining the disallowance of Rs. 8,94,33,333, being 1/3rd of the expenditure on advertisement and promotion of Rs.26,83,00,000 allegedly on the ground that the said expenditure resulted in promotion of brand name owned by the foreign company.
8. Br ie f fact s r elating to the iss ue, as fin d men tion i n the order of th e Ld .C IT( A ) at para 7 .1 , are that the assessee company during the relevant year incurred expenditure of Rs. 26,83,00,000/- on advertisement and sale promotion. The Assessing officer noted that assessee company was spending on advertising and marketing and therefore, it had built a formidable marketing network in India. That by incurring these expenses it ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 13 was generating benefits to the parent company i.e. GSK Pic, UK who owned the brand. The AO further noted that the said expenses were incurred in promoting the brand in India, the benefit of which was ultimately to be derived by the parent company. The AO further observed that there was a strong nexus between the expenses on advertisement and the revenues of the Associated Enterprises and therefore, the AE should contribute towards advertisement expenditure incurred by the assessee in India. That this arrangement was concocted to lower the profit of the assessee company and to save on the expenditure of the parent company and therefore, 1/3 of the advertising expenses were held to be towards brand building for the entities owning the brand and were disallowed by AO as not being business expenses of the assessee company. An addition of Rs.8,94,33,333/- (being 1/3 of Rs.26,83,00,000/-) was accordingly made.
9. Befor e the Ld. CI T( A ) the assessee mad e d etailed su b missio ns, r epr odu ced at para 7. 2 o f the C IT(A )' s ord er , to th e effec t that th e imp ug ned expe nses w ere incu rred at the l ocal leve l and w er e rou tine e xpenses in cu rred t o beat t he co mpetition in th e tr ade, that immed iate beneficiar y o f th e ex penses w as the assessee wh ich g ot reflecte d in the incr ease d turno ver and p r ofit ab ility. That the ex penses had no t been incur red for b ran d build ing an d th e ben efit, if an y, to the a ffiliated co mp an y was o nly incid en tal. Th e Ld. CI T( A) w as n ot conv in ced w ith the sub missio n s o f th e assessee ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 14 and acco rding ly up h eld the o rder o f t he AO stating that since ther e is no d en y in g th e fact that inc urr enc e of advertise ment ex penses resu lted in pro mo tion o f the br and name ow ned by the par en t co mpany, th e sai d exp en ses it canno t be said to h av e been incur red w holly and exclu siv ely f or the p urpo se o f a ssessee. Relevant fin ding s of th e Ld . CIT(A ) at para 7 . 3 of h is order ar e as under:
"7.3 The submission of the appellant have been considered. The assessing officer has disavowed 1/3 o advertisement expenses incurred by the appellant company on the ground that brand owned by the parent company ie GSK Pic, UK is being promoted and therefore benefit is reaching to the parent company. The appellant has submitted that even it is presumed that the benefit of the said advertisement accrues to the owner of the brand, than too it would not be commercially expedient for the assesses to recover any amount on account of advertisement from the owner of the brand as the owner of the such brand has allowed the appellant to use their brand without charging any royalty. The similar issue was before the DRP in AY 2006-07 wherein appellant submitted that even if there is some incidental benefit derived by the parent company in the promotion of brand name the entire expenses are eligible for deduction u/s 37(1) of the Act. Therefore, there is no denying the fact that incurring of advertisement expenses has resulted in the promotion of brand name owned by the parent company in UK. Hence, the contention of the appellant that the entire advertisement expenses have been incurred wholly and exclusively for the purpose of the business of the appellant cannot be accepted. Therefore, the entire expenses cannot be attributed to the business of the appellant and AO has rightly attributed 1/3 of such expenses to brand building. The disallowance made by the AO of Rs.8,94,33,333/- is upheld. Grounds of appeal No.3, 3.1, 3.2, 3.3, 3.4 and 3.5 are different.
10. Befor e us, the Ld . Cou nsel for th e assessee reitera te d th e su b missio ns ma de before th e CIT(A ). A t the ou tset h e drew o ur ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 15 attention to the de tails o f advertisem ent and p ro motio n ex penses, 1/3 r d o f w hich w as disallow ed by t he A O, as repr oduced in th e brief su b missio ns filed be for e u s an d point ed ou t t hat it w as evident fro m the sa me that all ex pen ses w er e in cur red for pro motin g the sales of the a ssessee c omp an y o nl y and h ad nothing abso lu tely to d o w ith the pr o mo tio n o f the bra nd o f th e paren t co mpany. That the assessee locally in cur red rou tine ex penses for adv er tising and p r omoting the p r odu cts d ealt in by th e assessee co mpany fo r incr easing its tur nove r. Th e Ld . Co unsel for th e assessee co nten ded th at the as sess ee w as in the b usiness o f ma nu factu re an d sale o f over th e co u nter p rod ucts i. e. eno, cr ocin, etc., for w hich it h ad acquire d the licence to man u factur e an d s ell in Ind ia fr o m M/s GS K P LC . That th e assessee w as th e exclusiv e user o f the brand n ame o f s uch p rod u cts in I ndia. Th e Ld . Co unsel for th e assesse e co ntend ed th at the ben efit o f th e en ti re ex pen ses inu red to the asse ssee o nly by way o f high er sales an d higher pro fits and the be nefi t, if any , to the p ar ent co mpan y w as only incidental and , ther efor e, the exp en d itur e w as in cu rre d wh olly and exclusively fo r th e pu rpose o f the b us iness o f the asse ss ee and w as thu s allow able. He co ntend ed t hat the reaso na bleness of exp en ditur e has to be see n fro m th e stand p oin t o f th e b usiness ma n and n ot that t he revenue. A numb er o f case laws were relied upon in suppo rt o f his con te ntion. A brie f gist o f th e su bmission s, ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 16 file d befor e us is as und er :
"During the relevant previous year, in order to promote the sales of products produced/ traded and marketed in India, the appellant incurred expenses amounting to Rs. 26.83.00,000 on advertisement and sale promotion expenses respectively [Pg. 62 of PB-Merits].
Advertisement and Promotion expenses Amount
Media-Tele vision 956.96
Media-Radio 12.46
Media-Film 4.43
Media-Press 5.05
Out Door Media / Internet Advertising 0.00
Prod - Television 82.26
Production - Radio 0.00
Production-Press 0.07
Out Door Production 0.00
Consumer / Product Research 229.14
ORG-Retail Service 17.60
Other Marketing Related Expenses 51.88
Consumer Promotion/Relation/Samples 142.80
Mailings 6.62
Literature 297.63
POP 71.93
Promotional Packaging 3.09
Promotional materials to doctors, etc. 36.99
Medical Conference 24.27
Trade Marketing/Field Activity 221.08
Medical Marketing & Rural Promotion 286.14
Promotional Products to consumers 233.32
Total 2,683.00
The assessing officer, held that (i) the appellant has Incurred a large amount on advertisement and publicity which is resulting in benefit to the associated enterprises who own the brand and (ii) the appellant was not able to demonstrate as to how it is wholly benefited from such brand building and that whole arrangement was concocted to lower its profit and to save expenditure of the associated enterprises. The assessing officer, accordingly made an adhoc disallowance of Rs.8,94,33,337 being 1/3rd of the expenditure on advertisement and publicity. The CIT(A) vide order dated 24-03-2014 disposed off the appeal filed by the appellant challenging the said disallowance holding as under:ITA No.2453/Del/2016 A.Y. 2005-06
& ITA No.532/Del/2014 A.Y. 2006-07 17 "7.3 The submission of the appellant have been considered. The assessing officer has disallowed 1/3 of advertisement expenses incurred by the appellant company on the ground that brand owned by the parent company i.e. GSK Plc. UK is being promoted and therefore, benefit is reaching to the parent company. The appellant has submitted that even it is presumed that the benefit of the said advertisement accrues to the owner of the brand, than too it would not be commercially expedient for the assessee to recover any amount on account of advertisement from the owner of the brand as the owner of the such brand has allowed the appellant to use their brand without charging any royalty. The similar issue was before the DRP in AY 2006-07 wherein appellant submitted that even if there is some incidental benefit derived by the parent company in the promotion of brand name the entire expenses are eligible for deduction u/s 37(1) of the Act. Therefore, there is no denying the fact that incurring of advertisement expenses has resulted in the promotion of brand name owned by the parent company in UK. Hence, the contention of the appellant that the entire advertisement expenses have been incurred wholly and exclusively for the purpose of the business of the appellant, cannot be accepted. Therefore, the entire expenses cannot be attributed to the business of the appellant and AO has rightly attributed 1/3 of such expenses to brand M/s. GlaxoSmithKline Asia Pvt. Ltd. "
The disallowance made by the assessing officer and sustained by the C1T(A) is unlawful and not sustainable for the reasons submitted as under:
The appellant is engaged in the business of manufacture and sale of 'Over the Counter" (OTC) products, viz. ENO, Crocin etc. The appellant vide agreement dated 18-01-1996 with GSK plc. (earlier known as SB plc.) [Pg. 1-7 of PB - CL 1 for AY 2006-07] acquired license to manufacture and sale of such products in India. The appellant, it is submitted, is the exclusive user of brand name of such products in India and entire expenditure on advertisements and sales promotion was incurred for promoting the sales of these products by the appellant in India and benefit of which was derived entirely by the appellant.
The aforesaid are routine expenses, incurred in connection with promotion of products through print, audio as well as visual media such as banners, television, commercial hoarding, glow sign boards etc. expenses on new products launch, exhibitions, payments made to advertising agencies to undertake promotion work etc. ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 18 The aforesaid advertisement and sales promotion expenses are generally required to be incurred to beat competition in the trade and for promoting sales of products. Such expenses have direct nexus with the sales of the products in India. Similar advertisement and sales promotion expenses are incurred by the competing companies for promoting sales of their products as well.
The above advertisement and promotion expenses were incurred for sales promotion and advertisement in India only and that, too, in respect of products, viz.. ENO, Crocin, etc., which are being dealt in by the appellant in India.
Therefore, the benefit of advertisement and brand promotion expenses incurred in India inure to the appellant in the form of higher sale and consequently higher profit. The entire benefit of advertisement and sales promotion expenses inured to the appellant as none of its affiliate company has sold any product in the domestic Indian market and it is only the latter which has sold the products (which were advertised) in the Indian market. Such expenses incurred in India, do not have any reach outside India so as to result in any benefit to the other group company which are the owner of the said brand.
(a) It is the settled position of law that the reasonableness of the expenditure has to be seen from the point of view of businessman and not that of the Revenue, as laid down by the Supreme Court repeatedly in the following cases:
- CIT v. Malayalam Plantations Limited: 53 ITR 140 (SC)
- CIT v. Walchand & Co.: 65 ITR 381
- J.K. Woollen Manufacturers v. CIT: 72 ITR 612 (SC)
-CIT v. Birla Cotton Spg. and Wvg. Mills Ltd.: 82 ITR 166 (SC)
- Madhav Prasad Jatia v. CIT U.P.: 118 ITR 200 (SC)
- S.A. Builders Ltd. v. CIT : 288 ITR 1 (SC)
- C1T v. Bharti Televentures Ltd: 331 ITR 502 (Del)
-C1T v. Padmani Packaging (P) Ltd. : 155 Taxmann 268 (Del)
-C1T v. Rockinan Cycle Industries Ltd.: 331 ITR 401 (P&H) (FB)
-CIT v. EKL Appliances Ltd. : 345 ITR 241 (Del HC) It is a settled position that the expenditure incurred wholly and exclusively for the purpose of the business would be allowable as deduction under section 37(1) of the Act, even if it results in a direct or incidental benefit to a third party.
Reliance is placed on the following decisions:ITA No.2453/Del/2016 A.Y. 2005-06
& ITA No.532/Del/2014 A.Y. 2006-07 19 • Sassoon J. David and Co. P. Ltd. v. CIT: 118 ITR 261 (SC) [Pg. 228 of PB-CL-2 for AY 2006-07] • CIT v. Chandulal Keshavlal & Co. 38 ITR 601 (SC) IPg.
