Madras High Court
Commissioner Of Income Tax-I vs M/S.Ttk Pharma Ltd on 17 August, 2011
Author: Chitra Venkataraman
Bench: Chitra Venkataraman, M.Jaichandren
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED: 17.08.2011
CORAM:
THE HONOURABLE MRS.JUSTICE CHITRA VENKATARAMAN
and
THE HONOURABLE MR.JUSTICE M.JAICHANDREN
Tax Case (Appeal) No.413 of 2005
Commissioner of Income Tax-I
Chennai. .. Appellant
Versus
M/s.TTK Pharma Ltd.
8, Old Trunk Road
Pallavaram
Chennai-600 042. .. Respondent
Tax Case (Appeal) filed under Section 260 A of the Income Tax Act, 1961, against the order of the Income Tax Appellate Tribunal, Madras A Bench dated 20.09.2004 in ITA.No.474/Mds/96.
For appellant : Mr.K.Subramaniam
Standing Counsel for Income Tax
For respondent : Mr.Venkatanarayanan
For M/s.Subbaraya Aiyar
JUDGMENT
(Judgment of the Court was delivered by CHITRA VENKATARAMAN,J.) The Tax Case Appeal is fled by the Revenue against the order of the Income Tax Appellate Tribunal, Madras A Bench dated 20.09.2004 in ITA.No.474/Mds/96 relating to the assessment year 1992-93 raising the following substantial question of law:-
Whether in the facts and in the circumstances of the case, the Tribunal was right in directing the assessing officer to re-compute the business profits of the Hyderabad Unit taking into account the formula laid down by the Delhi Tribunal in the case of Food Specialities Ltd.?
2. The assessee is a Public Limited Company engaged in the manufacture of pharmaceuticals and packaged fast foods. The assessee has three manufacturing units in Madras, Hyderabad and Bangalore. In the statement of income filed, the assessee claimed deduction of a sum of Rs.19,33,104/- under Section 80-I of the Income Tax Act, 1961 relatable to the Hyderabad Unit. It was noted by the Assessing Officer that the expenditure in respect of Hyderabad Division was low when compared to the turnover of that Unit. In this context, the assessee was asked to explain why the expenses booked under the heads Advertisement and sales promotion and the traveling expenses and other were low. The assessee gave details of expenses relatable to the Hyderabad Unit, but not debited to Hyderabad Unit as Rs.19,43,834/-. The Revenue viewed that as these expenses related to the Hyderabad Unit, the same have to be reduced from the profit of the Unit for the purpose of computation of deduction under Section 80-I of the Income Tax Act, 1961. The assessee pointed out that the company had incurred a sum of Rs.1,42,27,766/- towards traveling expenses and Rs.1,34,17,689/- towards field staff costs for all the Pharmaceutical Divisions as a whole. The assessee submitted that since the Hyderabad Unit had full-fledged marketing set up in existence, even though sale of pharmaceuticals in Hyderabad Unit accounted for 38.77% of the total turnover of the Pharmaceutical Divisions as a whole, it had not debited any part of these expenses to the Hyderabad Unit. The Assessing Officer pointed out that the method followed by the assessee had resulted in an artificially high profit for the Hyderabad Unit and in turn, a higher claim for deduction under Section 80-I of the Income Tax Act, 1961. The Assessing Officer viewed that all the expenses relatable to the Unit have to be deducted before arriving at the profit for the purpose of computation of deduction under Section 80-I of the Income Tax Act, 1961.
3. On hearing the assessee, the Assessing Officer pointed out that there were no details available to the basis of allocation made to the Hyderabad Unit. Thus, he adopted a formula for allocation of expenses by taking the percentage of pharmaceutical turnover of Hyderabad Unit to the total turnover of Pharmaceutical Divisions. Aggrieved by the same, the assessee filed an appeal before the Commissioner of Income Tax (Appeals).
4. In support of his contention, the assessee pointed out that the Hyderabad Unit, a separate company run under the name and style of M/s.TTK Chemicals Ltd., got merged with the assessee company in the year 1988. Prior to that, the assessee company was the consignment agent of M/s.TTK Chemicals Ltd., and the expenses of the assessee company was reimbursed by the principal company. The sales of the Pharmaceutical Division at Chennai was apportioned at 6.47% of the total sales of all the pharmaceutical products. The assessee further pointed that after the merger, there was only a marginal increase in the staff cost and traveling expenses. Thus, any attempt to allocate the marketing cost of other competitive goods to the Antibiotics Unit at Hyderabad without considering the direct selling cost incurred by the Unit itself would distort the relief.
