Income Tax Appellate Tribunal - Chandigarh
M/S Glaxosmithkline Asia Pvt. Ltd., ... vs Acit, Chandigarh on 26 October, 2021
आयकर अपील य अ धकरण,च डीगढ़ यायपीठ "ए", च डीगढ़
IN THE INCOME TAX APPELLATE TRIBUNAL,
CHANDIGARH BENCH 'A', CHANDIGARH
BEFORE: SHRI SATBEER SINGH GODARA, JUDICIAL MEMBER
AND SMT.ANNAPURNA GUPTA, ACCOUNTANT MEMBER
आयकर अपील सं./ ITA No.242/Chd/2017
नधा रण वष / Assessment Year : 2007-08
M/s GlaxoSmithKline Asia Pvt. बनाम The A.C.I.T.,
Ltd.,24-25 Floor, One Horizon Centre, LTU, New Delhi
Golf Course Road, DLF Phase-5, Now jurisdiction at
Gurgaon. DCIT, Circle 4(1),
Chandigarh.
थायी लेखा सं./PAN NO: A A B C S 3 2 3 7 R
अपीलाथ /Appellant यथ /Respondent
आयकर अपील सं./ ITA No.219/Chd/2017
नधा रण वष / Assessment Year : 2007-08
The A.C.I.T., बनाम M/s GlaxoSmithKline Asia Pvt. Ltd.,24-
Circle 4(1), 25 Floor, One Horizon Centre,
Chandigarh. 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.225/Chd/2017
नधा रण वष / Assessment Year : 2008-09
M/s GlaxoSmithKline Asia Pvt. बनाम The A.C.I.T.,
Ltd.,24-25 Floor, One Horizon Centre, Circle 4(1),
Golf Course Road, DLF Phase-5, Chandigarh.
Gurgaon.
थायी लेखा सं./PAN NO: A A B C S 3 2 3 7 R
अपीलाथ /Appellant यथ /Respondent
ITA No.47/Chd/2018
ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017
ITA No.1500/Chd/2018
ITA No.1495/Chd/2019
A.Ys. 2007-08 to 2015-16
Page 2 of 120
आयकर अपील सं./ ITA No.220/Chd/2017
नधा रण वष / Assessment Year : 2008-09
The A.C.I.T., बनाम M/s GlaxoSmithKline Asia Pvt. Ltd.,24-
Circle 4(1), 25 Floor, One Horizon Centre,
Chandigarh. 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.226/Chd/2017
नधा रण वष / Assessment Year : 2009-10
M/s GlaxoSmithKline Asia Pvt. बनाम The A.C.I.T.,
Ltd.,24-25 Floor, One Horizon Centre, Circle 4(1),
Golf Course Road, DLF Phase-5, Chandigarh.
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.221/Chd/2017
नधा रण वष / Assessment Year : 2009-10
The A.C.I.T., बनाम M/s GlaxoSmithKline Asia Pvt. Ltd.,24-
Circle 4(1), 25 Floor, One Horizon Centre,
Chandigarh. 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.227/Chd/2017
नधा रण वष / Assessment Year : 2010-11
M/s GlaxoSmithKline Asia Pvt. बनाम The D.C.I.T.,
Ltd.,24-25 Floor, One Horizon Centre, Circle 4(1),
Golf Course Road, DLF Phase-5, Chandigarh.
Gurgaon.
थायी लेखा सं./PAN NO: A A B C S 3 2 3 7 R
ITA No.47/Chd/2018
ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017
ITA No.1500/Chd/2018
ITA No.1495/Chd/2019
A.Ys. 2007-08 to 2015-16
Page 3 of 120
अपीलाथ /Appellant यथ /Respondent
आयकर अपील सं./ ITA No.222/Chd/2017
नधा रण वष / Assessment Year : 2010-11
The A.C.I.T., बनाम M/s GlaxoSmithKline Asia Pvt. Ltd.,24-
Circle 4(1), 25 Floor, One Horizon Centre,
Chandigarh. 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.228/Chd/2017
नधा रण वष / Assessment Year : 2011-12
M/s GlaxoSmithKline Asia Pvt. बनाम The D.C.I.T.,
Ltd.,24-25 Floor, One Horizon Centre, Circle 4(1),
Golf Course Road, DLF Phase-5, Chandigarh.
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.344/Chd/2017
नधा रण वष / Assessment Year : 2012-13
M/s GlaxoSmithKline Asia Pvt. बनाम The A.C.I.T.,
Ltd.,24-25 Floor, One Horizon Centre, Circle 4(1),
Golf Course Road, DLF Phase-5, Chandigarh.
Gurgaon.
थायी लेखा सं./PAN NO: A A B C S 3 2 3 7 R
अपीलाथ /Appellant यथ /Respondent
ITA No.47/Chd/2018
ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017
ITA No.1500/Chd/2018
ITA No.1495/Chd/2019
A.Ys. 2007-08 to 2015-16
Page 4 of 120
आयकर अपील सं./ ITA No.47/Chd/2018
नधा रण वष / Assessment Year : 2013-14
M/s GlaxoSmithKline Asia Pvt. बनाम The A.C.I.T.,
Ltd.,24-25 Floor, One Horizon Centre, Circle 4(1),
Golf Course Road, DLF Phase-5, Chandigarh.
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.1500/Chd/2018
नधा रण वष / Assessment Year : 2014-15
M/s GlaxoSmithKline Asia Pvt. बनाम The A.C.I.T.,
Ltd.,24-25 Floor, One Horizon Centre, Circle 4(1),
Golf Course Road, DLF Phase-5, Chandigarh.
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.1495/Chd/2019
नधा रण वष / Assessment Year : 2015-16
M/s GlaxoSmithKline Asia Pvt. बनाम The D.C.I.T.,
Ltd.,24-25 Floor, One Horizon Centre, Circle 4(1),
Golf Course Road, DLF Phase-5, Chandigarh.
Gurgaon.
थायी लेखा सं./PAN NO: A A B C S 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
सन
ु वाई क! तार&ख/Date of Hearing : 29.07.2021
उदघोषणा क! तार&ख/Date of Pronouncement : 26.10.2021
ITA No.47/Chd/2018
ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017
ITA No.1500/Chd/2018
ITA No.1495/Chd/2019
A.Ys. 2007-08 to 2015-16
Page 5 of 120
(Hearing through Webex)
आदे श/ORDER
Per Annapurna Gupta, Accountant Member :
Al l t he a p pe a ls r e l a te to the s a m e a s se s se e a n d pe rt a in to 9 a ss e ss me nt ye a r s i .e . A .Y . 20 0 7 -0 8 to 20 1 5 -1 6. F or a ss e s sme n t ye a rs 2 0 07 -0 8 to 2 0 10 -1 1 cr os s a p p ea l s h a ve be e n f il e d b y t he a sse ssee a nd t he de p a r tme n t a n d th e re ma i n in g, i .e . pe r ta i ni n g to a ss e ss me n t yea r s 2 0 1 1 -12 to 2 0 15 -1 6 , a re a p p e a l s fi le d b y the a sse ssee . Whi le the a ppe a ls for A. Y 2 0 0 7- 0 8 to 2 0 11 -1 2 a nd A .Y 2 0 1 3 -1 4, ar e a ga i n st the sep a r a te or de rs of t he C ommi ss i on e r of I n come Ta x( A pp e a ls )( i n sh or t re fe rre d to a s ["C I T(A ) "] p a ss e d u/s 25 0 ( 6) of the I n come Tax A ct, 1 96 1 , ( he re in a f te r re fe rr e d to a s "Ac t") , th ose for A .Y 2 0 12 -1 3 , 2 0 1 4- 1 5 a n d 20 1 5 -1 6 a r e a g a in st or d e r s p a s se d b y th e As se s si ng O ff i ce r in c ompl i a nc e w i th the d i r e ct ion s of th e D is pute Re sol uti on P a ne l( D RP ), p a ss e d u/s 14 3 ( 3) r . w. s. 14 4C ( 5 ) of t he Ac t.
2. At th e outs e t itse lf it was sta t e d t ha t th e imp u gn e d appeals had e ar li e r been l is ted f or he a r i ng a l ong w ith t he a p p e a l s fo r a s se s sme n t ye a r 2 0 0 5 -06 a n d a s s e s sme n t ye a r 2 0 06 -0 7 , i n I TA N o. 2 4 53 /D e l /2 0 1 6 a nd I TA N o. 5 3 2 /C h d /2 0 1 4 ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 6 of 120 r e s pe cti ve ly , s ince a l l t he a p pe a l s i nv olv e d ce rta i n c om mon i ssu e s . Tha t th e a p p e a l s fo r a ss e ss me n t ye a r s 2 00 5 -0 6 a n d 2 0 06 -0 7 , b e i ng th e le a d ye a rs , ha d be e n he a r d a n d th e de ci si on w a s a w a i te d . B oth th e p a rt ie s su b mi tt e d t ha t ce r ta i n is sues a r i si ng i n t he p r e se n t a ppe a ls , b e i ng common to th ose i n a ss e s sme n t y e a rs 20 0 5 -0 6 a nd 2 0 0 6 -07 , w ou ld b e cov e re d by th e de c is io n re nd e re d the re in . A ch a r t l is ti ng the is sues i nv olv e d i n a ll the a p pe a l s ri gh t fr om a ss e ss me n t ye a r 20 0 5 -0 6 to a s se ssme nt ye a r 2 0 15 -1 6 w a s f i le d be fore us. C on si d e r i ng th e a f ore s a id f act t he a ppe a ls w e re he a r d i ssue s - w ise a s pe r ch a r t sub mi tte d b e f ore us.
3. Me a n wh i le the d eci s ion i n th e a p p e a l s f or A. Y 2 00 5 -0 6 a n d 2 0 06 -0 7 w a s p r on oun ce d on 3 0 . 07 . 2 02 1 . Ta ki n g n ote o f the sa me a nd the s ub mi ssi on ma de by b oth t he p a r tie s be f ore u s, th e gr ou nd s r a i se d i n t he p re se nt a p p e a l s a re be ing pr oc ee de d to b e a dj u di ca te d i ss ue - w ise to f a ci l it a te a d ju d ic ation. Iss ue N o .1 : Di sa l lo w a nc e ma d e of p r o vi sio n o f st oc k obs ol e sc e n c e be ing c h a r g e d t o th e pr o fit a nd lo ss a c c oun t, ra i se d in a sse s se ' s a pp e a l fo r fo ll o wi ng A.Y .:
Assessment Year ITA No. Ground No. 2007-08 2 4 2 / C h d / 20 1 7 3 to 3. 3 2009-10 2 2 6 / C h d / 20 1 7 6 to 6. 1 ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 7 of 120 I t w a s c om mon g r oun d th a t t he i ssu e wa s i d e n tic a l to tha t r a i se d by the a ss e ssee i n the a pp e a l a l re a d y he a r d pe r ta in i ng to a ss e s sme n t ye a r 2 0 0 5- 06 v id e grou nd N o.1 .
4. We ha ve gone t hr ou gh the or de r of t he ITA T f or a ss e s sme n t ye a r 20 0 5 -0 6 a n d fi n d t he i s sue to h a ve be e n a d j ud ic a te d a t par a -6 of the or de r a s u nd e r :
"6. We have h eard bo th th e pa rties a nd ha ve also gone thro ugh th e d ocu m ents a nd d ecisio n s relied /r eferre d to before u s. T he claim of write off of stock am ou ntin g to Rs. 59, 79, 00 0/- has b een den ie d for w ant of evid ence. T he write-offs claimed by th e assessee relate to the fo llowing :
V ac c i ne s 37 .3 3l a c s
A qu af r e s h t oo th br u sh 12 .4 6 l a c s .
To t al 5 7. 7 9 l a cs
Th e m ajor write off cla im evid en tly perta in s to vaccines which , we fin d, the a ssesse e con siste ntly claim ed h a d b een nea rin g ex piry an d thus had no rea liz a ble va lu e. Copies of em ails exchan ged within the a sses see co mp any seek ing appro val for relea se, write off a nd d estruction of sto ck of vaccin es nea ring expiry m entio ning specifically th e s tock of such vaccines, m ails gra ntin g ap p roval gra ntin g for the sa m e, as also sa mple co pies of stock write off sheets of the vaccin es w ere file d to the C IT (A). Therefore it is no t that the claim w as enti rely u nsubs tantiated. Fu rth er despite th e repeated asser tion of th e assessee th a t the va ccin es written off were n ea r in g exp iry, eviden ced with em ails so exch anged an d th e stock wr ite off sh eets so m entio n in g, th e Revenue h as n o t b roug ht anythin g o n reco rd to contro vert the said claim . Wi thout pointin g out a ny infirmity in the explanatio n of th e assessee d uly evid en ced with docum en ts, we hold, the cla im co uld n ot be deni ed for w ant o f fu rther evid en ce. Nothing has b een p oin te d o ut reg ardi ng the ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 8 of 120 insu fficiency of evidences filed b y th e assessee. T hen why further evid en ces w ere n eede d to s u b sta ntia te t he claim we are u nable to un d erstand . I n the light of the sam e, we hold, th e claim o f the asses see as f ully justified vis a vis write o ff o f v accin es since und o ubted ly such vaccin es w ere not cap able of bein g used b eyond ex piry perio d and h a d no realizable value thereafter.
As for the write off o f Aqua fresh tooth brush th e assessee w e find h a d explaine d to th e CIT (A) the rea s ons for discon tin uatio n of the b u sin ess and the co n sequ ent withd raw al of th e toothb ru sh es, from th e m arket, being com m ercially unviable an d ha d as e vidence filed co py of the Bo ar d res oluti on dated 25-1 1-20 03 to this effect. T hus, we find tha t t he assessee has be en able to esta b lish docum en ta rily th e fact of write off o f the sa id pr odu ct a nd the Reven ue ha s n ot proved anyt hing to the co nt rary. For the reasons stated above in the c ontext of wr ite off of vaccin es w e see n o reaso n to disall ow the cla im o f the assessee. Moreover identica l claim of th e assessee, we have noted, w as a llowed by th e IT AT in identical fa cts a nd circu mstan ces in A .Y 20 03-0 4. Th e claim of the asses se e to write o ff of too th brush also is therefo re allowed I n effect th e enti re claim to write off am o untin g to Rs. 59, 79, 00 0/- is allowed. "
5. Si nc e t he i ssue al re a d y s ta nd s a d jud ic a te d a s a bo ve in t he p r e ce d in g a sse ssme nt ye a r , A. Y. 20 0 5 -0 6, t he de ci sion r e nde re d th e re i n wi l l a p pl y to th e i ss ue i n a ll th e r e ma i ni ng ye a r s co nc e r ne d. A cc ordi n gl y, th e i ss ue s of d i sa l l ow a nc e o f p ro vi si on of s tock ob sol e s ce n ce s ta nd s de c id e d i n fa v our of th e a sse ssee .
IS SU E N o .2 Di sa l lo w a nc e o f 1/3 r d o f t he e x p e nd it ur e
on a dve r t ise m e nt a nd pr o m ot io n ,
ho ld in g t h a t it r e su lt s in p r o mo t io n o f
bra n d na m e o w ne d by t he fo re i g n
ITA No.47/Chd/2018
ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 9 of 120 c om p a ny , r a ise d in a ss e sse ' s a p pe a l f or fo llo w in g A. Y. Assessment Year ITA No. Ground No. 2007-08 2 4 2 / C h d / 20 1 7 1 to 1. 1 2008-09 2 2 5 / C h d / 20 1 7 2 to 2. 1 2009-10 2 2 6 / C h d / 20 1 7 2 to 2. 1 2010-11 2 2 7 / C h d / 20 1 7 2 t o 2. 1 2011-12 2 2 8 / C h d / 20 1 7 2 to 2. 1 2012-13 3 4 4 / C h d / 20 1 7 4 to 4. 2 2013-14 4 7 / C h d /2 0 1 8 2 to 2. 1 2014-15 1 5 0 0 / C h d /2 0 1 8 4 to 4. 1 2015-16 1 4 9 5 / C h d /2 0 1 9 5 to 5. 1
6. I t w a s c om mon g r oun d th a t t he i ssu e wa s i d e n tic al to tha t r a i se d b y the a sse s see in the a pp e a l s a l re a d y hea r d pe r ta in i ng to a s se s sme n t ye a rs 20 0 5 -0 6 a n d 20 0 6 -0 7 v id e gr ou nd N o. 2 a n d 2 t o 2 . 4 r e spe cti ve ly .
7. We ha ve gone t hr ou gh the or de r of t he ITA T f or a ss e s sme n t ye a rs 2 0 0 5 -06 a nd 2 0 06 -0 7 , a n d f in d t he i ss ue to h a ve bee n a dj u dica t e d a t p a r a 1 1 of th e o rde r a s un de r :
"11 . W e h ave h eard bo th th e p ar ti e s. W e are con vin c ed wi th th e argu men ts of th e L d. C ou n sel f or th e as se ssee th a t th ere wa s n o re a son / b a si s at a l l f or ho ld in g th a t th e ad ver ti se men t / pro mo ti on ex pe n se s ben ef i te d th e p ar en t AE a n d he nc e a por ti on of i t wa s li a bl e to be d i sa l lo wed a s h av in g n o t been in cu r red wh ol l y an d exc l u s iv el y f or th e pu r po se of th e bu s in e ss ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 10 of 120 of th e a sse sse e.
T h er e is c le ar d i sti nc tio n be t we en br and bu ild in g and ad ve r ti si n g & m ar ke ti n g. W h ile the en d pu r po se of bo th ma y be th e sa me, i. e in cre as in g sal e s/ tu rn o ver, bu t th e a p pro a c h i s def in itel y d if f eren t. W h il e ad ve r ti si n g on l y co mmu n ic a te s wh a t a bu sin e ss h a s to of f er, reac hin g o u t to th e en d c us to mer an d i m pac tin g im med i ate sal e s, br an d bu il d ing exerc i se o n th e o th er han d c re a te s an id en ti ty / p er ce p t ion of the bu sin ess, gen era ti n g a wa r en es s ab o u t th e bu sin e ss u si n g str a teg ie s an d c am p aign s wi th t he g oal of cre ati ng a un iqu e and l a st ing i mage of th e bu sin e s s in th e mar ke t pl ac e. Br an d b u il d in g cre ate s a cu sto me r b a se estab l i sh ing l on g te r m rel a ti on sh i p wi th th e c u sto me r.
Wi th th is cl ear d is ti n c ti on be t we e n th e t wo ex pen ses, th e on u s to e sta bl i sh in c urr en c e of ei the r of th e expen se s is o n th e p ar ty cl a im i ng so. T h e Re ven u e cl a i ming th a t th e a sse ssee h a s inc u rred br and bu il d in g e x pen se s, th e on u s i s o n th e R even u e to estab l i sh th e s ai d f ac t. It c ann o t si mpl y be d eriv ed f rom th e f ac t th a t a sse sse e h a s in c u rred h u ge expen se s o n ad v er tise men t an d sal e pro mo ti on of prod uc ts th e br an d of wh ich be lo n ged to an o t h er en ti ty , c on sid er i n g th e cl e ar d i sti nc tio n in th e e nd ob jec ti ve of th e s aid e x pen se s an d th e a sse ssee con si s ten tl y cl a i ming th a t i t h ad acq u ire d th e exc lu s iv e l ice n se to m anuf ac tu re a n d sel l the prod u c ts in Ind i a and th u s be in g the sol e u se r of th e br a nd na me in In d i a. T hese c on te n ti on s o f th e as se s see h av e rema in ed u nc on tr over ted . T he entire ben ef it, in su ch circ u m sta n c e s, i nu re d to th e a sse ssee al on e a s i t al on e wa s o per a ti n g in th e In d ia n m ar ke t. Be n ef it if an y to th e A E was on l y in c iden ta l . An d on acc ou n t of su ch i n ci d en ta l ben ef it ac cr u i n g to a th ird p ar ty i t can n o t be sa id th a t the e x pen se wa s n o t wh o ll y and exc lu s iv el y f or th e ben ef i t of th e a sse ssee. A s l on g a s th e o b jec ti ve / pu r po se f or in cu rrin g an ex pen d itu re i s to be nef i t th e a sse sse e so le l y, th e expen d i tu re c a n be sa id to be in c ur re d wh ol l y an d exc l u sivel y f or th e ben ef i t of th e a sse ssee. An y in c ide n ta l be n ef i t ac c ru in g to a th ir d p ar ty on acc ou n t of the sa me, b ein g ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 11 of 120 be yon d th e c on tr o l of the a sse sse e, d oes n o t d il u te th e ch ar ac ter of the e x pen se.
W e do n o t f in d an y re a so n or ba s is th e ref or e f or ho ld in g a p ar t of th e e x pen se a s per tai n in g to br a nd bu il d in g. W e th e ref o re d irec t d el e ti on of th e di sal l o wa n ce mad e on acc ou n t of bran d bu il din g expen se s amou n t in g to R s. 8 ,9 4 , 3 3 , 3 3 3/-
Grou n d of ap pe al No. 2 i s all o we d . "
8. Si nc e t he i ssue al re a d y s ta nd s a d jud ic a te d a s a bo ve in t he p r e ce d in g a sse ss me nt ye a r s, A .Y . 2 00 5 -0 6 & 2 0 0 6 -0 7, t he d e c is ion re n de red th e re i n w i ll ap p ly t o the is sue s i n a l l t he r e ma i ni n g ye a rs c onc e r ne d . Ac cor d i ng ly, the is sue s of d is a l low a n ce of 1/3 r d of a d ve r ti se me n t a n d pr o mot ion e x pe nse s st a nd s d e ci de d in f a vo ur o f the as se sse e .
Iss ue N o .3 : Di sa l lo w a nc e of p ur c ha s e o f v a c c in e o f Gl ax o Sm it hk lin e Bi ol o g ic a l S .A. u /s 40 (a ) i) o f t he Ac t r a is e d in a sse s se ' s a pp e a l fo r fo ll o wi ng A.Y .
A s se s s m e n t Ye a r I TA N o . G r ou n d No .
2007-08 2 4 2 / C h d / 20 1 7 2 t o 2. 4 2008-09 2 2 5 / C h d / 20 1 7 1 t o 1. 4 2009-10 2 2 6 / C h d / 20 1 7 1 t o 1. 4 2010-11 2 2 7 / C h d / 20 1 7 1 t o 1. 4 2011-12 2 2 8 / C h d / 20 1 7 1 t o 1. 4 2012-13 3 4 4 / C h d / 20 1 7 3 t o 3. 5 2013-14 47/Chd/2018 1 t o 1. 4 ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 12 of 120 2014-15 1 5 0 0 / C h d /2 0 1 8 3 t o 3. 4 2015-16 1 4 9 5 / C h d /2 0 1 9 4 t o 4. 4
9. I t w a s c om mon g r oun d th a t t he i ssu e wa s i d e n tic al to tha t r a i se d b y the ass e s see in the a p pe a ls he a r d pe r t a in in g to a ss e s sme n t ye a rs 2 0 0 5 -06 a n d 2 0 06 -0 7 vi de g roun d N o s .2 . 2 a n d 3 t o 3 . 9 r e spe cti ve ly .