230 of PB-CL-2 for AY 2006-07) • SA Builders v. CIT: 288 ITR 1 (SC) [Pg. 236 of PB-CL-2 for AY 2006-07] • CIT v. Sales Magnesite (Pvt.) Ltd.: 214 ITR 1 (Bom) • J.R. Patel & Sons (P) Ltd. v. CIT: 69 ITR 782 (Guj) • CIT v. Adidas India Marketing (P) Ltd: 195 Taxman 256 (Del) [Pg. 243 of PB-CL-2 for AY 2006-07] • CIT v. Agra Beverages Corporation (P) Ltd: 200 Taxman 43 (Del) • Star India (P) Ltd. : 103 ITD 73 (TM) • National Panasonic (India) Ltd. v. JCIT: ITA 3238/Del/2002 (Del) • Nestle India Ltd. v. DC1T (Del)(2007) 111 TTJ 498 (Del). (The Revenue's appeal has been dismissed by the Hon'ble Delhi High Court vide order dated 22-10-2007 in ITA No. 96/08. The • Revenue's SLP against the decision of the High Court is also dismissed by the Supreme Court vide order dated 02-04-2009 in ITA No. 96/2002 and the decision of the Tribunal has become final.] • Samsung India Electronics Ltd. (ITA Nos. 98. 1 B & 143/2010)(DHC) • DCIT vs Maruti Countrywide Auto Financial Services Pvt Ltd: ITA no. 2181 to 2183/Del/2010 (Del). [Pg. 262 of PB-
CL-2 for AY 2006-07] • CIT vs. N.G.C. Network (India) P. Ltd. : 368 ITR 738 (Mumbai) [Pg. 114 of PB-CL-1 for AY 2006-07| Hon'ble Delhi High Court in the case of CIT vs. Discovery Communication India: 370 ITR 57, reiterated the law in this regard |Pg. 287 of PB-CL-2 for AY 2006-07):
"10.4. When expenditure is Incurred for appellant's own business, the mere fact that the expenditure would Inure or benefits a third party or the third party incidentally obtains some advantage, would not affect or distract from the finding that the expenditure was wholly and exclusively was for appellant's business. For example, a ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 20 retail trader may advertise different products which may incidentally benefit the manufacturers, but this does not mean that advertisement expenditure fails to meet the requirement of "wholly and exclusively". Law in this regard is well settled"
Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. vs. CIT : 374 ITR 118, too, held [Pg. 265 of PB-CL-2 for AY 2006-07]:
"54 Expenditure and decision of the appellant, whether or not to incur the said expenditure; the quantum thereof, cannot be a subject matter of challenge or disallowance by the Assessing Officer, once it is accepted that the expenditure was wholly, i.e. the quantum of expenditure incurred was fully, and exclusively for business purpose. In Sassoon J. Davit & Co. Pvt. Ltd. versus CIT [1979] 118 ITR 261 (SC), it has been held that an appellant can claim deduction for expenditure incurred for business purposes and no one else has authority to decide whether or not the appellant should have incurred the said expenditure. The expenditure cannot be disallowed wholly or partly because it would incidentally benefit a third person once the requirements of Section 37(1) were satisfied. Reference can be also ITA 16/2014 & connected matters Page 42 of 142 made to the decision of Delhi High Court in CIT versus Nestle India Limited [2011] 337 ITR 103 (Del), holding that the question of reasonableness or measure of expenses to be allowed cannot be a subject matter of adjustment or disallowance under Section 37(1) of the Act."
It was held similarly by the Hon'ble Delhi High Court in the case of CIT vs. Whirlpool of India Limited 381 ITR 154 (Pg. 278 of PB-CL-2 for AY 2006-07).
Recently Hon'ble Delhi High Court in the case of Pr. CJT-3 vs. Seagram Manufacturing (P) Ltd. 245 Taxman 389 reiterating the law in this regard, held (Pg. 288 of PB-CL-2 for AY2006-07]:
"6. Regarding Question No. 2, during the course of proceedings in the relevant Assessment Year 2003-04, the AO disallowed 10% from the expenditure on brand enhancement on the ground that it was allocable to the overseas owner/collaborator. The AC) reasoned that any enhancement in the brand presence of the assesses invariably had a fail-out vis-a-vis brand value of the overseas IPR. proprietor. The AO a/so recorded the relevant facts that not all brands which belong to the overseas owner were available in the Indian market and in the eventuality of the brand proprietor deciding to wind-up operations, its reputation would still remain intact. The CIT(A), however disagreed with this reasoning. The ITAT confirmed the order but with little or seconded or no reasoning.ITA No.2453/Del/2016 A.Y. 2005-06
& ITA No.532/Del/2014 A.Y. 2006-07 21
7. The expenses in this case were incurred by the assessed. The arrangement inter alia between the assessee and the brand proprietor was such that specified required brands were made available in the assessee deals. No doubt, the profits reported were put through the recourse of transfer pricing exercise for the purpose of Arm's Length Price determination. Yet, the fact remains that the overseas owner did not set up any other licensee, at least in the area where the assessee operated, to operate as a rival. Under the Trade Mark Act, especially Section 48, as long as [he arrangement existed, the assessee. who was a licensee of the products, was entitled to claim them as business expenditure though in the ultimate analysis they might have enhanced the brand of the overseas owner. No doubt, if the arrangements were terminated, the brand presence of the overseas owner of the articles/TPR would have subsisted. But that would nevertheless subsist in any event on the theory of trans-national reputation of the IPR owner. In the circumstances, disallowing a certain proportion on an entirely artificial and notional basis from the expense otherwise deductible, in our opinion, was not justified. The question of law is answered against the revenue. For the above reasons, the appeal fails. It is accordingly dismissed.
The AO has, on the basis of assumption and surmises, held that incurring of advertisement expenses has resulted in promotion of brand name owned by the foreign AE and, therefore, it cannot be said that the entire expenses have been incurred wholly and exclusively for the purpose of the business of the appellant. The aforesaid observation by the AO are only in the realm of assumption and surmises in as much as such expenses on advertisement have undisputedly incurred by the appellant in the course of carrying on of its own business and promoting sale of product manufactured by it in India. The incidental benefit allegedly resulting by way of promotion of brand owned by foreign AE cannot be the reason to disallow such expenditure incurred by the appellant wholly and exclusively for the purpose of its business even if it results in an indirect benefit to ihe overseas group company as per the settled position laid down in the aforesaid decision.
In view of the aforesaid, adhoc disallowance of Rs. 8,94,33,333 being l/3td of the expenditure on advertisement and publicity is unlawful and is liable to be deleted."
The Ld . D R relie d upon the ord er of the Ld. C IT( A ) and stated that sin ce ad mittedly the bene fit h ad accr ue d to the par en t co mpany wh o w as the ow ner o f the brand , th e exp en d itur e has been righ tly disallow ed by the authorities below. ITA No.2453/Del/2016 A.Y. 2005-06
& ITA No.532/Del/2014 A.Y. 2006-07 22 1 1. We h ave hear d both the par ties. We ar e convin ced with th e arg u ments o f t he Ld. Co unsel fo r th e assess ee that t here was no reason /b asi s at all fo r hol ding that t he adv er ti sement / pro motion exp en ses benefited th e paren t A E an d hence a p ortio n of it w as liab le to be disall ow ed as h av ing no t been incurred w holly and exclusively for the pu rpo se of the business of the assessee. There is clear dist inction betw een br and b uildi ng an d ad vertisin g & marketi ng . Whi l e th e end pur pose of both may b e th e sa me, i.e increasin g sales/tu r nover, but the ap pro ach is d efin itel y d if feren t. Wh ile adv ertising on ly co mmun icates w h at a busine ss h as to o ff er, reaching ou t to th e en d cu sto mer an d imp ac ting imme diate sales, brand b uilding exercise on th e o th er h an d c reates an identity /p er ceptio n o f the busine ss, generatin g aw areness abo u t the busine ss us in g str ategies an d campaigns w ith t he g oal o f creating a uniq ue and lasti ng image of the b usin es s in the marke t place. Brand build in g create s a cu s to mer base estab li shing lon g ter m r elationsh ip w ith th e customer.
With th is clear d is tinction betw een the tw o expense s, th e o nus to estab lish incu rren ce of eith er o f th e expenses is o n the party clai min g so. The Revenue claiming that th e assessee h as incurred brand b uil ding ex p en ses, the o nus i s on the Revenue to establis h the said fact. I t cann ot si mp ly be der iv ed fr o m th e fact th at ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 23 assessee has i ncu r red h uge ex pen ses o n ad vertise ment and s ale pro motio n o f pr o d ucts the brand o f w hich belonged to anoth er entity , considering th e clear d istincti on in the en d o bjective o f th e said exp en ses an d the assessee cons isten tly claimin g that it had acquired the ex clu siv e lice nse to man u facture an d sell t he pro du cts in India an d th us b eing the sole use r o f th e b rand na me in I n dia. These con ten tio ns of t he assess ee h av e r emained unco ntro verted. The en tire benef it, in such circu msta nces, in ured to th e assessee alone as it alone was operating in the I ndian mark et. Benefi t if any to th e AE w as only incidental. A nd on accou nt o f s uch incidental ben efit accrui ng to a third party it ca nnot be said that the ex pen se was n ot w holly and exclu siv ely for t he bene fit o f the assessee. A s lon g as the object iv e /pur po se for i ncurr in g an exp en d itur e is t o ben efit th e asses s ee solely , the ex pen ditu re can be said to b e incur red w ho lly an d exclusiv el y for the bene fit o f th e assessee. An y incid en tal ben efit ac cr uing to a third party on a ccou nt o f th e sa me, bein g b ey ond the contro l of th e assessee, d oes no t dilute th e character of the ex pen se.
We d o no t find an y reaso n o r basis th er efo re for holdi n g a part of the ex pense as p er taining to b ran d building. We ther efo r e direct deletion o f the d isallow ance made on accoun t o f bra nd bu ild ing exp en ses amou ntin g to Rs. 8, 9 4, 33, 333 /-
ITA No.2453/Del/2016 A.Y. 2005-06
& ITA No.532/Del/2014 A.Y. 2006-07 24 Gr ound of appeal N o. 2 is allow ed.
12. G rou nd No. 2. 2, 3.1 , 3. 3 an d 3 .4 , it was stated by th e Ld. Coun sel for th e as sessee r elated to t he sa me issue o f d isallow ance ma de o f a mo u nt paid to M /s G lax oS mithK line Biol o gical S.A., Belgiu m , b eing R s.1 6, 08, 70 ,5 38/- for pu rch ase o f v accine, on acco unt o f no n- de ductio n o f tax at so urce thereon , holding that there was a per manent esta blish me nt o f th e said ent ity in I ndia and , therefor e, th e pro fits attri butabl e to the pur chases mad e by the assesse e fro m the said e ntity w e re liable t o tax in Ind ia. Th e grou nds raised by the assessee read as un der :
"2.2 That the Commissioner of Income-tax (Appeals) erred on facts and in law in sustaining disallowance of Rs. 90,20,655 under section 40(a)(i) of the Act, with respect to purchase of vaccine amounting to Rs.16,08,70,538 lacs made from GlaxoSmithKline Biological S.A. ('GSK, Bio'), Belgium, allegedly holding that the appellant has failed to deduct tax at source from such payment.
3.1 That the Commissioner of Income-tax (Appeals) erred on facts and in law in allegedly holding that GSK Bio has outsourced its core activity to the appellant and all the activities are undertaken under direct supervision and control of GSK Bio and thereby establishing that there is a constant touch between the appellant and GSK Bio for R&D activities.
3.3 That the Commissioner of Income-tax (Appeals) erred on facts and in law in holding that clinical trial activities constitute permanent establishment of GSKBio in India within the meaning of Double Taxation Avoidance Agreement (DTAA) between India and Belgium on account of the following:
a. Fixed place of business in the form of place where clinical trials and research and development takes ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 25 place including but not limited to CDMCI and BDSI, Bangalore under Article 5(1) of the DTAA;
b. Premises used as a sales outlet or for receiving or soliciting orders with respect to vaccines under Article 5(2)(i) of the DTAA;
c. CDMCI, Bangalore under Article 5(2)(c) of the DTAA;
d. BDSI, Bangalore under Article 5(2)(c) of the DTAA; and e. Dependent agent PE in the form of the appellant under Article 5(4) of the DTAA.
