DCIT - 14(2)(2), MUMBAI vs. M/S PFIZER LTD., MUMBAI

These are 4 cross appeals in case of one assessee Pfizer Ltd for assessment year 2015 – 16 involving common grounds of appeal involving same facts and circumstances. Both the parties argued identically for both the years, therefore, all these four appeals are disposed of by this common order.

For assessment year 2015 – 16 Pfizer Ltd (the assessee/appellant) in ITA number 3736/M/2019 and The Deputy Commissioner Of Income Tax – 14 (2) (2), Mumbai (The Learned AO) in ITA number 3694/M/2019 have preferred appeal against the appellate order passed by The Commissioner Of Income Tax (Appeals) – 22, Mumbai (The Learned CIT – A) dated 19/3/2019 wherein appeal filed by the assessee against the assessment order passed under section 143 (3) of The Income Tax Act, 1961 (The Act) dated 31/12/2017 passed by the learned assessing officer was partly allowed. Both the parties are aggrieved by that order and therefore are in appeal before us.

Assessee has preferred ITA number 3736/M/2019 raising following grounds of appeal: –

The learned AO aggrieved with the appellate order has preferred appeal in ITA number 3694/M/2019 raising following grounds of appeal: –

For assessment year 2016 – 17 the assessee has raised following grounds of appeal in ITA number 1620/M/2020:-

The learned assessing officer has also filed an appeal in ITA number 1777/M/2020 for assessment year 2016-17 raising following grounds:-

First we state brief facts for AY 2015 – 16 shows that assessee is a domestic company engaged in the business of manufacturing, sale and pharmaceuticals including OTC pharmaceuticals, cosmetics allowed consumer products and trading of pharmaceuticals. It filed its return of income on 30/11/2015 declaring a total income of ₹ 1,996,466,610/–. This return was revised on 31/3/2017 and the total income was shown at Rs. 215,66,98,620. The return was picked up for scrutiny. Assessment order under section 143 (3) of the act was passed on 31/12/2017 by The Assistant Commissioner Of Income Tax Circle – 14 (2) (2), Mumbai determining total income of the assessee at ₹ 464,39,54,789. This assessment order was challenged before the learned CIT – A which is the subject matter of appeal before us.

We first take up ITA number 3736/M/2019 filed by the assessee. The ground no. 1 and 2 of appeal is with

Assessee approached the learned CIT – A who decided this issue by paragraph number 4.3. The learned CIT – A noted that assessee has filed an additional evidences wide letter dated 29/1/2019 where by the assessee claimed that the erroneous reporting transaction of ₹ 108 lakhs. In 19 out of the total unreconciled figure of ₹ 1,935,842 which is also accepted by the learned assessing officer in the remand report and accordingly addition to that extent was deleted. The balance addition of ₹ 1,827,523/– was confirmed. Therefore, assessee is in appeal before us.

Before us, assessee reiterated all the submissions made before the lower authorities and stated that still the assessee does not have any confirmation from the other parties. Assessee also stated that in the earlier years

The learned departmental representative vehemently supported the order of the learned lower authorities and stated that when the assessee could not reconcile the difference between the information available with the income tax department and its return of income, the lower authorities have correctly made the addition.

We have carefully considered the rival contention and perused the orders of the lower authorities. We find that in case of Pfizer Ltd sum of ₹ 1,912,889 remained unreconciled before the learned assessing officer and in case of Wyeth Ltd a sum of ₹ 22,953/– could not be reconciled and therefore amount of ₹ 1,934,842/– was added by the learned assessing officer. When the matter reached before the learned CIT – A, assessee could produce the confirmation of ₹ 10,800,319 with respect of the bank of Baroda that it has been inadvertently mentioned in the name of the assessee and therefore this addition was deleted. There is no other confirmation available with respect to the other parties. Looking at the details of the parties we find that out of the 8 different

Similarly for assessment year 2016 – 17 in ITA number 3736/M/2019 the addition on account of unreconciled

Ground no 3 to 5 of appeal for assessment year 2015 – 16 is with respect to the disallowance of depreciation on opening block of intangible assets amounting to ₹ 2,037,225,000/– being intangible assets comprising of goodwill generated because of merger of Wyeth Limited with the assessee.