10. We ha ve gone t hr ou gh the or de r of t he ITA T f or a ss e s sme n t ye a rs 2 00 5 -0 6 a n d 200 6 -0 7 a n d fi n d th e i s sue to h a ve bee n a dj u dica t e d a t pa ra 1 8 of t he or de r a s un de r :
"1 8. W e h ave he ar d bo th th e par ti e s an d h av e al so caref ul l y gon e th rou gh th e ord ers of th e au th o r it ie s bel o w a s al so th e d oc u men ts ref erred to b y the L d. Cou n sel f o r th e a sse sse e bef o re us. O n goin g th ro u gh th e sa me an d af ter caref u ll y c on si d erin g th e sa me we f ind meri t i n the con ten ti on of th e L d. Co un sel f or th e as se ssee th a t th e i ssue n ee d s re co n sid er a tio n.
T h e AO h a s h el d PE of GSK B io l ogic al s S A in In di a ba sed on h i s f in d in g s th a t c l in ic al tr i al s an d R &D are core ac ti v i ti e s in v ac c ine d eve lo p men t wh i ch is g o t don e b y G SK B iol ogic al s in In d i a t h rou gh th e a sse ssee an d o th er af f ilia te s. T h ese f in din g s we f in d ar e b a sed on , a s men ti on ed in th e a sse s sme n t ord er a t p age 3 5 "f acts ex tr ac ted f ro m v ar iou s we b si te s of th e as se ssee s gro u p co mp a nie s wh i c h thro w l igh t on th e vacc ine bu s in e s s of th e grou p and rol e of In d ian af f il iate s" . T h e rol e of th e a s sessee i s b a se d on dec i sion ta k en i n th e 6 3 r d mee tin g of th e Gen e ti c En gin eer in g A p pr o val Co m mi ttee on th e 8 t h F e br u ar y 20 0 6 .T h e A O h as c on ten d ed th a t GS K B io lo g ic al s i s carr y in g on v ac c in e d eve lo p men t ac ti v i ty th rou gh th e se f ixe d plac e of bu sin e ss. T h a t all in tel le c tu al ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 13 of 120 pro per ty in th e vac c in e ve sts wi th GS K Biol og ic al s, wh il e R &D ac ti vi ty i s carr ied ou t in In d ia, th e as se ssee is e c on omic all y d e pe nd en t on GSK Biol og ic al s S A an d ha s n o o the r bu sin e ss. T h e L d. C IT ( A) , we h ave n o ted h a s me rel y re i ter a te d th e f ind in gs of th e A O. T h e as se s see on th e o th er h an d , we f in d h as mad e spec if ic f ac tu al a n d l egal su b mi ssion s c ou n ter in g th e f ind in gs of th e A O /C IT ( A) , po in tin g ou t th a t th e f ac ts are to th e c on tr ar y th a t th ere wa s n o agree men t of GSK B iol og ic al s S A wi th th e as sessee bu t in f act i t had en tered in to t wo agr ee me n ts wi th GSK Ph ar m a, an In di a n Co mp a n y, f or c arr y ing o u t c l in ic al re se a rch an d d a ta m an ag emen t. Co p ie s of th e agre e men t h ad been pl ace d o n r ec ord . It wa s al so po in ted ou t th a t in ter m s of th e D T AA wi th B el g iu m, th er e was n o f ixed pl ac e PE of G SK Bio lo g ic al s S A in In d i a as it d id no t have an y su ch p l ac e a t i ts d i spo sal . T h a t c on d uc ti n g cl in ic al tr i al s d id n o t co n s ti tu te th e co re ac ti v i ty of GSK B io lo g ic al s SA , wh i c h wa s en g aged in manuf ac tur in g v ac c ine s. T ha t n e i th er GS K Ph ar ma n or th e as se ssee we r e ac ti n g a s ag en ts of GS K B io lo g ic al s SA , an d th at in ter ms of DT AA, PE d id no t in c l u d e ma in tai n in g pre mi se s f o r rese ar c h an d d eve l o p men t. T h a t wi tho u t pre ju d ice to th e af oresta ted arg u me n ts, even if th ere wa s a PE of GSK B iol og ic al s, n o purc h a se s mad e b y th e a ss e sse e of v ac c ine s we re at tr i bu ta b l e to th e PE an d th eref or e al so n o prof i ts on ac c ou n t of th e sa id pu rc h ase s wer e tax a bl e in In d i a, th eref ore req uirin g no taxe s to be d ed u c ted a t sou r ce .
No n e of th e se f ac tu al an d l eg al c on te n ti on s we f ind have be en d e al t wi th b y th e L d. C IT ( A) .
On the co n tr ar y it wa s b ro ug h t to ou r n o ti c e th a t th e AO' s f in d ing s we re b ase d o n da ta / i nf o rma tion ex tr ac te d f rom web si te s n on e of wh i c h wa s rel a te d to th e a sse s see . T h a t eve n th e in f orma tio n e x tr ac ted regard in g c on d uc ti n g of c l inic al tr ial s a t p age s 3 9 - 4 7 of th e A O' s ord er did n o t men tio n th e a sse ssee a s th e si te wh ere tr i al s we re to be c arr ie d ou t. T h a t even th e Gen e ti c E ng in ee r in g Com mi ttee r ep or t d id n o t re l a te to th e i mpu gn ed ye ar, be ing d a te d 8 t h F e bru ar y ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 14 of 120 20 0 6 .T h a t th e f in d in g s to th e e ff ec t th a t n o o t h er ac ti v i ty wa s be in g c arr ied ou t b y th e as se ssee e xc e p t cl in ic al tr ial s wa s in cor rec t as th e a sse ssee wa s manuf ac tur in g En o an d Cro c in .
T h e f in d in gs of the A O th eref ore th a t the a sse ssee wa s c arr y in g o u t c l in ic al tr i al s f or GS K B iol og ic al s, we f ind , h as been de mon str a ted bef ore u s to be n o t b a sed on rel ev an t f ac ts. A nd th e L d . C IT ( A) h a s mer el y rei ter a ted th e f ind in g s of the A O d e sp i te s pe cif ic f actu al an d l eg al con ten ti on s mad e b y th e a sse sse e to th e c on tr ar y. We h ave al so n o ted th a t th e de ter m in a ti on of PE of GSK Biol og ic al s SA , i s pen d in g bef ore th e H on ' b l e D e lh i H igh Cou r t in wr i t pe ti ti on s f ile d by GS K Biol og ic al s S A ag a in s t proc eed i n gs in i ti a te d u / s 1 48 of th e A c t on th e b a si s th a t t he re exi sts PE , f or A. Y 2 00 5 - 06 T O 2 0 0 9 -1 0 .
Con sid er in g the a bove, we are o f th e vie w th a t i t wo u l d be in th e f i tn e ss of m a tte r to re store th e i ssu e bac k to th e A O f or ad ju d ic a ti on a f resh in ac c ord an c e wi th l a w af te r g i vin g du e o p por tu ni ty of h earin g to th e as se ssee an d af ter c on sid er in g a l l f actu al and l e gal con ten ti on s r a i se d b y i t.
Gro un d No 2 .2 - 3 .4 are acc ord in gl y r e sto red b ac k to th e A O wi th th e a bove d irec ti on s an d th eref ore sta nd al l o we d f o r s ta tis ti c al pur po se s. "
11. Si nc e t he i ssue al re a d y s ta nd s a d jud ic a te d a s a bo ve in t he p r e ce d in g a sse ss me nt ye a r s, A .Y . 2 00 5 -0 6 & 2 0 0 6 -0 7, t he d e c is ion re n de red th e re i n w i ll ap p ly t o the is sue s i n a l l t he r e ma i ni n g ye a rs c onc e r ne d . Ac cor d i ng ly, the is sue s of D is a l low a n ce of p ur ch a se of va c ci ne of G la xo Smi th kl i ne B i ol ogi ca l S .A . u /s 4 0 (a ) i ) of t he Act sta n d s a l l owe d f or st a ti sti ca l p u rp os e s .
ITA No.47/Chd/2018
ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 15 of 120 Iss ue N o .4 : Di sa l lo w a nc e o f Pr o du c t De v e l o pm e nt Ex pe n se s in r e la t io n t o p re - l a u nc h o f pr o du c t be in g c a pi ta l in na t ur e r a is e d i n a sse s se ' s a pp e a l fo r fo ll o wi ng A.Y .
A s se s s m e n t Ye a r I TA N o. G r ou n d No .
2007-08 2 4 2 / C h d / 20 1 7 4 t o 4. 2 2008-09 2 2 5 / C h d / 20 1 7 4 t o 4. 2 2009-10 2 2 6 / C h d / 20 1 7 4 t o 4. 1 2010-11 2 2 7 / C h d / 20 1 7 4 t o 4. 1 2011-12 2 2 8 / C h d / 20 1 7 5 t o 5. 1 2012-13 3 4 4 / C h d / 20 1 7 7 t o 7. 1 2013-14 47/Chd/2018 5 t o 5. 1 2014-15 1 5 0 0 / C h d /2 0 1 8 7 2015-16 1 4 9 5 / C h d /2 0 1 9 8 t o 8. 2
12. I t w a s c om mon g r oun d th a t t he i ssu e w a s i d e n tic a l to tha t r a i se d by the a ss e ssee i n the a p pe a l a l re a d y he a r d pe r ta i ni ng to a ss e s sme n t ye a r 2 00 6 -0 7 v id e gr ou nd N os. 4 to 4 .2 .
13. We ha ve gone t hr ou gh the or de r of t he ITA T f or a ss e s sme n t ye a r 20 0 6 -0 7 a n d fi n d t he i s sue to h a ve be e n a d j ud ic a te d a t pa r a 3 3 a s u n de r:
"33 . W e h ave h eard bo th th e p ar ti es. Ad m i tte dl y id en tic al i ssu e ar o se in th e prec ed in g ye a r al so in th e ca se of th e a sse s see an d th e IT AT d eeme d i t f i t to restore i t b ac k to th e A O f o r ad ju d ic a ti on af r esh a f ter exa min ing the n a tu re an d i mp ac t o f th e e xpen se s v is a vi s th e exi sti n g bu sin e s s of th e a sse sse e. In th e pre sen t c a se al so th e R even u e h a s de c id ed th e is su e ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 16 of 120 ba sed o n ge ne r al ob serv a ti on s wi t h ou t ex a min in g th e na tur e an d i mp a c t of th e ex pe n s es on the e x i sti n g bu s in e s s of the a sse sse e. E ven th e d ec is io n of th e IT AT in th e c a se of Gl ax o S mi th kl in e c on su me r H e al th care L td .( su pr a) , rel ie d u po n by th e L d . Cou n sel f or th e as se ssee , we f in d, r en de red i ts ju d g men t af ter exa min ing th e f ac ts rel a ti n g to th e ex pen se s v i s a vi s its n atu re an d i mp ac t on bu sine ss. T he is su e th eref ore, we h ol d , n e eds to be r e con s id ere d by th e AO f o r wh ic h pur po se we re sto re i t to th e A O wi th th e direc ti o n to ad j u dic a te it in a cc ord an ce wi th th e direc ti o n of th e IT AT in th e c a se of the a sse sse e f or A. Y 1 99 8 - 99 and 1 99 9 -2 0 0 0 .
Gro un d of ap p eal No 4 & 4 .1 are al l o we d f or
sta tis ti c al pur po ses. "
14. Si nc e t he i ssue al re a d y s ta nd s a d jud ic a te d a s a bo ve in t he p r e ce d in g a sse ssme nt ye a r , A. Y. 20 0 6 -0 7, t he de c ision r e nde re d th e re i n w il l a p ply to the i ssue s i n a l l th e re ma in i ng ye a r s co nc e r ne d. Ac cor d i ngl y, th e i ssu e of Di s a ll ow a n ce of P r odu ct D e ve l opme nt Exp e nse s in re la tion to p re -l a un ch of p r od uc t, b e i ng c a pi ta l in n a tu re s ta n ds a l low e d f or s ta ti st ica l p ur p ose s.
Iss ue N o .5 : Di sa l lo w a nc e of m a r ke t re s e a r c h ex p e n se s inc u rre d o n ma rk e t su r ve ys , ma r ke t r e se a r c h be in g c a pi ta l i n n a tu r e , ra i se d in a s se s s e e ' s a p p e a l fo r fo ll ow i ng A.Y .:
A s se s s m e n t Ye a r I TA N o . G r ou n d No .
2007-08 2 4 2 / C h d / 20 1 7 5 t o 5. 3 2008-09 2 2 5 / C h d / 20 1 7 3 t o 3. 2 2009-10 2 2 6 / C h d / 20 1 7 3 t o 3. 1 ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 17 of 120 2010-11 2 2 7 / C h d / 20 1 7 3 t o 3. 1 2011-12 2 2 8 / C h d / 20 1 7 3 t o 3. 1 2012-13 3 4 4 / C h d / 20 1 7 5 t o 5. 1 2013-14 47/Chd/2018 3 t o 3. 1 2014-15 1 5 0 0 / C h d /2 0 1 8 5 2015-16 1 4 9 5 / C h d /2 0 1 9 6
15. B r i e f fa c ts re la tin g to the is sue ar e t ha t the assessee had debited expenses incurred towards market research/study which were disallowed by the AO to the extent of 50% on an adhoc basis holding that the assessee had failed to provide name, address and PAN of the parties. The CIT( A) upheld the disallowance but for a different reason, holding that the impugned expenses were capital in nature giving enduring benefit to the assessee having been incurred on products which were yet to be launched.
16. At the outset itse lf, Ld. counsel for the assessee pointed out that the issue is covered by the order of the Tribunal in the case of GlaxoSmithKline Consumer Healthcare Ltd. for assessment year 1998-99 to 2001-02 and 2002-03, 2003-04 and 2004-05 to 2008-09, 2009-10, 2010-11, 2011-12, 2012-13 and 2013-14.
Our attention was drawn to the relevant findings in the said case as under :
"In this background we may peruse the expenses incurred ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 18 of 120 by the appellant under the head 'Promotional and Trade Marketing expenses'. Such expenditure has been incurred on existing products of the appellant and includes cost of presentation items, gifts, etc. given to the customers on the sale of the product, expenditure on advertisement material etc. The expenditure can be viewed as in actuality discount in kind allowed to the customers and expenditure on advertisement of the existing products of the appellant. Clearly the expenses incurred are of revenue nature. The expenses in question have merely facilitated the carrying on the business of the appellant more fruitfully. The argument o f the revenue that such expenditure result in enduring benefit in as much as the expenditure results in enhancing of the brand, in our view, cannot be taken to mean that the expenditure is capital in nature. As we have noted earlier, it is not each and every enduring benefit which is to be conclude as a capital outgoing. At this point it is pertinent to refer to the decision of the Hon'ble Apex Court in the case of Empire Jute Co. Ltd. (supra).
xxxxxx The aforesaid decision of the Hon'ble Apex Court clearly shows that the test o f enduring benefit is not conclusive to judge true nature of expenditure. One has to go further and ascertain as to whether particular expenditure results into an advantage of enduring nature in the capital field or revenue field. In the instant case having regard to the nature and details of expenditure it is clear that the expenditure under the head "Promotional and Trade marketing expense "
is an expenditure which is incurred wholly and exclusively for the purposes of business and is in the revenue field. The same is allowable as revenue expenditure. Now we may examine the expenditure under the head "Product Development Expenses ". The details of the expenditure show that the same has been incurred for introducing and developing new products. The appellant is engaged in the business of manufacture and sale of food and health care products under a well known brand. The expenses include development expenses for new products namely nutribar chocolate, Ribena soft drink, Horlicks re- launch expenses. Certainly such expenditure has the potential to improve the profitability of the appellant. ITA No.47/Chd/2018
ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 19 of 120 However, the issue to be considered is whether the expenditure seeks to enlarge the profit yielding capacity or it increases the efficiency of the business. This aspect, in our considered opinion, is to be decided in the light of the business realities under which the appellant is operating. The appellant is engaged in the business of manufacturing of fast moving consumer goods. The business of the appellant is subjected to volatility in consumer preferences, tastes and wants. The appellant is therefore required to perennially study the market and launch new varieties in its products line and meet the competition in the market. It is in this background one has to examine whether the impugned expenditure incurred on development, introduction and launching of newer products is an advantage in the revenue filed or not. In our humble opinion, the expenditure in question has merely enabled the appellant to remain competitive in the market and retain the customer preferences and loyalty towards its brand of products. The said advantage certainly is not limited to the period under consideration but spills over to the future also. So however this is not conclusive to hold that the expenditure in question is a capital expenditure-The parity of reasoning laid down by the apex court in the case of Empire Jute Co. Ltd. (supra) discussed by us in the earlier paragraph is squarely applicable with respect to such expenditure also.
xxxxx xxxxx In conclusion, we hold that having regard to the aforesaid discussion the claim of the appellant for allowability of impugned expenditure as revenue expenditure is justified. We, therefore set aside the order of the CIT(A) and direct the Assessing officer to delete the addition. "
17. Referring to the aforesaid decision, ld. counsel for the assessee pointed out that it had been held in the said decision that expenditure incurred which enabled the assessee to remain competitive in the market and retain its customer preferences and loyalty towards its brand of products, could not be said to be capital in nature, even though the benefit may spill over to few ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 20 of 120 years, since enduring benefit is not conclusive to judge the true nature of an expenditure and for the said purpose, what is to be ascertained is whether a particular expenditure results in an advantage of enduring nature in the capital field or revenue field.
He drew our attention to the parity of reasoning drawn in the said decision from the judge ment of Apex Court in the case of Empire Jute Company Ltd Vs CI T (1980) 124 I TR 1(SC).
18. Referring to the facts of the case before us, ld. counsel for the assessee pointed out that the assessee company is in the FMCG business (fast moving consumer goods), and it has to continuously expand and enlarge its range of products in order to survive and improve profits and it is towards this endeavour that the assessee develops new types of products from time to time and tests the m in the market and if the tests are successful, the products are commercially launched. He contended that it was in the course of these activities that the assessee had to incur expenditure of Rs. 1,26,83,000/-. The ld. counsel for the assessee contended that it is evident that the consumer market research expenses is a necessity for day today running of any fast moving consumer goods business which is marked by cut throat competition and instantaneous and continuous changes in ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 21 of 120 consumer preferences and for survival expenses of the impugned nature ha ve to be incurred. That these expenses are not incurred once and for all but are recurring in nature which is evident from the fact that such expenditure has been incurred in the future years also. He pointe d out that the decision of the CI T(A) holding it as capital in nature was based on account of his observations that the expenditure is not recurring but occurs once and for all, has the potential to enlarge the profit yielding capacity of the assessee by introducing new products and has provided the asse ssee with an advantage of enduring nature. The ld. counsel for the assessee pointed out that in view of the submissions made in this regard and the decision of the I TAT in the case of GlaxoSmithKline Consumer Healthcare Ltd. (supra) the reasoning of the Revenue authorities for holding the impugned expenditure falls flat.
19. The ld. DR on the other hand heavily relied on the order of the CIT(A) supporting his findings that the impugned expenses were capital in na ture and hence had been rightly disallowed.
20. We have heard both the parties and we have also gone through the decision of the ITA T in the case of GlaxoSmithKline Consumer Healthcare Ltd.(supra) cited before us. The issue ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 22 of 120 relates to disallowance of Market Research Expenses treating them to be capital in nature on account of the fact that they provide enduring benefit, are incurred for launching new products and are not recurring in nature. It is not denied that the assessee is a FMCG company catering to the needs of consumers in the fast moving goods category. As rightly pointed out by the Ld.Counsel for the assessee, the demands in these type of companies are continuously changing and evolving and there is cut throat competition involved in it. Such circumstances, require regular, continuous research and development of the products being marketed so as to remain relevant and competitive in the market. These facts cannot be denied. In the light of these facts, the expenditure incurred by the assessee on market research is merely for maintaining its profit earning ability and does not enhance the same. It is an expenditure which is incurred by the industry segment to which the assessee belongs so as to remain relevant and competitive in the said segment. By no stretch of imagination, the impugned expenditure, therefore, can be said to be capital in nature. The benefit, though made may be derived for a few years but is definitely not on capital account but on the contrary is on a revenue account to maintain its profitability only and not by way ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 23 of 120 of enhancing it. The decision of the I TAT in the case of GlaxoSmithKline Consumer Healthcare Ltd. (supra) cited before us strengthens the case of the assessee wherein product development expenses which were found to have been incurred not on capital account but on revenue account, though giving enduring benefit in future, were held to be revenue in nature and hence allowable. In view of the above, the disallowance of market research expense is directed to be deleted and we hold that the assessee is entitled to claim the same as revenue in nature. The assessee has alternately pleaded for allowance of depreciation which is of no re levance since the entire claim of expenses has been allowed treating it as revenue in nature
21. The issue of allowability of market research expenses, accordingly, is decided in favour of the assessee.
Iss ue N o .6 : The disallowance of post retirement medical benefit holding this ex penditure as being in the nature of contingent liability, ra i se d i n a sse s se e ' s a pp e a l fo r fo ll o wi ng A.Y .:
A s se s s m e n t Ye a r I TA N o . G r ou n d No .2008-09 2 2 5 / C h d / 20 1 7 5
2009-10 2 2 6 / C h d / 20 1 7 5 t o 5. 2 2010-11 2 2 7 / C h d / 20 1 7 5 2011-12 2 2 8 / C h d / 20 1 7 4 ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 24 of 120 2012-13 3 4 4 / C h d / 20 1 7 6 2013-14 47/Chd/2018 4 2014-15 1 5 0 0 / C h d /2 0 1 8 6 2015-16 1 4 9 5 / C h d /2 0 1 9 7 - 7. 1
22. Brief facts relating to the issue are that the AO noted from the balance sheet of the assessee that the a ssessee had made provision for employees' benefit which included provision for post retirement medical benefits liability. The AO disallowed the same holding tha t such provisions were not allowable, which was upheld by the ld. CIT(A) holding that the impugne d provision is only a contingent liability.
23. Before us, at the outset it was pointed out that identical issue of disallowance of provision for post retire ment benefits to employees had been adjudicated by the I TAT in the case of GlaxoSmithKline Consumer Healthcare Ltd. for assessment year 2007-08 to 2013-14 wherein the Tr ibunal had held a s under :
"In the facts of the present case before us the appellant had recognised and accounted for the post retirement benefit due to its employees, in terms of the scheme of employment and also in terms of the revised/ change in Accounting Standard!5 issued by ICAI which was to be followed during the year, is an allowable deduction in the hands of the appellant. The said claim being based on the valuation of the actuary is both scientific and one of the recognised method of accounting and quantifying the said post retiremental medical benefits. In such cases though actual and exact quantification may not be possible, however, the ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 25 of 120 liability so recognised by the appellant could not be said to be unascertained and contingent. The appellant having followed the mercantile system of accounting was compulsorily required to account for the said post retirement medical benefits as the same was quantified and had accrued during the year. The claim of the appellant was thus allowable irrespective of the fact that the appellant had made a provision in the books of account but had claimed the said deduction in the computation of income. It is well settled proposition that the way in which entries are made by the appellant in its books of account is not determinative of the question whether the appellant had earned any profit or suffered any loss as held by the hon'ble apex court in Sutlej Cotton Mills Ltd. v. CIT (1979) 116 ITR 1 (SC). It was further held by the hon'ble apex court that what is necessary to be considered is the true nature of transaction and whether in fact it has resulted in profit or loss to the appellant. Further, the said deduction was claimed during the year under consideration and the claim being bona fide is to be allowed in the year in which the same accrues though the said liability is to be discharged at a later date. "
24. Copy of the order was placed before us. Referring to the same, ld. counsel for the assessee contended that the ITA T held that provision for post retirement benefit made in terms of scheme of employment and also in terms of a ccounting standard issued by the ICAI which was required to be followed ,is an allowable deduction in the hands of the assessee. It was pointed out that the ITA T had also taken note of the fact that the claim was based on valuation of the same done by an actuary which is both scientific and one of the recognized method of accounting for quantifying post retirement medical benefits. That in such cases, though actual benefit cannot be exactly quantified, ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 26 of 120 however, liability so recognized cannot be termed to be contingent.