3.4 That the Commissioner of Income-tax (Appeals) erred on facts and in law in alternatively holding that the assessee constituted business connection with GSK Bio within the meaning of section 9(1)(i) of the Act."
13. Br ie f facts relatin g to the issu e, as stated at p ar a 9 .1 of th e CIT(A )'s ord er , are that th e asses se e co mp any had ma de pay men t amounting t o Rs. 16, 08 ,7 0, 538 /- to G laxo s mithk lin e Biol ogicals SA (herein after refer r ed to as GS K B io lo gicals S A) at Belg iu m for purchase o f v accine. The Assessing o fficer (A O ) no ted that no TD S h ad been ded ucted on this pay ment as requir ed u/s 1 95 o f th e Act. H e further n oted that th e assessee w as resp o nsib le for undertakin g clini c al trials as w ell as researc h and d evelop men t activities o n behal f o f M /s G SK Biologicals S A , fo r w hich r eason he h eld tha t the core activ iti es o f the B elgi u m Co mp an y w er e being carr ied ou t in I ndia, and th er ef ore it constitu ted per man en t estab lish men t o f M /s GS K Biologicals SA in Ind ia within th e mean ing o f A rticle - 5 o f th e D TAA between in I ndia an d B elgiu m. He also held th at the asses see con st ituted "B usines s c onnection " ITA No.2453/Del/2016 A.Y. 2005-06
& ITA No.532/Del/2014 A.Y. 2006-07 26 of M /s G SK B io log icals S A S A w ith in th e mean ing of sectio n 9(1) (i) o f the A ct. A ccor dingly the AO held that the income o f th e Belgiu m co mpan y w as tax ab le in Ind ia and th er efore, the assessee was u nder obl ig at ion to deduct tax at so ur ce, w hich h av ing no t been deducted, the amou n t p aid to GS K Biologicals SA , of Rs.
16, 08, 70, 538/- w as liab le to b e disallow ed u/s 4 0(a)( i} of the A ct.
14. The asse ssee m ad e detaile d su b missio ns be fo r e th e Ld. CI T( A) against the afor esaid dis allow ance conten d in g th at no PE o f GSK Biolo gicals S A SA can b e said to have b ee n for med in India as per A rticle 5 of Do uble Taxation A voidance Ag reemen t( DTA A ) betw een In dia and Belg iu m r ead w ith the facts of th e case and that ev en i f it w as p resu med th at there was a P E of G S K Biologic als SA,SA, in In dia, no business cou ld b e attr ib utab le to it since th e p urchas e o f v accine too k place on princip al t o pr in ci pal basis ou tsi de I n dia for w hich eve n pay men t was mad e outside Ind ia. The same fi nd men tion in para 9. 2 of th e CIT(A )'s order. The Ld. CIT( A ), h ow ev er , dismissed th e con tention o f t he assessee a nd up held the d isallow anc e made by the AO.
B efo re u s, at the outset itself, the Ld. Co unsel fo r th e assessee con tended t hat his plea on this g roun d r aised w as that t he issue b e restor ed back fo r the r eason tha t speci fic factua l and le gal ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 27 con tentions mad e befo re th e Ld . CI T(A ) had neither been con sid er ed, n or d ealt w ith by him w hile con fi rmi ng th e disallo wance. The Ld . C ounsel for t he assessee conten ded that i t had been pleaded bef ore the Ld. CI T(A ) that GS K B iolog icals SA SA did n ot h av e a PE in Ind ia in terms o f any o f th e criterias me ntio ned in th e D TA A betw een I ndia and Belg iu m. H e con tend ed that it h ad b een s p ecifically pointed o ut t o th e Ld . C IT(A ) that there w as neith er any fix ed p lace i n Ind ia w here the business o f GS K Bio lo gicals S A w as being carr ied out, n or co uld th e activ ity allegedly b ein g ca rried o ut by G S K Biologicals SA in I ndia, o f clin ical tr ials an d r esear ch and d ev el op men t, b e said to co nstitut e its co re activ ities, w hich is a pre-r equ isite fo r cr eatio n of P E in India. H e fur ther con tend ed th at it h ad also been po in ted o ut that carry in g out o f r esearch and develo p ment activ iti es w ould no t create a PE in In d ia as p er A rticle 5( 3) o f DTA A in India and Belgiu m an d it ha d also been stated that agency P E h ad also no t been created in In dia since n o ag en t had b een appo in ted by GSK Bio lo gicals S A SA. It w as con tended that, th e facts were show n to the Ld .C IT( A ) ,to the contrary , po int ing out th at an a gr eement had been entered into between GSK Biologicals S A and GSK P harma, a compan y based in Mu mb ai for ren dering serv ices in r elation to research a nd clini cal trials un der tak en by G S K Bio lo g icals S A in the cou rse o f car ry ing ou t its b usin es s of pro duction o f vaccine in ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 28 Belgiu m. It w as pointed o ut th at the said two entities had entered into an ag reemen t for pro v ision of ser vice s in relation t o procur emen t, or ga nization an d co or d inatio n o f clinical trials i n India by G S K Phar ma to G S K Bio log icals S A an d also fo r ren dering se rvices inv olving p retria l scien ti fic ac tiv ities, data entry , data clinic, data analysis and r epor ting o f clin ical tr ials and oth er med ical da ta . The Ld. Cou nsel f or the assess ee po in ted o u t that GSK Biologicals SA did no t have at its disposal, no r had legal right or access to any fixed p lace fo r car rying o ut its b usin ess i n India and fur the r even the acti vities carr ied ou t by G SK Bio lo gicals S A of rendering se rvices in relation to co ndu ct o f clin ical trials cou ld not be said to c onstitute the co re business o f GS K Biolo gicals SA w hich n eed to be carried o ut fr om a fixed place for co ns titu ting a P E in Indi a as per A rticle 5(1) o f th e DTAA. Th e Ld . Cou nsel f or th e ass essee contended that it w as also pointed o u t that neith er the as sessee, no r GSK P harma w as eng ag ed in so licitin g o rders for or o n beh al f o f G SK B io lo gicals SA and, th er efore, the assessee co uld not be said to b e a d ep en den t agent PE in ter ms of A rticle( 4) o f D TA A. The Ld. C ounsel for th e assessee also co n tended that in any case, the assessee had procur ed v acci ne directly fro m G S K B iolog icals S A on principal to p rin cipal b asi s and the pur ch ase s w ere not be attr ibu ta ble to P E, if any , o f G S K B io log icals S A an d, th er efore, also n o p ro fits o n ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 29 acco unt o f th e said tr an saction co u ld be attributable t o the P E in ter ms o f the D oub le Taxation A vo idance A greement. Th e Ld . Coun sel for t he assessee drew ou r attentio n to th e detailed su b missio ns made to the CIT(A ), r eprodu ced at pages 7 4 to 87 of the P aper Bo ok. He also dr ew our attentio n to all th e necessary docu ments substan tiating the abov e argu men ts bein g co pies o f agr ee ment ente red into betw een GSK Biologicals S A and GSK Ph ar ma w hich w er e also placed b efore the Ld. C IT( A ). In th is reg ar d a brie f s u mmar y o f the co nte ntion s made w er e also p lace d bef ore us w hich are as und er :
"During the relevant previous year, the appellant purchased /imported vaccines for a sum aggregating to Rs. 16,08,70,538 from GSK Biologicals SA (GSK Biologicals SA), a group company incorporated under the Jaws of Belgium and engaged in the business of production of vaccines.
GSK Biologicals SA for the purpose of manufacture of vaccines, undertakes intensive research and development with the objective of discovering and developing new and improved vaccines.
GSK Biologicals SA has entered into the following agreements with GSK Pharma, a group company based in Mumbai. for rendering services in relation to research and clinical trials undertaken by GSK Biologicals SA in the course of carrying on of its business of production of vaccines in Belgium;
(a) GSK Belguim and GSK Phanna entered into an Inter-company Agreement dated 6"1 April, 2004, which was replaced by a new Inter-company Agreement dated 25lh July. 2006, for provision of services in relation to the procurement, organization and coordination of clinical trials in India by SK Phanna to the GSK Biologicals SA. |Pg. 8-26 of PB-CL-I for AY 2006-07]
(b) GSK Biologicals SA and GSK Pharma entered into Clinical Data Managemenl Center Agreement dated 1st December, 2004, (which was subsequently amended on 20lh ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 30 February, 2008), for rendering of services by GSK Pharma to GSK Biologicals SA involving pre-trial scientific activities, data entry, data cleaning, data analysis and reporting of clinical trials and other medical data (Pg. 27-37 & 35 of PB-CL-1 for AY 2006-
07].
The assessing officer held that clinical trial activities constitute permanent establishment of GSK Biologicals SA in India within the meaning of Article 5 of Double Taxation Avoidance Agreement with Belgium (DTA A) [Pg. 52-77 of PB-CL-1 for AY 2006-07] on account of the following:
(a) Fixed place of business in the form of place where clinical trials and research and development takes place including but not limited to CDMCI and BDS/, Bangalore under Article 5(1) of the DTAA;
(b) Premises used as a sales outlet or for receiving or soliciting
orders with respect to vaccines
under Article 5(2)(i) of the DTAA;
(c) CDMCI, Bangalore under Article 5(2)(c) of the DTAA;
(d) BDSI. Bangalore under Article 5(2){c) of the DTAA; and
(e) Dependent agent PE in the form of the appellant under Article
5(4) of the DTAA.
In coming to the conclusion that GSK Biologicals SA had a PE in India and. therefore, consideration paid by the appellant for import of vaccines were chargeable to tax in India, the assessing officer made ex-parte inquiries and investigation. From the various websites, the assessing officer gathered that appellant had got conducted clinical trials in India at centres in Mumbai and Bangalore. Based on the ex-parte enquie assessing officer came to the conclusion that all the core activities, related to vaccine development, were undertaken in India by the appellant on behalf of GSK Biologicals SA and under direct supervision and control of GSK Biologicals SA. The assessing officer inferred that the appellant was responsible for undertaking clinical trials as well as research and development activities on behalf of the applicant.
The assessing officer, accordingly, made a disallowance of Rs. 16,08,70,538 under section 40(a)(i) of the Act, with respect to purchase of vaccine being payment made to GSK Biologicals SA for purchase of vaccine, on the ground that the appellant failed to deduct tax at source from such payments. The CIT(A), on the basis of order passed by the assessing officer for the assessment year 2011-12, disallowed Rs. 90.20.655, in terms of aforesaid circulars 2/2014 and 3/2015 has made disallowance of 23% of net profit earned by GSK Bio., as against ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 31 disallowance of entire sum of purchase made by the assessing officer in the year under consideration.
The disallowance of Rs. 90,20.655 under section 40{a)(i) of the Act, with respect to purchase of vaccine amounting to Rs. 1 6,08,70,538 made by the assessing officer and sustained by the C1T(A) is unlawful and not sustainable for the reasons submitted in our written submissions separately filed.
Further, it has been repeatedly held by the Courts in the following decisions that the question of existence of the Permanent Establishment and consequent taxability of payment in the hands of the payee in India is dependent on the outcome of the assessment of the payee:
CIT vs Samsung Electronics Co Ltd: 185 Taxman 313 (Kar) [Pg. 313 of PB-CL-2 for AY 2006-07] CIT, International Taxation, Bangalore vs Sonata Information Technology Ltd: 232 CTR 20 (Kar) [Pg. 339 of PB-CL-2 for AY 2006-07] Van Oord ACZ India (P) Ltd vs CIT: 189 Taxman 232 (Del) [Pg. 339 of PB-CL-2 for AY 2006-07] Mahindra & Mahindra Ltd vs DCIT: 122 TTJ 577 (Mum)(SB) [approved by the Bombay High Court in the case reported as DIT(IT) vs Mahindra and Mahindra Ltd: 365 ITR 560 (Bom)] [Pg. 352-387 of PB-CL-2 for AY 2006-07] It is submitted that GSK Biologicals SA under section 245Q(1) of the Act filed application before the Authority of Advance Rulings to decide, whether it would result in a Permanent Establishment in India within the meaning of Article 5 of the Double Taxation Avoidance Agreement between India and Belgium.
