M/S GLAXOSMITHKLINE ASIA PVT. LTD.,GURGAON vs. DCIT, CHANDIGARH

आदेश/Order

Per Annapurna Gupta, Accountant Member:

The above appeals relate to the same assessee and pertain to

different assessment years. The appeal in ITA No.2453/Del/2016

relates to assessment year(A.Y) 2005-06 and is directed against the

order passed by the Commissioner of Income Tax (Appeals)-2,

Chandigarh (in short referred to as CIT(A) dated 29.02.2016 , u/s

250(6) of the Income Tax Act,1961, (hereinafter referred to as

‘Act’) . The appeal in ITA No.532/Chd/2014, relates to assessment

year 2006-07 and is directed against the order of the Assessing

Officer dated 31-03-2014, passed u/s 143(3) r.w.s. 144C(5) &

254/153(2A) of the Act, passed in accordance with the directions

of the Dispute Resolution Panel(DRP in short), in second round,

on the directions of the ITAT.

It was common ground that the issues involved in both the

appeals were identical, they were therefore heard together and are

being disposed off by a common consolidated order.

ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 3

Ld. Counsel for the assessee contended that A.Y 2005-06 was the

base year and the additions/adjustments made therein had been

reiterated in the succeeding year ,i.e A.Y 2006-07.The appeal for

A.Y 2005-06 was therefore first taken up for hearing.

ITA No.2453/Del/2016 A.Y 2005-06.

“1. That the Commissioner of Income-tax (Appeals) erred on facts and in law in sustaining the disallowance of stock written-off of Rs. 50,79,000 allegedly holding that the appellant failed to produce evidence of (i) informing the excise authorities or other regulatory authorities for destruction of such goods and (ii) intimating the dealers/ stockiest for not selling Aquafresh toothpaste, to substantiate the claim.”

company is in the business of manufacturing and trading of drugs

and oral health care products. During the year it claimed deduction

of Rs. 50,79,000/- on account of write off stocks on the ground

that it had discontinued dealing in one of its products i.e.

Aquafresh Tooth Brush and vaccine stocks nearing expiry were not

capable of being sold in the market. The Assessing officer

disallowed the same stating that the assessee was unable to

substantiate its claim. The Ld.CIT(A) upheld the disallowance at

para 6.3 of his order as under:

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“6.3 The submission of the appellant have been considered. The Assessing Officer asked the precise evidence related to destruction of stock, reconciliation of unsold goods lying at depot, how it was destroyed and evidence related to closer of business. However, no definite findings of the AO on the disallowance of write off stocks is available in the assessment order. It is seen, that similar disallowances were made by the AO in the case of the appellant company in assessment year 2004-05 on the ground that no evidence that these goods were destroyed were submitted by the assessee to substantiate its claim. I have carefully considered the submission of the assessee and various evidence on record. There is no evidence to substantiate the claim, that the appellant company informed the excise authorities and other regulatory authorities with regard to the destruction of stock of Rs. 59,79,000/-. There is also no evidence to suggest that the appellant intimated the dealers/ stockiest not to sale Aquafresh Toothpaste w.e.f. the date of discontinuation of business of Aqua Toothpaste. Therefore, in the absence of any evidence to support the claim of the assessee for write off stock, the disallowance is sustained. Ground of appeal No.2 is dismissed.”

identical disallowance made in assessment year 2003-04 in the

case of the assessee had been deleted by the ITAT. Our attention

was drawn to the relevant findings of the ITAT in its order passed

in the said case in ITA No. 1323/Chd/2012 dated 28-09-18, at para

10-11, as under:

“10. We have gone through the entire history of the case and the facts on record. On the issue of whether the expenditure incurred on destruction of the goods be treated as capital expenditure as held by the Revenue, we are not in agreement with any of the points taken up by the Revenue mentioned above. While the issue before us is destruction of the stock and claiming consequently the expenditure as revenue expenditure, the Revenue's submission that it is an item of disbursement and hence may be regarded as capital in nature cannot be accepted. Similarly this expenditure as pointed out in point no. 3 of the Revenue's submission cannot