25. The ld. counsel for the assessee pointed out that in the impugned case also, the facts were identical, that the assessee having created the provision in accordance with the terms of employment and the Accounting Standard 15 of the ICAI relating to accounting of employee benefits. He, therefore, contended that the impugned provision had been rightly claimed by the assessee.
26. The ld. DR on the other hand relied on the order of the authorities below.
27. We have heard both the parties. We have also gone through the orders of the I TAT in the case of GlaxoSmithKline Consumer Healthcare Ltd.(supra) and have noted that the issue of allowability of provision created for meeting medical expenses of the employees post retirement had been adjudicate d in the said case wherein the ITAT had allowed the said provision on noting that it had been created on scientific basis by actuary in terms of and recognizing the scheme of employment a nd also the Accounting Standard-15 issued by the ICAI in this regard. Considering the same, the I TA T had held that the said provision ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 27 of 120 could not be, therefore, said to be contingent in nature and was duly allowable, being recognized method of accounting. In the impugned case also, we find, that the assessee had claimed the provision, valued by an actuary, created in terms of the scheme of e mployment and the Accounting Standard-15 of the ICAI, which facts have not been controverted by the revenue before us. Therefore, the issue, we find, stands squa rely covered by the decision of the ITAT in the case of GlaxoSmithKline Consumer Healthcare Ltd. following which we hold tha t the provision for post retire ment medical benefit is an allowable claim and the disallowance, therefore, made on account of the same is directed to be deleted.
The issue of allowance of post retirement benefits is accordingly decided in favour of the assessee. Iss ue N o .7 : Issue relating to disallowance of claiming CENVAT recovera ble holding that ex penditure to be not in the nature of trading ex penditure, raised in assessee's appeal for following A.Y.:
A s se s s m e n t Ye a r I TA N o . G r ou n d No .
2008-09 225/Chd/2017 6 t o 6. 1
28. The facts relating to the issue are that the assessee had written off service tax recoverable which was not allowed by the ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 28 of 120 Revenue holding that it pertained to earlier years a nd could not also be treated as bad debt.
29. The assessee contended before us that after the introduction of CENVAT Credit Rules, 2004, it had started taking credit of service tax paid on its input services i.e. Cross Charge Service and Advertisement services. The expenses were debited Ex- Service Tax Component, which was treated as recoverable to be adjusted as input C ENVAT Credit against the output service tax to be paid. Therefore, the input Service Tax was not treated as part of cost of services in the Profit & Loss Account but was accumulated under Service Tax re coverable in the balance sheet. That due to judicial pronouncement, the assessee was not allowed utilization of this service tax credit which was, accordingly, charged off to Profit & Loss Account in the year of the judicial orde r so pronounced. It was pointed out by the counsel tha t this amount of input credit having been paid against the entire value of services availed, was expense incurred in the course of business of the assessee and since it was not allowed to be set off against service tax payable in the impugned year, the same ought to have been allowed as a deduction on the amount being written off. Alternatively the assessee claimed that ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 29 of 120 the cla im should be allowed in the respective years to which it belonged since it represented cost of services availed.
30. The ld. DR on the other hand relied on the orders of the authorities below.
31. We have heard both the parties. The CENVAT credit write off claimed by the assessee has been denied by the Revenue holding it to be not in trading nature. The facts relating to the claim, not disputed by the Revenue, is that they represented the input service tax paid by the assessee for various services availed, which was accounted for separately, to be adjusted against out-put service tax to be paid. That it was claimed as a write off in the Profit & Loss Account on account of orders passed by the Service Tax Authorities denying benefit of set off to the said claim. In the backdrop of these undisputed facts, it is clear that the CENVAT Credits represented cost of services availed, which was not claimed in the relevant years since they were eligible to be set off against output service tax to be paid by the assessee. On this claim of set off being judicia lly held to be not allowable, we agree with the Ld.Counsel for the assessee, the impugned CENVA T Credits partook the character of cost of services and did so in the year in which the order holding them ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 30 of 120 as not eligible for setoff against output tax, was passed. Till then they merely represented asset by wa y of service tax credit available on account of the same. In view of the same, we find merit in the claim of the assessee that the write off of cenvat credit recoverable was allowable as revenue expenditure in the year written off and the disallowance so made by the revenue authorities, holding the m to be non trading in nature, we hold is not in accordance with law and is directed to be deleted.
This issue of claim of CENVAT credit recoverable is accordingly decided in favour of the assessee. Iss ue N o .8 : Disa llowance of provision of Market Claims on account of the assessee having failed to establish the nature of liability raised in assessee's appeal for following A.Y.:
A s se s s m e n t Ye a r I TA N o . G r ou n d No .
2010-11 2 2 7 / C h d / 2 0 17 6 to 6. 1
32. The facts relating to the issue are that the assessee had debited and claimed provision for market claims which were disallowed by the revenue holding that it was a liability of future date and was also contingent in nature. It was also observed that the explanation of the assessee, that the sa me pertained to VA T Schemes of dealers, was not supported by any documentary ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 31 of 120 proof of actual claim. Accordingly, the provision for market claims was disallowed.
33. Before us the submissions made before the authorities below were reiterated stating that the provision so claimed represented additional liability on account of VAT in respect of sale of finished goods made by the assessee which was provided as per estimate of such market claims by the dealers or distributors. Th e contention of the ld. counsel for the assessee before us was that the said provision had been made by the assessee for meeting the liability to be incurred in future and the said liability which incurred. In this respect he relied upon decision of the Apex Court in the case of Bharat Earth Movers Vs CI T 245 I TR 428 and in the case of Rotork Controls India Ltd. Vs CI T 314 I TR 62. The ld. counsel for the assessee contended that the present claim had been made by the assessee as per estimation of such market claims by dealers and distributors and therefore, it was the obligation as per the claims to this effect made by dealers/distributors and thus, crystallized and came into effect during the relevant previous years. He, therefore, contended that the impugned claim was allowable. Alternatively, he contended tha t the amount of market claim which was added ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 32 of 120 to the income of the assessee in subsequent years on reversal may be directed to be reduced from the same if the claim is held not allowable in the impugned year.
34. The ld. DR on the other hand relied on the orders of the authorities below.
35. We have heard both the parties. There is no dispute vis-à- vis the proposition of la w, that an ascertained liability which is a present obligation determined on a reasonable and scientific basis, is to be allowed as deduction even if the outflow for the same, to settle the obligation, arises in a future date. What is important is the incurrence of the liability. In the present case, the assessee has contended that it has incurred liability on account of VAT claims to be ma de by dealers which is to be discharged in the subsequent years, but, we find, no documentary evidence in this regard has been filed to substantiate its claim. In the absence of the same, we fail to understand how the liability arose in the impugned year or could be said to be present obligation of the assessee even though it was required to be discharged in future years. The facts regarding the claim itself are not clear and therefore, we are not inclined to agree with the contention of the assessee. However, ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 33 of 120 the alternate claim of the assessee of reducing the said provision reversed in subsequent years from its taxable income is justifiable and the revenue authorities are directed to allow the same in accordance with law.
36. The issue of allowance of provision of market claims is accordingly, adjudicated against the assessee. Iss ue N o .9 : Regarding claim of surcharge and education cess raised as additional ground by the assessee in all the impugned assessment years, i.e. A.Y 2007-08 to A.Y 2015-16:
37. This issue has been raised before us as a dditional ground alongwith an application seeking admission of the same on the grounds that it is a legal issue and therefore, needs to be admitted for adjudication in vie w of the decision of the Apex Court in the case of N TPC Vs CIT 229 I TR 383(SC). It was pointed out that identical additional ground was raised in assessment years 2005-06, 2006-07 already heard.
38. We have gone through the order of the ITA T pertaining to assessment year 2005-06, 2006-07 and we find that identical additional ground raised therein was a dmitted for adjudication and thereafter decided against the assessee holding as under :
"22. We h ave hea rd b o th the p arties. D ea ling first w ith ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 34 of 120 the ad m ission of the ad diti ona l g ro und raised as a b ove before us, the a sse ssee h as r aised a legal g ro u nd rela t in g to adm issib ility o f edu ca ti on ce ss p a id as a d edu ctio n a nd the adjud ic atio n o f the sam e surely do es not req uire an y investiga ti on of f resh facts. Even th e L d. D R has not objected to the a dm ission of the s am e. Th e add itional groun ds raised ar e acco rdi ngly a dm itted for ad ju d icat ion. Th e ord er was pro nou nced du ring the co urse o f hearing.
N ow co m ing to t he con tentio n of the L d. DR that the additio nal groun d , havin g not been raised b ef ore the CIT (A) and th us n o t dealt with b y h im , needs to be s ent back to h im fo r a djudica tio n, we a re not con vinced w ith the co nten tion of t he Ld . D R. Section 25 3 of the Act gr a nts righ t of a ppeal to th e ass essee, ag g rieved by a ny o f the orders specified th erein , to th e I T AT. As per Section 2 54 of the Act, the ITAT m ay after giving b oth th e pa rties to the ap pea l a n o ppo rtu nity o f bei ng hea rd, pass s uch orders th ereo n a s it deem s fit. Rule 11 of th e I TAT Rules,1 963, wh ich d eals wit h G roun d s which m ay be ta ken in a ppeal, p erm its raisin g of ad ditiona l g ro unds b y appella nts, bein g o th er th an th ose raised in th e mem oran dum of a ppeal, sub ject to th e sam e b eing heard by the lea ve of the T ribu nal. T he Ru le further p erm its the Tribu nal to not co nfin e itself t o the grou nds raised wh ile deciding an a ppeal.
Read in g the a bo ve tog ether, there is no restriction to the po wer of th e T ribun al in entert aining an add iti o nal groun d ra ised b ef ore it fo r a djud ic ation. As long as all facts are a va ila b le o n record all add ition al gro u nds, including those raised for th e fir st ti m e ca n be a dju dica ted by the IT AT. T his issue stand s settle d b y th e apex cour t in the ca se of NT PC L imited ( supra) w here on the qu es tion wheth er th e Tribu nal has jurisdi ction to exa mine a question of la w no t ra ised b ef ore the lo wer auth orities, it was categor ica lly held that the p o wer of the IT AT in dea ling with a ppe als has been expr essed in the st atut e in the widest pos sibl e term s. T hat th ere is no restrictio n of its pow er to deal on ly with th ose is sues which aris e from the CIT (A)' s or d er and an y questio n o f law , facts relat ing ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 35 of 120 to which are o n re cord , ca n b e ra ise d b efore the T rib u nal for the first time. It w as em ph asize d in th e decision that the p urpose of a ssessm ent p roceed ings is to correc tly assess th e tax liabi lity o f a ssessees in accordan ce wit h l aw and to this en d the po wer of the T rib una l can not be restricted o nly to d ecide issue s w h ich arise fro m the CIT (A)'s order. T he d ecision of the H o n'ble ap ex court on the issu e is as under:
"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 absence of any statutory provision, the appellate authority is ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 36 of 120 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 of th e settled po sition as a bove, we do not find any m erit in th e argu ment o f th e Ld . D R and even the case law r elied u p on b y the L d. DR, we fin d, is of no assistan ce a s it do es not la y a blanket prop osition as can va ssed by th e Ld . D R, b ut has been rend ered i n th e facts of the case before the H on' ble High Cou rt. In the sa id case the H on' ble High Co urt fou nd that the I TAT h ad set a sid e the ord er of the CIT (A) and a nnulled the orde r of the AO by decid ing the ap peal on th e additio nal gr ou nds ra ised a fter adm itt ing them for ad ju d ication. T ha t inste ad of concen tr ating on th e issu es a lr eady decided b y the CIT (A) , th e T rib una l only con centr ated o n th e grou nds ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 37 of 120 which ha d not b een ta ken befo re him an d decided the appeal a nn ullin g the assessm en t. I n this b ackg rou nd th e Ho n'ble H igh cou rt h eld th at the T ribun al h a d exhi bited undu e haste in d ecidin g the appeal b y adjudicatin g o nly the issu es wh ich w ere not even th ere before th e CI T( A) a nd tha t such appro ach wa s ne ith er le g al nor pr oper. I n the present case it is not that th e outco m e of the entire app eal dep en ds on the a d dition al gr oun d r a ised . On th e con trary the add itio nal gr ou nd im pacts o nly one claim of the assessee t o dedu ctio n o f ed uca tio n cess pai d, wh ich neither req uires a n y fa cts to be unco vered or even verif ied or investig ated . T here is n o fin ding o f fa ct to b e record ed vis a vis the im pug ned issu e an d he nce no im pedim en t to the IT AT in adjudicating the is sue. Th erefore we find th ere is no reaso n to restore it fo r a djudi ca tion to th e CIT (A). Th e co nten tion of the L d. D. R. therefore that the additio nal g round raised shoul d be restored to the CIT ( A) is acco rdingly dism issed.
Now com ing to the issue to b e adjudicated, wheth er the edu ca tion cess pa id by the ass esse e an d calcula ted as propo rtio n of th e in com e tax, is allo wable as expenditu re. Th is issue arise s i n th e context o f th e pro visio ns of se ction 40(a )(ii) o f the Act which deals with certain am oun ts which a re not a llo w able w hile c om puting th e inco m e un d er the head 'b usin ess an d professio n' a nd sub -clau s e( ii) thereof m ention s taxes pa id on profits a nd g ain s of business a nd prof ession as n ot a ll ow able. T he relevant provisions of sectio n rep roduced as und er:
"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.ITA No.47/Chd/2018
ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 38 of 120 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 referre d to by the L d. Coun sel fo r the a ssessee of t he H on' ble H igh Court s of Bom ba y an d Rajas than h ave catego r ically held edu cat ion cess to be not co vered u/s 4 0( a)( ii) of the Act. T he reaso ning being t hat this p rovisi on originally inclu d ed cess also which w a s specifically om itted later on and even the CBDT in Circular No. 91/58 /66 -IT J(19 ) dated 1 8-05 - 1967 cla rified that cess was no t co vered u /s 40( a)( ii). But at th e sam e tim e we are aw are of an d even the L d D R has pointed out the d ecision of the Ho n'ble Apex C ourt in the case of K. Srinivasa n (su pra ) wherein it ha s b een categorica lly hel d that the " tax o n in com e" would in clu de all surcharg e an d add itiona l surch a rg e levied on it. The Ho n'ble Apex cou rt w as seized wi th the issue whether su rch arge is to b e paid by asse s sees o n t heir in co me con sid erin g that it is n ot m entio ne d in the ch ar ging s ecti on of the Act. T he H on 'ble a pex co urt , in a d etailed o rd er tracing th e con ce pt of surch arge i n taxation law s, its legisla tive hist or y , its d ictio nary mean in g and the lan gua ge emp lo yed in the Fin ance Bil ls specifying rate s of taxes to be levied and t he su rch arge a n d add iti onal su rch arge to b e p a id thereo n, found t hat it only increa s ed the rate of ta x. Accordingly the H o n'ble a pex co urt h eld tha t surch arge a nd additio n al surc ha rg ed levied und er the Act fo rmed part o f ta x a nd th erefo re was liable to b e paid as per the ch argi ng p ro vi sion of th e Act. T he relev ant portio n of th e or d er of the H on 'bl e a pex court in this rega rd is as un der;
"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 ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 39 of 120 in 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 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 ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 40 of 120 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.
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 ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 41 of 120 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 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 ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 42 of 120 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 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 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 ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 43 of 120 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 the de cision of th e Ho n' ble Ap ex C o urt, w hen applied t o the pro visio ns o f sectio n 40( a)( ii) o f the Ac t, it is abu ndan tly clea r that th e tax levied on profits or gain of any business or pr o fessio n, which is not allowab le as p er the sa id sub- sec ti on, would inclu d e all sur charge an d additio nal surch a r ge levied th ereon.
Now co ming to th e nature of edu ca tion cess, th e Fina nce Bill, b y virtue of w hich the ra te o f ta xes a re determ in ed in Sch ed ule-1 th ereof, deals with the levy o f e ducation c ess at Chapter -II(12 ) as un der:
(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 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 of th e ab ove reveal s tha t th e educat ion cess is a n add iti onal surchar g e levied by the U nion.
Considerin g tha t ta x on in co me h as b een so d efined by the Ho n'ble Apex Co urt a s above a s including su rcha rge a nd additio nal s urcha rg e, it stan ds settled therefore, that th e edu ca tion cess is in the nature o f ta x levied o n th e inco me from the b usines s and profession a n d thus sp ecifica lly not allow able as per t he provision s of s ectio n 40 (a)( ii) of th e Act. T here is no s cope fo r a ny o the r in terpr eta tion / v iew on the issu e con sid ering the decisio n of th e a pex court in K. Srinivasan (su pra) rea d with th e Finance Bill levying edu ca tion cess.
ITA No.47/Chd/2018
ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 44 of 120 We t herefore ho ld that edu ca tion cess falls w ithin the scop e of am ou nts no t allo w ed as d ed uction u /s 4 0(a) (ii) of the Act.
Th e ad dition al g round s raised by the assessee a re, therefo re, dismissed. "
In view of the same, this issue is admitted for adjudication in all the appeals wherein raised and decided against the assessee.
Iss ue N o .1 0: Adj us t me n t m a de o n a c c o u nt o f i nt e re st o n re c e i va ble a l le g e d ly r e c h a r a c te r iz ing a s o n se c u re d lo a ns ra is e d i n th e f ollo w in g a p p e a ls of t he a sse s se e .ITA No.344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019
A.Y.2012-13 A.Y.2014-15 A.Y. 2015-16 Ground No.2 to 2.7 Ground No.2 to 2.7 Ground No.3 to 3.6
39. B ri e f l y s ta te d , th e TP O tr e a te d t he de l a ye d re ce i p ts of p a yme n ts fo r r e ce iv a b le s be y ond 30 days as i nte r na ti on al tr a n sa ct ion s a n d b e n ch ma rk e d th e sa me a p p l ying S B I b ase r a te pl u s 3 0 0 b asi s po in ts, de te rmin i ng th e r e b y the a d ju stme nt to the i nc ome of t he a sse ssee on a cc oun t of d ee me d i nte re st on r e ce i va b le s. The a s se s se e ob je cte d to t he s a me bef or e the DRP w hi c h ob je cti on w a s d is mis se d h old i ng th e tr e at me nt of t he d e l a ye d re ce i pt s of p a yme n ts for r e ce i va ble s to h a ve be en r i ght ly tr e a te d a s i nt e r na t ion a l tr a ns a cti on s, a s d e fi ne d for the p ur p ose of t ra nsf e r p r ic in g a d jus tme n t to b e ma d e as pe r ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 45 of 120 p r ovi si on s of th e A ct, b ut a t t he sa me ti me d ire cte d tha t for tr e a t in g the s a me a s in te rn a ti on al t ra nsa cti on de la y b e yon d 60 d a ys i s to be c ons id e re d a n d the in te re st r a te t o be a pp l ie d i s LI B O R p lu s 4 00 b a si s po in ts.
40. Th e r e a r e p r ima r i l y tw o a sp e ct s t o th is i ssu e w h ic h ha s b ee n ch a lle n ge d b e f ore us;
i) th e tre a tme nt of th e de lay e d p a yme nt of r e ce i va b le s as i nte r na ti on a l tr a n sa c tio ns as d e f ine d u/s 9 2 B o f the A ct;
i i) De te r mi na t io n of a r ms ' le ngt h pr ic e a d ju stme nt b e ma de to the in come of the a sse sse e i n re l a ti on to th e sa i d tr a n sa c ti on.
41. Ta k i ng up fi r st th e is sue of c ha r a c te r i za t ion of d e l a ye d p a yme n t of re ce i v a ble s be y ond 60 days as i nte r na ti on a l tr a n sa ct ion s u /s 9 2 B of t he Act , w e f in d tha t the AO / TP O a n d th e D RP b ot h ha v e re l ie d u p on th e i ns e r ti on of Exp la n a ti on b e l ow se cti on 92 B of th e Ac t by th e F i na n ce Act , 2 0 12 w i th r e tr os pe ct ive e ff e c t f r om 0 1 .0 4 .2 0 0 2 cl a r if yi ng th at t he i nte r na ti on a l tr ans a cti on sh a l l i n cl ud e a n y t yp e of a d va n ce p a yme n ts or de fe rre d p a yme n ts or re ce i va b les . Th e D RP th e re a f te r ha s r e l ie d u p on var i ous I TA T d e c is ion s, mor e p a r ti cul a r l y i n th e ca se of Te ch boo ks I nte r na ti on a l P vt. Lt d. V s. ITA No.47/Chd/2018
ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 46 of 120 D C I T ( 2 01 5 ) - TI I -2 8 2 -I TA T-D E L- TP , a f f ir mi ng thi s p os iti on tha t ou tsta n d in g r e ce i va ble s con st itute in te r n a ti on al t ra nsa c ti on u/s 9 2 B of th e Act .
42. Ou r a tte n ti on was drawn by t he Ld. C ou ns e l for t he a ss e s see to t he de ci si on of the H on' bl e De lh i Hi gh C ou r t i n t he ca s e of P r . CI T Vs . Kus um H e a l th ca re P vt. Ltd . In I TA N o. 7 65 /2 0 1 6 d a t e d 2 5. 0 4. 2 0 17 p oi n tin g o ut t he r e fr om t ha t t he H on' bl e H igh C our t ha d i n te r p r ete d thi s ve ry e xp la n a ti on u/s 92B of th e A ct, h ol d in g t ha t the e x pre ssi on "r e ce i va b le s"
a p p e a r i ng in the a cco un ts of th e e n ti ty coul d n ot be a u toma ti ca l l y ch a ra cte r i ze d a s a n in te r n a ti ona l tr an sa ct ion .
Th a t fo r d oi n g s o the TP O ne e d s to di sc e r n a p a tte r n i n t he r e ce i va b le s o uts ta n di n g i nd i ca ti n g th a t th e a rr a n ge me nt r e f le cts a n in te rn a ti on a l tr a ns a cti on in te nde d to b e ne fi t the AE i n some w a y. I t wa s p oi n te d o ut tha t th i s vie w w a s r e i te ra te d by th e H on 'b le H i gh C our t in th e c a se of Av e n ue Asi a P v t. Ltd . V s.
D C I T r e p or te d a t 3 9 8 I TR 1 2 0 . Th e Ld . D R w a s una b le to b r i ng ou r no tic e a ny con tr a r y de ci si on of a n y H i gh C ou r t on the i ssu e .