The Hon'ble Authority of Advance Rulings, however, vide order dated 21-07-2015 dismissed the application of the assessee as not maintainable on the grounds that questions raised in the application had been decided in the assessment of the captioned assessee and were pending before the CIT(A).
Also the cases of GSK-Balguim for assessment year 2005-06 to 2009-10 were reopened by the issuing officers under section 148 of the Act in order to bring to tax its income holding existence of permanent establishment in India. The assessee has challenged the re-assessments in writ petitions before the Delhi High Court, which are admitted and are also pending disposal.
ITA No.2453/Del/2016 A.Y. 2005-06
& ITA No.532/Del/2014 A.Y. 2006-07 32 It would be appreciated that the question in the above appeal as to whether GSK-Belgium has a permanent establishment in India can only be decided in the hands of the payee company, which matters are pending at present before the Hon'ble Delhi High Court."
15. The Ld . C ounsel for the asses see co ntended that desp ite th e abo ve sp eci fic an d detailed sub missi ons mad e by the a ssessee th e Ld. C IT(A ) gave no c ognizan ce t o the same an d up held th e disallo wance r eite ratin g the order of the A O. He drew o ur attention to para 9 .3 of the Ld. CI T( A ) w hich is r eprod uced as under:
"9.3 The submission of the appellant have been considered. It is seen that M/s GSK Biologicals SA has outsourced its core activity to the assessee company and all the activities are undertaken under the direct supervision and control of M/S GSK Biologicals SA. Thus there is a constant touch between Indian center and the center of the assessee of the abroad for R&D activities. This arrangement where assessee is responsible for undertaking clinical trial as well as R&D activities on behalf of GSK Biologicals SA constitute permanent establishment of M/s GSK Biologicals SA in India within the meaning of DTAA between India and Belgium as under:
Fixed place of business in the form of place where clinical trials and research and development takes place including but not limited to CDMCI and BDSt Bang/ore under Article 5(1} of the DTAA.
"a. Premises used as a sales outlet or for receiving or soliciting orders with respect to vaccines under Ariicle-5(2)(i) of the DTAA.
b) CDMCI, Bangalore under Article 5(2)(c) of the DTAA.
c) BDSI, Bangalore under Article 5(2}(c) of the DTAA.
d) Dependent Agent PE in the form of the assessee under Article 5(4) of the DTAA,"
a) The assessee company also constitutes 'business connection' of M/s GSK Biologicals SA SA within the meaning of section 9(1)(i) of the Act as discussed above: Therefore, M/s GSK Biologicals SA is chargeable to tax in India for the payment received on account of ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 33 vaccine purchase from the assessee company. The appellant company has failed to deduct TDS u/s 195 of the Act and therefore provisions of section 40(a)(i) are attracted. Appellant has also submitted that the entire disallowance is not called for in terms of CBDT circular no 2/2014 and 3/2015. I have perused these circulars and it is seen that these circulars have been followed by the assessing officer in AY 2011-12 in the case of the appellant. The appellant filed copies of assessment order u/s i43{3) for AY 2011-12 in the case of the assessee and copy of annual accounts of Glaxosmithkline Biologicals SA for the year ending December, 2004 and December 2005 as additional evidence. These additional evidence were forwarded to AO for his report. The report of the AO is as under:
"The Circular states that, for the purpose of making disallowance of 'other sum chargeable' u/s 40(a)(i) of the Act, the appropriate portion of the sum which is chargeable to tax under the Act shall form the basis of such disallowance and shall be the same as determined by the AO having jurisdiction. The assessee has also submitted the copy of the assessment order for AY 2011-12 passed by the AO to show the method of arriving at the disallowance to be made u/s 40(a)(i). With respect to the above it should be state that the circulars came in to force only during the FY 2013-14 and FY 2014-15 and cannot be used as a basis of disallowance made by the AO for AY 2005-06.
The circulars were issued in the light of decision of supreme court of India in the case of G£ Technology Pvt. Ltd. vs CIT and Transmission Corporation of AP Ltd. vs. CIT. It should also be stated here that these decisions came much after the assessment was completed under section 143(3) of the IT Act and could not be adopted by the AO for the year under consideration.
Without prejudice to the above, the AR of the assessee has restricted the income attributable to the applicant (PE) in India at 15.38%. However, this is not acceptable. In this case reliance is placed on the decision of Motorola Inc vs. DCIT 96 TTJ 1 and M/s National Petroleum Construction Co. vs. Add!. Director of International Taxation ITA No. 5168/Del/2010 where the tribunals have held that the income attributable to the PE is 20% to 25%. The AO during the AY 2011-12 has also adopted 22.5% based on the above decisions. Hence, the assessee's version of 15.38% is on the lower side and is not acceptable."
b) The additional evidence filed by the appellant are admitted as these go to the route of the matter and AO has also not objected for admission. Circular 2/2014 came much after the relevant assessment was completed in the light of the decision of Hon'ble Supreme in the case of GE Technology Pvt. Ltd. vs. CIT and Transmission Corporation of AP Ltd. vs. CIT. But the circular is clarificatory in ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 34 nature as this was issued against various references received from the field officers by the CBDT in which clarification was sought whether the tax is to be deducted under sub section 1 of section 195 on the whole sum being remitted to a non-resident or only the portion representing the sum chargable to tax particularly if no application has been made under subsection 2 of section 195 of the Act to determine the sum. Vide circular No 3/2015 dated 12.02.2015 CBDT has clarified as under:
"4. As disallowance of amount under section 40(a)(i) of the Act in case of a deductor is interlinked with the sum chargeable under the Act as mentioned in section 195 of the Act for the purposes of tax deduction at source, the Central Board of Direct Taxes {'CBDT"}, in exercise of powers conferred under section 119 of the Act, hereby clarifies that for the purpose of making disallowance of 'other sum chargeable" under section 40(a)(i) of the Act, the appropriate portion of the sum which is chargeable to tax under the Act shall form the basis of such disallowance and shall he the same as determined by the assessing officer having jurisdiction for the purpose of sub-section (1) of section 195 of the Act as per instruction No.2/2014 dated 26-02-2014 of CBDT. Further, where determination of 'other sum chargeable' has been made under sub- section (2), (3) or (7) of section 195 of the Act, such a determination will form the basis for disallowance, if any, under section 40(a)(i) of the Act."
c) Following the above circulars which have been followed by Assessing Officer, in AY 2011-12 in the case of the appellant, the disallowance of the appellant is computed as per the principle followed by the AO in A.Y 2011-12. The appellant has worked out the ratio of operating profit to operating income of the deductee i.e. GSK Biologicals SA SA @ 24.38%. By applying the same rate of profit on the sale transactions of vaccines to the assesse, the amount of Rs.3,92,20,237/- (i.e.24.38% of Rs.16,08,70,538/-) is attributable to the net profit earned by the GSK Biologicals SA SA on the sale of vaccines to the assessee. The Assessing Officer has worked out the net profit attributable to PE services taking the average of the percentages held as net profit of the company attributable to the PE services in the case of Motorolla Inc. Vs DCIT (Supra) and M/s National Petroleum Construction co,(Supra) as 20% and 25% of gross receipts respectively. By applying the average @ 23%, the net profit attributable to PE functions of the GSK Biologicals SA SA is determined at Rs.90,20,655/- (being 23%o f Rs.3,92,20,237/-. Therefore the disallowance u/s 40(a)(i) is restricted to Rs.90,20,655/-. The grounds of appeal nos. 5, 5.1 to 5.11 are partly allowed."
16. Referring to the abo ve, he po in ted out that the L d. CIT(A ) held that G SK Biologicals S A had PE in In dia w as b ased on h is ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 35 fin dings t hat G S K Biolog icals S A had ou tso ur c ed its cor e activities to as ses see co mp any and all activit ies w er e un dertak en under direct sup erv ision and con tr o l of GS K B io logicals S A. These find ings he co ntend ed had no basis at all excep t so me dat a collected by th e AO fro m the inte rnet an d th is d esp ite speci fi c su b missio ns ma de b y the assessee befo re hi m that th er e w as no agr ee ment betw een GS K Biolog icals SA and th e assesse e an d even the core acti vities of G S K Biologicals S A w er e n ot bein g carr ied out in I ndia. Th e L d. Coun sel fo r the assessee co ntend ed that since all th e factu al su b missio ns ma de by th e assessee an d even th e position of law str essed up on by the assessee have been co mpletely ig no r ed by the Ld. CIT(A ), th e matter needs recon sid eratio n.
H e further stated th at G SK Biolog icals SA had appr oached th e AA R for a ru ling w hether it had a P E in In d ia, w hich ap plicatio n had been d is misse d findi ng th at the issue h ad been dec ided by th e AO in the case of the presen t assessee an d the matter w as befor e the CIT(A ), w ith out g iving any fi ndi ng s on mer it . Th at the cases of G S K B ilogicals SA h ad b een reop ened u/s 148 o f the A ct for A. Y 20 05- 06 TO 2009 -10 , against wh ich a w rit had been filed to the H on' ble D elhi High C our t w hich h ad b een ad mi tted an d w as pen ding for dispo s al. Ld. C ounsel contended th at th e fa ct o f P E o f ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 36 GS K Biologicals S A cou ld be established in its o wn case an d even the D RP had stated so w hile dealin g with id en ti cal i ssue in th e objectio ns o f the assessee to the d raf t order passed in th e case of the assessee for subsequ en t year i.e. , 20 06- 07. Thatsince th e deter minatio n of P E of GSK Bio lo gicals S A was pen ding be for e the H on' ble H ig h Cou rt the re for e also th e is sue n eeded to b e restor ed b ack fo r deciding on the basis of the disposal o f th e same.
17. The Ld. DR, o n th e other hand, dr ew our attentio n to p ar a
9. 3(c) of th e o rder of the Ld. CI T( A ) as r epr odu ced above and stated th at the dis allow an ce h ad been uph eld b y the Ld. CIT(A ) based o n the prin cip le fo ll ow ed by th e A O in asses smen t yea r 2011 -12. S he fur ther referr ed to G ro und N o. 3. 1, 3. 3 & 3. 4 raised by the assessee ch alleng ing the or d er o f th e CIT (A ) h old in g t hat GS K Biological SA had outsour ced its k ey activi ties to th e assessee, that clin ical trial activities co nstituted P E o f GSK Bio and th at o f the as sessee con stitu ting business con nectio n of GSK Bio . S he con tended that th e A O had given detail ed fin d ings on th e abo ve, based on facts be fore him a nd she h eavily r el ied on th e order of the AO in this reg ar d.
18. We hav e hear d bo th the parties and h ave also car efu lly gon e thr oug h the or d er s of th e autho rities below as also the docu men ts refer r ed to b y th e Ld. C ounsel for th e assessee before u s. On g oing ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 37 thr oug h the sa me and after car efully considering th e same w e fin d mer it in th e c onten tion o f the Ld. Co unsel fo r th e asses see that th e issue need s r econsideration .
The AO has held P E o f G S K Biologicals S A in In dia b ased on h is fin dings that cli nical trials a nd R &D are cor e activ ities in vaccin e dev elop men t w hich is got d one by GS K Biologicals in I ndia thr oug h th e ass ess ee and o ther a ff iliates. These find in g s w e find are b ased o n, as mentioned in th e assess ment or der at page 35 "facts ext racted fro m various web s ites of th e a ssessees g rou p com pa nies which t hrow lig h t on th e vaccin e bu siness o f the g ro up and role of I ndian affiliates" . The role of t he assessee i s b ased on decisio n taken i n th e 6 3 r d meetin g o f the G enetic Eng in eering Ap prov al C o mmittee o n the 8 t h F ebr uary 2006 .The AO h as con tended th at GS K Biologicals is car r ying on vaccin e dev elop men t activ ity th roug h th ese fixed place o f bus iness. That all intellectual pr operty in the v accine vests w ith GSK Bio lo gicals, w hile R &D activ ity is car ried o ut in Ind ia, th e assessee i s econ o mically d ependent o n G S K B io lo gicals S A and has no other bu sin ess. The Ld. CI T(A ) , w e hav e noted has merel y reiter ated th e find ing s of the AO.