5. In considering the same, the Commissioner of Income Tax (Appeals) pointed out that it was not the case of the assessee that the Hyderabad Unit was a separate business concern and the Corporate Office had no responsibility therefor and did not enjoy the fruits thereof. If the company, as a whole, enjoyed the fruits of the operations of a particular Unit, the expenditure relatable to that Unit but debited only in the books of the Corporate Office, would necessarily be required to be apportioned to the Hyderabad Unit to ascertain its true and actual profits.
6. The Commissioner of Income Tax (Appeals) pointed out that the assessee itself admitted to the apportionment made for the period prior to the merger. He further pointed out that the assessee had let in no evidence as regards the expenditure referable to the Hyderabad Unit. Considering the fact that the Assessing Officer had apportioned the cost on scientific basis by taking the total turnover of business at large to the turnover, in particular to the Hyderabad Unit, the Commissioner of Income Tax (Appeals) confirmed the order of the Assessing Officer by substituting the figure at Rs.43,87,843/- and Rs.41,38,015/- towards traveling expenses and field staff cost respectively. Aggrieved by the same, the assessee went on appeal before the Income Tax Appellate Tribunal.
7. The assessee contended that even prior to merger, the assessee-company was marketing the products manufactured by M/s.TTK Chemicals Ltd., as a consignment agent and the assessee-company was reimbursed of the expenditure incurred; that for estimating the traveling expenses and the field staff cost, turnover could not be the basis. In support of the contention, learned counsel for the assessee placed reliance on the judgment of the Delhi Bench of the Tribunal in the case of Food Specialities Ltd. Vs. ACIT reported in (1995) 54 ITD 352.
8. The Tribunal considered the said issue and pointed out that even though the apportionment of expenditure is confirmed in the light of the judgment of Delhi Bench of the Tribunal in the case of Food Specialities Ltd. Vs. ACIT reported in (1995) 54 ITD 352, nevertheless, it required a remand back to the Assessing Officer to find out the actual expenditure for apportionment, for the purpose of computing the deduction under Section 80-I. Thus, the Tribunal set aside the order of the Commissioner of Income Tax (Appeals) and remanded the matter back to the Assessing Officer to find out the expenditure relating to travel expenses and field staff cost attributable to the Hyderabad Unit from out of the total expenditure. Aggrieved by this, the Revenue has filed the above Tax Case Appeal before this Court.
9. Learned Standing Counsel appearing for the Revenue pointed out that the assessee was a consignment agent for M/s.TTK Chemicals Ltd. The said M/s.TTK Chemicals Ltd. merged with the assessee company, viz., M/s.TTK Pharma Ltd., with effect from 01.06.1988. Thus thereon, M/s.TTK Chemicals Ltd., became a Unit of the assessee company. He pointed out that given the fact that the total income and expenditure are calculated only at the Corporate Office and that the expenses on traveling and field staff cost were not separately maintained, on the admitted facts, the only method by which the expenditure could be apportioned to the Hyderabad Unit was by taking the ratio of the turnover relatable to the Hyderabad Unit to the total turnover relatable to the business of the assessee. He pointed out that even though the assessee contended that the Hyderabad Unit had its own Marketing Division, yet, no evidence was placed before any of the authorities to support the said plea. The expenses allocation, hence, had to be made on the basis of the percentage of turnover of the Hyderabad Unit to the total turnover of the Pharmaceutical Divisions. Thus, supporting the order of the Commissioner of Income Tax (Appeals), learned Standing Counsel pointed out that the Tribunal committed a serious error in the reasoning by placing reliance on the decision of the Delhi Tribunal in Food Specialities Ltd. Vs. ACIT reported in (1995) 54 ITD 352, which has no relevance to this case.
10. Per contra, learned counsel appearing for the assessee, supporting the order of the Income Tax Appellate Tribunal, pointed out that there is no dispute that expenses have to be apportioned. He further submitted that considering the fact that the same had to be with reference to the actual expenditure incurred after the merger, rightly, the Tribunal remanded the matter to the Assessing Officer for re-working the same; hence, there is no error in the order of the Income Tax Appellate Tribunal.
11. Heard the learned Standing Counsel appearing for the Revenue as well as the learned counsel appearing for the assessee and perused the material available on record.
12. It is seen from the records that the Hyderabad Unit was a separate Unit till 01.06.1988 and got merged with the assessee company on 01.06.1988. Till then, the assessee company was marketing the products manufactured by the Hyderabad Unit as a consignment agent and as regards the expenses incurred by the assessee, the same was reimbursed. The percentage of sales before the merger of M/s.TTK Chemicals Ltd., was at 6.47% and the same is not disputed by the Revenue. However, after the merger, even though the Hyderabad Unit remained a separate Unit for the purpose of Section 80-I of the Income Tax Act, 1961, the indirect cost incurred by the assessee should be apportioned to the Hyderabad Unit with reference to the total cost on the expenditure of the company as a whole, considering the fact that the expenditure of all the Units were pooled and accounted for at the Corporate Office.