43. I n vie w of the sa me , th e re fore , the a b ove in te r p re ta ti on by th e H on 'ble De lh i Hi gh C ou rt , of th e e xp l a na t io n i ns e r te d to ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 47 of 120 se cti on 9 2 B of the A ct de f in i ng the i nte r na t ion a l tr a ns a cti on s, w i ll p r e va i l . Fol low i ng the de ci sion of th e H on 'b le De l hi H i gh C ou r t a n d a pp l yi ng i t to th e is sue be fore u s, we h ol d t ha t f or ch a r a cte r iz i ng the re ce i va ble s a s i nt e r na ti on a l tr ans a cti on s, th e sa me cou ld n ot h a ve bee n don e a u toma ti ca l l y a nd the TP O i de a l ly s hou ld ha ve s tud ie d the pa tte r n i n t he a ccou n ts of t he a ss e s see re g a rd ing r e c ove ry of th e a moun ts re ce i v a ble s a n d d e te r min e d fr om the sa me the re a fte r w he the r the sa me r e f le cte d a p a tter n i n di ca t in g a n a r r a nge me n t e nd u ri n g t o t he b e ne f it of t he AE.
44. I n t he f a ct s of the ca se s b e f ore us r e l a ti ng to a sse ssme nt ye a r s 2 0 1 2 -13 , 20 1 3- 14 a nd 2 0 1 4 -15 , w e fi n d, no su ch e xe r cise h a s b e e n d one by th e TP O bu t i n fa c t h e h a s on l y p r oce e de d to ch a r a cte r ize the re ce iv a b le s outs ta n di n g f or re cove r y of p a yme n t be yon d a s p e ci fi c pe r i od a s in te r n a ti ona l tr a ns a cti on s. Th e r e f or e , the ba si s of ch a r a cte r i z in g the re ce i va b le s as i nte r na ti on a l tr an sa ct ion s in t he ca s e s b e fo re u s i s cl e a r l y i s n ot i n a c cor d a nc e w i th l a w a s in te r p re te d by the H on' bl e De lhi H ig h C ou rt i n th e ca se of Kus um He a lt hc a re P vt . Ltd . ( sup r a ) .
45. I n t he fa c ts of the c a se re la t in g to a sse ss me nt yea r 2 0 1 2- 1 3 t he a sse ssee h a s p oi nte d out th e f a cts re la tin g to t he ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 48 of 120 r e c ove ry of the re ce i va b le s d ur i ng th e ye a r co nte nd i ng , i n tu rn , th a t t he re co ul dn 't ha v e be e n a p a tte r n re fle c ti ng in a n y w a y of a n y be ne fi t be i ng p a ss e d to the A E on a c cou nt o f ou tst a nd i ng r e ce i va b le s. He ha s p oi n te d o ut tha t t he a sse ssee ha d r e c ove re d 9 9 .7 2 % of it s re ce i v a ble s w i th in a gr ee d ti me l ine a s un d e r :
1) 1 6 i nv oic e s of Rs. 2 8. 0 6 cr or e s h a ve bee n r e a li ze d w i thi n 3 0 to 3 2 d a ys .
2) 1 8 i nv oi ce s o f Rs. 7 .5 cr or e s h a ve be e n re a l i ze d w i th 6 0 to 6 2 d a ys
3) 3 i nv oi ce s of Rs.3 .1 cr or e s ha ve b e e n re a l ize d afte r 6 2 d a ys .
46. Th i s fa c t w e fi n d i s c or ro bo ra t e d by the ca l cul a ti on sh ee t a n ne xe d to the tr a n sf e r p r ic in g or d e r p a s se d for t he imp u gne d ye a r u /s 92 C A (3 ) o f the A ct, ca l cul a ti n g t he a d j us tme n t t o b e ma d e on a cc oun t of t re a ti ng t he r e ce i va b le s a s i nte r na ti on al tr a n sa ct ion s, p l a ce d be fore us a t p a ge N o. 2 62 of the a ppe a l se t f il e d w hi c h l is ts 8 1 i nv oi ce s a s p oi nte d out b y t h e Ld. C ou ns e l f or th e a sse ssee a l so a bo ve a nd in d ic a te s tw o i nv oic e s h a vi ng b ee n re a li ze d bey ond 62 da y s tota l in g i n a l l to 0 . 1 cr ore s. Th e r e f or e , the d a ta f il e d b y th e a sse ssee a s a bo ve st a nds co rr ob or a te d b y the ca l cul a ti on sh ee t o f TP O a l s o. C on si d e r i ng th is f a ct th a t o nl y Rs. 0 .1 c r or e s out of t ota l r e ce i va b le s of ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 49 of 120 Rs .3 6 .0 2 c r or e s ( 2 8. 0 6+7 . 5 +0. 1 ) ha v e bee n re a li ze d be yon d 62 d a ys , wh i ch c ons ti tut e 0. 2 % of th e tot a l re ce i va b le s a n d 9 9 .7 2 % of the re ce i v a ble s , the re fore , h a vi ng be e n col le cte d w i thi n ti me sc hed u le , un d oub te dly th e re is n o pat te r n , in the f a cts of th e ca se r e la t in g to th e imp u gne d y e a r , of re cove r y of p a yme n ts f r om r e ce i va b le s in d ic a ti ng any a rr a n ge me nt i nte nde d to be nef it t he A E i n a n y w a y. I n fa c t the re cove r y of r e ce i va b le s e f fe cte d be yo nd a pe r iod of 6 0 d a ys i n th e imp u gne d ye a r i s too min or a n d i m ma te r i a l to r e fle c t a ny p a tte r n a s s uc h, a n d w e , th e re f ore h ol d , th a t a s p e r the d e ci si on of th e H on 'ble D e l hi H ig h C our t it c oul d not be sa i d t ha t ou tst a nd i ng r e ce i va b le s i n the i mp ug ne d ca se pe nd i ng f or re cove r y be yond 60 d a ys c oul d be t re a te d as i nte r na ti on a l tr a ns a cti on s. Th e r e f or e , the ad ju stme nt ma d e on a cc oun t of i nte re st on the sa me , for A. Y. 20 1 2 -1 3, a mo un ti n g to R s. 14 , 8 19 /- is d i re cte d to b e de le te d .
47. I n the re ma i ni n g ye a r s i.e . a sse ssme n t ye a r s 2 0 14-1 5 a n d 2 0 15 -1 6 t he f acts as a b ove re l a ti n g to the r e cove r y of r e ce i va b le s a r e not the re b e fo re us, the re f ore , th e i ss ue n ee d s to be re s tored back to th e TPO to d e te r min e the ch a r a cte r iz a ti on of ou ts ta nd i ng r e ce i va b le s as i nte r na ti on a l ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 50 of 120 tr a n sa ct io ns i n a ccor d a n ce w it h the ob se r va ti on s o f the H on 'ble D e l hi H ig h C ou rt in th e ca se of Kus um H e a l th ca r e P vt . Ltd . ( su pr a ) .
48. We ha ve a l so not e d fr om t he ord e r of the H on'bl e De lhi H ig h C ou rt i n th e ca se of Kus um He a lth ca re P vt . Ltd . (s up r a ) th a t it h a s b e e n he ld th a t the de la y i n re cove r y of r e ce i va b les w oul d h a ve a n impa c t on t he w or ki n g c a pi ta l o f t he a sse ssee w hi c h a l so ne e d s to b e s tud i e d . I n th e d e ci si on of th e I TA T i n th e c a se of K usu m H e a l thc a r e P vt . Ltd . vs AC I T in I TA N o. 6 81 4 /D e l /2 0 1 4 , r e l ie d up on by the Ld .C oun se l f or t he a ss e s see be f ore u s, we ha ve note d tha t the ad j ust me nt on a cc oun t of ou tsta n d i ng r e ce i vab l e s w a s de le te d hol d i ng t hat th e w or k i ng ca p ita l a dj u stme n t w ou l d ta k e i nt o a cc oun t t he i mpa ct of d e l a ye d re cove r y of d e b tor s a s a l so a ny ac cou nt p a ya b l e me ch a nism a d opt e d b y the a s se s se e t o b a l a nc e the d e l a ye d re a li z a tion. I t w a s, the ref or e , he l d tha t i f t he ope r a ti ng p r ofi t ma r gi n of th e a ss e ssee ar e h ighe r th a n th e ope r a ti ng p r ofi t ma rg in of comp a r a b l e c a se s a f te r w or k i ng ca p i tal a d j ust me nt , th en no a d j us t me n t on a ccou nt of r e a l i za t ion of tr a d e re ce ip ts i s r e q u ire d.
49. C ons id e ri n g the sa me w e re store the is sue of tre ati ng t he ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 51 of 120 a cc oun ts re ce iv abl e s a s i n te r n a tiona l tr a n sa ct ion s a n d b e n ch ma r k in g th e s a m e f or th e p ur p ose of a dj u stme nt t o b e ma d e to th e i nco me of th e a sse ssee , to th e TP O to d e te r min e the sa me a f re sh i n a cc or d anc e wi th l a w .
50. Th e r e for e , fo r a sse ssme nt ye a r s 2 0 1 4 -15 a n d 20 1 5 -1 6 t he i ssu e i s re store d b a ck to t he TP O a n d is , t he r e fore , a l l owe d f or st a ti sti ca l p u rp os e s .
Iss ue N o .1 1: Tr a nsf e r P ri c in g A dj us tm e nt in r e l a ti o n t o ex p o r t o f g o o d s r a i se d in a s se s se e ' s a p p e a l fo r fo ll ow in g A .Y. :
A s se s s m e n t Ye a r I TA N o . G r ou n d No .
2012-13 3 4 4 / C h d / 20 1 7 2 t o 2. 7 2014-15 1 5 0 0 / C h d /2 0 1 8 2 t o 2. 7 2015-16 1 4 9 5 / C h d /2 0 1 9 3 t o 3. 6
51. Th i s is su e p e r ta i ns o nl y to a s s e s sme n t ye a r 2 0 1 5-1 6 , th e re f ore , the fa ct s r e le va n t to th e sa i d ye ar are b e i ng d is cu sse d he re u nd e r:
52. B ri e f f a cts re la t in g to the is su e a r e th a t th e a s se sse e h a d r e p or te d s a le of p ro du cts by i t to i ts a ss oci a te e nt e r pr i se (A E) G la x oSmi th k li ne Exp or ts Li mite d , UK a moun ti ng to Rs .3 7 ,9 3 ,4 9 , 35 5 /-. The a ss e ss ee di sc lo se d a n op er a t in g ma r gi n of 9 . 5 9 % on th e s a me ( OP /O C ) and in th e TP S tu dy t he ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 52 of 120 tr a n sa ct ion w a s b e n ch ma r ke d b y th e Tr a n sa c ti on a l N e t Ma r gi n Me t hod ( TN M M) co nsi d e r i ng the a s se s se e a s the te ste d p a rt y. C omp a r a b le s s e le c te d d is cl ose d a n op e r a ti ng ma r gi n of 10 . 63 % a n d t he tr a ns a cti on wa s cl a i med to be a t a rms ' l e ng th p r i ce f a ll i ng w i thi n ( + /-) 3 % r a nge o f th e o pe r a ti ng p rofi t ma r gi n of th e a sse ssee . Th e Tr a n sf e r P r i ci ng O ff i ce r ( TP O ) c ar r i e d ou t a f re sh se a r ch a nd se le c te d se ve n comp a r a b le s wi th a me di a n O P /OC ma r gi n of 1 4. 0 4 %. A cc o rd i ng ly , an a d j us tme n t of Rs .1 2 4 .0 4 l a cs wa s comp u te d b y t he TPO b y a pp l yi ng thi s ma r gi n o n the op e r a ti on a l cos t of t he a ss e ssee w hich a m ou nte d to Rs. 3 46 1 . 53 l a cs . Th e a sse ss ee fi le d ob je cti on b ef or e t he DR P co nte nd i ng tha t the good s sol d to i ts A E w e re in tu rn to be p r ovi d e d to W or l d H e a l th O r ga n iz a ti on ( W HO ) , as pe r a Me mo ra n d u m of U nd e r s ta nd i ng e nte re d i nt o w i th i t, fr e e of c ost f or e l i min a ti on of lymp h a ti c f i l a r i a si s d i se a se fr om e nd e mic co un tr ie s. Th e a s se sse e a ls o o bj e cte d to the i nc lu sion of ce r ta i n co mpa r a b l e s. Th e D RP di smi s s e d a ll the con te nti on s of t he a ss e s see h ol di n g in p a r a s 3 .3 to 3. 5 of its or d e r as un d e r :
"3.3 Having considered the submission of the assessee, we are of the view that the subsequent action of the AE is not material to decide the arm's length price of exports to the AE. The very fact that in the TP study the profit margin of the transaction has been benchmarked shows that the arguments of the transaction being not for commercial ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 53 of 120 purposes does not hold any ground, and must be rejected.
3.4 The assessee has objected to rejection of certain companies by the TPO from the set of comparables in the TP study. The following companies were rejected by the TPO on the grounds that they were not appearing in the search portal based on accept/reject matrix of the assessee:
(i) Celebrity Biopharma Ltd.
(ii) Elysium Pharmaceutical Ltd
(iii) Strides Pharma Science Ltd
3.4.2 The Financial statements submitted by the assessee has been perused, which has apparently been downloaded from MOCA Website or respective company website. It is also seen that in case of Celebrity Biopharma Ltd 99% shares are held by the promoter director and the nature of the business/products cannot be ascertained from the annual report. The company does not own any patent or intangible and hence is a contract, manufacturer at est. The TPO's action of rejecting these comparables and other compatibles which are not in public domain is therefore upheld. In case of Zim Laboratories Ltd the TPO has rejected n the grounds that it is functionally not comparable. It is admitted that the product names are formulations and compositions which are sold to Pharmaceutical companies for final production of drugs and medicines. TPO's action is upheld.
3.5 The assessee has requested for grant of working capital adjustment to the operating margins, which has been denied by the TPO. Having considered the submission of the assessee the TPO is directed to allow working capital adjustment to the assessee and the set comparables. The assessee's claim for risk adjustment is rejected being devoid of merit and to lack of computability."
53. Th e D RP , h ow e ve r , a l lo we d w or k i ng c a pi ta l a d ju st me nt to th e a s se sse e a n d a cc or di n gl y a f ter g iv in g e ffe c t to the d ire cti on of the D RP ,the TP O r e comp u te d th e a r ms' le n gth ma r gi n a t 1 2 .1 2 % a n d ma d e a n a d j us tme n t of R s.8 7 , 58 , 2 87 / - i n th e p r i ce ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 54 of 120 of i n te r na t io na l tra n sa c ti on of e xpor t of good s.
54. B e f ore u s t he Ld .C ou ns e l f or the a s se s se e re ite ra te d the co nte nti on ma d e b e f ore the D RP th a t th e t ra nsa c ti on of s a le of goo ds w a s n ot for c om me r ci a l p ur p ose s a n d the AE h a d fu r the r d on a te d the goods to W H O w it hout a n y c ha r ge . Th e re cou ld not h a ve be e n , th e re for e , a n y mot iv e on th e p a r t of th e a s se s se e to d iv e r t a n y p a r t of i ts p r of i ts to i t s f or e i gn a sso ci a te e n te rp r i se a n d, t he re fore , th e re oug ht to ha v e be e n n o a d j ustme n t ma d e to th e s a le p ri ce of th is tr a ns a cti on . H e a ls o ob j e cte d to the e x cl usi on of ce r ta i n comp a r a b l e s b y th e TPO . H i s su bmi ss i ons i n w r iti n g i n th i s re ga r d a re a s u nd e r :
"The DRP allowed working capital adjustment in the margin of comparable companies. After giving effect to the direction of DRP, the TPO re-computed the arm's length margin at 12.12% and made an adjustment of Rs. 87,58,287 in the price of international transaction of export of goods.
It is submitted adjustment made by the TPO with respect to the difference in the arm's length price of international transaction related of sale of goods to the associated enterprise is not sustainable and liable to be deleted for the following reasons submitted as under:
Re: The transaction of sale of goods was not for commercial purposes and the AEs have further donated the goods to WHO without any charge It is submitted that in terms of Memorandum of Understanding entered by the associated enterprise with World Health Organization ('WHO'), the associated enterprise agreed to provide Albendazole 400 mg tablets required by WHO for ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 55 of 120 implementation of program for elimination of Lymphatic Filariasis disease from each endemic country.
The said Albendazole 400 mg tablets were agreed to be provided by the associated enterprise to WHO with any charge. However, the associated enterprise has assured the appellant, an arm's length return of 9% (approx.) on direct and indirect expenses incurred in manufacturing such Albendazole 400 mg tablets and supplying to WHO on its behalf.
Accordingly: the appellant, during the year under consideration, has entered into international transaction of sales of 'Albendazole 400 mg' tablets for Rs. 37,93,49,355 to its group company, namely. GlaxoSmithKline Exports Limited. UK and earned an operating profit of 9.59% over cost. It shall be noted here that there could not be nay motive on the part of the appellant to divert any part of its profit to its foreign associated enterprises, by way of selling goods at a lower price as the associated enterprise is not selling the goods, but donating the same to WHO for a philanthropy cause. It would, therefore, be concluded that there was no transfer of profit by the appellant to the associated enterprises so as to result in an adjustment. Re: Fresh search undertaken by the assessc It is submitted that the appellant, in order to verify the suo- moto search undertaken by the TPO, itself undertook a fresh search of comparable companies on the basis of quantitative and qualitative filters applied by the TPO. The search resulted in 22 companies with operating profit margin ranging from 2.30% to 13.49%.
S. No Company Name OP/OC
1 Strides Pharma Science Ltd. -24.7%
2 Kilitch Drugs (India) Ltd. - 11.2%
3 Celebrity Biopharma Ltd. -10.0%
4 Colinz Laboratories Ltd. -0.3%
5 Syschcm (India) Ltd. -0.2%
6 Ozone Pharmaceuticals Ltd. 0.3%
7 Laboratories Ltd. 2.1%
8 Elysium Pharmaceuticals Ltd. 2.3%
9 Resonance Specialties Ltd. 2.5%
ITA No.47/Chd/2018
ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 56 of 120 10 Triochem Products Ltd. 5.7% 11 Advik Laboratories Ltd. 6.6% 12 Panchsheel Organics Ltd. 9.00% 13 Wockhardt Ltd. 9.2% 14 Tyche Industries Ltd. 10.19% 15 Granules India Ltd 13.49% 16 NGL Fine Chem Ltd. 14.04% 17 Hikal Limited- Pharma Segment 18.05% 18 Shilpa Medicare Limited 23.27% 19 IOL Chemicals and Pharmaceuticals 25.03 Limited-Bulk Drugs Segment 20 Kothari Phytochemicals & Inds.Ltd.- Bulk 31.42% Drugs segment 21 Harman Finochem Ltd. 38.43% 22 Suven Life Sciences Ltd.- Manufacturing 56.02% Segment 35th Percentile 2.30% 65th Percentile 13.49% Accordingly, it was submitted that since the operating profit margin earned by appellant at 9.59% is within the arm's length range of 2.30%- 13. 4-9%. no adjustment ought to be made in the arm's length price of international transaction of export of goods.
Re: Incorrect exclusion of comparable by the TPO In this regard, it is respectfully submitted that while applying TNMM, the following companies excluded by the TPO in the impugned order ought to be considered as comparable for the reasons tabulated as under:
Company Reasons for Remarks of the applicant Name Remarks of the applicant exclusion by TPO Celebrity Cherry picked It is submitted that the TPO himself has Biopharm by the undertaken a fresh search of comparable a Ltd. appellant as companies, applying additional Elysium the said quantitative and qualitative filters, on Pharmaceu companies were the basis of contemporaneous not appear ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 57 of 120 ticals Ltd. in accept/reject information available in public Strides matrix domain. Had it been the case that Pharma submitted by only those companies can be Science the applicant considered as comparable which Ltd. along with has featured in the search the TP study.
analysis of comparable companies undertaken at the time of preparation of transfer pricing study, then under such circumstances, the TPO should not have undertaken a fresh search and considered a fresh set of the TPO comparable companies. In fact, has cherry picked only the companies with higher margins in order to predetermined result and rejected the said companies having lower margins.
It may be noted that the companies passes all the filters applied by the TPO and functional dissimilarity is not disputed by the TPO. Therefore, the company be considered by the TPO.
Triochem Insufficient Complete financial information with Products financial audited accounts is available on the Ltd. information in website of the company itself at the public (http://www.triochemproducts.com/erro domain rdocs/notfound.aspx?m=err. Further, the companies passes all the filters applied by the TPO and functional dissimilarity is not disputed by the TPO.
Zim Functionally The products manufactured by the said Laboratori not comparable company include granules. pellets es Ltd. to the applicant (sustained, modified, extended release), company. taste masked powders, suspensions, tablets, capsules etc. which caters to various therapeutic segments such as cardiovascular, anti-infective, gastrointestinal, respiratory system nervous system, musculoskeletal, hematology system and vitamins.
The product name listed above are the name of the compositions only and not the ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 58 of 120 commercial name under which it is sold.
In fact, as per the website of the company, it is providing services to following medical companies, which are engaged in commercializing and selling such products after further processing:
In view of the aforesaid, the company ought to be ns in the final set of comparable companies.
F i n a l S e t o f c o m p a r a bl e c om p an i e s Af te r c o ns i d e r i n g a n al ys i s , th e r an g e of av e r ag e o p e r ati n g m ar g i n of th e f i n al l i s t o f co m p ar ab le c o m p an i e s wo r k s o u t to 2 . 3 0 % to 1 1 . 4 0% as u n d e r:
S . N o. C om p a n y A d ju s te d O P / O C
1. S tr i d e s P h ar m a S c i e nc e L td . -24.7%
2. C e l e br i ty B i o p h ar m a L td . -10.0%
3. Z i m L ab o r a to r i e s L td . 2.10%
4. P an c h s he e l Or g an i c s L td. 2.23%
5. E l ys i u m P h ar m ac e u ti c al s L td . 2.30%
6. T r i o c he m P r od uc ts L td . 5.70%
7. T yc h e In d u s tr i e s Ltd . 6.87%
8. N G L f in e - C h e m L td . 11.40%
9. G r an u l e s In d i a L td . 12.10%
10. IO L C h e m ic al s 22.28%
P h ar m ac e u ti c al s L td .
11. K o th ar i P h y to c h e m i c al s & 27.84%
In d s . L td .
12. H ar m an F i n o c h e m L td . 36.39%
3 5 t h P e r cen t i l e 2 . 3 0%
6 5 t h P e r cen t i l e 11.40%
S in c e , th e o p e r ati n g m ar g i n o f th e a p p l i c an t a t 9 . 5 9 % l i e s wi th i n th e r an g e of f i n al c o m p ar ab l e c o m p an i e s f ro m 2. 0% to 1 1 . 4 0% , th e r ef or e , th e i n te r n a ti o n al tr a n s ac ti o n o f e x p or t o f g o o ds u n d e r tak e n b y th e ap p l i c an t o u g h t to b e c o n s i d e r e d to b e at ar m ' s l e n g th c r i te r i a. "
Th e Ld . DR s up p or te d t he or de r of th e TPO / DR P. ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 59 of 120
55. We h a ve he a r d b oth th e p a r tie s. W i th re ga r d to t he a ss e s see 's co nte nt ion of n o a d just me nt t o be ma de on a c cou nt of t he e n d p ur pos e of t he tr a n sact ion of s a le of good s to i ts AE b e i ng ph i la n th ropi c , w e d o n ot fin d a n y me r i t i n t he s a me for th e re a so n th a t t he c omme r ci a l i nt e n tio n in the t ra nsa c ti on b e twe e n t he a sse ssee a n d its AE i s a n a d mit t e d fa c t, t he a ss e s see h a vi n g ch a rg e d a ma r gi n o f 9 % a pp r oxi ma te l y on t he co st i n cu rr e d by i t. W he n the re i s a n a d mitt ed c om me r ci a l i nte nt i n th e tr ans a cti on , i t s ho ul d i d e a l ly b e , the re fore , th e n a t a r ms ' le ng th o nl y. The sub s e q ue nt a cti on of t he AE o f u si ng th e pr od u ct/go ods f or p h il a nt hr op i c p u r po se can not h a ve a ny e f fe ct co ns id er i ng the a dmi t te d c omme r ci a l tr a ns a cti on b e twe e n the a ssess ee a n d i ts AE.