ITA No.2453/Del/2016 A.Y. 2005-06
& ITA No.532/Del/2014 A.Y. 2006-07 38 The assessee on th e other hand , w e f in d h as made specific factua l and legal su b missio ns counteri ng the fin d ings o f th e A O/CI T( A), pointin g ou t that t he facts are to th e contrary that th e re was no agr ee ment o f G S K Biologicals S A with the a ssessee b u t in fact it had entered in to tw o ag reemen ts w ith G SK P har ma, an In dian Co mpan y, fo r carr y ing ou t clinical r esearch an d d ata ma nage men t. Copies o f the agr eement had b een placed o n recor d. I t w as also pointed ou t that in ter ms o f th e D TAA with B elgiu m, there w as no fixed place P E o f GS K Biologicals S A in I ndia as it di d n ot have any such place at its disp osal. That cond ucting clin ical trials d id not constitu te the cor e activity o f G SK Bio lo gicals S A, w hich w as eng ag ed in manu facturing vaccin es. That neither G S K P harma nor the asses see w ere acting as a gents of G SK Biolog icals S A, and that in ter ms o f D TA A, P E did no t i nclude maintai nin g pre mise s for re search an d d evelop men t . That w ithou t prejud ice to the afor estated ar gu men ts, ev en if th ere was a P E of G SK Biological s, no pur chases mad e by the assessee o f v accines w ere attr ibutab le to the P E and therefo re al so no p ro fits on account o f the said purchases w er e tax able in In dia , ther efor e r eq uir in g no taxes to be ded ucted at sour ce.
N on e of th ese factu al and legal co nten tion s w e find have been dealt w ith b y th e Ld. CIT(A ).
ITA No.2453/Del/2016 A.Y. 2005-06
& ITA No.532/Del/2014 A.Y. 2006-07 39 O n the contrary it w as br oug h t to o ur n otice th at th e AO ' s fin dings w er e bas ed o n d ata/in f or mation ex tr acte d fr om w eb site s none o f w hich w as r elated to th e assess ee. That even t he inf or matio n extracted r eg ar ding co n ductin g o f cli nical tr ials at pag es 39- 47 o f th e AO 's or der did no t mentio n the a ssessee as t he site w her e tr ials w er e to be car ried out. That even the G enetic Eng in eering Co mmittee repo rt did not relate to the i mp u gned year , being dated 8 t h F ebru ar y 200 6. Th at the finding s to th e effec t that no other activity w as being carried out b y th e asses see except clin ical tr ials was in cor rect as the as sessee w as man u fa ctur in g Eno and C rocin.
The findi ngs o f th e A O th erefo re th at the as sessee w as carrying out clinical trial s for G SK Biolog icals, w e find , has been demonstrated be fo r e us to be not b as ed on rele vant facts. A nd the Ld. CI T(A ) h as merely reiterat ed th e find ing s o f th e AO desp ite sp eci fic fact ual an d legal con ten tion s made by th e ass essee to th e con tr ar y. We have also noted that the deter minati on o f P E of G S K Bio lo gicals S A, is pen ding be fo r e the H on' ble D elhi High C ourt in wr it p etitions file d b y GSK Biologicals S A again st proceeding s initiated u/s 148 o f the Act on th e b asis that th er e exi sts P E, for A. Y 200 5-06 TO 200 9-10 .
ITA No.2453/Del/2016 A.Y. 2005-06
& ITA No.532/Del/2014 A.Y. 2006-07 40 Considerin g the ab ov e, w e are of th e v iew that it w ou ld be in the fitn ess o f ma tter to re sto re t he issue b ack to th e A O for adjud icatio n a fres h in acco rdanc e w ith law after g iv ing d ue oppo rtunity o f he ar in g to the asses see and a fter con sidering all fact ual and leg al co ntentions raised b y it.
G ro und N o 2. 2 - 3. 4 are acco rdi ngl y resto re d bac k to the A O w ith the above directio ns and there for e stand allow ed fo r statistical purp oses.
19. D uring the co urse of hearin g th e as sessee raised add itional grou nds be for e u s u nder Ru le 11 o f the In co me Tax Rules, 19 62 vid e ap plication dated 2 0 t h day o f M ay 2 021. The add itiona l grou nds raised read as un der:
"1. That on the facts and circumstances of the case and in law, the assessing officer ought to have allowed, in pursuance to law clarified by the Hon'ble Rajasthan High Court in the case of Chambal Fertilisers and Chemicals Ltd vs JCIT: D.B. ITA No.52/2018 and Hon'ble Bombay High Court in the case of Sesa Goa Ltd vs JCIT: 117taxmann.com 96 (Bom HC), deduction of Rs. 43,95,675, being education cess computed on returned income, paid by the Appellant before the due date of filing return of income for the subject assessment year.
2. That on the facts and circumstances of the case and in law, pursuant to law clarified in the case of Chambal Fertilisers and Chemicals Ltd (supra) and Sesa Goa Ltd (supra), the assessing officer also ought to have allowed further deduction in respect of any additional amount paid by the Appellant towards education cess during the financial year relevant to the subject assessment year."ITA No.2453/Del/2016 A.Y. 2005-06
& ITA No.532/Del/2014 A.Y. 2006-07 41
20. O n th e ad missio n of th e afores aid ad dition al g rou n ds th e Ld. Coun sel fo r th e a ssessee co ntend ed th at th e issu e ra ised in th e add itional gr ound s related to c lai m of t he assessee o f education cess p aid as allow able dedu ction. The Ld . Co unsel fo r th e assessee con tended that th e issu e sto od square ly covered by th e decision o f the H on 'ble H igh Cour ts o f B o mbay and R ajastha n in the case o f Sesa G oa Ltd. Vs. JCI T, 117 Tax man n. co m 96 ( Bo m) an d Ch ambal Fertilizer s & Che micals Lt d. V s. JCIT (D B) in ITA N o. 52 /2 018, order dated 3 1. 07. 20 18 respectively . H e fur th er c on tended that follo w ing the afo r esaid decision th e ITAT in a n umb er o f cases had held edu catio n cess as an allow ab le claim. He fur th er stated that th ere w as no con tr ar y decisio n of any o th er H igh Co urts on the issu e. I n view o f th e ab ove h e con tend ed that sin ce a legal grou nd has been r aised requir ing no fr esh inve stigatio n into th e fact s th e sa me b e ad mitted. In this regard he relie d upo n th e decisio ns o f the Ho n'b le A pex Cou rt in th e case of N . T.P.C. Li mited Vs. CI T, 22 9 ITR 38 3 and Jute Cor poratio n o f I ndia V s. CIT, 187 ITR 688 . O n the meri ts o f th e case, he r elie d upon th e decisio n o f th e H o n'ble H ig h C o urts as re ferred to abo v e, stating that the issu e w as sq uarely covered in favou r of the assessee.
21. The Ld. D R raised no ob jection to the admissi on o f th e add itional gr oun d bu t conten ded t hat since t he sa me w ere b eing ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 42 raised for the firs t time, they need ed to be r estor ed to the CI T( A) , pointin g ou t th at th e H on'ble M adhy a P radesh High C ourt in th e case of Co mmis sio ner of In co me Tax vs Tollara m Hasso mal(M P ) 298 I TR 2 2 had h eld that the add iti onal g rou nds a d mi tted b y th e Tribu nal an d raise d for the f ir st time be for e it, need t o be r estored back to th e CI T( A) for adjudication.
To this the Ld . C ounsel for the asses see con ten ded th at as per R ule 11 o f the R ules, the I TA T is en tit led to ad mit the add itional grou nds an d th e ad mission is n o t re str icted to mere ad mitting it only and not adjud icatin g it. That the decision r elied up on by th e Ld. DR w as rendered in the facts o f th o se case w herein it w as con sid er ed exp edi ent by t he H on'ble H igh Co urt to restore th e issue to th e CIT(A ) for pro pe r adjudi catio n a fter ad mis sion o f th e add itional g ro un ds raised by the ass essee. H e conten ded th at th e decisio n reli ed u p on by the Ld . D R co uld not b y an y str etch b e said to b e layin g dow n a b lanke t pro position that additio na l grou nds r aised n eed to be con sider ed by th e ITAT o nly for th e purp ose w hether th ey can b e ad mitt ed or not and th e adjud icatio n of the same has inv ar iably to be left and r estor ed to the C IT( A ). On the merit s o f t he issue, the Ld. D R stated th at the issue w as cov er ed ag ain st th e assessee by the decision o f t he H on'ble A pex Cour t i n th e case o f CIT Vs. K.S riniv asan, 83 ITR 346 w herein th e ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 43 Ho n'ble A pex Co u rt had held th at all sur charg e a n d add itio nal su rcharge levied o n inco me tax w ere in the natur e o f in co me ta x itsel f and th e ed ucation ces s, therefor e, was in the n atur e o f inco me tax and th u s n ot allo wable as deduction b y vir tue o f th e prov isions o f secti on 40 (a) (ii) o f th e A ct. The Ld. DR p ointed ou t that th e decision o f the H on 'ble H igh C ourt's r elied u pon b y th e Ld. Co unsel fo r the assessee had n ot c onsidered th e deci sio n o f th e Ho n'ble A pex Cou r t in the case o f K.S rinivasan (su pr a) and b ei ng the decision of the H on'b le A pex Cour t, the same w ould pr ev ail.
22. We h ave h eard b oth the parties. D ealin g first w ith th e ad mission o f th e add itional gro u nd r aised as ab ove be for e us, th e assessee has r aise d a leg al gro und r elating to admi ssibility o f edu catio n ces s p aid as a deduction an d the adjudi ca tion o f th e sa me sur el y does n ot r eq uire any inv e stigation o f fresh facts. Even the Ld. D R h as not objected to th e ad mis sio n o f th e same. Th e add itional g ro un ds r aised are accord in gly a dmitted for adjud icatio n. The o rder was p rono unced du rin g the cour se o f hearing .
N ow comin g to th e con ten tio n o f t he Ld. DR th at th e add itio nal grou nd, h aving no t been raised befo re the CI T( A) an d th us no t dealt with by h i m , needs to b e se nt back to h i m for ad jud ication , we are not conv in ced w ith the co ntention o f the Ld. DR. S ection ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 44 253 o f the A ct gr ants right o f app eal to th e asses see, aggr ieved by any of t he or ders speci fied ther ei n , to the ITA T. A s per S ection 254 o f the A ct, the ITA T may a ft er giving both the pa rties to th e app eal an oppo rt un ity of b eing hear d, p ass such or der s thereon as it d ee ms fit. R ule 11 o f the I TA T Rules,1 963 ,w hich d eals w ith Gr ound s w hich may be tak en in ap peal, per mits raising o f add itional gr o unds by appellants, bein g o ther th an th os e raised in the me mo rand u m o f ap peal, sub ject to the same being h ear d by th e leav e o f the Tribu n al. The Rule fu rt h er p er mits the Trib un al to no t con fine itsel f to the gr oun ds raised while deciding an appeal.
Read in g the ab ov e togeth er , there is no restrictio n to th e pow er of th e Trib un al in enter tainin g an additio n al gr ound raised bef ore it f or ad ju d ication. A s long as all facts are a vailable on recor d all ad ditio n al grou nds, includ in g th ose raised fo r th e fir st time can be adjudi cated b y the ITA T. This issue stan d s settled by the apex cour t in th e case o f N TPC Li mited (su p ra) w here on th e question w hether th e Tribun al has jur isdiction to exami ne a question o f law not raised bef ore t he lo wer autho riti es, it w as catego rically h eld that th e pow er o f th e I TA T in dealin g w ith app eals has been expressed in the s tatute in th e w id est possible ter ms. That there is no r estr iction o f it s po wer to d ea l o nly w ith tho se issues w hich arise fr o m the CI T(A ) 's order and any q uestion ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 45 of law , facts relat ing to w hich are o n r ecor d , can b e raised be for e the Tribun al fo r th e firs t ti me. It w as emphasized in th e decision that th e pu rpo se o f assess ment pr oce eding s is to c orre ctly asses s the tax liab ility o f as sessees in acc ordance w ith law and to th is end the po wer o f t he Tr ib u nal cann ot be restr icted on l y to decid e issues w hich arise fr o m t he C IT( A )'s or der . The d ecision o f th e Ho n'ble apex cour t on the issu e is as un der :
"The Tribunal has framed as many as five questions while making a reference to us. Since the Tribunal has not examined the additional grounds raised by the assessee on the merits, we do not propose to answer the questions relating to the merits of those contentions. We reframe the question which arises for our consideration in order to bring out the point which requires determination more clearly. It is as follows:
"Where on the facts found by the authorities below a question of law arises (though not raised before the authorities) which bears on the tax liability of the assessee, whether the Tribunal has jurisdiction to examine the same ?"