13. A perusal of the order of the various authorities shows that the assessee had incurred Rs.1,42,27,166/- towards traveling expenses and Rs.1,34,17,689/- towards field staff cost for the Pharmaceutical Divisions as a whole. The sales in Hyderabad Unit accounted for 38.77% of the total turnover. The facts also reveal that there was no details as regards the expenditure debited to the Hyderabad Unit. Thus, in the background of the said facts, the Assessing Officer had to rightly go by some formula to arrive at the profits of the Hyderabad Unit for the purpose of working out the relief under Section 80-I of the Income Tax Act, 1961. Hence, the Assessing Officer worked out the travelling expenses and the field staff cost to be allocated to the Hyderabad Unit by calculating the total expenses of the Pharmaceutical Divisions at 38.77% on the total turnover. In order to arrive at the correct profit, for the purpose of deduction under Section 80-I of the Income Tax Act, 1961, the Assessing Officer took note of the total turnover of the Pharmaceutical Divisions and the Hyderabad Unit to work out the percentage and thus, rightly arrived at the profit of the Hyderabad Unit. The traveling expenses to be allocated to the Hyderabad Unit being at 38.77% of Rs.1,42,27,766/-, was arrived at Rs.55,16,105/- and the field staff cost to be allocated to the Hyderabad Unit being 38.77% of Rs.1,34,17,689/-, was arrived at Rs.52,02,038/-. In so working out the formula, we do not find that there is any illegality or arbitrariness to make the results illogical for this Court to accept the case of the assessee. Considering the fact that the assessee did not place any material before any authorities, we do not find any fallacy in the reasoning of the Assessing Officer. Thus, on the admitted fact that there should be apportionment on the expenditure towards traveling expenses and field staff cost, we uphold the order of the Assessing Officer.
14. As regards the claim of the assessee to treat the pre-merger expenses at 6.47% incurred in 1988 to be treated as the percentage of expenditure directly relatable to the Hyderabad Unit, we do not find such claim could be taken, supported by any material, as a correct reflection of the expenses incurred by the Hyderabad Unit. As rightly pointed out by the Commissioner of Income Tax (Appeals), if such course had been adopted, it would only result in an ad hoc disallowance without any basis. Thus, taking note of these facts, the Commissioner of Income Tax (Appeals) rightly confirmed the order of the Assessing Officer to take the ratio of the Hyderabad Units turnover to the total turnover.
15. As far as the Income Tax Appellate Tribunals order is concerned, on a reading from the narration of the facts of the Delhi Tribunals order in the case of Food Specialities Ltd. Vs. ACIT reported in (1995) 54 ITD 352, it is evident that there were two Units, one old Unit and the other, a new Unit. On the facts of the case, the Delhi Tribunal therein held that the increase in the overhead expenses incurred by the assessee had to be apportioned between the old Unit and the new Unit on the basis of turnover. Thus, the increase in the overhead expenses after the setting up of the new plant was taken note of, for the purpose of arriving at the proportion or apportionment of the increased expenditure between the new and the old Unit. The Tribunal therein pointed out that the assessee was in a position to identify the direct costs relating to Cereal Plant Unit. Further, the Tribunal observed that as one of the factors, the increased cost, along with turnover, could be taken for working out the reasonable cost attributable to the new Unit. The Tribunal thus held that the increased expenditure could be apportioned between the old Unit and the new Unit on the basis of turnover.
16. As far as the present case is concerned, the merger had taken place as early as in the year 1988. It is not as though the Hyderabad Units Profit and Loss Account have not come for consideration before the assessee company in the matter of allocation of the expenditure. Whatever might have been the percentage of allocation prior to the merger, in the post-merger scenario, on the fourth year of operation, we do not think that the Tribunals order, drawing a parallel with that of the Delhi Bench of the Tribunals order, could be upheld by this Court. On the admitted fact that the income and expenditure of the three Units are considered at the Corporate Office, with the apportionment thus fixed at 38.77% on the basis of the total turnover to the turnover relatable to the Hyderabad Unit, the expenditure apportioned, thus was rightly made by the Assessing Officer, as confirmed by the Commissioner of Income Tax (Appeals).
17. On the facts available herein, the basis of working out the apportionment, hence, merits acceptance by this Court. In the circumstances, we have no hesitation in setting aside the order of the Tribunal in remanding the case to the Assessing Officer for re-working of the apportionment.
18. In these circumstances, we set aside the order of the Tribunal and thereby restore the order of the Commissioner of Income Tax (Appeals). Accordingly, the Tax Case Appeal stands allowed. No costs.
nvsri/ksv To
1. The Commissioner of Income Tax, Chennai.
2. The Commissioner of Income Tax (Appeals-I), Chennai.
3. The Income Tax Appellate Tribunal, Bench A, Chennai