Similar grounds raised for assessment year 2016 – 17 also as per ground number 2 where the opening block of intangible asset is computed at ₹ 1,527,918,750/– and the learned assessing officer has disallowed the depreciation.

During the course of assessment proceedings, the learned assessing officer noted that as per annexure – 4 of form number 3 CD that the depreciation on goodwill of the

The assessee aggrieved with that has preferred appeal before us.

The bench specifically asked about the status of assessment year 2014 – 15 of the appellate order passed by the learned CIT – A which is referred to in his appellate order for this year. The counsel submitted that the issue is pending before coordinate bench in ITA number 2132/M/2018. We find that whether the assessee has acquired a capital asset eligible for depreciation on the amalgamation of Pfizer Ltd with Wyeth Ltd as an intangible asset is required to be examined in the year in which the amalgamation took place. That year is assessment year 2014 – 15, which is decided by the coordinate bench in ITA No 2138/M/2018 setting aside the issue back to the file of the ld AO. For this year, depreciation would be granted on the opening written down value of that block. Therefore, in this year, it is not required to be decided with respect to whether assessee has acquired any depreciable asset on the scheme of amalgamation. As that issue is pending now before the ld AO for assessment year 2014 – 15, we set aside this issue back to the file of the learned AO as whatever is

Similarly, for assessment year 2016 – 17 the assessee has categorically stated that ground number 2 of that appeal is identical to ground number 2 of the appeal for assessment year 2015 – 16. Therefore with similar reasons and to determine only the quantum of depreciation, we set-aside this ground also to the file of the learned AO.

Ground number 6 to 8 are with respect to disallowance of depreciation in respect of assets at Thane plant amounting to ₹ 343 lakhs. Similar ground of appeal is also raised for assessment year 2016 – 17 wherein ground number 3 contests the disallowance of depreciation on assets at Thane plant amounting to ₹ 6,932,278/–. Therefore, both these grounds for both the assessment years are having identical facts and circumstances. This is also the statement of the assessee in the return submission made.

During the course of assessment proceedings, the learned assessing officer noted that assessee’s Thane plant was

On appeal before the learned CIT – A, wherein he noted that from the records it appears that assessee had every intention to not to start that plant again since it had already acquired facility of manufacturing at Goa and it also had the benefit of manufacturing facilities of Wyeth Ltd plus the loan and license manufacturing facilities under which it could get its products manufactured at different facilities. He further noted that assessee has sold its

The learned authorized representative referred to the submissions made before the learned CIT – A placed at page number 51 of appellate order. It was the claim of the assessee that for assessment year 2001 – 02, honourable Bombay High Court on similar issue has decided the issue in favour of the assessee with respect to the different manufacturing facility. Further, the coordinate bench in assessee’s own case for assessment year 2002 – 03 and 2003 – 04 and 2005 – 06 has also decided in favour of the assessee. Therefore, this issue is squarely covered in favour of the assessee, Lower authorities failed to appreciate the identical facts and circumstances.

The learned departmental representative strongly supported the order of the learned lower authorities and

We have carefully considered the rival contention and perused the orders of the lower authorities. The learned assessing officer has categorically noted that assessee is not using the facility at Thane manufacturing plant. Subsequently this plant is sold in assessment year 2016 – 17. The learned CIT – A has also categorically noted that assessee did not want to restart this plant because of the availability of other manufacturing facilities. No evidences produced before us to show that there is a temporary lull in the business, the assets were not used because of some compulsions on part of the assessee. The conduct of the assessee of selling of these assets in subsequent year clearly shows that this plant was not used for the purposes of the business for the current year and the assessee had an intention to sale this plant and therefore the manufacturing facilities were stopped. However as the

Further, the reliance upon the case of honourable Bombay High Court in assessee’s own case for assessment year 2001 – 02 is also relevant.