3. Under s. 254 of the IT Act the Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit. The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceeings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction denied, we do not see any reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of that item. We do not see any reason to restrict the power of the Tribunal under s. 254 only to decide the grounds which arise from the order of the CIT(A). Both the assessee as well as the Department have a right to file an appeal/cross-objections before the Tribunal. We fail to see why the Tribunal should be prevented from considering questions of law arising in assessment proceedings although not raised earlier.
4. In the case of Jute Corporation of India Ltd. vs. CIT (1990) 88 CTR (SC) 66 :
(1991) 187 ITR 688 (SC) : TC 7R.343, this Court, while dealing with the powers of the AAC observed that an appellate authority has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations, if any, prescribed by the statutory provisions. In the ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 46 absence of any statutory provision, the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter. There is no good reason to justify curtailment of the power of the AAC in entertaining an additional ground raised by the assessee in seeking modification of the order of assessment passed by the ITO. This Court further observed that there may be several factors justifying the raising of a new plea in an appeal and each case has to be considered on its own facts. The AAC must be satisfied that the ground raised was bona fide and that the same could not have been raised earlier for good reasons. the AAC should exercise his discretion in permitting or not permitting the assessee to raise an additional ground in accordance with law and reason. The same observations would apply to appeals before the Tribunal also.
5. The view that the Tribunal is confined only to issues arising out of the appeal before the CIT(A) takes too narrow a view of the powers of the Tribunal [vide, e.g., CIT vs. Anand Prasad (1981) 128 ITR 388 (Del) : TC 8R.1021, CIT vs. Karamchand Premchand (P) Ltd. (1969) 74 ITR 254 (Guj) : TC 8R.547 and CIT vs. Cellulose Products of India Ltd. (1985) 44 CTR (Guj) 278 (FB) : (1985) 151 ITR 499 (Guj)(FB) : TC 8R.965]. Undoubtedly, the Tribunal will have the discretion to allow or not allow a new ground to be raised. But where the Tribunal is only required to consider a question of law arising from the facts which are on record in the assessment proceedings we fail to see why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee.
6. The reframed question, therefore, is answered in the affirmative, i.e., the Tribunal has jurisdiction to examine a question of law which arises from the facts as found by the authorities below and having a bearing on the tax liability of the assessee. We remand the proceedings to the Tribunal for consideration of the new grounds raised by the assessee on the merits."
In view o f the settled po siti on as ab ov e, w e do not fin d any mer it in th e ar gu ment o f t he Ld. D R and ev en the case law relied upon by th e Ld. DR, w e find , is o f n o assistance as it d oes no t la y a blan ket pr oposit ion as canv assed by the Ld. DR , bu t has been ren dered in the fac ts o f th e case b efo re the H on'b le H igh C our t. In the said case the H o n'ble H igh C our t fou n d that the ITA T had set aside the ord er o f t he CIT(A ) and an nulled the o rder o f t he AO by deciding t he app eal on the add it ional grou nds r aised afte r ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 47 ad mitting the m f or adjud icati on. Tha t instead o f con ce ntrating o n the issue s alr ea d y decided by th e CIT(A ) , the Tri bunal on ly con centrated on th e g roun ds w hich h ad not b een ta ken befo re hi m and decid ed the appeal an nullin g the assess men t. In th is backg roun d t he Ho n'ble H igh co urt held th at the Tr ibu nal had exh ib ited un d ue haste in deciding th e app eal by ad ju dicating only the issues w h ich w er e n ot even the re bef ore the C I T( A ) and that su ch appro ach w as neith er legal nor pr oper. In the pre s ent case it is not that th e outco me o f the entir e ap peal depen ds on th e add itional g ro und raised. O n the co ntrary the ad d itio nal gro und impacts only o ne claim o f the asses see to d ed uction o f education cess paid, w hich n either requir es any fact s to b e uncov ered or ev en ver ified or investi gated. Th er e is no fin ding o f fact to be recorded vis a v is th e i mpug n ed issue an d henc e no i mpediment t o th e ITA T in ad jud icating th e issue. Th er efo r e w e fin d there is n o r eason to restor e it for ad ju d ication to t he C IT( A ). The co ntention of the Ld . D. R. therefo re th at the addition al gr ound raised should be restor ed to the C IT(A ) is accor dingly dis missed. No w co ming to th e issue to be adjud icated, w hether the education cess p aid by the assessee an d calculated as pr opo r tion o f th e inco me tax, is allow ab le as expendi ture. This issu e arises in th e con text o f the prov ision s o f sectio n 40( a) (ii) of th e A ct wh ich ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 48 deals w ith cer tai n amou nts wh ich are not allow able w hile co mputing th e in come und er the he ad 'b usiness an d pr o fession' and su b- clause(ii) thereo f men tions t ax es paid o n pro fit s an d gains of bu sin ess and pr ofes sion as not allow able. Th e r elevan t prov isions o f section r ep rodu ced as under:
"40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",--
(a) in the case of any assessee--
(i) ...........................
.................................
(ii) any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains.
Explanation 1.--For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes and shall be deemed always to have included any sum eligible for relief of tax under section 90 or, as the case may be, deduction from the Indian income-tax payable under section 91.
Explanation 2.--For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes any sum eligible for relief of tax under section 90A."
23. U ndo ubted ly , the decision re ferre d to b y the Ld. Coun sel for the assessee o f t he H on 'ble H ig h Co u rts o f B o mb ay an d R ajasthan hav e categ o rically held ed ucation cess to b e not c overed u /s 40(a)( ii) o f the A ct. The reasoning bein g that th is p rov ision ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 49 originally i ncluded cess also w hich w as specifically o mit ted late r on and even the CBD T in Circular N o. 91/58 /6 6-ITJ(1 9 ) dated 1 8- 05-1 967 clar ifie d that cess was no t covered u /s 4 0(a)( ii). But at the same ti me w e ar e aw are of and ev en the Ld D R has p ointed ou t the d ecision o f t he H on'ble Ap ex Cou rt in the c ase o f K. Sr in iv asan ( supr a) w herein it has b een catego rically he ld that th e "tax on inco me" w ould in clude all sur ch ar ge an d additio nal su rcharge levied o n it. The Ho n'b le Ap ex cour t w as seized w ith the issue w h ether su rchar ge is to b e paid by assesse es on th eir inco me co nsiderin g that it is n ot men tion ed in the ch arg ing sectio n of the A ct. Th e H o n' ble ape x cou r t , i n a det ailed or der tr acin g th e con cept o f surchar ge in taxati on law s, its legislative h istory , its dictio nary mea nin g an d th e lang ua ge emp loy ed in t he F inance Bills speci fy in g ra tes o f tax es to b e levied an d t he sur charge an d add itional sur ch ar g e to be pai d thereon , fo und th at it o nly increased the r ate of tax . A ccor dingl y th e H on'b le apex co urt held that su rchar g e an d addition al s urc harged levied und er the A ct for med p art o f tax and t here for e w as liable to b e pai d as per th e charg in g p rov isi on o f the A ct. Th e re levant po rtion o f t he o rder o f the H on' ble ap ex cou rt in this reg ar d is as under;
" Sec. 2 of the Finance Act, 1964, which is headed as "Income- tax and super- tax" provides in sub-s. (1) that income-tax and super-tax shall be charged at the rates specified in Parts I and II of the First Schedule respectively and that in ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 50 cases to which certain paragraphs of those parts apply these taxes shall be increased by a surcharge for the purpose of the Union. According to sub-s. (2) where the total income of an assessee not being a company includes any income chargeable under the head "Salaries" income-tax and super-tax payable by the assessee on the salary portion of the total income shall be the proportionate amount payable according to the rates provided in the Finance Act, 1963. Under s. 2 of the Finance Act, 1963, income-tax was to be charged at the rates specified in Part I of the First Schedule and super-tax at the rates specified in Part II of that Schedule. The income-tax was to be increased in the cases mentioned by a surcharge and additional surcharge for the purpose of the Union and a special surcharge. The super-tax was, however, to be increased by a surcharge for the purpose of the Union and a special surcharge. It will be noticed that s. 2(2) of the Finance Act, 1964, did not contain mention of any of the surcharges. This led to the controversy which resulted in the reference.
4. Before the High Court the assessee relied on ss. 4 and 5 of the IT Act, 1961, hereinafter called "the Act". These sections provide for charge of income-tax and super-tax. It was pointed out that surcharges was treated in the Finance Acts as a tax different from the income-tax and super-tax and that surcharge was levied by the Finance Act while the income and super-taxes were levied by the Act. Reference was made in this connection to the First Schedule to the Finance Act, 1963. Part I of that Schedule dealt with "income-tax and surcharge on income- tax". Under that heading were given the rates of income-tax as also the rates of surcharge. Similarly, Part II of the Schedule dealt with super-tax and surcharge on super-tax and under that heading the rates of super-tax and the rates of surcharge on super-tax were given. Among the surcharges in the case of income- tax were mentioned : (a) a surcharge for the purpose of the Union, (b) a special surcharge and (c) an additional surcharge. As regards the surcharge on super- tax there was mention of (a) a surcharge for the purpose of the Union and (b) a special surcharge. The High Court examined the aforesaid provisions of the Finance Acts of 1963 and 1964 and Arts. 270 and 271 of the Constitution apart from the legislative entry 82 in List I of the Seventh Schedule. It came to the ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 51 conclusion that income-tax and super-tax did not include surcharge and that these were called by different nomenclature in all the statutory provisions.
5. In order to determine the point before us, which is of considerable complexity, it is necessary to trace the concept to surcharge in taxation laws in our country. The power to increase federal tax by surcharge by the federal legislature was recommended for the first time in the report of the committee on Indian Constitutional Reforms, Volume I, Part I. From paragraph 141 of the proposals it appears that the word "surcharge" was used compendiously for the special addition to taxes on income imposed in September, 1931. The Government of India Act, 1935, Part VII, contained provisions relating to finance, property, contracts and suits. Secs. 137 and 138 in Chapter I headed "Finance" provided for levy and collection of certain succession duties, stamp duties, terminal tax, taxes on fares and freights, and taxes on income, respectively. In the proviso to s. 137 the Federal legislature was empowered to increase at any time any of the duties or taxes leviable under that section by a surcharge for Federal purposes and the whole proceeds of any such surcharge were to form part of the revenues of the federation. Sub-s. (3) of s. 138 which dealt with taxes on income related to imposition of a surcharge. Under the Government of India Act, 1935, the surcharge was levied for the first time by the Indian Finance No. 2 Act, 1940. Sec. 3(1) of that Act read :
"Subject to the provisions of this section, the rates of income-tax and rates of super-tax...imposed by sub-s. (1) of s. 7 of the Indian Finance Act, 1940, shall, in respect of the year beginning on the first day of April, 1940, be increased by a surcharge for the purposes of the Central Government."
Similar phraseology was employed in respect of surcharge on super-tax. The provisions relating to surcharge were omitted in the Finance Acts of 1946 to 1950. It was reintroduced in the Finance Act of 1951 and the same has been continued in the Finance Acts of subsequent years. Special surcharge came to be levied in the Finance Acts of 1958 to 1964 and 1966 to 1971 and the additional surcharge was levied only by the Finance Act of 1963. ITA No.2453/Del/2016 A.Y. 2005-06
& ITA No.532/Del/2014 A.Y. 2006-07 52
6. In the Finance Act of 1951, s. 2 relating to income-tax and super-tax provided that these taxes would be levied at the rates specified in Parts I and II of the First Schedule increased in each case by a surcharge for the purpose of the Union. The Finance Act of 1952 was a short document and s. 2 thereof simply provided :
"The provisions of s. 2 of, and the First Schedule to, the Finance Act, 1951, shall apply in relation to income-tax and super-tax for the financial year 1952-53 as they apply in relation to income-tax and super-tax for the financial year 1951-
52...."