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be considered as relates to any frame work of business or as mentioned in the point no. 1 doesn't bring out any new asset. The Revenue's reliance that this write off be treated as capital expenditure based on the contention that the action of recalling of the product amounts to termination of agency and purely voluntary for obtaining substantial benefit cannot be accepted in the facts of the case. Based on the settled position of law as to what constitutes a capital expenditure, this write off of stock cannot be treated as capital expenditure. We are also not in agreement with the contention of the Ld. DR that these expenditures were not related with particular previous year but were related to many earlier years cannot be accepted as these products constitute a part of the closing stock for the instant year.

write off of Rs.50.79 lacs pertained to stock of aquafresh tooth

brush of Rs.12.46 lacs and the balance pertained to write off of

stock of vaccine. The Ld. Counsel for the assessee contended that

major portion of the write off related to vaccines and which had

been duly submitted to the authorities below that they were

nearing expiry and hence not capable of being sold in the market.

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The Ld. Counsel for the assessee contended that this fact has not

been controverted by the Revenue and, therefore, when the

vaccines itself were not capable of being used, they had no

realizable value and the write off therefore of the same was

justified. With regard to the claim of write off of toothbrush the

Ld. Counsel for the assessee pointed out that it had been explained

that the assessee company had decided to discontinue this line of

business finding it commercially unviable and hence the stock was

withdrawn from the market. He pointed out that evidence in the

form of write off sheets approving the write off of the products,

and copy of Board Resolution dated 11-03-2004 approving the

write off had been filed. That therefore, it was incorrect on the

part of the Revenue Authorities to hold that the write off was

unsubstantiated. The Ld. Counsel for the assessee further pointed

out that the D.R.P. in assessee’s own case had held the claim of

the assessee on impairment of the stock as allowable revenue

expenditure. A brief submission of its arguments in this regard

was filed before us and are being reproduced hereunder:

“The appellant is engaged in the business of manufacture and sale of OTC products, viz., Eno. Crocin and oral healthcare products, etc. The appellant is also engaged in resale / distribution of vaccine. The appellant has in the relevant previous year written off in the profit and loss account stock amounting to Rs. 50.79.000 comprising of the following:

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(a) During the relevant previous year, the appellant has written off the stock of following vaccine aggregating to Rs.38.33 lacs, which were nearing expiry: (Rs. in lacs)

Brand Quantity Value Fluarix 13.820 17.28 Mencevax 5.884 20.07 Priorix. 246 0.34 Tvpherix 653 0.64 38.33

(b) The appellant had discontinued its business of manufacture of Aquafresh Tooth Brush and the said product was withdrawn from the market. Therefore, the entire inventory of Aquafresh Tooth Brush, related raw material and packing material were withdrawn and destroyed. Accordingly, the appellant has written off stock of Aquafresh toothbrush amounting to Rs. 12.46 lacs. The write off of such stock is supported by (i) stock write off sheet approving the write off of such products, (n) Copy of resolution of the meeting of the Board of Directors held on 11-03-2004 for discontinuation of Aquafresh toothbrush business [Pg. 269- 308 of PB - Merits (Reply dated 14.06.2013)1- The loss aggregating to Rs. 50,79,000 on account of write off of such stock of vaccine and Aquafresh toothbrush was claimed as revenue deduction in the relevant previous year [Pg. 1 of PB - Merits (Audited Accounts)]. The assessing officer, while completing the assessment, made disallowance of such stock written off. The assessing officer did not record any finding I reason for making the said disallowance. The action of the assessing officer in making disallowance of write off of stock amounting to Rs.59,79,000 as aforesaid is unlawful and is not sustainable for the reasons submitted as follows: In our respectful submission, the appellant as per the consistent method of valuation of stock values the closing stock at cost or net realisable value, whichever is lower as mandated by Accounting Standard — 2 on 'Valuation of inventories' prescribed by the Institute of Chartered Accountants of India. Since such stocks could not be sold in the market, the net realizable value of such stock was taken as 'Nil'. The market price in the instant case being Nil, In accordance with the consistent method of valuation of inventory followed by the appellant, the value of these items was written down to Nil and was reduced from the value of the inventories.