Even the facts stated in ground number 4 of the appeal of the assessee for assessment year 2015 – 16 clearly shows that thane plant was never used by the assessee for the year and was not even intended to be use. The assessee has actively started making an effort to get out of that particular manufacturing facility. Even the labour force was also to be terminated or terminated. The labour unions are also cajoled foreclosure of that unit. Therefore, that unit was neither used non-intended to be used but is to be sold only. However, as the thane plant has entered block of assets, respectfully following the decisions of honourable High courts , we reverse the orders of lower authorities and direct ld AO to allow depreciation on Thane Plant.

Assessee has relied upon several judicial precedents which are dealt with as under:-

Even otherwise when the plant is sold , short-term capital gain is charged, assessee is granted deduction of written down value of the plant. Depreciation and short-term capital gain are also charged at the same rate.

Accordingly, we reverse the orders of the learned lower authorities in denying depreciation to the assessee with respect to the Thane plant for both the years. Accordingly, ground numbers 6 to 8 of the appeal of the assessee for Ay 2015-16 and Ground no 3 for AY 2016-17 are allowed.

For assessment year 2015 – 16, Ground number 9-13 are with respect to the disallowance of expenses related to Thane plant of ₹ 120,081,338/–. Brief facts shows that the assessee has incurred one-time expenses of ₹ 95,000,000 towards contribution for workmen, ₹ 22,938,494/- as fees and ₹ 2,142,929 towards legal and

This issue was agitated before the learned CIT – A, he decided this issue as per paragraph number 8.3 of his order. During the course of appellate proceedings, the additional evidences were furnished which was sent to the learned assessing officer for his remand report. On submission of the remand report, the explanation of the assessee was called for. After detailed discussion the learned CIT – A held that:-

Before us assessee submitted that an expenditure of ₹ 9.50 crores is paid to Bhartiya Kamgar Karmchari Mahasangh [ BKKM] with a view to arrive at amicable settlement with Thane plant workers for successfully concluding the voluntary retirement scheme proposed by the assessee through the support of that organization and to continue the business operation of the assessee in a peaceful and a profitable manner. As was informed to the Bombay stock exchange lock out notice dated 1 August 2014, the lockout pursuant to labour unrest had no impact

With respect to the legal expenditure of ₹ 22,938,409 paid to M/s Sandeep Puri and associates and similar legal fees amounting to ₹ 2,142,929 paid to other advocates, it was submitted that these legal costs were incurred in connection with labour matters and have a direct Nexus with the business of the assessee and thereby constitutes expenditure incurred out of commercial expediency. The assessee placed reliance on the decision of the honourable Bombay High Court in case of CIT versus Airlines Hotel Private Limited 346 ITR 33 ( Bom) wherein it was held that legal payment incurred for settling on resolving dispute to be allowed as business expenditure. Accordingly

The learned departmental representative vehemently supported the order of the learned CIT – A and submitted that with respect to the expenditure of ₹ 9.5 crores the assessee has not submitted any receipt or any evidence of incurring those expenses to show that its incurred wholly and exclusively for the purposes of the business. In absence of any evidence placed by the assessee, there is no clarity on nature of payment and its purpose and resultant business need Therefore, expenditure has rightly been disallowed. He further stated that in absence of any evidence that how that particular organization help the assessee to close down its plant was also not placed on record. With respect to legal fees he supported the order of the learned CIT – A and submitted that those expenses are capital in nature.

We have carefully considered the rival contention and perused the orders of the lower authorities. The assessee has incurred an expenditure of ₹ 120,081,338 during the year with respect to the closure of a manufacturing plant comprising of contribution to a labour union amounting to ₹ 9.5 crores and professional fees for litigation relating to workmen compensation of ₹ 25,081,338/–. The learned assessing officer disallowed the claim of the assessee because of the reason that

Learned CIT – A confirmed the disallowance of expenditure with respect to labour union stating that assessee did not file any evidence of payment or any explanation with any documentary evidences for incurring the expenditure showing that it was the necessity of the business or the purpose of such expenditure. With respect to the other expenditure, the learned CIT(A) held that these are capital in nature.