56. As f or ot he r con te nti on of the a sse sse e r e ga r d i ng e x cl usi on of cer ta i n c ompa r a b l e s, we h a ve n ote d th at t he a ss e s see h a s give n de ta i le d re as ons f or i n cl usi on of c e r ta i n co mpa r a b l e s i n th e li st of comp a r a b le s se le c te d b y the TP O w hi c h in cl ud e s the f oll ow i ng n a me s :
1) C e le br i ty B i op har ma Ltd .
2) El ys iu m P h a r ma c e u tic a ls Lt d.
3) S tr id e s P h a r ma S ci e n ce Ltd .
4) Tr io ch e m P r od uc ts Ltd .
ITA No.47/Chd/2018
ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 60 of 120
5) Z im La b or a tor i e s Ltd .
57. Th e D RP , w e f in d , ha s onl y d is cu sse d a n d de a lt w i th t wo co mpa r a b l e s i. e . Ce le b r i ty B i op ha r ma Ltd . a nd Zim La b or a tor i e s Lt d. w hi l e r e je ctin g th e e n ti re c ompa ra b l e s p oi nte d ou t by the a s se s se e a s ab ove , a s ha v i ng b ee n w r ong ly e x cl ude d b y the TP O . Ev e n vi s-à -v is th e re a s ons gi ve n f or r e je c ti ng Zim L a b or a tor i e s Lt d. as b e i ng not f un ct ion a l ly co mpa r a b l e s, t he f in d in gs of th e D RP th a t the p r od uc t n a me s are f or mul a ti on and c omp osi ti on w h ic h are s old to p ha r ma c e ut ic a l co mpa n i e s fo r f in a l p r od uct ion of d r ugs a n d me d i ci ne s, we f i nd , ha s n ot c ons id e re d the f a cts r e l a ti ng to t he co mpa n y as p oi nte d out to us w he re in th e asse ssee ha s me n ti one d t he p r od uc ts ma n uf a ctu r e d by sa i d c omp a ny a s i nc lu d in g ta b l e ts , c a p sul e s , e tc . w h ic h c a te r to var i ous th e r a pe u ti c se gme n ts. Ho w t hi s h a s bee n re a d to me an on ly f or mul a ti ons and c omp osi ti on sol d f or fi n a l pr od u cti on of d r ugs , w e fa i l to un d e r st a nd .
58. Si nc e we f in d th e DRP ha s n ot a p p l ie d it s mi n d co mp l e te ly to the con te n ti on of the a sse s see b e f ore i t, we c ons id e r i t fi t to r e s tore the i ss ue ba c k to th e TP O f or r e co nsi der a ti on of t he co nte nti on of the a sse ssee re ga r d in g e x cl usi on of ce r ta i n ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 61 of 120 co mpa r a b l e s f r om the li st o f compa r a b l e s s e le cte d by the TPO .
Th e TP O i s d ir e cte d to p a s s a sp e a k i ng o rde r d e t a il i ng t he r e a s ons f or re je ct in g th e a b ove comp a r a bl e s a s po in te d out by th e a s se s see a nd th e re a fte r a dj udi ca t e the i ssue in a cco rd a n ce w i th law. N ee dle ss to add the a sse ssee be gr a n te d due op p or tun i ty of he a ri n g i n th i s re ga r d . Th i s i s sue th e re f ore , is p a r tl y a l l ow e d f or sta ti st ic a l p ur p ose s.
59. We s ha l l n ow deal w ith the appeals f or e a ch of t he a ss e s sme n t ye a r s b e f ore us .
A. Y. 20 0 7-0 8 आयकर अपील सं./ ITA No.242/Chd/2017 नधा रण वष / Assessment Year : 2007-08 (Assessee's Appeal) "1. That the Commissioner of Income-tax (Appeals) [('CIT(A)'] erred on facts and in law in sustaining the disallowance of Rs.5,10,74,000, being 1/3rd of the expenditure on advertisement and promotion of Rs. 15,32,22,000 allegedly on the ground that the said expenditure resulted in promotion of brand name owned by the foreign company.
1.1 That the CIT(A) 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 since the expenditure was incurred in the course of carrying on of its business, it was allowable deduction as business expenditure.
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60. Th e i ss ue i n v ol ve d in th e a b ov e gr ou nd s s ta nd s a d j ud ic a te d b y us a bo ve a t I s sue N o. 2 in p a r a 7 -to 8 of ou r or d e r a bo ve . A ccor di n gl y, th is g ro un d i s a ll ow e d
2. That the CIT(A) erred on facts and in law in sustaining disallowance of Rs. 96.44,127 under section 40(a)(i) of the Act, with respect to purchase of vaccine amounting to Rs. 19,12,91,000 made from GlaxoSmithKIine Biological S.A. ('GSK, Bio'}, Belgium, allegedly holding that the appellant
-as failed to deduct tax at source from such payment. 2.1 That the CIT(A) 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 2.2 That the CIT(A) erred on facts and in law in holding that clinical trial activities constitute permanent establishment of GSK Bio 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 place including but not limited to CDMCI and BDS1, 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 TAA;
d: BDSl, 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.
2.3 That the CIT(A) erred on facts and in law in alternatively holding that the assessee constituted business connection with ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 63 of 120 GSK Bio within the meaning of section 9(1)(i) of the Act.
2.4 Without prejudice, the CIT(A) erred on facts and in law in determining the profit attributable to the alleged PE in India at 23% of the net profits of GSK, Bio, as against 15.38% determined by the appellant on the basis of functions, asset and risk analysis of the appellant vis-a-vis GSK, Bio,
61. Th e i ss ue i n v ol ve d in th e a b ov e gr ou nd s s ta nd s a d j ud ic a te d b y us a b ove a t I ss ue N o .3 in p a ra 1 0 to 1 1 of ou r or d e r a b ove . Ac cor d i ngl y, thi s g ro un d i s a l lo we d f or sta t is ti ca l p ur p ose s.
3. That the CIT(A) erred on facts and in law in sustaining the disallowance of stock obsolescence of Rs. 11,12,000 allegedly holding that the appellant failed to produce details of (i) stock with batch number (ii) manufacturing and expiry date of such goods, and (iii) method of destruction of such goods, to substantiate the claim.
3.1 That the CIT(A) erred on facts and in law in rejecting the additional evidence filed under Rule 46A of the Income Tax Rules, 1962, with respect to disallowance of obsolete stock, allegedly holding that the appellant has failed to furnish the details sought by the assessing officer and no submission were made before the assessing officer regarding the inability in filing such details. 3.2 That the CIT(A) erred on facts and in law in not appreciating the fact that in the case of the appellant itself, similar expenses incurred towards "Provision for Stock Obsolescence" was allowed deduction by the Dispute Resolution Panel ('DRP') in the direction issued for the assessment year 2006-07 and the revenue is not in appeal against the direction of DRP.
3.3 That the CIT(A) erred on facts and in law in not adjudicating appellant's contention raised in grounds of appeal no. 4.1 and 4.2 filed before him, for directing the assessing officer to expunge the extraneous and unfounded remarks made in the assessment order alleging that the appellant was once ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 64 of 120 charged for improper disposal of expired drugs by FDA Maharashtra.
62. Th e i ss ue i n v ol ve d in th e a b ov e gr ou nd s s ta nd s a d j ud ic a te d b y us a b ove a t I ssu e N o .1 i n pa r a 4 to 5 of ou r or d e r a bo ve . A ccor di n gl y, th is g ro un d i s a ll ow e d
4. That the CIT(A) erred on facts and in law in sustaining the disallowance of product development expenses amounting to Rs. 8,21,000 allegedly holding that the said expenditure is in relation to pre-launch of a product and therefore, capital in nature.
4.1 Without prejudice, that the CIT(A) erred on facts and in law in not allowing depreciation @ 25% on the said product development expenditure by treating the same as capital in nature.
4.2. Without prejudice, that the CIT(A) erred on facts and in law in not allowing depreciation @ 25% on the said product development expenditure incurred for the earlier assessment year, i.e. AY 2006-07, by treating the same as capital in nature.
63. Th e i ss ue i n v ol ve d in th e a b ov e gr ou nd s s ta nd s a d j ud ic a te d b y us a b ov e a t I ss ue N o.4 i n pa r a 13 to 14 of ou r or d e r a b ove . Ac cor d i ngl y, thi s g ro un d i s a l lo we d f or sta t is ti ca l p ur p ose s
5. That the CIT(A) erred on facts and in law in suo-moto disallowing market research expenses amounting to Rs. 1,26,83,000 allegedly holding that the said expenditure incurred on market surveys, market research for the products which are to be launched and party for existing products, are capital in nature and gave enduring benefit to the appellant. 5.1 That while the CIT(A) has categorically held that the ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 65 of 120 disallowance of the said expense on adhoc basis by the AO is not tenable, he has erred on facts and in law in suo-moto treating the same to be capital in nature without appreciating the fact that the AO has never treated the said expense to be capital in nature.
5.2 That the CIT(A) erred on facts and in law in sustaining the said disallowance on a ground different than raised by the assessing officer without issuing an enhancement notice to the appellant.
5.3 Without prejudice, that the CIT(A) erred on facts and in law in not allowing depreciation @ 25% on the said market research expenses by treating the same as capital in nature.
64. Th e i ss ue i n v ol ve d in th e a b ov e gr ou nd s s ta nd s a d j ud ic a te d b y us a b ove a t I ss ue N o .5 in p a ra 2 0 to 2 1 of ou r or d e r a b ove . Accor d i ng ly, th is gr oun d i s a l l owed in the sa i d te rms .
65. Th e a ss e ss ee ha s a l so r a is e d a dd i ti ona l gr oun d t he a d mi ssi on & a d j ud i ca ti on of w hi ch h a s b ee n de a l t in i ss ue N o. 9 a t p a ra 3 8 of o ur o rd e r a b ove Th e a dd i ti ona l gr ou n d a ccor d i ng ly is a d mi tt e d f or a d j ud ic a ti on a n d d is mis se d.
66. I n e ffe c t Ap pe a l of th e a s se s se e i s p a rt ly a ll ow e d f or st a ti sti ca l p u rp os e s आयकर अपील सं./ ITA No.219/Chd/2017 ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 66 of 120 नधा रण वष / Assessment Year : 2007-08 (Revenue's Appeal) "i). On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in restricting the disallowance from Rs. 19,12,91,000/- to Rs. 96,44,127/- made u/s 40(a)(ia) of the Act on account of payment made to Glaxo Smith Kline Biological SA at Belgium for purchase of Vaccine without deducting tax u/s 195 of the by relying on circular No. 2/2014 dated 26.02.2014 and circular No. 3/2015 dated 12.02.2015 holding that these circulars were clarificatory in nature ignoring the fact that these circulars came into force during F.Y. 2013-14 and F.Y. 2014-15 respectively and do not apply to A.Y. 2007-08.
67. I t w a s c ommon g ro un d t ha t th e i ss ue r a i se d a bo ve w a s co nn e cte d to G r oun d N o.2 to 2. 4 of th e a s se sse s a p p e a l in I TA N o. 2 42 /C h d /20 1 7 for th e imp u gne d ye a r . S i nce the sa i d i ss ue h a s b ee n r e st ore d ba c k t o the AO a t p a r a 6 1 of ou r or de r a b ove , t hi s i ss ue a ls o sta n d s re s tore d to the AO w i th t he d ir e cti on to the AO t o d e c id e the sa me a l ong w ith th e sa i d gr ou nd s N o. 2 to 2 .4 of th e a sse sse s a p pe a l .
Gr ou nd of a p pe a l N o.i is a l lowe d for s ta ti stica l pu r po se s .
ii) On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs. 4703/- made on account of written off advances by treating the same to be in the nature of business loss inciden tal to the business of the assessee when these advances had never been shown by the assessee as a part of its income and therefore could not be claimed as expense when these were written off.
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68. Th e is su e i nv ol ve d re la te s to t he cl a i m of w r it e of f of a d va n ce s, re l a ting to old o uts ta nd i ng cl a i ms re cov e r a b le f ro m ve nd or s, w r it te n off in th e P r ofi t & Loss A cc ou n t si n ce th e y w e re no l onge r re c ove r a ble . Th e AO d i sa l lo we d th e sa i d cl a i m h old i ng th e m to b e not in re l ati on to th e b u si ne ss of the a ss e s see , w h i ch w a s a l l ow e d b y th e Ld . C I T( A) h ol d i ng th a t th ey w e re i n the n a tur e of bu si ne ss l os s i nci d e n ta l t o the bu si ne ss of th e a sse ssee an d a s s uch c ove re d u /s 37 ( 1 ) of th e Ac t.
69. Th e De pa r tme nt ha s ch a l le nge d th is a ll ow a n ce of cl a im by th e Ld. C I T( A ) b e fo re u s. I n th is re g a r d the Ld. C ou ns e l f or the a ss e s see ha s p oin te d ou t th a t the i ss ue is cove red i n f a vou r of th e a sse ssee by th e d i re c tio n of the D RP i n a ss e ssee ' s o wn c a se f or a s se s sme n t ye a r 2 00 6 -0 7 .
70. We ha ve gone thr oug h th e or de r s of th e a u tho ri tie s be low a n d se e no r e a son to i n te r fe re in t he or de r of the Ld . C I T( A) . The f a ct tha t th e a d va nc e s w ri tte n of f re la te t o ou tstand i ng cl a i m of ve nd or s h a s n ot b ee n di s pu te d by th e Re ve n ue . In the li gh t of th is f a ct , the f i nd i ng of th e Ld .C I T( A ) th a t t he i rre cov e r a b il i ty of th e s a me t a ntamo un te d to tr a d in g/b us in e s s l oss e s to the a ss e s see , we fin d , is c or r e ct . Mor e o ve r e ve n th e D RP h as d e c ide d t hi s i s sue i n f a vo ur of the a s se sse e i n a sse ss me n t ye a r ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 68 of 120 2 0 06 -0 7 . Th e r e for e , we d o not f i nd a ny me r it i n the g r oun d r a i se d by the Re ve n ue a n d d i smi ss th e sa me .
iii) On the facts and circumstances of the case and in law, the Ld. CIT{A) has erred in deleting the disallowance of Rs. 29,42,500/- on account of d isco un t on sal e s, R s. 2 , 9 1, 3 3 ,0 0 0 /- on ac co un t of sel lin g and d istri bu tion expen ses and Rs. 1,2 0 ,7 2 ,0 00 /- on ac c ou nt of sal es promotion expenses by admitting the additional evidence by ignoring Rule 46 A of the Income tax Rules especially when the assessee was given sufficient time and opportunity during the assessment proceedings to furnish the details/proof of the same but it failed to do so and also the fact that the AO had raised objection to the admission of addl. evidence during the appellate proceedings.
71. I n t he i mp ug ne d gr ou nd th e ch a lle nge to the or der of t he Ld .C I T(A ) b y th e Re ve nue is to the a d mi ssi on of a d d it ion a l e v ide nce s, i gn or in g th e p r ov is io ns of Rul e 4 6 A of t he I n come Ta x Ru le s ,1 9 6 2 , gov e r n in g th e ma nn e r of a dmi ss io n of a d d it ion a l e v i de nc e s i n th is re g a rd.
72. Th e f a ct s r e l a ti ng to t he is sue a re tha t d ur i ng a sse ssme nt p r oce e d in gs the AO h a d d is a ll ow e d 5 0 % of e x pe nd itu re re l a ti ng to d i scou nt on sa l e s , ma r ke t rese a r ch e xpe nse s, se ll i ng a n d d is tr i bu ti on e xpen se s , s a le s p r omoti on e xpe nse s for th e re a s on th a t th e a ss e ssee had not f ur n i sh e d de ta i ls of e x pe nses i nc ur r e d in re spe ct of di sc oun t on sa l e s a n d wh e the r TD S h a d b ee n de du cte d on the sa me or n ot and had fu rt he r not ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 69 of 120 su b mit te d n a me s, a d d re sse s a nd P AN s of the p a r ti e s . W i th r e s pe ct to the d isa l l ow a nc e of othe r e x pe nse s the r e a s on in g of th e AO w a s th e s a me o n a ccou nt of n on fu r ni sh i n g of pr op e r i nf or ma ti on r e ga r d i ng the sa me . D ur in g a pp e ll a te p r oce e d in gs th e a sse ssee f il ed a d d iti on a l e vi de nce s w h ic h w a s ad mitt e d b y th e Ld .C I T(A ) a f te r con f ro nti n g the AO wi th the same a n d t he i ssu e , the re a f te r , d e c ide d p a r tl y i n fa v our of th e a s se s se e . I t i s a ga i n st thi s a d m is si on of a d d it ion a l e v ide nce s tha t th e Re ve n ue h a s co me up b e f or e u s co nte nd i ng tha t the AO h a d o bj e c te d to th e a d mi ss io n o f t he a d d iti on a l e v ide n ce s on the gr ou nd tha t su ff i ci e n t op p or tun it y ha d bee n g iv e n to the a s se s se e d ur ing a ss e s sme n t p r oce e d in gs t o fu r ni sh the sa me a n d , t he re fore , as per Rule 46A the s a id e v ide n ce s oug ht to ha ve no t be e n a d mi tte d in t he ap p e l la te pr ocee d in gs.
73. We ha ve gon e thr ough th e or d e r of th e Ld . C I T( A) w h o, w e f in d , ha d a d mi tte d the a d d it ion a l e v ide nce s not in g the f a ct tha t th e de ta i ls a ske d for by th e A O w e re cu mbe r some a nd t he a ss e s see w a s gi ve n on l y t wo d a ys' ti me t o f ur n is h the sa me a n d th e a sse ssee w he n re q ue ste d for fu r the r ti me , the sa me w a s not gi ve n a nd the a sse ss me nt or de r pa ss e d . The Ld .C I T( A ), w e fi nd , h a s a l so not e d th a t t he a sse ssee cou r ie re d the se d e t a il s to the ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 70 of 120 AO b u t th e y we re sti l l not con si de re d b y h im. The se fa ct s h a ve r e ma i ne d un con tr ove r te d be f ore u s. I n the l i ght of the a b ove f a cts , si n ce a deq u a te op p or tu ni ty h a d n ot bee n gi ve n to the a ss e s see to f ur nis h the de t a il s a n d th e f a ct s de mons tr a ti ng th a t th e a sse sse e ma d e e ve r y p os si bl e e f for t to f il e t he sa me d ur i ng a ss e s smen t p r oc ee d i ng s, th e a d mi ss io n o f t he a d d iti on a l e v ide nce s b y the Ld .C I T(A ), w e ho ld , a r e i n a c cor d an ce w i th Ru le 4 6A of the I n co me Ta x Ru le s , 1 96 2 , whi ch r e q u ire a d mi ssi on of th e a d d iti on a l e vid e n ce s b y t he C I T( A) i n t he a b se nce of a de q ua te op po rt un it y gi ve n d ur i ng a sse ssme nt p r oce e d in gs .
I n vie w of t he a b ov e , we d o not f in d a n y me r i t in t he gr ou nd r a is e d b y th e Re ve n ue a n d d is mis s th e s a m e .
74. In effect appeal of the Revenue is partly allowed for statistical purposes.
A.Y 2008-09 आयकर अपील सं./ ITA No.225/Chd/2017 नधा रण वष / Assessment Year : 2008-09 (Assessee's Appeal) "1. That the Commissioner of Income-tax (Appeals) ['ClT(A)'] erred on facts and in law in sustaining disallowance of Rs. 1,53,69,881 under section 40(a)(i) of the Act, with respect to purchase of vaccine amounting to ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 71 of 120 Rs. 23,43,93,453 made from GlaxoSmithKline Biological S.A. ('GSK, Bio'), Belgium, allegedly holding that the appellant has failed to deduct tax at source from such payment.
1.1 That the CIT(A) 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. 1.2 That the CIT(A) erred on facts and in law in holding that clinical trial activities constitute permanent establishment of GSK Bio 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 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.
1.3 That the CIT(A) 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.
1.4 Without prejudice, the CIT(A) erred on facts and in law in determining the profit attributable to the alleged PE in India at 23% of the net profits of GSK, Bio, as against 15.38% determined by the appellant on the basis of functions, asset and risk analysis of the appellant vis-a-vis GSK, Bio.ITA No.47/Chd/2018
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75. Th e i ss ue i n v ol ve d in th e a b ov e gr ou nd s s ta nd s a d j ud ic a te d b y us a b ove a t I ss ue N o .3 in p a ra 1 0 to 1 1 of ou r or d e r a b ove . Ac cor d i ngl y, thi s g ro un d i s a l lo we d f or sta t is ti ca l p ur p ose s.
2 That the ClT{A) erred on facts and in law in sustaining the disallowance of Rs. 9,12,99,000, being 1/3rd of the expenditure on advertisement and promotion of Rs. 27,38,96,000 allegedly on the ground that the said expenditure resulted in promotion of brand name owned by the foreign company.
2.1 That the CIT(A) 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 since the expenditure was incurred in the course of carrying on of its business, it was allowable deduction as business expenditure.
76. Th e i ss ue i n v ol ve d in th e a b ov e gr ou nd s s ta nd s a d j ud ic a te d b y us a b ove a t I ssu e N o .2 i n pa r a 7 to 8 of ou r or d e r a bo ve . A ccor di n gl y, th is g ro un d i s a ll ow e d .
3 That the CIT(A) erred on facts and in law in sustaining the disallowance of market research expenses amounting to Rs. 1,86,45,000 allegedly holding that the said expenditure incurred on market surveys, market research for the products which are to be launched and party for existing products, are capital in nature and gave enduring benefit to the appellant.
3.1 Without prejudice, that the CIT(A) erred on facts and in law in not allowing depreciation @ 25% on the said market research expenses by treating the same as capital in nature.
ITA No.47/Chd/2018
ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 73 of 120 3.2 Without prejudice, that the CIT(A) erred on facts and in law in not allowing depreciation @ 25% on the said market research expenses incurred for the earlier assessment year, i.e. AY 2007-08, by treating the same as capital in nature.
77. Th e i ss ue i n v ol ve d in th e a b ov e gr ou nd s s ta nd s a d j ud ic a te d b y us a b ove a t I ss ue N o. 5 in p a r a 20 -2 1 of ou r or d e r a b ove . Accor d i ng ly, th is gr oun d i s a l l owed in the sa i d te rms .