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The method of valuation of stock, it is respectfully submitted, is in accordance with the accepted principles of accounting propounded by the institute of Chartered Accountants of India. The Courts in India, too, have accepted the method of valuation of obsolete/defective stock at net realisable value being lower than cost. Reliance in this regard is also placed on the following decision: - Chainrup Sampatram vs. CIT : 24 1TR 48 (SC) - K. Mohammad Adam Sahib v. CIT : 56 1TR 360 (Madras HC) - India Motor Parts and Accessories (P) Ltd. v. CIT : 60 ITR 531 (Madras HC) - CIT v. Dalmia Cement (Bharat) Ltd.: 215 ITR 4411 (Delhi HC) - CIT vs. Bharat Commerce & industries Limited : 240 ITR 256 (Delhi HC) - Hotline Tele Tube and Components Limited: 175 Taxman 286 (Delhi HC)[Pg. 35-36 of PB-CL for AY 2004-05 & 2005-06] - C1T v. Hughes Communication India Ltd.: 215 Taxman 136 (Delhi HC) [Pg. 37-39 of PB-CL for AY 2004-05 & 2005-06] - CIT v Becton Dickinson India (P.) Ltd.: 214 Taxman 636 (Delhi HC) [Pg. 40-42 of PB-CL for AY 2004-05 -& 2005-06] - CIT v Bharat Commerce & Industries Ltd.: 107 Taxman 135 (Delhi HC) [Pg. 43-45 of PB-CL for AY 2004-05 & 2005-06] - IAC v. Consolidated Pneumatic Tool Co. (India) Ltd.: 14 1TD 564 (Bom. Tribunal) - Wipro Limited vs. DCIT : 96 TTJ 211 (Bangalore Tribunal). - Samsung India Electronics Limited (ITA No. 3734/Del/2002) (Delhi Tribunal) - Jet Airways India (P) Ltd. vs CIT (in 4228/M/2000 for assessment year 1997-98; 3349/M/2002 for assessment year!998-99; 2682/M/2003 for assessment year 1999-2000; 5945/M/2003 for assessment year 2000-01; 7389/M/2004 for assessment year 2001-02; 4087/M/05 for assessment year 1997-98; 3691/M/02 for assessment year 1998-99; 3201/M/03 for assessment year 1999-2000; 6084/M/03 for assessment year 2000-01; 7390/M/04 for assessment year 2001-02) (Mumbai Tribunal)

ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 9

- Emersons Process Management India (P) Ltd. vs Addl. CIT: IT Appeal No. 8118 (Mum.) of 2010 [Pg. 46-66 of PB-CL for AY 2004-05 & 2005-06) - Digital Equipment India Ltd. vs CIT: ITA No. 6623 and 6624(Bom.)/2008 Assessment Years 1990-91 and 1991-92 ITA Nos. 7466, 6707 and 6708(Bom.)/1995 Assessment Years 1989- 90, 1990-91 and 1991-92 [Pg. 67-80 of PB-CL for AY2004-05 & 2005-06] - CIT v Nuware India Ltd,: 118 ITD 70 (Del) [Pg. 81-93 of PB- CL for AY 2004-05 & 2005-06] The ld. CIT(A), however, sustained the disallowance holding that: 3. The submission of the appellant have been considered. The assessing officer asked the precise evidence related to destruction of stock, reconciliation of unsold goods lying at depot, how it was destroyed and evidence related to closer of business. However, no definite findings of the AO on the disallowance of write off stocks is available in the assessment order It is seen, that similar disallowances were made by the AO in the case of the appellant company in assessment year 2004-05 on the ground that no evidence that these goods were destroyed were submitted by the assessee to substantiate Us claim. I have carefully considered the submission of the assessee and various evidence on record. There is no evidence to substantiate the claim, that the appellant company informed the excise authorities and other regulatory authorities with regard to the destruction of stock of Rs. 59, 79,000/-. There is also no evidence to suggest that the appellant intimated the dealers/stockiest not to sale Aquafresh Toothpaste w.e.f the date of discontinuation of business of Aqua Toothpaste. Therefore, in the absence of any evidence to support the claim of the assessee for write off stock, the disallowance is sustained. Ground o appeal No. 2 is dismissed. It is submitted that the appellant, vide letter dated 14.06.2013 filed before the Id. CIT(A) additionally submitted the sample copies of stock write off sheets and email approvals, etc. related to write off of vaccines along with copy of hoard resolution dated 25.1S.2013, in order to support its claim of provision made for write off of stock [Pg. 269-308 of PB - Merits (Reply dated 14.06.2013)]. The C1T(A), merely on the ground that there is no evidence to show that, the assessee has informed the excise authorities and other regulatory authorities with regard to the destruction of stock, sustained the aforesaid disallowance, when, in fact, there is no requirement to inform the excise authorities and other regulatory authorities for creating provision of obsolete stock.

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Further, the DRP, in appellant's own case for assessment year 2006- 07 held the claim of the appellant for deduction of expenses on impairment of stock as allowable revenue expenditure [Page 26 of PB -CL for AY 2004-05 and 2005-06]. In view of the aforesaid, it is respectful submission of the appellant that any disallowance of the expenses in respect of the impairment of stock amounting to Rs. 50.79 lacs is not sustainable and is liable to be deleted.”

The Ld. DR on the other hand relied on the order of the Ld.

CIT(A).

the documents and decisions relied /referred to before us. The

claim of write off of stock amounting to Rs. 59,79,000/- has been

denied for want of evidence. The write-offs claimed by the

assessee relate to the following:

Vaccines 37.33lacs Aquafresh toothbrush 12.46 lacs.

Total 57.79 lacs

The major write off claim evidently pertains to vaccines which, we

find, the assessee consistently claimed had been nearing expiry

and thus had no realizable value. Copies of emails exchanged

within the assessee company seeking approval for release, write

off and destruction of stock of vaccines nearing expiry mentioning

specifically the stock of such vaccines, mails granting approval

granting for the same, as also sample copies of stock write off

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sheets of the vaccines were filed to the CIT(A).Therefore it is not

that the claim was entirely unsubstantiated. Further despite the

repeated assertion of the assessee that the vaccines written off

were nearing expiry, evidenced with emails so exchanged and the

stock write off sheets so mentioning, the Revenue has not brought

anything on record to controvert the said claim. Without pointing

out any infirmity in the explanation of the assessee duly evidenced

with documents, we hold, the claim could not be denied for want

of further evidence. Nothing has been pointed out regarding the

insufficiency of evidences filed by the assessee. Then why further

evidences were needed to substantiate the claim we are unable to

understand. In the light of the same, we hold, the claim of the

assessee as fully justified vis a vis write off of vaccines since

undoubtedly such vaccines were not capable of being used beyond

expiry period and had no realizable value thereafter.

As for the write off of Aquafresh tooth brush the assessee we

find had explained to the CIT(A) the reasons for discontinuation

of the business and the consequent withdrawal of the toothbrushes,

from the market, being commercially unviable and had as evidence

filed copy of the Board resolution dated 25-11-2003 to this effect.