With respect to the payment of ₹ 9.5 crores made to a labour union, we do not find any infirmity in the order of the lower authority as no evidences showing the purpose of such payment, any agreement with the labour union, or any other evidence to even remotely suggest that these expenditure are related to the employees of the assessee company at the closed unit. Accordingly, in absence of any documentary evidence, such payment cannot be allowed. Mere submission of a lockout notice dated 1 August 2014 submitted to a stock exchange does not help in claiming that expenditure is allowable. No commercial expediency was demonstrated by showing any minutes with the labour

We do not find that the decision of the honourable Gujarat High Court in case of CIT versus Raipur manufacturing Co Ltd 84 ITR 50 has the facts anywhere near the facts of the case before us. In that case, there was a resolution of the board of directors, there was an agreement, payment was made to a co-operative society promoted by the assessee, therefore, and it was held that there is a business Nexus between the amount of payment and business of the assessee. In the present case there is no document available, therefore, it is impossible to establish any business connection between the business of the assessee and the nature of payment made. Even the assessee could not establish that why the payment was made to a labour union. Even the receipt was also not produced.

In the decision of honourable Karnataka High Court in CIT versus Migraine And Refined Oils Co Ltd [282 ITR 576] the payment was made to the employees of the company who are retrenched. Therefore, there was a direct Nexus between the employment of those employees with the assessee company and retrenchment compensation paid to them.

Assessee failed to establish before us that how the decision of the coordinate bench in case of Knight Riders sports private limited versus ACIT [193 TTJ 313] helps the

Therefore, the disallowance of ₹ 9.5 crores made by the assessee to a labour union namely Bhartiya kamgar Karmchari Mahasangh is correctly confirmed by the ld Lower authorities. Thus, Ground no 9 is allowed partly, Ground no 10 and 11 are dismissed.

Coming to the second issue of the payment of legal fees, we find that assessee has submitted that these were the legal cost incurred in connection with the labour matters and have the direct Nexus with the business of the assessee and therefore constitute the expenditure incurred out of commercial expediency. We find that the payment made by the assessee is with respect to the business of the assessee. Thane unit was one of the business units of the assessee. The payment was made to an advocate. The learned assessing officer has not doubted that this expenditure was not incurred for the legal fees. Therefore according to us, the assessee is entitled to deduction of these expenditure as business expenditure under section 37 (1) of the act. However, the learned assessing officer has disallowed it for one more reason that no taxes been deducted at source on such payment. As the learned CIT – A has confirmed the disallowance holding that it is a capital expenditure, there was no occasion before the learned CIT – A to examine this issue. Therefore, we set-

In the result ground number 12 is allowed of the appeal for assessment year 2015 – 16 is partly allowed.

Ground number 14-17 are with respect to the disallowance under section 40 (a) (ia) of the act in respect of purchase of finished goods from Medriech Ltd amounting to ₹ 61,178,695.

Similar ground is raised by the assessee for assessment year 2016 – 17 where the disallowance made by the learned assessing officer and confirmed by the learned CIT – A on identical facts and circumstances is ₹ 56,119,497/– .

For assessment year 2015 – 16, fact shows that during the course of assessment proceedings the assessee was repeatedly asked to show a difference between its contract manufacturing and principal manufacturing arrangements. Assessee only produced the legal agreements of contract

The learned authorized representative submitted that the honourable Bombay High Court in the assessee’s own case for assessment year 2007 – 08 held that the transaction of purchase of goods does not partake the character of works contract and therefore no taxes are required to be deducted at source. Therefore, this issue is squarely covered in favour of the assessee.