4 That the CIT(A) erred on facts and in law in sustaining the disallowance of product development expenses amounting to Rs. 54,08,000 allegedly holding that the said expenditure is in relation to pre-launch of a product and therefore, capital in nature.
4.1 Without prejudice, that the CIT(A) erred on facts and in law in not allowing depreciation @ 25% on the said product development expenditure by treating the same as capital in nature.
4.2 Without prejudice, that the CIT(A) erred on facts and in law in not allowing depreciation @ 25% on the said product development expenditure incurred for the earlier assessment year, i.e. AY 2006-07 and 2007-08, by treating the same as capital in nature.
78. Th e i ss ue i n v ol ve d in th e a b ov e gr ou nd s s ta nd s a d j ud ic a te d b y us a b ove a t I ss ue N o .4 in p a ra 1 3 to 1 4 of ou r or d e r a b ove . Ac cor d i ngl y, thi s g ro un d i s a l lo we d f or sta t is ti ca l p ur p ose s.
5. That the CIT(A) erred on facts and in law in sustaining the disallowance on account of provision for post-retirement medical benefit given to employees of amounting to Rs. ITA No.47/Chd/2018
ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 74 of 120 6,62,343 allegedly holding that the these provision are in the nature of contingent liability and thus not subject to deduction under income tax.
79. Th e i ss ue i n v ol ve d in th e a b ov e gr ou nd s s ta nd s a d j ud ic a te d b y us a b ove a t I ssue N o. 6 in p a ra 2 7 of ou r or de r a b ove . Ac cor d i ngl y, t hi s gr ou nd i s a l lo we d .
6. That the CIT(A) erred on facts and in law in sustaining the disallowance of Cenvat credit recoverable amounting to Rs. 3,45,67,000 allegedly holding that the said expenditure is not in the nature of trading loss and therefore cannot be allowed as a business expense. 6.1 That the CIT(A) erred on facts and in law in sustaining the disallowance, allegedly holding that that the amount of cenvat credit incurred towards output services accumulated and not utilized pertains to earlier years and even if it has been written off during the relevant financial year, it is not in nature of trading loss pertaining to the year under consideration.
80. Th e i ss ue i n v ol ve d in th e a b ov e gr ou nd s s ta nd s a d j ud ic a te d b y us a b ove a t I ssue N o. 7 in p a ra 3 1 of ou r or de r a b ove . Ac cor d i ngl y, t hi s gr ou nd i s a l lo we d
81. Th e a ss e ss ee h a s a ls o r a i se d a d d ition a l gr ou nd a s un d e r :
"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. 1TA 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. 2,55,04,589, being education cess computed on returned income, paid by the Appellant before the due ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 75 of 120 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 lo the subject assessment year."
82. Th e a d mi ss ion & a d ju d ic a tio n of th e a b ove gr ound s ha s b ee n de a l t i n i ssue N o. 9 a t p a r a 3 8 o f our or de r a b ov e Th e a dd i ti ona l gr ou n d a ccor d i ng ly is a d mi tt e d f or a d j ud ic a ti on a n d d is mis se d.
83. I n e ffe c t a ppe a l of the a sse ssee i s p a r tly a ll ow e d for st a ti sti ca l p u rp os e s .
आयकर अपील सं./ ITA No.220/Chd/2017 नधा रण वष / Assessment Year : 2008-09 (Revenue's Appeal) "i) On the facts and circumstances of the case and in law, the Ld. CIT(A) haserred in restricting the disallowance from Rs. 23,43,93,453/- to Rs. 1,53,69,881/- made u/s 40(a)(ia) of the Act on account of payment made to Glaxo Smith Kline Biological SA at Belgium for purchase of Vaccine without deducting tax u/s 195 of the by relying on circular No. 2/2014 dated 26.02.2014 and circular No. 3/2015 dated 12.02.2015 holding that these circulars were clarificatory in nature ignoring the fact that these circulars came into force during F.Y. 2013-14 and F.Y. 2014-15 respectively and do not apply to A.Y. 2008-09.
84. I t w a s c ommon g ro un d t ha t th e i ss ue r a i se d a bo ve w a s ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 76 of 120 co nn e cte d to G r oun d N o.1 to 1. 4 of th e a s se sse s a p p e a l in I TA N o. 2 25 /C h d /20 1 7 for th e imp u gne d ye a r . S i nce the sa i d i ss ue h a s be e n re s tored ba ck to the AO a t p a r a 7 5 o f our or d e r a b ove , th is is su e a l so st a nd s r e s tor e d to t he A O wi th th e di re c ti on to th e A O to de ci de t he sa me a l ongw i th t he sa i d gr o u nd s 2 to 2 . 4 of th e a sse sse s ap p e a l .
Gr ou nd of a p p e a l N o. i i s a ll ow e d fo r st a tis ti ca l p u rp os e s .
ii) On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs. 42,000/- made on account of written off advances by treating the same to be in the nature of business loss incidental to the business of the assessee when these advances had never been shown by the assessee as a part of its income and therefore could not be claimed as expense when these were written off.
85. I t w a s c ommon gr ou nd th a t the is su e ra i se d i n t he a b ove gr ou nd w as i de nt ic a l to th at ra i se d b y the Re ve n ue in i ts a p p e a l f or A. Y 2 0 07 -0 8 , i n I TA N o .2 1 9 /C h d /2 0 1 7 in g r oun d N o. ii . I n v ie w of th e sa me our de cisi on r e n de re d th e re in a t p a ra 7 0 of our o rd e r a bo ve wi l l a pp l y f ol lo w in g w h ic h t hi s gr oun d r a i se d is d i smi ss e d .
86. I n e ffe ct a p pe a l of th e Re ve n ue is p a r tl y a ll ow e d for st a ti sti ca l p u rp os e s .
ITA No.47/Chd/2018
ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 77 of 120 A.Y 2009-10 आयकर अपील सं./ ITA No.226/Chd/2017 नधा रण वष / Assessment Year : 2009-10 (Assessee's Appeal) "1. That the Commissioner of Income-tax (Appeals) ['CIT(A)'] erred on facts and in law in sustaining disallowance of Rs. 1,77,16,251 under section 40(a)(i) of the Act, with respect to purchase of vaccine amounting to Rs. 24,16,16,000 made from GlaxoSmithKline Biological S.A. ('GSK, Bio'), Belgium, allegedly holding that the appellant has failed to deduct tax at source from such payment.
1.1 That the CIT(A) 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 1.2 That the CIT(A) erred on facts and in law in holding that clinical trial activities constitute permanent establishment of GSK Bio 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 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 ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 78 of 120 e. Dependent agent PE in the form of the appellant under Article 5(4) of the DTAA.
1.3 That the CIT(A) 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.
1.4 Without prejudice, the CIT(A) erred on facts and in law in determining the profit attributable to the alleged PE in India at 23% of the net profits of GSK, Bio, as against 15.38% determined by the appellant on the basis of functions, asset and risk analysis of the appellant vis-a-vis GSK, Bio.
87. Th e i ss ue i n v ol ve d in th e a b ov e gr ou nd s s ta nd s a d j ud ic a te d b y us a b ov e a t I ss ue N o.3 i n pa r a 10 to 11 of ou r or d e r a b ove . Ac cor d i ngl y, thi s g ro un d i s a l lo we d f or sta t is tic a l p ur p ose s.
2. That the CIT(A) erred on facts and in law in sustaining the disallowance of Rs. 11,48,37,000, being 1/3rd of the expenditure on advertisement and promotion of Rs. 34,45,11,000 allegedly on the ground that the said expenditure resulted in promotion of brand name owned by the foreign company.
2.1 That the CIT(A) 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 since the expenditure was incurred in the course of carrying on of its business, it was allowable deduction as business expenditure.
88. Th e i ss ue i n v ol ve d in th e a b ov e gr ou nd s s ta nd s a d j ud ic a te d b y us a b ove a t I ssu e N o .2 i n pa r a 7 to 8 of ou r or d e r a bo ve . A ccor di n gl y, th is g ro un d i s a ll ow e d ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 79 of 120
3. That the CIT(A) erred on facts and in law in sustaining the disallowance of market research expenses amounting to Rs.1,94,71,000 (after allowing depreciation @25% p.a. on expense of Rs. 2,59,62,000) allegedly holding that the said expenditure incurred on market surveys, market research for the products which are to be launched and party for existing products, are capital in nature and gave enduring benefit to the appellant.
3.1 Without prejudice, that the CIT(A) erred on facts and in law in not allowing depreciation @ 25% on the said market research expenses incurred for the earlier assessment years, i.e. AY 2007-08 and 2008-09, by treating the same as capital in nature.
89. Th e i ss ue i n v ol ve d in th e a b ov e gr ou nd s s ta nd s a d j ud ic a te d b y us a b ove a t I ss ue N o .5 in p a ra 2 0 to 2 1 of ou r or d e r a bo ve . A ccor di n gl y, th is g ro un d i s a ll ow e d in s a i d te r ms .
4 That the CIT(A) erred on facts and in law in sustaining the disallowance of product development expenses amounting to Rs. 18,07,000 (after allowing depreciation @25% p.a. on expense of Rs, 24,09,000) allegedly holding that the said expenditure is in relation to pre-launch of a product and therefore, capital in nature. 4.1 Without prejudice, that the CIT(A) erred on facts and in law in not allowing depreciation @ 25% on the said product development expenditure incurred for the earlier assessment years, i.e. AY 2006-07, 2007-08 and 2008- 09, by treating the same as capital in nature.
90. Th e i ss ue i n v ol ve d in th e a b ov e gr ou nd s s ta nd s a d j ud ic a te d b y us a b ove a t I ss ue N o .4 in p a ra 1 3 to 1 4 of ou r or d e r a b ove . Accor d in gl y, th is gr oun d i s a l l ow e d f or sta t is tic a l p ur p ose s.
ITA No.47/Chd/2018
ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 80 of 120 5 That the CIT(A) erred on facts and in law in sustaining the disallowance on account of provision for post-retirement medical benefit given to employees of amounting to Rs. 8,88,780 allegedly holding that the these provision are in the nature of contingent liability and thus not subject to deduction under income tax.
5.1 That the CIT(A) erred on facts and in law in sustaining disallowance of provision of market claims amounting to Rs. 1,43,39,000 allegedly holding that the appellant has failed to establish with supporting evidence the nature of liability for which provision has been created and claimed. 5.2 Without prejudice, that the CIT(A) erred on facts and in law in not considering that under the mercantile system of accounting deduction of expenditure is allowable in the year in which the liability is quantified and accrued, notwithstanding that the same has to be discharged at a later date.
91. Th e i ss ue i n vol ve d i n g r oun d N o .5 st a nd s a d j ud i ca te d b y us a b ove at I ss ue N o.6 in p ara 27 of ou r or d e r a b ove. Ac cor d i ng ly, thi s gr ou nd is a l l ow ed .
92. Th e is su e i nv ol ve d i n g r oun d no .5 . 1 sta n d s a d j ud i ca te d b y u s a b ove a t I ssu e N o. 8 i n p a r a 3 5 to 3 6 of ou r or d e r a b ove. Ac cor d i ng ly, thi s gr ou nd is d i smi s se d.
93. Gr ou nd N o. 5 .2 i s a r gu me n ta ti ve a nd r e l a te s to bo th t he i ssu e s ra i se d in G ro un d N o5 & 5 .2 a n d h a s b ee n d e a l t w i th i n th e m.
6. That the CIT(A) erred on facts and in law in upholding the disallowance of a sum of Rs. 87,32,000 being the amount of provision of stock obsolescence charged to the profit and ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 81 of 120 loss account allegedly on the ground that:
(i) the appellant failed to furnish evidence for destruction of obsolete stock.
(ii) No details of drugs which have become obsolete and withdraw and actually destroyed were furnished by the assessee.
6.1 That the CIT(A) erred on facts and in law in not appreciating that the said provision for stock obsolescence was a trading loss incurred in the course of the carrying on of the business and is allowable as deduction under section 28 of the Act.
94. Th e i ss ue i n v ol ve d in th e a b ov e gr ou nd s s ta nd s a d j ud ic a te d b y us a b ove a t I ssu e N o .1 i n pa r a 4 to 5 of ou r or d e r a bo ve . A ccor di n gl y, th is g r oun d i s a ll ow e d
95. Th e a ss e ss ee h a s a ls o r a i se d a d d ition a l gr ou nd a s un d e r :
"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. 1TA 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. 2,55,04,589, 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 lo the subject assessment year."ITA No.47/Chd/2018
ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 82 of 120
96. Th e a d mis si on & a d j ud i ca ti on of th e a b ove gr oun d s ha s b ee n de a l t i n I ssu e N o.9 a t pa r a 38 of ou r or d e r a bove Th e a dd i ti ona l gr ou n d a ccor d i ng ly is a d mi tt e d f or a d j ud ic a ti on a n d d is mis se d.
97. I n e ffe c t a ppe a l of the a sse ssee i s p a r tly a ll ow e d for st a ti sti ca l p u r pos e s .
आयकर अपील सं./ ITA No.221/Chd/2017 नधा रण वष / Assessment Year : 2009-10 (Revenue's Appeal) "i) On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in restric ting the disallo wance f rom Rs. 24,16,16,000/- to Rs. 1,77,16,251/- made u/s 40(a)(ia) of the Act on account of payment made to Glaxo Smith Kline Biological SA at Belgium for purchase of Vaccine without deducting tax u/s 195 of the by relying on circular No. 2/2014 dated 26.02.2014 and circular No. 3/2015 dated 12.02.2015 holding that these circulars were clarificatory in nature ignoring the fact that these circulars came into force during F.Y. 2013-14 and F.Y. 2014-15 respectively and do not apply to A.Y. 2009-10.
98. I t w a s c ommon g ro un d t ha t th e i ss ue r a i se d a bo ve w a s co nn e cte d to G r oun d N o.1 to 1. 4 of th e a s se sse s a p p e a l in I TA N o. 2 26 /C h d /20 1 7 for th e imp u gne d ye a r . S i nce the sa i d i ss ue h a s b e e n re st ored b a ck t o th e AO a t pa ra 8 7 of our o rd e r a b ove , thi s i s sue a l so sta nd s r e sto re d to th e A O w ith the d i r e ct ion to th e A O to de ci de t he sa me a l ongw i th t he sa i d gr o u nd s 2 to 2 . 4 ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 83 of 120 of th e a sse sse s ap p e a l .
Gr ou nd of a p p e a l N o. i i s a ll ow e d fo r st a tis ti ca l p u rp os e s .
ii) On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs. 95,000/- made on account of written off advances by treating the same to be in the nature of business loss incidental to the business of the assessee when these advances had never been shown by the assessee as a part of its income and therefore could not be claimed as expense when these were written off.
99. It was common ground that the issue raised in the above ground was identical to that raised by the Revenue in its appeal for A.Y 2007-08,in ITA No.219/Chd/2017 in ground No.ii. In view of the same our decision rendered t h e r e i n a t p a r a 7 0 o f o u r o r d e r a b o v e w i l l a p p l y fo ll o w i n g which this ground raised is dismissed.
1 0 0. I n e ffe ct a p pe a l of th e Re ve n ue is p a r tl y a ll ow e d for st a ti sti ca l p u rp os e s .
A.Y 2010-11 आयकर अपील सं./ ITA No.227/Chd/2017 ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 84 of 120 नधा रण वष / Assessment Year : 2010-11 (Assessee's Appeal)
1. T h a t th e Co m mi ssion e r of In c o me- tax ( A p p e al s) ['C IT ( A) '] erre d o n f acts an d in l aw in su s ta i n in g d i sall o wa nc e of Rs. 3, 1 5 ,4 2 , 10 1 u n d er sec ti on 4 0 (a) ( i) of the A c t, wi th re s pec t to pu rch a se of vac c in e a mou n ti n g to R s. 2 4 , 9 8 , 6 2, 0 0 0 mad e f rom G l axo S m ith Kl in e B iol og ic al S . A. ( 'GS K, B io' ), Be lg iu m, al l ege dl y ho ld in g th a t th e a p pel l an t h a s f ail ed to d ed u c t ta x a t sou rc e f rom su ch p a y men t.
1 .1 T h a t th e C IT ( A) e rred on f acts an d in l a w in al l eged l y h o ld in g th a t GS K B io h as ou tso ur ced i ts co re ac ti v i ty to th e a p pel l a n t and al l th e ac ti v i ti e s are u n de r ta ken u nd er d ire c t su perv is ion an d c on tro l of GS K B io an d th ere b y es ta b l ish in g th a t th ere i s a c on stan t tou ch be t we e n th e ap pe ll an t an d GS K Bio f or R& D ac ti v i ti e s
1. 2 T h at th e C IT ( A) e rred on f acts an d in l a w in h ol d in g th a t c l i n ic al tr i al ac ti v i ti e s c on sti tu te per m an e n t e sta b l i sh me n t of GSK Bio in In d i a wi th i n th e me an in g of D ou bl e T ax ati on A vo id an c e Ag reeme n t ( D T AA) be t we en In d i a an d Bel g iu m on ac cou n t of th e f oll o wi n g:
a. Fixe d pl ac e of bu sin e ss in th e f orm of plac e wh ere cl in ic al tr ial s an d re se arc h and dev el op me n t ta k es pl ac e in cl u d in g bu t no t li mi ted to C D M C I an d BD S I, Ban g alo re un d er Ar ticl e 5 (1 ) of th e D T AA ;
b. Pre mi se s u sed as a s al e s ou tl e t or f or rece iv ing or sol ic i tin g ord er s wi th re spec t to vacc ine s un d er A r ticl e 5 ( 2) ( i) of th e DT AA;
c. CD MC I, B an g al or e u nd er Ar ticl e 5( 2 ) ( c) of th e D T AA;
d. BD S I, B an g alo re u nd er A r tic le 5( 2 ) ( c) of th e DT A A; an d ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 85 of 120 e. D epen d en t ag en t PE in th e f orm of th e ap pel l an t u nd er Ar ticl e 5 ( 4) of the DT A A.
1. 3 T h a t th e C IT ( A) erre d on f ac ts an d in l a w in al ter n a tiv el y h ol din g th a t th e a sse ssee c on sti tu ted bu s in es s co nn e c tio n wi th GS K B io wi th i n th e me an i n g of sec tion 9 (1 ) (i) of the A c t.
1. 4 W i th ou t pre ju d ic e, th e C IT ( A ) erre d on f acts and in l a w i n de ter m in in g th e prof i t a ttr i bu ta bl e to the al l ege d PE in In d i a a t 2 3 % of the ne t prof its of GS K, B io, a s a ga in s t 1 5. 3 8 % d e te r min ed b y th e a p pel l an t o n the b a si s of f u nc tio ns, a sse t a nd ri sk an al y si s of the a p pel l an t v i s- a- v i s GSK , B io.
1 0 1. Th e i ssu e in vol ve d in th e a b ove grou nd s s ta nd s a d j ud ic a te d b y us a b ove a t I ss ue N o .3 in p a ra 1 0 to 1 1 of ou r or d e r a b ove . Ac cor d i ngl y, thi s g ro un d i s a l lo we d f or sta t is ti ca l p ur p ose s.
1 . T h a t th e C IT ( A) erre d o n f ac ts an d in l a w in su sta i n in g th e di sal l o wa n ce of R s. 1 4 ,5 4 , 5 3, 0 0 0, be in g 1 /3 r d of the expen d i tu re o n ad ver ti se men t an d pro mo ti on of Rs. 4 , 3 63 . 6 0 l a c s al l eged l y on the grou n d th a t th e sa id expen d i tu re re su l ted in pro mo ti on of bra n d n a me o wn e d b y th e f oreign c omp an y.
2. 1 T h a t th e C IT ( A) erred o n f ac ts a nd in la w i n n o t a p prec ia ti ng th a t th e a sse sse e i s th e e xcl u sive l ice n see au th or i ze d to manuf ac ture an d sel l prod u c ts un d er t h e br an d n ame i n In d i a an d sin ce the ex pen d i tu re wa s in c u rred in the co ur se of c arr y in g on of its bu s ine ss, i t wa s al lo wa bl e d ed u c tio n a s bu si ne ss ex pe nd i tu re.
1 0 2. Th e i ss ue in vol ve d in th e a bo ve gr oun d s s ta nd s a d j ud ic a te d b y us a b ove a t I ssu e N o .2 i n pa r a 7 to 8 of ou r ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 86 of 120 or d e r a bo ve . A ccor di n gl y, th is g r oun d i s a ll ow e d .
3. T h a t th e C IT ( A) erre d on f ac ts an d in l a w i n su sta i n in g d i sa l l o wa n ce of mar ke t re se arc h ex pen se s a mou n ti ng to R s. 3 , 0 7, 0 9 ,0 0 0 ( af te r al l o wi n g d e prec ia tio n @2 5 % on th e e xpen se of R s. 4 , 09 , 4 6, 0 0 0) al l eged l y h ol d in g th a t th e sa id ex pen d i ture in c u rr ed o n mar ke t su rve y s, mar ke t rese arc h f or the pro du c ts wh i c h are to be l au nc h ed an d p ar ty f or existin g prod u c ts, are c a p ita l in na ture an d gave e nd u r in g be n ef it to th e a p pel l an t.
3. 1 W i th ou t pre ju d ic e, th a t th e C IT ( A) err ed on f ac ts an d in l a w i n n o t al lo wi n g de pr ec i a ti o n @ 2 5 % on the sa id mar ke t rese arc h e x pen se s in cu rre d f or the e arl ie r a sse ssme n t ye ar s, i. e. AY 20 0 7 -0 8 ,
2 0 08 - 0 9 an d 2 0 0 9 - 10 , b y tre ati ng the s ame as c a pi ta l in n a tu re.
1 0 3. Th e i ss ue in vol ve d in th e a bo ve gr oun d s s ta nd s a d j ud ic a te d b y us a b ove a t I ss ue N o .5 in p a ra 2 0 to 2 1 of ou r or d e r a bo ve . A ccor di n gl y, th is g ro un d i s a ll ow e d in s a i d te r ms .
4. T hat the CIT (A) erred on f acts and in law in sustaining the disallo wance of product developmen t expenses amounting to Rs. 59,44,000 (af ter allo wing depreciation @25% p.a. on expense of Rs. 79,25,000) allegedly holding that the said expenditure is in relation to pre-launch of a produc t and theref ore, capital in nature.
4.1 Without prejudice, that the C IT (A) erred on f acts and in law in not allowing depreciation @ 25% on the said product developmen t expenditure incurred f or the earlier assessment years, i.e. AY 2006-07, 2007-08, 2008-09 and 2009-10, by treating the same as capital in nature.
1 0 4. Th e i ss ue in vol ve d in th e a bo ve gr oun d s s ta nd s ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 87 of 120 a d j ud ic a te d b y us a b ove a t I ss ue N o .4 in p a ra 1 3 to 1 4 of ou r or d e r a b ove . Ac cor d i ngl y, thi s g ro un d i s a l lo we d f or sta t is ti ca l p ur p ose s.
5. T hat the C IT (A) erred on f acts and in la w in sustaining the disallo wance on account of provision f or post-retirement medical benef it given to employees amounting to Rs. 3,34,000 allegedly by holding that the these provision are in the nature of contingent liability and thus not subject to deduction under income tax.