Thus, we find that the assessee has been able to establish

documentarily the fact of write off of the said product and the

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Revenue has not proved anything to the contrary. For the reasons

stated above in the context of write off of vaccines we see no

reason to disallow the claim of the assessee. Moreover identical

claim of the assessee, we have noted, was allowed by the ITAT in

identical facts and circumstances in A.Y 2003-04. The claim of the

assessee to write off of toothbrush also is therefore allowed

In effect the entire claim to write off amounting to Rs.

59,79,000/- is allowed.

Ground No.1 raised by the assessee is allowed.

“2. That the Commissioner of Income-tax (Appeals) erred on facts and in law in sustaining the disallowance of Rs. 1/3rd 8,94,33,333, being of the expenditure on advertisement and promotion of Rs.26,83,00,000 allegedly on the ground that the said expenditure resulted in promotion of brand name owned by the foreign company.

of the Ld.CIT(A) at para 7.1, are that the assessee company during the

relevant year incurred expenditure of Rs. 26,83,00,000/- on advertisement and

sale promotion. The Assessing officer noted that assessee company was

spending on advertising and marketing and therefore, it had built a

formidable marketing network in India. That by incurring these expenses it

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was generating benefits to the parent company i.e. GSK Pic, UK who owned the

brand. The AO further noted that the said expenses were incurred in promoting

the brand in India, the benefit of which was ultimately to be derived by the

parent company. The AO further observed that there was a strong nexus

between the expenses on advertisement and the revenues of the Associated

Enterprises and therefore, the AE should contribute towards advertisement

expenditure incurred by the assessee in India. That this arrangement was

concocted to lower the profit of the assessee company and to save on the

expenditure of the parent company and therefore, 1/3 of the advertising

expenses were held to be towards brand building for the entities owning the

brand and were disallowed by AO as not being business expenses of the

assessee company. An addition of Rs.8,94,33,333/- (being 1/3 of

Rs.26,83,00,000/-) was accordingly made.

submissions, reproduced at para 7.2 of the CIT(A)’s order, to the

effect that the impugned expenses were incurred at the local level

and were routine expenses incurred to beat the competition in the

trade, that immediate beneficiary of the expenses was the assessee

which got reflected in the increased turnover and profitability.

That the expenses had not been incurred for brand building and the

benefit, if any, to the affiliated company was only incidental. The

Ld.CIT(A) was not convinced with the submissions of the assessee

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and accordingly upheld the order of the AO stating that since there

is no denying the fact that incurrence of advertisement expenses

resulted in promotion of the brand name owned by the parent

company, the said expenses it cannot be said to have been

incurred wholly and exclusively for the purpose of assessee.

Relevant findings of the Ld.CIT(A) at para 7.3 of his order are as

under:

“7.3 The submission of the appellant have been considered. The assessing officer has disavowed 1/3 o advertisement expenses incurred by the appellant company on the ground that brand owned by the parent company ie GSK Pic, UK is being promoted and therefore benefit is reaching to the parent company. The appellant has submitted that even it is presumed that the benefit of the said advertisement accrues to the owner of the brand, than too it would not be commercially expedient for the assesses to recover any amount on account of advertisement from the owner of the brand as the owner of the such brand has allowed the appellant to use their brand without charging any royalty. The similar issue was before the DRP in AY 2006-07 wherein appellant submitted that even if there is some incidental benefit derived by the parent company in the promotion of brand name the entire expenses are eligible for deduction u/s 37(1) of the Act. Therefore, there is no denying the fact that incurring of advertisement expenses has resulted in the promotion of brand name owned by the parent company in UK. Hence, the contention of the appellant that the entire advertisement expenses have been incurred wholly and exclusively for the purpose of the business of the appellant cannot be accepted. Therefore, the entire expenses cannot be attributed to the business of the appellant and AO has rightly attributed 1/3 of such expenses to brand building. The disallowance made by the AO of Rs.8,94,33,333/- is upheld. Grounds of appeal No.3, 3.1, 3.2, 3.3, 3.4 and 3.5 are different.