The learned departmental representative vehemently submitted that assessee has not submitted any evidence such as invoices etc, therefore it cannot be asserted that whether the issue is covered in favour of the assessee or not. Unless the assessee submitted those details, it cannot

We have carefully considered the rival contention and perused the orders of the lower authorities. Facts clearly shows that during the relevant assessment year the assessee had two separate agreements with the supplier, one for manufacture of finished goods under loan license agreement and another for purchase of finished goods under supply agreement. The learned assessing officer blurred the distinction between these two agreements and held that contract for purchase of finished goods under the Supply agreement is identical to the contract of an effect of finished goods under loan license agreement. Accordingly, the learned assessing officer held that assessee should have deducted tax at source. The learned AO did not disallow the whole amount but held that 30% of the amount of purchase of finished goods is related to service, labor charges and tax should have been deducted thereon. The learned CIT – A further held that as the assessee has a practice of obtaining goods manufactured by several small industries because of several benefits available to them and therefore these contracts are loan and license agreement of manufacturing. We failed to understand that how the Supply agreement has been considered by the lower authorities as license manufacturing contract agreement. Identical issue arose in case of the assessee for assessment year 2007 – 08 wherein it has been held that purchase of goods does not

Identical ground is raised in appeal of the assessee for assessment year 2016 – 17 as per ground number 4. There are no changes in the facts and circumstances of the case. The addition/disallowances also made by the learned AO on identical reasoning. The learned first appellate authority also confirmed the same on the same reasoning. Therefore, for the similar reasons as we provided for allowing ground number 5 of the appeal of the assessee for assessment year 2015 – 16, we allow ground number 4 of the appeal of the assessee for assessment year 2016 – 17 and direct the learned lower authorities to delete the disallowance of ₹ 56,119,497.

This leaves us with the additional ground raised by the assessee for assessment year 2016 – 17 with respect to applicability of the DTAA rate for dividend distribution tax.

For assessment year 2016 – 17 the assessee has raised an additional ground of appeal by letter dated 1 September 2021 as under:-

The learned departmental representative vehemently objected the application for admission of the additional ground. He’s objection was twofold. He objected that the issue is squarely covered against the assessee by the decision of special bench of the tribunal in case of TOTAL OIL LTD. The second objection was that that issue does not arise from the records available. The facts are required to be investigated. In the return of income they assessee has not disclosed the shareholding of the shareholder entities. Therefore, additional ground of appeal cannot be admitted where the facts are required to be investigated.

The learned authorized representative submitted that issue is purely a legal issue and therefore the admission of the additional ground is justified. The learned authorized

We have carefully considered the rival contention and perused the orders of the lower authorities. Application for admission of the additional ground raised by the assessee is also perused. All the judicial precedents cited before us by both the parties are also considered. In case of Assessee, identically we admitted additional ground for AY 2014-15 in ITA No 2132/ M/2018. After Admission, we dismissed that ground after recording arguments of both the parties. We do not find any reason to deviate from

In the result appeals of the assessee for AY 2015-16 and 2016-17 are partly allowed.

Now we come to the appeal of the learned assessing officer for assessment year 2015 – 16 wherein the solitary ground of the appeal was with respect to the disallowance of payment made to the Drs in alleged violation of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002. The brief fact shows that the assessee company during the year has debited a sum of ₹ 756,131,000 as advertisement expenses. The assessee was asked to furnish the details of nature and quantum of expenditure incurred i.e. nature of payment mentioned in Indian market Council regulation 2002. The assessee company in its letter dated 26/12/2017 submitted the details of such expenditure. As per the information furnished, assessee incurred following expenditure:-

The learned departmental representative submitted that this issue is squarely covered against the assessee by the decision of the honourable Supreme Court in case of Apex

The learned authorized representative submitted that that the amount of the expenditure and the nature of items distributed by the assessee are of very low and of an insignificant value for item unlike the distribution of laptops, gold coins etc. which were the fact before the honourable Supreme Court. The coordinate bench in case of Wyeth Ltd has remanded the matter to the AO to examine the details of expenses in light of the judgment of the honourable Supreme Court. Therefore, the matter should be sent back to the AO.

We have carefully considered the rival contention and perused the orders of the lower authorities. We find that the learned assessing officer has categorically mentioned the details of expenditure, which are disallowable. The assessee itself has given those details and therefore there

In the result appeal of the ld AO for assessment year 2015-16 and 2016-17 are allowed.