1 0 5. Th e i ss ue in vol ve d in th e a bo ve gr oun d s s ta nd s a d j ud ic a te d b y us a b ove a t I ssue N o. 6 in p a ra 2 7 of ou r or de r a b ove . Ac cor d i ngl y, t hi s gr ou nd i s a l lo we d
6. T hat the C IT (A) erred on f acts and in la w in sustaining disallowance of provision of market claims amounting to Rs. 1,96,24,000 allegedly holding that the appellant has f ailed to establish with supporting evidence the nature of liability f or which provision has been created and claimed. 6.1 Without prejudice, that the CIT (A) erred on f acts and in la w in not considering that under the mercantile system of accounting deduction of expenditure is allo wable in the year in which the liability is quan tif ied and accrued, notwithstanding that the same has to be discharged at a later date.
1 0 6. Th e i ss ue in vol ve d in th e a bo ve gr oun d s s ta nd s a d j ud ic a te d b y us a b ove a t I ss ue N o .8 in p a ra 3 5 to 3 6 of ou r or d e r a bo ve . A ccor di n gl y, th is g ro un d i s di smi ss e d .
Th e a ss e ss ee h a s a ls o r a i se d a d d ition a l gr ou nd a s un d e r : ITA No.47/Chd/2018
ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 88 of 120 "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. 1TA 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.
2,55,04,589, 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 lo the subject assessment year." 1 0 7. Th e a d mis s i on & a d j ud i ca ti on of t he a b ov e gr oun d s ha s b ee n de a l t i n I ssu e N o.9 a t pa r a of our or d e r a bov e Th e a dd i ti ona l gr ou n d a ccor d i ng ly is a d mi tt e d f or a d j ud ic a ti on a n d d is mis se d.
1 0 8. I n e ffe ct a p pe al of t he a sse sse e i s p a r tl y a l l ow e d for st a ti sti ca l p u rp os e s .
आयकर अपील सं./ ITA No.222/Chd/2017 नधा रण वष / Assessment Year : 2010-11 (Revenue's Appeal)
i) On the f acts and circumstances of the case and in law, the Ld. CIT (A) has erred in restricting the disallo wance f rom Rs. 24,98,62,000/- toRs. 3,15,42,101/- made u/s 40(a)(ia) of the Act on ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 89 of 120 account of payment made to Glaxo Smith Kline Biological SA at Belgium f or purchase of Vaccine without deducting tax u/s 195 of the by relying on circular No.2/2014 dated 26.02.2014 and circular No. 3/2015 dated 12.02.2015 holding that these circulars were clarif icatory in nature ignoring the f act that these circulars came into force during F.Y. 2013-14 and F.Y. 2014-15 respectively and do not apply to A.Y. 2010-11.
1 0 9. I t w a s c ommon gr oun d th a t th e is sue r a i se d ab ov e w a s co nn e cte d to G r oun d N o.1 to 1. 4 of th e a s se sse s a p p e a l in I TA N o. 2 27 /C h d /20 1 7 for th e imp u gne d ye a r . S i nce the sa i d i ss ue h a s b ee n re store d ba c k to t he AO a t p a r a 1 0 1 of our o rde r a b ove , t hi s i ss ue a ls o sta n d s re s tore d to the AO w i th t he d ir e cti on t o t he A O to d e c ide th e sa me a l on gwi th th e sa i d gr ou nd s 2 t o 2 . 4 of th e a sse sse s ap p e a l .
Gr ou nd of a p pe a l N o.i is a l low e d f or sta t is tic a l p ur p ose s.
1 1 0. I n e f fe ct a p p e a l of th e Re ve n ue i s a l l ow e d for sta t is ti ca l p ur p ose s A.Y 2011-12 आयकर अपील सं./ ITA No.228/Chd/2017 ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 90 of 120 नधा रण वष / Assessment Year : 2011-12 (Assessee's Appeal) "1. T hat the Commissioner of Income-tax (Appeals) ['C IT (A)'] erred on f acts and in law in sustaining disallo wance of Rs. 1,37,82,000 under section 40(a)(i) of the Act, with respect to purchase of vaccine amounting to Rs. 47,32,96,000 made f rom GlaxoSmithKline Biological S.A. ('GSK, Bio'), Belgium, allegedly holding that th e appellant has f ailed to deduct tax at source f rom such payment. 1.1 T hat the CIT (A) erred on f acts and in la w 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 f or R&D activities 1.2 T hat the CIT (A) erred on f acts and in la w in holding that clinical trial activities constitu te permanent establishmen t of GSK Bio in India with in the meaning of Double T axation Avoidance Agreement (DTAA) between India and Belgium on account of the f ollowing:
a. Fixed place of business in the f orm of place where clinical trials and research and developmen t takes place including but no t limited to CDMCI and BDS I, Bangalore under Article 5(1) of the DT AA;
b. Premises used as a sales outl et or f or receiving or soliciting orders with respect to vaccines under Article 5(2)(i) of the DT AA;
c. CDMCI, Bangalore under Article 5(2)(c) of the DT AA;
d. BDS I, Bangalore under Article 5(2)(c) of the DT AA; and ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 91 of 120 e. Dependent agent PE in the f orm of the appellant under Article 5(4) of the DT AA.
1.3 T hat the CIT (A) erred on f acts and in la w in alternatively holding that the assessee constituted business connection with GSK Bio within the meaning of section 9(1 )(i) of the Act.
1.4 Without prejudice, the CIT (A) erred on f acts and in law in determining the prof it attributable to the alleged PE in India at 23% of the net prof its of GSK, Bio, as against 15.38% de termined by the appellant on the basis of f unctions, asset and risk analysis of the appellant vis-a-vis GSK, Bio.
1 1 1. Th e i ss ue i n v ol ve d in th e a b ov e gr ou nd s s ta nd s a d j ud ic a te d b y us a b ove a t I ss ue N o .3 in p a ra 1 0 to 1 1 of ou r or d e r a b ove . Ac cor d i ngl y, thi s g ro un d i s a l lo we d f or sta t is ti ca l p ur p ose s.
2 T hat the CIT (A) erred on f acts and in la w in sustaining the disallo wance of Rs. 19,68,95,000, being 1/3 r d of the expenditure on advertisement and promotion of Rs. 59,06,86,000 allegedly on the ground that the said expenditure resulted in promotion of brand name o wned by the f oreign company.
2.1 T hat the C IT (A) erred on f acts and in law in not appreciating that the assessee is the exclusive licensee authorized to manuf acture and sell products under th e brand name in India and since the expenditure was incurred in the course of carrying on of its business, it was allo wable deduction as business expenditure.
1 1 2. Th e i ss ue in vol ve d in th e a bo ve gr oun d s s ta nd s a d j ud ic a te d b y us a b ove a t I ssu e N o .2 i n pa r a 7 to 8 of ou r ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 92 of 120 or d e r a bo ve . A ccor di n gl y, th is g ro un d i s a ll ow e d .
3 T hat the CIT (A) erred on f acts and in la w in sustaining disallo wance of market research expenses amounting to Rs. 4,57,28,250 (after allowing depreciation @ 25% p.a. on expense of Rs. 6,09,71,000) allegedly holding that the said expenditure incurred on market surveys, market research f or the products which are to be launched and party f or existing produc ts, are capital in nature and gave enduring benef it to the appellan t. 3.1 Without prejudice, that the CIT (A) erred on f acts and in la w in not allo wing depreciation @ 25% on the said market research expenses incurred f or the earlier assessment year, i.e. AY 2007-08, 2008- 09, 2009-10 and 2010-11, by treating the same as capital in nature.
1 1 3. Th e i ss ue i n v ol ve d in th e a b ov e gr ou nd s s ta nd s a d j ud ic a te d b y us a b ove a t I ss ue N o .5 in p a ra 2 0 to 2 1 of ou r or d e r a bo ve . A ccor di n gl y, th is g ro un d i s a ll ow e d in s a i d te r ms .
4. That the CIT(A) erred on facts and in law in sustaining the disallowance on account of provision for post-retirement medical benefit given to employees of amounting to Rs. 7,40,627 allegedly holding that the these provision are in the nature of contingent liability and thus not subject to deduction under income tax.
1 1 4. Th e i ss ue in vol ve d in th e a bo ve gr oun d s s ta nd s a d j ud ic a te d b y us a b ove a t I ssue N o. 6 in p a ra 2 7 of ou r or de r a b ove . Ac cor d i ngl y, t hi s gr ou nd i s a l lo we d .
5. That the CIT(A) erred on facts and in law in sustaining the disallowance of product development expenses amounting to Rs. 95,76,000 (after allowing depreciation @ 25% p.a. of ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 93 of 120 expense of Rs. 1,27,68,000/- allegedly holding that the said expenditure is in relation to pre-launch of a product and therefore, capital in nature.
5.1 Without prejudice, that the CIT(A) erred on facts and in law in not allowing depreciation @ 25% on the said product development expenditure incurred for the earlier assessment years, i.e. AY 2006-07 to 2010-11, by treating the same as capital in nature.
1 1 5. Th e i ss ue in vol ve d in th e a bo ve gr oun d s s ta nd s a d j ud ic a te d b y us a b ove a t I ss ue N o .4 in p a ra 1 3 to 1 4 of ou r or d e r a b ove . Ac cor d i ngl y, thi s g ro un d i s a l lo we d f or sta t is ti ca l p ur p ose s.
1 1 6. Th e a s se sse e has a l so r a i se d a ddi ti on a l gr oun d a s u nd e r:
"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. 1TA 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. 2,55,04,589, 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 lo the subject assessment year."
1 1 7. Th e a dmi s si on & a dj ud i ca t ion o f th e a b ove g roun ds ha s ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 94 of 120 b ee n de a l t i n I ss ue N o. 9 a t p a ra 3 8 of ou r or d er a b ove Th e a dd i ti ona l g ro un d a ccor d i ng ly is a d mi tt e d f or a d j ud ic a ti on a n d d is mis se d.
1 1 8. I n e ffe ct a p pe al of t he a sse sse e i s p a r tl y a l l ow e d for st a ti sti ca l p u rp os e s .
A.Y 2 0 12 -1 3 आयकर अपील सं./ ITA No.344/Chd/2017 नधा रण वष / Assessment Year : 2012-13 (Assessee's Appeal)
1. That the assessing officer erred on facts and in law in completing the assessment under section 143(3) of the Income Tax Act ('the Act') at an income of Rs. 2,18,45,08,400 as against the returned income of Rs.1,75,46,21,920.
The above ground is general in nature and needs no adjudication
2. That the assessing officer erred on facts and in law in making an adjustment of Rs. 14.819 to the arm's length price of alleged 'international transactions' of accounts receivable undertaken with the associated enterprise, on the basis of the order passed under section 92CA(3) of the Act by the Transfer Pricing Officer (TPO'). ITA No.47/Chd/2018
ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 95 of 120 2.1 That the Dispute Resolution Panel ('DRP') erred on facts and in law in upholding the order of the TPO, wherein, it was held that the alleged delay in receipt of receivables as unsecured loans advance to the associated enterprise which is as an international transaction in terms of section 92B of the Act.
2.2 That the DRP/TPO erred on facts and in law in not appreciating that delay in receipt of receivable is not an 'international transaction', per se, under section 92B of the Act but is a consequence of an 'internal transaction' undertaken in the form of sale of goods/services rendered to the associated enterprise.
2.3 That the DRP/TPO erred on facts and in law in re-
characterizing the alleged delay in receipts of receivables as unsecured loans advanced to the associated enterprises and making a transfer pricing adjustment on that basis. 2.4 Without prejudice, that the DRP/TPO erred on facts and in law in not accepting that in any case the transaction of delay in respect of receivables was closely linked to the 'international transaction' of exports and since the profit earned by the appellant as a percentage of cost is higher than the profit earned by comparable companies, no transfer pricing adjustment was even otherwise required to be made in this regard.
2.5 Without prejudice, that the DRP/TPO erred on facts and in law in rejecting the delay in receipt of receivables on transaction undertaken with unrelated third parties as comparable uncontrolled price for the purpose of benchmarking the delay in receipt of receivables on transaction undertaken with associated enterprises, applying CUP method.
2.6 Without prejudice, that the DRP/TPO erred on facts and in law in adding an adhoc mark-up of 400 points on the Libor rate of interest, arbitrarily on account of credit rating risk, security risk, transaction cost etc. 2.7 Without prejudice, that the DRP/ TPO erred on facts and in law in not appreciating that the in terms of Master Circular No. 10/2011-12, Reserve Bank of India allows a period of ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 96 of 120 12 months to all companies for receiving repatriation of export sales proceeds, and therefore, interest if any, ought to be imputed on the period of delay beyond 12 months. 1 1 9. Th e i ss ue i n v ol ve d in th e a b ov e gr ou nd s s ta nd s a d j ud ic a te d b y us a b ove a t I s sue N o. 1 0 in p a r a 4 0 to 50 of ou r or d e r a b ove . Acco rd i ng ly , th is gr oun d is a ll ow e d f or t he i mpu gn e d y e a r .
Corporate tax issue
3. That the assessing officer erred on facts and in law in making disallowance of Rs. 1,61,64,003 under section 40(a)(i) of the Act, with respect to purchase of vaccine amounting to Rs. 66,17,54,000 made from GlaxoSmithKline Biological S.A. ('GSK, SA'), Belgium, allegedly holding that the appellant had failed to deduct tax at source from such payments.
3.1 T hat the assessing off icer erred on f acts and in law in holding that GSK, SA had a permanent establishment in India and was, theref ore, taxable in India in as much as all activities of vaccine developmen t, including clinical trials and R & D of GSK, SA are being carried out through the f ixed place of business in India and under direct supervision and control of GSK, SA.
3.2 T hat the assessing off icer erred on f acts and in law in holding that the appellant was responsible f or undertaking any clinical trial as well as research and development activities on behalf of GSK, SA, the resultan t ne w/ improved product of wh ich belongs to GSK Biological SA.
3.3 T hat the assessing off icer erred on f acts and in law in holding that clinical trial activities constitu te permanent establish ment of GSK Biological SA in India within the meaning of Article 5 of Double T axation Avoidance Agreemen t (DT AA) ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 97 of 120 between India and Belgium on account of the f ollowing:
a. Fixed place of business in the f orm of place where clinical trials and research and development takes place including but not limited to CDMCI and BDS I, Bangalore under Article 5(1) of the DT AA;
b. Premises used as a sales outlet or f or receiving or soliciting orders with respect to vaccines under Article 5(2)(i) of the DT AA;
c. CDMCI, Bangalore under Article 5(2)(c) of the DT AA;
d. BDS I, Bangalore under Article 5(2)(c) of the DT AA; and e. Dependent agent PE in the f orm of the appellant under Article 5(4) of the DT AA.
3.4 T hat the assessing off icer erred on f acts and in law in al ternatively holding that the assessee constitu ted business connection with GSK Belgium SA with in the meaning of section 9(1 )(i) of the Ac t.
3.5 Without prejudice, the assessing off icer erred on f acts and in la w in determining the prof it attribu table to th e alleged PE in India at 22.5% of the net prof its of GSK, SA as against 15.38% determined by the appellan t on the basis of f unctions, asset and risk analysis of the appellant vis-a-vis GSK, SA.
1 2 0. Th e i ss ue in vol ve d in th e a bo ve gr oun d s s ta nd s a d j ud ic a te d b y u s a b ove a t I s su e N o. 3 i n pa r a 1 0 -1 1 of ou r or d e r a b ove . Ac cor d i ngl y, thi s g ro un d i s a l lo we d f or sta t is ti ca l p ur p ose s.ITA No.47/Chd/2018
ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 98 of 120
4. T hat the assessing off icer erred on f acts and in law in disallowing a sum of Rs. 33,28,14,000, being 1/3 r d of the expenditure incurred by the appellant on advertisement and publicity amoun ting to Rs. 99,84,41,000 lacs, holding that the expenditure was incurred f or brand building f or the entities o wn ing the brand.
4.1. T hat the assessing off icer erred on f acts and in law in not appreciating that expenditure on advertisement and publicity incurred by the appellant is wholly & exclusively f or his manuf acturing and distribution activity and any benef it arising in the f orm of brand building to the associated en terprises is inciden tal benef it. 4.2 T hat the assessing off icer erred on f acts and in law in holding that there was a strong nexus between the advertisement expenditure and revenues of the associated enterprises and, theref ore, the associated en terprises should contribu te to wards advertisement expenditure incurred by the assessee in India.
1 2 1. Th e i ss ue in vol ve d in th e a bo ve gr oun d s s ta nd s a d j ud ic a te d b y us a b ove a t I ssu e N o .2 i n pa r a 7 to 8 of ou r or d e r a bo ve . A ccor di n gl y, th is g ro un d i s a ll ow e d .
5. T hat the assessin g off icer erred on f acts and in la w in disallo wing market research expenses amounting to Rs. 5,28,08,250 (after allowing depreciation @ 25% on Rs. 7,04,11,000 i.e. Rs. 1,76,02,750) on the alleged ground that the said expenditure was capital in nature and gave enduring benef it to the appellan t. 5.1 Withou t prejudice, that the assessing off icer erred on f acts and in law in not allowing depreciation @ 25% on the said market research expenses ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 99 of 120 incurred f or the earlier assessment year, i.e. AY 2007-08 to 2011-12, by treatin g the same as capital in nature.
1 2 2. Th e i ss ue in vol ve d in th e a bo ve gr oun d s s ta nd s a d j ud ic a te d b y us a b ove a t I ss ue N o .5 in p a ra 2 0 to 2 1 of ou r or d e r a bo ve . A ccor di n gl y, th is g ro un d i s a ll ow e d in s a i d te r ms .
6. T hat the assessing off icer erred on f acts and in la w in making addition of Rs. 5,86,661 with respect to provision of medial reimbursement to retired employees allegedly holding that the expenditure was contingent in nature and the amount has not been actually paid thus not allo wed as deduction.
1 2 3. Th e i ss ue in vol ve d in th e a bo ve gr oun d s s ta nd s a d j ud ic a te d b y us a b ove a t I ssue N o. 6 in p a ra 2 7 of ou r or de r a b ove . Ac cor d i ngl y, t hi s gr ou nd i s a l lo we d .
7. That the assessing officer erred on facts and in law in disallowing product development expenses amounting to Rs. 2,74,98,750(af ter allo wing depreciation @25%onRs.3,66,65,000i.e.Rs.91,66,250)allegedly holding that the said expenditure is capital in nature and gave enduring benefit to the appellant.
7.1 Without prejudice, that the assessing officer erred on facts and in law in not allowing depreciation @ 25% on the said product development expenditure incurred for the earlier assessment year, i.e. AY 2006-07 to 2011-12, by treating the same as capital in nature.
1 2 4. Th e i ss ue in vol ve d in th e a bo ve gr oun d s s ta nd s a d j ud ic a te d b y us a b ove a t I ss ue N o .4 in p a ra 1 3 to 1 4 of ou r or d e r a b ove . Ac cor d i ngl y, thi s g ro un d i s a l lo we d f or sta t is ti ca l ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 100 of 120 p ur p ose s.
8. T hat the assessing officer erred on facts and in law in levying interest under sections 234B, 234D and 244k of the Act.
1 2 5. Th is gr ou nd i s con se q ue n ti a l in n a tu re a n d i s th e re fore n ot b e in g de a l t wi th b y us .
1 2 6. Th e a s se sse e has a l so r a i se d a ddi ti on a l gr oun d a s u nd e r:
"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. 1TA 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. 2,55,04,589, 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 lo the subject assessment year."
1 2 7. Th e a dmi s si on & a dj ud i ca t ion o f th e a b ove g roun ds ha s b ee n de a l t i n I SS U E N o.9 a t par a 3 8 of ou r or d e r ab ove Th e a dd i ti ona l gr ou n d a ccor d i ng ly is a d mi tt e d f or a d j ud ic a ti on a n d d is mis se d.
ITA No.47/Chd/2018
ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 101 of 120 1 2 8. I n e ffe ct a p pe al of t he a sse sse e i s p a r tl y a l l ow e d for st a ti sti ca l p u rp os e s .
A.Y 2 0 13 -1 4 आयकर अपील सं./ ITA No.47/Chd/2018 नधा रण वष / Assessment Year : 2013-14 (Assessee's Appeal)
1. T hat the Commissioner of Income-tax (Appeals) ['C IT (A)'] erred on f acts and in law in sustaining disallo wance of Rs. 68,39,550 under section 40(a)(i) of the Act, with respect to purchase of vaccine amounting to Rs. 73,41,73,000 made f rom GlaxoSmithKline Biological S.A. ('GSK, Bio'), Belgium, allegedly holding that th e appellant has f ailed to deduct tax at source f rom such payment. 1.1 T hat the CIT (A) erred on f acts and in la w 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 f or R&D activities.
1.2 T hat the CIT (A) erred on f acts and in la w in holding that clinical trial activities constitu te permanent establishmen t of GSK Bio in India with in the meaning of Double T axation Avoidance Agreement (DTAA) between India and Belgium on account of the f ollowing:
a. Fixed place of business in the f orm of place where clinical trials and research and ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 102 of 120 developmen t takes place including but no t limited to CDMCI and BDS I, Bangalore under Article 5(1) of the DT AA;
b. Premises used as a sales outl et or f or receiving or soliciting orders with respect to vaccines under Article 5(2)(i) of the DT AA;
c. CDMCI, Bangalore under Article 5(2)(c) of the DT AA;
d. BDS I, Bangalore under Article 5(2)(c) of the
DT AA; and
e. Dependent agent PE in the f orm of the
appellantunderArticle5(4)of the DT AA.
1.3 T hat the CIT (A) erred on f acts and in law in alternatively holding that the appellan t constituted business connection with GSK Bio within th e meaning of section 9(1 )(i) of the Act.
1.4 Without prejudice, the CIT (A) erred on f acts and in law in determining the prof it attribu table to the alleged PE in India at 22.5% of the net prof its of GSK, Bio, as against 15.38% determined by the appellant on the basis of f unctions, asset and risk analysis of the appellant vis-a-vis GSK, Bio.
1 2 9. Th e i ss ue in vol ve d in th e a bo ve gr oun d s s ta nd s a d j ud ic a te d b y us a b ove a t I ss ue N o .3 in p a ra 1 0 to 1 1 of ou r or d e r a b ove . Ac cor d i ngl y, thi s g ro un d i s a l lo we d f or sta t is ti ca l p ur p ose s.
1 T hat the CIT (A) erred on f acts and in law in sustaining the disallowance of Rs. 39,76,18,333, being 1/3 r d of the expenditure on advertisement and promotion of Rs. 11928.55 lacs allegedly on the ground that the said expenditure resulted in ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 103 of 120 promotion of brand name owne d by the f oreign company.
1.1 T hat the C IT (A) erred on f acts and in law in not appreciating that the appellan t is the exclusive licensee authorized to manuf acture and sell products under th e brand name in India and since the expenditure was incurred in the course of carrying on of its business, it was allo wable deduction as business expenditure.
1 3 0. Th e i ss ue in vol ve d in th e a bo ve gr oun d s s ta nd s a d j ud ic a te d b y us a b ove a t I ssu e N o .2 i n pa r a 7 to 8 of ou r or d e r a bo ve . A ccor di n gl y, th is g r oun d i s a ll ow e d .