There was no specific mention whatsoever of surcharge in s. 2 nor was there any modification of the First Schedule to the Finance Act of 1951 which contained the rates, etc., relating to the surcharge. Similar state of affairs existed with regard to the Finance Acts of 1953, 1954 and 1957. Sec. 2 of the Finance Act, 1971, is to the effect that the provisions of s. 2 and of the First Schedule to the Finance Act, 1970, shall apply in relation to income-tax for the assessment year or, as the case may be, the financial year commencing on the first day of April, 1971, as they apply in relation to income-tax for the assessment year commencing on the first day of April, 1970, with certain modifications set out in the section. The First Schedule to the Finance Act of 1970 was modified and the Schedule so modified contains provisions for surcharge on income-tax. It is significant that s. 2 of the Finance Act of 1971 speaks only of income-tax and not of any surcharge. It is only in the modifications made in the Schedule to the Finance Act of 1970 that there is provision for a surcharge.
7. The above legislative history of the Finance Acts, as also the practice, would appear to indicate that the term "income- tax" as employed in s. 2 includes surcharge as also the special and the additional surcharge whenever provided which are also surcharges within the meaning of Art. 271 of the Constitution. The phraseology employed in the Finance Acts of 1940 and 1941 showed that only the rates of income-tax and super- tax were to be increased by a surcharge for the purpose of the Central Government. In the Finance Act of 1958, the language used showed that income-tax which was to be charged was to be increased by a ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 53 surcharge for the purposes of the Union. The word "surcharge" has thus been used to either increase the rates of income-tax and super-tax or to increase these taxes. The scheme of the Finance Act of 1971 appears to leave no room for doubt that the term "income-tax" as used in s. 2 includes surcharge.
8. According to Art. 271, notwithstanding anything in Arts. 269 and 270, Parliament may at any time increase any of the duties or taxes referred to in those articles by a surcharge for the purposes of the Union and the whole proceeds of any such surcharge shall form part of the consolidated fund of India. Art. 270 provides for taxes levied and collected by the Union and distributed between the Union and the States. Clause (1) says that taxes on income other than agricultural income shall be levied and collected by the Government of India and distributed between the Union and the States in the manner provided in cl. (2). Art. 269 deals with taxes levied and collected by the Union but assigned to the States. The provisions of Art. 268 which is the first one under the heading "Distribution of revenue between the Union and the States" relate to duties levied by the Union but collected and appropriated by the States. Thus, these articles deal with the levy, collection and distribution of the proceeds of the taxes and duties mentioned therein between the Union and the States. The legislative power of Parliament to levy taxes and duties is contained in Arts. 245 and 246(1) read with the relevant entries in List I of the Seventh Schedule.
9. As mentioned before, the legislative entry 82 in List I relates to taxes on income other than agricultural income; income-tax, super-tax and surcharge would all fall under this entry. It is exercise of the legislative power conferred by that entry that the Union Parliament enacts the provision in the Finance Act each year relating to them. It is that Act which authorises these taxes to be charged and prescribes the rates at which they can be charged. Sec. 4 of the Act simply provides that where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates income-tax at that rate or those rates shall be charged in accordance thereto and subject to the provisions of the Act. Sec. 95, which was omitted by the Finance Act of 1965, contained similar provision with regard to super-tax. Although under the Act s. 4 is the charging ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 54 section yet income-tax can be charged only where the Central Act which, in the present case, will be the Finance Act, enacts that income- tax shall be charged for any assessment year at the rate or rates specified therein. The distinction made by the High Court that the surcharges are levied only under the Finance Act and income- tax under the Act may not hold good if the above view which has been pressed on behalf of the revenue were to be accepted. In our judgment it is unnecessary to express any opinion in the matter because the essential point for determination is whether surcharge is an additional mode or rate for charging income-tax.
10. The meaning of the word "surcharge" as given in the Webster's New International Dictionary includes, among others, "to charge (one) too much or in addition..."; also "additional tax". Thus, the meaning of surcharge is to charge in addition or to subject to an additional or extra charge. If that meaning is applied to s. 2 of the Finance Act, 1963, it would lead to the result that income-tax and super-tax were to be charged in four different ways or at four different rates which may be described as : (i) the basic charge or rate (In Part I of the First Schedule); (ii) surcharge; (iii) special surcharge; and (iv) additional surcharge calculated in the manner provided in the Schedule. Read in this way, the additional charges form a part of the income-tax and super-tax. It is possible to argue, and that argument has been commended on behalf of the Revenue, that the word "surcharge" has been used in Art. 271 for the purpose of separating it from the basic charge of a tax or duty for the purpose of distributing the proceeds of the same between the Union and the States. The proceeds of the surcharge are exclusively assigned to the Union. Even in the Finance Act itself it is expressly stated that the surcharge is meant for the purpose of the Union.
11. It would appear that, since the Finance Act, 1943, upto the Finance Act, 1967, a provision was made for taxing the income under the head "Salaries" according to the provisions of the Finance Act of the preceding year rather than of the current year if the assessee had any income in addition to his income by way of salary. According to the Tribunal this was done because if the income under the head "Salaries" was to be assessed at the rates fixed by the Finance Act ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 55 enacted for the current year it would entail considerable administrative work in the form of a refund or collection in the final assessment. Since by the Finance Act of 1967, this method or procedure was dropped we do not consider that much significance can be attached to this aspect.
12. In the result we are unable to sustain the view of the High Court. The question that was referred must be answered in the affirmative and in favour of the Revenue. In view of the nature of the point involved the parties are left to bear their own costs in this Court. The appeal by certificate is dismissed." Considerin g th e decision o f the H on'ble A pex Co urt, wh en applied to the pr ovisio ns of section 4 0(a)( ii ) o f th e A ct, it is abun dan tly clear th at the tax levied on p ro fits or ga in o f any business or pro fession, w hich is not allow able as per the said sub-section, wo uld include all surcharge and addition al su rc har ge lev ied thereon .
No w coming to th e nature of edu cation cess,the F in ance Bill, by vir tu e o f w hich t he rate o f taxes ar e d eter mi ned i n Schedule-1 thereo f, deals w ith the levy o f ed ucat io n cess at Chapte r-II(1 2) as under:
(12) The amount of income-tax as specified in sub-sections (4) to (10) and as increased by the applicable surcharge, for the purposes of the Union, calculated in the manner provided therein, shall be further increased by an additional surcharge, for the purposes of the Union, to be called the "Health and Education Cess on income-tax", calculated at the rate of four per cent of such income-tax and surcharge so as to fulfil the ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 56 commitment of the Government to provide and finance quality health services and universalized quality basic education and secondary and higher education:
24. A peru sal o f th e a bo ve reveal s that t he educatio n cess is an add itional surc har ge lev ied by the Union. C onsidering that tax on inco me has be en s o d efined by the Ho n'ble Ap ex Co ur t as above as including sur charg e an d add itional s urcharg e, it stands settled there fo re, that th e ed ucatio n cess is in the natur e of tax lev ied on the inco me fr o m the b usiness an d pr ofe ssion an d thus sp ecifically not allow able as p er th e pro v isio ns o f s ection 40( a) (ii) of the A ct.
There is n o scop e fo r an y other in te rp retation / v iew on the iss u e con sid er ing t he decisio n o f th e apex cour t in K . S rinivasan ( supra) read w ith the F in an ce Bill levying edu cation cess. We t herefore h old that educatio n ce ss falls w ithin th e scop e o f amounts not allowed as deductio n u/s 4 0(a)( ii) of the A ct. The addi tio nal g r oun ds r aised by the assessee ar e, there fo re, dis missed.
I n effect the a p p eal o f t he as sessee is p ar tly al low ed for statistical pu rposes .
We no w take up the ap peal of the asse ssee in ITA No.5 32/Chd /2 01 4 fo r assessment year 2 006- 07. ITA No.2453/Del/2016 A.Y. 2005-06
& ITA No.532/Del/2014 A.Y. 2006-07 57 ITA No. 532/Chd/2014(A.Y.2006-07):
25. G rou nd N o. 1 raised by th e assess ee i n this ap peal is gen er al an d hen ce requires no adjudicated .
26. G rou nd N os. 2 to 2.4 raised by the assessee are as und er :
"2. That the assessing officer erred on facts and in law in disallowing a sum of Rs.6,12,00,000, being 1/3rd of the expenditure on advertisement and publicity of Rs.18,36,00,000 incurred by the appellant holding that the expenditure was incurred for brand building for the entities owning the brand.
2.1 That the assessing officer erred on facts and in law in holding that there was a strong nexus between the advertisement expenditure and revenues of the associated enterprises and, therefore, the associated enterprises should contribute towards advertisement expenditure incurred by the assesses in India.
2.2 That the assessing officer erred on facts and in law in not appreciating that the assessee is the exclusive licensee authorized to manufacture and sell products under the brand name in India and the entire benefit of such expenditure accrued to the appellant and no one else.
2.3 That the DRP erred on facts and in law in affirming the order passed by the assessing officer allegedly holding that "there is no denying of the fact that incurring of advertisement expenses has resulted in promotion of brand name owned by the foreign associated enterprise......... It cannot be said that entire expenses have been incurred exclusively and wholly for the purpose of the business of the appellant."
2.4 That the assessing officer erred on facts and in law in not appreciating that the advertisement and publicity expenses were incurred by the appellant in the course of carrying on of its business and were allowable deduction as business expenditure."
27. It w as common g r oun d th at th e issu e r aised in the abo ve ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 58 grou nds w as iden tical to that raised in gr oun d N o .1 o f I TA No.2 453 /D el/201 6 and ou r deci sio n r en dered ther ein at para 6 sh all app ly mutatis mutandis to these g roun ds also. Gr ound No .2 -2. 4 accor din gly ar e allow ed.
28. G rou nd N os. 3 to 3.9 raised by the assessee are as und er :
"3. That the assessing officer erred on facts and in law in making disallowance of purchase of vaccine amounting to Rs.19,80,75,340 from GlaxoSmithKline Biological S.A., invoking provision of section 40(a)(i) of the Act alleging that the appellant had failed to deduct tax at source from such payments.
3.1 That the assessing officer erred on facts and in law in holding that GSK Biological SA had a permanent establishment in India and was, therefore, taxable in India in as much as (i) vaccine development activities of GSK Biological SA was being carried out through the fixed place of business in India, (ii) GSK Biological SA was conducting its business in India through the facilities in India, (iii) the core business activities of GSK Biological SA were being carried out in India and (iv) GSK Biological SA had a centre for vaccine clinical trial of R&D in Bombay, Bangalore and Delhi.
3.2 That the assessing officer erred on facts and in law in holding that the appellant was responsible for undertaking any clinical trial as well as research and development activities on behalf of GSK Biological SA, the resultant new/ improved product of which belongs to GSK Biological SA.
3.3 That the assessing officer erred on facts and in law in holding that clinical trial activities constitute permanent establishment of GSK Biological SA in India within the meaning of Article 5 of Double Taxation Avoidance Agreement (DTAA) between India and Belgium on account of the following:ITA No.2453/Del/2016 A.Y. 2005-06
& ITA No.532/Del/2014 A.Y. 2006-07 59 b. Premises used as a sales outlet or for receiving or soliciting orders with respect to vaccines under Article 5(2)(i) of the DTAA;
a. Fixed place of business in the form of place where clinical trials and research and development takes place including but not limited to CDMCI and BDSI, Bangalore under Article 5(1) of the DTAA;
c. CDMCI, Bangalore under Article 5(2)(c) of the DTAA;
d. BDSI, Bangalore under Article 5(2)(c) of the DTAA; and e. Dependent agent PE in the form of the appellant under Article 5(4) of the DTAA.
3.4 That the assessing officer erred on facts and in law in alternatively holding that the assessee constituted business connection with GSK Biologicals SA SA within the meaning of section 9(1)(i) of the Act.
3.5 That the assessing officer erred on facts and in law in holding that "all the core activities related to vaccine development are undertaken in India on behalf of M/s.
GSK Biologicals SA instead of operating a full- fledged centre in the form of a branch has outsourced its core activity to the Indian company, the assessee". 3.6 That the assessing officer erred on facts and in law in holding that "in fact M/s. GSK Biological SA is getting its works done in India through the appellant and other affiliates of the GSK group, which have no intellectual property right in the vaccines they develop or undertake clinical trials for".
3.7 That the DRP erred on facts and in law in upholding the aforesaid findings of the assessing officer on the basis of assumption and surmises without appreciating the merits of the matter.
3.8 That the assessing officer erred on facts and in law in not appreciating that the appellant did not carry out any clinical trial and research and development activity on behalf of GSK Biological SA in India.
ITA No.2453/Del/2016 A.Y. 2005-06
& ITA No.532/Del/2014 A.Y. 2006-07 60 3.9 That the assessing officer erred on facts and in law in not appreciating that no clinical trial / research and development was undertaken in India in respect of various vaccines imported by the appellant during the relevant previous year."
29. It w as common g r oun d th at th e issu e r aised in the abo ve grou nds w as identical to that r aised in gr oun d No . 2.2 - 3. 4 in ITA N o. 245 3/D el/2 016 and our decis ion rend ered therei n at para 18 o f o u r or der a bove, shall app ly w ith equal fo rce to these grou nds also.
The iss ue raised accor dingly is res to red bac k to the A O for adjud icatio n afres h in accord an ce w ith the d ir ection in ITA No.2 453 /D el/201 6 and G r ound No. 3-3 .9 stand allow ed for statistical pu rposes .
30. G rou nd N os. 4 & 4 .1 raised by the assessee ar e as u nder:
"4. That the assessing officer erred on facts and in law in disallowing product development expenses amounting to Rs.14,55,000 on the alleged ground that the said expenditure was capital in nature and gave enduring benefit to the appellant.
4.1 That the assessing officer erred on facts and in law in not appreciating that the aforesaid expenses were operational expenses incurred by the appellant in the course of carrying on its business and the same did not result in the creation of a capital asset nor any advantage in the capital field so as to be regarded as capital expenditure."
31. The issue raised i n the aforesaid g r ou nds relates to cl aim of P ro duct D evelo pmen t & Resear ch Exp enses to t he tune o f ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 61 Rs.1 4. 55 lacs wh ich w as no t allow ed to the assess ee. These w ere incur red b y the assessee fo r carr y in g out consu m er surv ey mar ket research & co nsu mer analys is in respect o f p rod u cts that fro m par t o f the as sessee's line o f bu siness. The Ld. Cou nsel for the assess ee co nte nd ed th at the is su e stood squarely cov er ed in fav our o f the asses see by t he d ec ision o f the ITAT in t he case o f GlaxoS mithK lin e C onsu mer H ealth care Ltd. for assessment years 199 8-9 9 to 2004 -05. Copy o f the said o rder was placed bef ore us. O ur atte ntion w as dr aw n to the re levant p orti on o f the order. I t w as al so pointed out t hat identi cal iss ue stood adjud icated in the case o f the asses see by the I TA T i n earlier years an d t he is su e h ad been rest or ed back to th e AO . O ur attention w as dr aw n to t he or d er o f th e ITA T in the c ase o f t he assessee fo r A .Y 19 98- 99 and 199 9-2 000 in ITA No 2099 /D el/20 02 421/D el/2 00 3 and ITA No.2 645/D el/200 2, 131 6/D el/2 003, Rel evant por tion is as un der:
"After hear ing bot h the p arties we a re o f th e vie w that b oth th e authoritie s below have dispose d o ff t he issue b y ma king general observatio ns w itho u t d iscussing the na ture an d im pact o f su ch expenditure. We th erefore set a side t he orders of the C IT ( A) fo r both th e years on t his issue an d resto re the m atter to the AO fo r fresh adj udicatio n after exam ining the nature a nd im pa ct of th e ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 62 expenditure by t h e assessee vis a vis the e xistin g b u sin ess in term s o f section 37"
32. The Ld. D R, o n the other hand, po in ted ou t that th is p lea had been r ais ed b y the assessee bef ore the D RP also wh ich on nothing that the ex pen ses were incurr ed befor e actu al lau nch o f the project, held t hat the relia nce pl aced by the Ld. Co unsel fo r the assessee on the decision o f the ITA T in the case of GlaxoS mithK lin e Consu me r H ealthcare Ltd. (su p ra) w as mi splaced . S he fur ther poin ted o ut fr om the find in gs o f the D RP at p ag e 32 o f its or der that the D R P noted that the imp ugn ed exp en ses w ere cap ital in natur e as the p rodu ce endu rin g benefi t in resp ect of the new pro ject b eing launched, she, th er efore, con tended that the plea of t he Ld. C ounsel fo r the as se ssee w as, there fo re, no t maintainable.
33. We hav e hear d b ot h the p ar ties. A dmittedly id en ti cal is sue aro se in th e prece ding year also in the case o f the assessee and the ITA T d eemed it fit to r estor e it back to the AO for adjud icatio n afresh aft er exa mining t he nature and i mp act o f the exp en ses vis a vis the existing b usin ess o f th e as sess ee. I n the presen t case also the Revenu e has decided the issu e based o n gen er al obs ervatio n s w ithout ex amin ing the natu re and i mp act o f the expens es on th e existing busine s s o f the assessee. Even the ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 63 decisio n o f t he ITA T in th e case o f Glaxo S mithkl in e co nsu mer Health care Ltd. (su pra), relied u pon b y the Ld . Coun sel fo r the assessee , we find , r en dered its jud gment after exami ning the fact s relati ng to th e exp enses vis a v is its na ture an d i mp act on business. Th e issu e th er efor e, w e ho ld, need s to be r eco nsider ed by the A O fo r w h ich purp ose w e re sto re it to the A O with the dir ectio n to ad ju dicate it i n accor d an ce w ith the d irecti on o f t he ITA T in the case of th e asses see fo r A. Y 1 998- 99 an d 19 99- 2000 .
G ro und o f ap peal N o 4 & 4. 1 a re allow ed fo r statistical purp oses.
34. The asses see has also raised add iti o nal g rou n ds be fo r e u s vid e its applicati o n under Rule 1 1 of the Inc o me T a x Rules, 1962 , dated 1 5. 03.20 19 as u nder:
Addi ti o nal g ro un d d at ed 22 .1 1. 2 01 8:
"That on the facts and circumstances of the case and in law, the impugned order passed by the assessing officer giving effect to the appellate order passed by the Hon'ble Tribunal, is barred by limitation and therefore, is liable to be quashed. "
Addi ti o nal g ro un d d at ed 26 .1 1. 2 01 8:
"Without prejudice, that the assessing officer erred on facts and in law in not appreciating that disallowance of expense under section 40(a)(i) of the Act ought to be restricted to the appropriate proportion of the sum chargeable to tax out of the total payment of Rs. 19,80,75,340 made by the appellant to GlaxoSmithKline Biological S.A."ITA No.2453/Del/2016 A.Y. 2005-06
& ITA No.532/Del/2014 A.Y. 2006-07 64 A ddi ti o nal g ro un d d at ed 2 0. 0 5. 2 02 1:
"1. That on the facts and circumstances of the case and in law, the assessing officer ought to have allowed, in pursuance to law clarified by the Hon'ble Rajasthan High Court in the case of Chambal Fertilisers and Chemicals Ltd vs JCJT: D.B. ITA No.52/2018 and Hon'ble Bombay High Court in the case of Sesa Goa Ltd. vs JCIT: 117 taxmann.com 96 (Bom HC), deduction of Rs. 50.38,687, being education cess computed on returned income, paid by the Appellant before the due date of filing return of income for the subject assessment year.
2. That on the facts and circumstances of the case and in law, pursuant to law clarified in the case of Chambal Fertilisers and Chemicals Ltd (supra) and Sesa Goa Ltd (supra), the assessing officer also ought to have allowed further deduction in respect of any additional amount paid by the Appellant towards education cess during the financial year relevant to the subject assessment year."
35. The Ld. Co unsel for the assessee contended that the is sues raised in all the gr ound s w er e legal and all th e fact s for adjud icatin g the s ame w ere on r eco r d. H e, therefor e, p lead ed that the gro und s b e admitted fo r ad ju dication . Ld. D R did no t ob ject to th e same.
The additio n al gr o und s raise d are le gal grou nd s and admitted ly req uire n o inve stigatio n o f facts,the re is ,w e fin d, therefor e no impedimen t in ad mit ting the m fo r adjud ication , as h el d by the apex co urt i n th e case o f N TPC Ltd . V s. CI T, 2 29 ITR 3 83(S C) . Or der w as pr onou nced du ring the cour se of hearing itself. ITA No.2453/Del/2016 A.Y. 2005-06
& ITA No.532/Del/2014 A.Y. 2006-07 65 3 6. Ther eafter it was po in ted ou t that the grou nd s r aised vide app lication d ated 20 -05 -202 1 r elate to allow ability o f education cess. It w as common g r oun d th at th e issu e r aised in the abo ve grou nds was ident ical to that raised in the add itional gr ound s raised in ITA N o.2 453/D el/201 6. Ou r decisio n r en dered therein at par a 22 sh all a pp ly mutati s mutan dis to thes e gr ou nd s also. According ly the ad d itional g r ound s r aised v id e applica ti on dated 20-0 5-20 2 1 stan d dismissed.
37. V is- à- vis gr oun d s r aised v id e ap plication dated 22. 11 . 2018 on the or der passed by th e A O g iv in g e ffect to the o rd er o f th e ITA T b eing barr ed by limit ation, the ld . coun sel for the assessee fair ly co nce deded that iden tical is sue stood decide d b y th e ITA T, D elhi Bench against th e asses see in the cas e o f Religare Cap ital M ar kets Li mited v s D CIT I TA No. 18 81/D el/2014 dated10- 10- 2019 . Th e said add itio nal gro und is, th er efore, dis missed.
38. The additio nal g ro und r aised v id e applicatio n da ted
22. 11. 20 18 relates to th e issue o f app ortion men t o f p ro f its to the PE of M /s G lax oSmit hK line Biolo gi cal SA. Since this issu e is interrelated a nd d epen dent o n dete rmin ation o f exis tence o f Permanen t Establis h ment o f M/s G laxoS mith Kline Biolo g ical S A wh ich issue h as been co ntes ted b y th e assessee in grou nd No s.3 ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 66 to 3. 9 r aised be for e u s and o n n oting that the af orestated grou nds h av e b een r estor ed back by us to the AO w hile d ealing with the said gro u nds at para 2 9 o f ou r or der abov e, this issue is also r esto red b ack to th e A O to b e adjud icated alon gw ith the issue o f deter min at ion o f P E o f M /s G lax oS mithK line Biolo gical SA raised gr ou nd No s.3 to 3. 9 abo ve. Th is ad diti onal g r ound i s, there fo re, allow ed fo r statistical pu rpo ses.
In th e result, the appeal of the assessee is partly allo w ed for statistic al pur poses.
In ef fect b oth th e appeals ar e par tly allow ed fo r s tatistical purp oses.
Sd/- Sd/-
(R.L. NEGI) (ANNAPURNA GUPTA)
याय क सद य/Judicial Member लेखा सद य/Accountant Member
Dated: 30th July, 2021
*रती*
आदे श क त*ल+प अ,े+षत/ Copy of the order forwarded to :
• अपीलाथ / The Appellant
• यथ / The Respondent
• आयकर आय<
ु त/ CIT
• आयकर आय<
ु त (अपील)/ The CIT(A)
• +वभागीय त नAध, आयकर अपील#य आAधकरण, चDडीगढ़/ DR, ITAT,
CHANDIGARH
• गाड फाईल/ Guard File
आदे शानस
ु ार/ By order,
सहायक पंजीकार/ Assistant Registrar