3. T hat the CIT (A) erred on f acts and in law in sustaining disallowance of market research expenses amoun ting to Rs. 6,62,29,500 (after allowing depreciation @ 25% p.a. on expense of Rs, 8,83,06,000) allegedly holding that the said expenditure incurred on marke t surveys, market research f or the products wh ich are to be launched and party f or existing products, are capital in nature and gave enduring benef it to the appellant.
3.1 Without prejudice, that the C IT (A) erred on f acts and in la w in no t allo wing depreciation @ 25% on the said market research expenses incurred f or the earlier assessment year, i.e. AY 2007-08, to 2012-
13, by treating the same as capital in nature. 1 3 1. Th e i ss ue in vol ve d in th e a bo ve gr oun d s s ta nd s a d j ud ic a te d b y us a b ove a t I ss ue N o .5 in p a ra 2 0 to 2 1 of ou r or d e r a bo ve . A ccor di n gl y, th is g ro un d i s a ll ow e d in s a i d te r ms .
4.That the CIT(A) erred on facts and in law in sustaining the disallowance on account of provision for post-retirement medical benefit given to employees of amounting to Rs. 20,00,628 ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 104 of 120 allegedly holding that the these provision are in the nature of contingent liability and thus not subject to deduction under "come tax.
1 3 2. Th e i ss ue in vol ve d in th e a bo ve gr oun d s s ta nd s a d j ud ic a te d b y us a b ove a t I ssue N o. 6 in p a ra 2 7 of ou r or de r a b ove . Ac cor d i ngl y, t hi s gr ou nd i s a l lo we d .
5. That the CIT(A) erred on facts and in law in sustaining the disallowance of product development expenses amounting to Rs. 5,35,81,500 (af ter allo wing depreciation @ 25% p.a. of expense of Rs. 7,14,42,000) allegedly holding that the said expenditure is in relation to pre-launch of a product and therefore, capital in nature. 5.1 Without prejudice, that the CIT(A) erred on facts and in law in not allowing depreciation @ 25% on the said product development expenditure incurred for the earlier assessment year, i.e. AY 2006-07 to 2012-13, by treating the same as capital in nature.
1 3 3. Th e i ssu e in vol ve d in th e a b ove grou nd s s ta nd s a d j ud ic a te d b y us a b ove a t I ss ue N o .4 in p a ra 1 3 to 1 4 of ou r or d e r a b ove . Ac cor d i ngl y, thi s g ro un d i s a l lo we d f or sta t is ti ca l p ur p ose s.
Th e a ss e ss ee h a s a ls o r a i se d a d d ition a l gr ou nd a s un d e r :
"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. 1TA No.52/2018 and Hon'ble Bombay High Court in the case of Sesa Goa Ltd vs JCIT: 117 ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 105 of 120 taxmann.com 96 (Bom HC), deduction of Rs. 2,55,04,589, 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 lo the subject assessment year."
1 3 4. Th e a dmi s si on & a dj ud i ca t ion o f th e a b ove g roun ds ha s b ee n de a l t i n I ss ue N o. 9 a t p a ra 3 8 o f our or de r ab ov e Th e a dd i ti ona l gr ou n d a ccor d i ng ly is a d mi tt e d f or a d j ud ic a ti on a n d d is mis se d.
1 3 5. I n e ffe ct a p pe al of t he a sse sse e i s p a r tl y a l l ow e d for st a ti sti ca l p u rp os e s .
A.Y 2 0 14 -1 5 ITA No.1500/Chd/2018 Assessment Year : 2014-15 (Assessee's Appe al) "1. That the assessing officer erred on facts and in law in completing the assessment under section 143(3) ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 106 of 120 read with section 144C of the Income- tax Act ("the Act") at an income of Rs. 2,98,91,55,911 as against income of Rs. 2,57,62,21,110 returned by the assessee. 1 3 6. Th e a b ove gr ound i s g e ne r a l in n a tur e a nd nee ds no a d j ud ic a ti on.
1.1 That on the facts and circumstances of the case and in law, the impugned order passed by the assessing officer is barred by limitation and therefore, is liable to be quashed.
1 3 7. N o a rg ume nts w e re ma de vi s a vis th e a b ove gr oun d. Th is gr ou nd of a p p e a l i s th e re f ore di smi s se d .
2. That the assessing officer erred on facts and in law in making an adjustment of Rs.11,41,294 to the arm's length price of alleged 'international transactions' of accounts receivable undertaken with the associated enterprise, on the basis of the order passed under section 92CA(3) of the Act by the Transfer Pricing officer (TPO') and sustained by Dispute Resolution Panel ('DRP').
2.1 That the DRP/ TPO erred on facts and in law in re-
characterizing the alleged transaction of delay in receipts of receivables as unsecured loans advanced to the associated enterprises.
2.2 That the DRP/ TPO erred on facts and in law in not appreciating that delay in receipt of receivable is not an 'international transaction', per se, under section 92B of the Act but is a consequence of an 'international transaction' undertaken in the form of services rendered to the associated enterprise.
2.3 That the DRP/TPO erred on facts and in law in holding that the non- realization of invoice value beyond the ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 107 of 120 period of 60 days is a separate international transaction, whose arm's length price is required to be determined separately.
2.4 Without prejudice, that the DRP/ TPO erred on facts and in law in not accepting that in any case the transaction of delay in respect of receivables was closely linked to the 'international transaction' of export and since the profit earned by the assessee as a percentage of cost is higher than the working capital adjusted profit earned by comparable companies, no transfer pricing adjustment was even otherwise required to be made in this regard.
2.5 Without prejudice, that the DRP/ TPO erred on facts and in law in not appreciating that the appellant has received receivables from unrelated parties with similar delay of period and accordingly the delay in receipt of receivables from unrelated parties should be considered as a valid internal CUP for the purpose of benchmarking. 2.6 Without prejudice, that the DRP/ TPO erred on facts and in law in adding an adhoc mark-up of 400 points on the Libor rate of interest, arbitrarily on account of credit rating risk, security risk, transaction cost etc., following the direction of DRP passed in the preceding year. 2.7 Without prejudice, that on the facts and in the circumstances of the case and in law, the DRP/TPO erred on facts and in law in not appreciating that the in terms of Master Circular of 2013-14, Reserve Bank of India allows a period of 12 months to all companies for receiving repatriation of export sales proceeds, and therefore, interest if any, ought to be imputed on the period of delay beyond 12 months.
1 3 8. Th e i ss ue in vol ve d in th e a bo ve gr oun d s s ta nd s a d j ud ic a te d by us a b ov e a t I s sue N o.1 0 i n p a ra 4 0 to 50 of our or d e r a b ove . Ac cor d i ngl y, thi s g ro un d i s a l lo we d f or sta t is ti ca l p ur p ose s.
ITA No.47/Chd/2018
ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 108 of 120
3. That the DRP/ AO erred on facts and in law in sustaining disallowance of Rs. 43,83,000 under section 40fa)(i) of the Act, with respect to purchase of vaccine amounting to Rs. 59,44,14,000 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 DPR/ AO 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. 3.2 That the DRP/ AO erred on facts and in law in holding that clinical trial activities constitute permanent establishment of GSK Bio 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 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.
3.3 That the DRP/ AO erred on facts and in law in alternatively holding that the appellant constituted business connection with GSK Bio within the meaning of section 9(1 )(i) of the Act.ITA No.47/Chd/2018
ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 109 of 120 3.4 Without prejudice, the DRP/ AO erred on facts and in law in determining the profit attributable to the alleged PE in India at 22.5% of the net profits of GSK, Bio, as against 15.38% determined by the appellant on the basis of functions, asset and risk analysis of the appellant vis-a-vis GSK, Bio.
1 3 9. Th e i ss ue in vol ve d in th e a bo ve g r oun d s s ta nd s a d j ud ic a te d b y us a b ove a t I ss ue N o .3 in p a ra 1 0 to 1 1 of ou r or d e r a b ove . Ac cor d i ngl y, thi s g ro un d i s a l lo we d f or sta t is ti ca l p ur p ose s.
4. That the DRP/ AO erred on facts and in law in sustaining the disallowance of Rs.37,74,87,000, being 1/3rd of the expenditure on advertisement and promotion of Rs. 11324.59 lacs allegedly on the ground that the said expenditure resulted in promotion of brand name owned by the foreign company.
4.1 That the DRP/ AO erred on facts and in law in not appreciating that the appellant is the exclusive licensee authorized to manufacture and sell products under the brand name in India and since the expenditure was incurred in the course of carrying on of its business, it was allowable deduction as business expenditure. 1 4 0. Th e i ss ue in vol ve d in th e a bo ve gr oun d s s ta nd s a d j ud ic a te d b y us a b ove a t I ssu e N o .2 i n pa r a 7 to 8 of ou r or d e r a bo ve . A ccor di n gl y, th is g ro un d i s a ll ow e d .
5. That the DRP/ AO erred on facts and in law in sustaining disallowance of market research expenses amounting to Rs.5,42,63,000 (after allowing depreciation @ 25% p.a. on expense of Rs.1,35,65,750) allegedly holding that the said expenditure incurred on market surveys, market research for the products which are to be launched and party for existing products, are ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 110 of 120 capital in nature and gave enduring benefit to the appellant.
1 4 1. Th e i ss ue in vol ve d in th e a bo ve gr oun d s s ta nd s a d j ud ic a te d b y us a b ove a t I ss ue N o .5 in p a ra 2 0 to 2 1 of ou r or d e r a bo ve . A ccor di n gl y, th is g ro un d i s a ll ow e d .
6. That the DRP/ AO erred on facts and in law in sustaining the disallowance on account of provision for post-retirement medical benefit given to employees of amounting to Rs. 17,72,337 allegedly holding that the these provision are in the nature of contingent liability and thus not subject to deduction under income tax.
1 4 2. Th e i ss ue in vol ve d in th e a bo ve gr oun d s s ta nd s a d j ud ic a te d b y us a b ove a t I ssue N o. 6 in p a ra 2 7 of ou r or de r a b ove . Ac cor d i ngl y, t hi s gr ou nd i s a l lo we d .
7. That the DRP/ AO erred on facts and in law in sustaining the disallowance of product development expenses amounting to Rs. 2,63,75,250 (after allowing depreciation @ 25% p.a. of expense of Rs. 87,91,750) allegedly holding that the said expenditure is in relation to pre-launch of a product and therefore, capital in nature.
7.1 Without prejudice, that the DRP/ AO erred on facts and in law in not allowing depreciation @ 25% on the said product development expenditure incurred for the earlier assessment year, i.e. AY 2006-07 to 2013-14, by treating the same as capital in nature. 1 4 3. Th e i ss ue in vol ve d in th e a bo ve gr oun d s s ta nd s a d j ud ic a te d b y us a b ove a t I ss ue N o .4 in p a ra 1 3 to 1 4 of ou r or d e r a b ove . Ac cor d i ngl y, thi s g ro un d i s a l lo we d f or sta t is ti ca l ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 111 of 120 p ur p ose s.
1 4 4. Th e a s se sse e has a l so r a i se d a ddi ti on a l gr ou nd a s u nd e r:
"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. 1TA 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. 2,55,04,589, 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 lo the subject assessment year."
1 4 5. Th e a dmi s si on & a dj ud i ca t ion o f th e a b ove g roun ds ha s b ee n de a l t i n I ssu e N o.9 a t pa r a 38 of ou r or d e r a bove Th e a dd i ti ona l gr ou n d a ccor d i ng ly is a d mi tt e d f or a d j ud ic a ti on a n d d is mis se d.
1 4 6. I n e ffe ct a p pe al of t he a sse sse e i s p a r tl y a l l ow e d for st a ti sti ca l p u rp os e s .
ITA No.47/Chd/2018
ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 112 of 120 A.Y 20 1 5-1 6 आयकर अपील सं./ ITA No.1495/Chd/2019 नधा रण वष / Assessment Year : 2015-16 (Assessee's Appeal) "1. T hat the Assessing Off icer erred on f acts and in law in comple ting the assessment under section 143(3) read with sec tion 144C of the Income-tax Act ("the Ac t") at an income of Rs. 404,73,27,530 as against income of Rs.361,50,30,310 returned by the appellant.
1 4 7. Th e a b ove gr ou nd b e i ng ge ne ra l i n na tu re nee d s no a d j ud ic a ti on.
1.1 T hat on the f acts and circumstances of the case and in law, the impugned order passed by the assessing off icer is barred by limitation and theref ore, is liable to be quashed.
1 4 8. N o a rg ume nts w e re ma de vi s a vis th e a b ove gr oun d. Th is gr ou nd the re f ore sta n d s d i smi ss e d .
2.T hat the assessing off icer erred on f acts and in law in making an adjustment of Rs. 87,58,287 to the arm's length price of 'international transactions' of export of goods by the appellant with the associated enterprise, on the basis of the order passed by the T ransfer Pricing Off icer ('T PO')/ Dispu te Resolution Panel ('DRP').
2.1 T hat the AO/ T PO erred in the f acts and in law in no t considering that the transaction of sale of goods was not f or commercial ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 113 of 120 purposes and AEs have f urther donated the goods to WHO without any charge.
2.2 T hat the T PO/ DRP erred on f acts and in law in rejecting the f ollowing companies f rom the f inal set of comparable companies allegedly holding them to have been cherry picked by the appellant:
- Celebrity Biopharma Ltd.
- Elysium Pharmaceu ticals Ltd.
- S trides Pharma Science L td.
2.3T he DRP erred on f acts and in law in rejecting companies considered by the appellant holding that such companies are contrac t manuf acturer, without appreciating that the appellant also acts as con tract manuf acturer f or the associated enterprises f or sale of Albendazole tablets.
2.4 That the T PO/ DRP erred on f acts and in la w in rejec ting Triochem Products Ltd as comparable f rom the f inal set of comparable companies allegedly holding that complete f inancial inf ormation is not available in public domain.
2.5 That the T PO/ DRP erred on f acts and in la w in rejecting Z im Laboratories Ltd. as comparable f rom the f inal set of comparable companies allegedly holding that the company is f unctionally dissimilar to the appellant.
1 4 9. Th e i ss ue in vol ve d in th e a bo ve gr oun d s s ta nd s a d j ud ic a te d b y us a b ove a t I s sue N o. 1 1 in p a r a 5 5 to 5 8 of ou r or d e r a b ove . Ac cor d i ngl y, th is g ro un d i s a l lo we d f or sta t is tic a l p ur p ose s.
3. T hat the assessing of f icer erred on f acts and in law in making an adjustment of Rs. 18,98,270 to ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 114 of 120 the arm's length price of alleged 'international transactions' of accounts receivable undertaken with the associated enterprise, on the basis of the order passed under section 92CA(3) of the Act by the T ransf er Pricing off icer ('T PO') and sustained by Dispu te Resolution Panel ('DRP').
3.1 T hat the DRP/ T PO erred on f acts and in la w in re-
characterizing th e alleged transaction of delay in receipts of receivables as unsecured loans advanced to the associated enterprises. 3.2 T hat the D RP/ T PO erred on f acts and in law in not appreciating that delay in receipt of receivable is not an 'international transaction', per se, under section 92B of the Act bu t is a consequence of an 'international transac tion' undertaken in the f orm of services rendered to the associated enterprise. 3.3 T hat the D RP/ T PO erred on f acts and in law in holding that the non-realization of invoice value beyond the period of 60 days is a separate international transaction, whose arm's length price is required to be determined separately. 3.4 Without prejudice, that the DRP/ T PO erred on f acts and in la w in not accepting that in any case the transac tion of delay in respect of receivables was closely linked to the "international transaction' of export and since th e prof it earned by the appellan t as a percentage of cost is higher than the working capital adjusted prof it earned by comparable companies, no transf er pricing adjustment was even other wise required to be made in this regard.
3.5 Without prejudice, that the DRP/ TPO erred on facts and in law in adding an adhoc mark-up of 400 points on the Libor rate of interest, arbitrarily on account of credit rating risk, security risk, transaction cost etc., following the direction of DRP passed in the preceding year.
3.6 Without prejudice, that on the facts and in the circumstances of the case and in law, the DRP/TPO erred ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 115 of 120 on facts and in law in not appreciating that the in terms of Master Circular of 2014-15, Reserve Bank of India allows a period of 9 months to all companies for receiving repatriation of export sales proceeds, and therefore, interest if any, ought to be imputed on the period of delay beyond 9 months.
1 5 0. Th e i ss ue in vol ve d in th e a bo ve gr oun d s s ta nd s a d j ud ic a te d b y us a b ove a t I s sue N o. 1 0 in p a r a 4 0 to 5 0 of ou r or d e r a b ove . Ac cor d i ngl y, th is g ro un d i s a l lo we d f or sta t is tic a l p ur p ose s.
4. That the DRP/ AO erred on facts and in law in sustaining disallowance of Rs. 4,56,300 under section 40(a)(i) of the Act, with respect to purchase of vaccine amounting to Rs. 987.27 lakhs made from GlaxoSmithKline Biological S.A. ('GSK, Bio'), Belgium, allegedly holding that the appellant has failed to deduct tax at source from such payment.
4.1 That the DPR/ AO 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. 4.2 That the DRP/ AO erred on facts and in law in holding that clinical trial activities constitute permanent establishment of GSK Bio 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 place including but not limited to GDMCI 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;ITA No.47/Chd/2018
ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 116 of 120 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 4.3 T hat the DRP/ AO erred on f acts and in la w in alternatively holding that the appellant constituted business connection with GSK Bio within the meaning of section 9(1 )(i) of the Act.
4.4 Without prejudice, the D RP/ AO erred on f acts and in law in determining the prof it attribu table to the alleged PE in India at 22.5% of the net prof its of GSK, Bio, as against 15.38% determined by the appellant on the basis of f unctions, asset and risk analysis of the appellant vis-a-vis GSK, Bio.
1 5 1. Th e i ss ue in vol ve d in th e a bo ve gr oun d s s ta nd s a d j ud ic a te d b y us a b ove a t I ss ue N o .3 in p a ra 1 0 to 1 1 of ou r or d e r a b ove . Ac cor d i ngl y, th is g ro un d i s a l lo we d f or sta t is tic a l p ur p ose s.
5. T hat the DRP/ AO erred on f acts and in law in sustaining the disallowance of Rs. 38,09,78,666, being l/3 r d of the expenditure on advertisement and promotion of Rs. 11429.36 lacs allegedly on the ground that the said expenditure resulted in promotion of brand name owne d by the f oreign company.
1 5 2. Th e i ss ue in vol ve d in th e a bo ve gr oun d s s ta nd s a d j ud ic a te d b y us a b ove a t I ssu e N o .2 i n pa r a 7 to 8 of ou r or d e r a bo ve . A ccor di n gl y, th is g ro un d i s a ll ow e d . ITA No.47/Chd/2018
ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 117 of 120
6. T hat the DRP/ AO erred on f acts and in law in sustaining disallowance of market research expenses amounting to Rs. 5,56,20,000 (after allowing depreciation @ 25% p.a. on expense of Rs. 7,41,60,000) allegedly holding that the said expenditure incurred on marke t surveys, market research 7.1f or the products which are to be launched and partparty f or existing produc ts, are capital in nature and gave enduring benef it to the appellant.
153. Th e i ss ue in vo lv e d in the a b ov e g ro un ds s tand s a d j ud i ca te d b y us a b ove a t I s sue N o.5 in pa r a 2 0 t o 2 1 of ou r or d e r a b ove . Accor d in gl y, th i s gr oun d i s a l low e d.
7. T hat the DRP/ AO erred on f acts and in la w in sustaining the disallo wance on accoun t of provision for post-retirement medical benef it given to employees of amounting to Rs. 23,75,010 allegedly holding that the these provision are in the nature of contingent liability and thus not subjec t to deduction under income tax.
7.1 T hat the DRP erred on f acts and in law in observing that "why additional provision needs to be created when the annual premium paid and charged to the P&L account covers all the liabilities that the assessee is obliged to discharges in respect of the retirees".
154. Th e i ss ue in volv e d in the a b ov e g ro un ds s tand s a d j ud i ca te d b y us a bo ve a t I s su e N o. 6 i n p a r a 2 7 of ou r or d e r a b ove . Accor d in gl y, th i s gr oun d i s a l low e d.
8. T hat the DRP/ AO erred on f acts and in la w in sustaining the disallowance of product developmen t expenses amounting to Rs.
2,15,76,000 (after allowing depreciation @ 25% p.a. of ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 118 of 120 expense of Rs. 2,87,68,000) allegedly holding that the said expenditure is in relation to pre-launch of a product and therefore, capital in nature. 8.1 Without prejudice, that the DRP/ AO erred on f acts and in la w in not appreciating that even if the expenditure incurred on product developmen t is considered to be in the nature of capital expenditure, the said expenditure ought to be allo wed deduction under section 35(1 )(iv) of the Act.
8.2 Without prejudice, that the DRP/ AO erred on f acts and in la w in not allo wing depreciation @ 25% on the said product developmen t expenditure incurred for the earlier assessment year, i.e. AY 2006-07 to 2013-14, by treating the same as capital in nature.
155. Th e i ss ue in volv e d in the a b ov e g ro un ds s tand s a d j ud i ca te d b y us a b ove a t I s sue N o.4 in pa r a 1 3 t o 1 4 of ou r or d e r a b ove . Ac cor d i ng ly, th is g ro un d is a l l ow e d f or s ta ti sti ca l pu r p ose s .
1 5 6. Th e a ss e ss ee h a s a ls o r a i se d a d d ition a l gr ou nd a s un d e r :
"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. 1TA 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. 2,55,04,589, 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 ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 119 of 120 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 lo the subject assessment year."
1 5 7. Th e a dmi s si on & a dj ud i ca t ion o f th e a b ove g roun ds ha s b ee n de a l t i n I ss ue N o. 9 a t p a ra 3 8 of ou r or d er a b ove Th e a dd i ti ona l g ro un d a ccor d i ng ly is a d mi tt e d f or a d j ud ic a ti on a n d d is mis se d.
1 5 8. I n e ffe ct a p pe al of t he a sse sse e i s p a r tl y a l l ow e d for st a ti sti ca l p u rp os e s .
1 5 9. I n the re su lt, a ll the a p pe a l s of th e a sse s se e a n d t he Re ve n ue , sta n d pa r tl y a l low e d fo r st a ti sti ca l p u rp os e s .
Or d e r pr on ou nced o n 26 t h Oc tober , 2 0 2 1.
Sd/- Sd/-
(SATBEER SINGH) (ANNAPURNA GUPTA)
याय क सद य/Judicial Member लेखा सद य/Accountant Member
दनांक /Dated: 26th October, 2021
*रती*
आदे श क! त,ल-प अ.े-षत/ Copy of the order forwarded to :
1. अपीलाथ / The Appellant ITA No.47/Chd/2018 ITA Nos.219 to 222,225 to 227,242, 228, 344/Chd/2017 ITA No.1500/Chd/2018 ITA No.1495/Chd/2019 A.Ys. 2007-08 to 2015-16 Page 120 of 120
2. यथ / The Respondent
3. आयकर आयु/त/ CIT
4. आयकर आयु/त (अपील)/ The CIT(A)
5. -वभागीय त न2ध, आयकर अपील&य आ2धकरण, च4डीगढ़/ DR, ITAT, CHANDIGARH
6. गाड फाईल/ Guard File आदे शानुसार/ By order, सहायक पंजीकार/ Assistant Registrar