submissions made before the CIT(A). At the outset he drew our

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attention to the details of advertisement and promotion expenses, 1/3 rd of which was disallowed by the AO, as reproduced in the

brief submissions filed before us and pointed out that it was

evident from the same that all expenses were incurred for

promoting the sales of the assessee company only and had nothing

absolutely to do with the promotion of the brand of the parent

company. That the assessee locally incurred routine expenses for

advertising and promoting the products dealt in by the assessee

company for increasing its turnover. The Ld. Counsel for the

assessee contended that the assessee was in the business of

manufacture and sale of over the counter products i.e. eno, crocin,

etc., for which it had acquired the licence to manufacture and sell

in India from M/s GSK PLC. That the assessee was the exclusive

user of the brand name of such products in India. The Ld. Counsel

for the assessee contended that the benefit of the entire expenses

inured to the assessee only by way of higher sales and higher

profits and the benefit, if any, to the parent company was only

incidental and, therefore, the expenditure was incurred wholly and

exclusively for the purpose of the business of the assessee and was

thus allowable. He contended that the reasonableness of

expenditure has to be seen from the stand point of the business

man and not that the revenue. A number of case laws were relied

upon in support of his contention. A brief gist of the submissions,

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filed before us is as under:

“During the relevant previous year, in order to promote the sales of products produced/ traded and marketed in India, the appellant incurred expenses amounting to Rs. 26.83.00,000 on advertisement and sale promotion expenses respectively [Pg. 62 of PB-Merits]. Advertisement and Promotion expenses Amount Media-Tele vision 956.96

Media-Radio 12.46 Media-Film 4.43 Media-Press 5.05 Out Door Media / Internet Advertising 0.00 Prod – Television 82.26 Production – Radio 0.00 Production-Press 0.07 Out Door Production 0.00 Consumer / Product Research 229.14 ORG-Retail Service 17.60 Other Marketing Related Expenses 51.88 Consumer Promotion/Relation/Samples 142.80 Mailings 6.62 Literature 297.63 POP 71.93 Promotional Packaging 3.09 Promotional materials to doctors, etc. 36.99 Medical Conference 24.27 Trade Marketing/Field Activity 221.08 Medical Marketing & Rural Promotion 286.14 Promotional Products to consumers 233.32 2,683.00 Total The assessing officer, held that (i) the appellant has Incurred a large amount on advertisement and publicity which is resulting in benefit to the associated enterprises who own the brand and (ii) the appellant was not able to demonstrate as to how it is wholly benefited from such brand building and that whole arrangement was concocted to lower its profit and to save expenditure of the associated enterprises. The assessing officer, accordingly made an adhoc disallowance of Rs.8,94,33,337 being 1/3rd of the expenditure on advertisement and publicity. The CIT(A) vide order dated 24-03-2014 disposed off the appeal filed by the appellant challenging the said disallowance holding as under:

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"7.3 The submission of the appellant have been considered. The assessing officer has disallowed 1/3 of advertisement expenses incurred by the appellant company on the ground that brand owned by the parent company i.e. GSK Plc. UK is being promoted and therefore, benefit is reaching to the parent company. The appellant has submitted that even it is presumed that the benefit of the said advertisement accrues to the owner of the brand, than too it would not be commercially expedient for the assessee to recover any amount on account of advertisement from the owner of the brand as the owner of the such brand has allowed the appellant to use their brand without charging any royalty. The similar issue was before the DRP in AY 2006-07 wherein appellant submitted that even if there is some incidental benefit derived by the parent company in the promotion of brand name the entire expenses are eligible for deduction u/s 37(1) of the Act. Therefore, there is no denying the fact that incurring of advertisement expenses has resulted in the promotion of brand name owned by the parent company in UK. Hence, the contention of the appellant that the entire advertisement expenses have been incurred wholly and exclusively for the purpose of the business of the appellant, cannot be accepted. Therefore, the entire expenses cannot be attributed to the business of the appellant and AO has rightly attributed 1/3 of such expenses to brand M/s. GlaxoSmithKline Asia Pvt. Ltd. " The disallowance made by the assessing officer and sustained by the C1T(A) is unlawful and not sustainable for the reasons submitted as under: The appellant is engaged in the business of manufacture and sale of 'Over the Counter" (OTC) products, viz. ENO, Crocin etc. The appellant vide agreement dated 18-01-1996 with GSK plc. (earlier known as SB plc.) [Pg. 1-7 of PB - CL 1 for AY 2006-07] acquired license to manufacture and sale of such products in India. The appellant, it is submitted, is the exclusive user of brand name of such products in India and entire expenditure on advertisements and sales promotion was incurred for promoting the sales of these products by the appellant in India and benefit of which was derived entirely by the appellant. The aforesaid are routine expenses, incurred in connection with promotion of products through print, audio as well as visual media such as banners, television, commercial hoarding, glow sign boards etc. expenses on new products launch, exhibitions, payments made to advertising agencies to undertake promotion work etc.

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The aforesaid advertisement and sales promotion expenses are generally required to be incurred to beat competition in the trade and for promoting sales of products. Such expenses have direct nexus with the sales of the products in India. Similar advertisement and sales promotion expenses are incurred by the competing companies for promoting sales of their products as well. The above advertisement and promotion expenses were incurred for sales promotion and advertisement in India only and that, too, in respect of products, viz.. ENO, Crocin, etc., which are being dealt in by the appellant in India. Therefore, the benefit of advertisement and brand promotion expenses incurred in India inure to the appellant in the form of higher sale and consequently higher profit. The entire benefit of advertisement and sales promotion expenses inured to the appellant as none of its affiliate company has sold any product in the domestic Indian market and it is only the latter which has sold the products (which were advertised) in the Indian market. Such expenses incurred in India, do not have any reach outside India so as to result in any benefit to the other group company which are the owner of the said brand. (a) It is the settled position of law that the reasonableness of the expenditure has to be seen from the point of view of businessman and not that of the Revenue, as laid down by the Supreme Court repeatedly in the following cases: - CIT v. Malayalam Plantations Limited: 53 ITR 140 (SC) - CIT v. Walchand & Co.: 65 ITR 381 - J.K. Woollen Manufacturers v. CIT: 72 ITR 612 (SC) -CIT v. Birla Cotton Spg. and Wvg. Mills Ltd.: 82 ITR 166 (SC) - Madhav Prasad Jatia v. CIT U.P.: 118 ITR 200 (SC) - S.A. Builders Ltd. v. CIT : 288 ITR 1 (SC) - C1T v. Bharti Televentures Ltd: 331 ITR 502 (Del) -C1T v. Padmani Packaging (P) Ltd. : 155 Taxmann 268 (Del) -C1T v. Rockinan Cycle Industries Ltd.: 331 ITR 401 (P&H) (FB) -CIT v. EKL Appliances Ltd. : 345 ITR 241 (Del HC) It is a settled position that the expenditure incurred wholly and exclusively for the purpose of the business would be allowable as deduction under section 37(1) of the Act, even if it results in a direct or incidental benefit to a third party. Reliance is placed on the following decisions:

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• Sassoon J. David and Co. P. Ltd. v. CIT: 118 ITR 261 (SC) [Pg. 228 of PB-CL-2 for AY 2006-07] • CIT v. Chandulal Keshavlal & Co. 38 ITR 601 (SC) IPg. 230 of PB-CL-2 for AY 2006-07) • SA Builders v. CIT: 288 ITR 1 (SC) [Pg. 236 of PB-CL-2 for AY 2006-07] • CIT v. Sales Magnesite (Pvt.) Ltd.: 214 ITR 1 (Bom) • J.R. Patel & Sons (P) Ltd. v. CIT: 69 ITR 782 (Guj) • CIT v. Adidas India Marketing (P) Ltd: 195 Taxman 256 (Del) [Pg. 243 of PB-CL-2 for AY 2006-07] • CIT v. Agra Beverages Corporation (P) Ltd: 200 Taxman 43 (Del) • Star India (P) Ltd. : 103 ITD 73 (TM) • National Panasonic (India) Ltd. v. JCIT: ITA 3238/Del/2002 (Del) • Nestle India Ltd. v. DC1T (Del)(2007) 111 TTJ 498 (Del). (The Revenue's appeal has been dismissed by the Hon'ble Delhi High Court vide order dated 22-10-2007 in ITA No. 96/08. The • Revenue's SLP against the decision of the High Court is also dismissed by the Supreme Court vide order dated 02-04-2009 in ITA No. 96/2002 and the decision of the Tribunal has become final.] • Samsung India Electronics Ltd. (ITA Nos. 98. 1 B & 143/2010)(DHC) • DCIT vs Maruti Countrywide Auto Financial Services Pvt Ltd: ITA no. 2181 to 2183/Del/2010 (Del). [Pg. 262 of PB- CL-2 for AY 2006-07] • CIT vs. N.G.C. Network (India) P. Ltd. : 368 ITR 738 (Mumbai) [Pg. 114 of PB-CL-1 for AY 2006-07| Hon'ble Delhi High Court in the case of CIT vs. Discovery Communication India: 370 ITR 57, reiterated the law in this regard |Pg. 287 of PB-CL-2 for AY 2006-07): "10.4. When expenditure is Incurred for appellant's own business, the mere fact that the expenditure would Inure or benefits a third party or the third party incidentally obtains some advantage, would not affect or distract from the finding that the expenditure was wholly and exclusively was for appellant's business. For example, a

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retail trader may advertise different products which may incidentally benefit the manufacturers, but this does not mean that advertisement expenditure fails to meet the requirement of "wholly and exclusively". Law in this regard is well settled" Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. vs. CIT : 374 ITR 118, too, held [Pg. 265 of PB-CL-2 for AY 2006-07]: "54 Expenditure and decision of the appellant, whether or not to incur the said expenditure; the quantum thereof, cannot be a subject matter of challenge or disallowance by the Assessing Officer, once it is accepted that the expenditure was wholly, i.e. the quantum of expenditure incurred was fully, and exclusively for business purpose. In Sassoon J. Davit & Co. Pvt. Ltd. versus CIT [1979] 118 ITR 261 (SC), it has been held that an appellant can claim deduction for expenditure incurred for business purposes and no one else has authority to decide whether or not the appellant should have incurred the said expenditure. The expenditure cannot be disallowed wholly or partly because it would incidentally benefit a third person once the requirements of Section 37(1) were satisfied. Reference can be also ITA 16/2014 & connected matters Page 42 of 142 made to the decision of Delhi High Court in CIT versus Nestle India Limited [2011] 337 ITR 103 (Del), holding that the question of reasonableness or measure of expenses to be allowed cannot be a subject matter of adjustment or disallowance under Section 37(1) of the Act." It was held similarly by the Hon'ble Delhi High Court in the case of CIT vs. Whirlpool of India Limited 381 ITR 154 (Pg. 278 of PB-CL-2 for AY 2006-07). Recently Hon'ble Delhi High Court in the case of Pr. CJT-3 vs. Seagram Manufacturing (P) Ltd. 245 Taxman 389 reiterating the law in this regard, held (Pg. 288 of PB-CL-2 for AY2006-07]: “6. Regarding Question No. 2, during the course of proceedings in the relevant Assessment Year 2003-04, the AO disallowed 10% from the expenditure on brand enhancement on the ground that it was allocable to the overseas owner/collaborator. The AC) reasoned that any enhancement in the brand presence of the assesses invariably had a fail-out vis-a-vis brand value of the overseas IPR. proprietor. The AO a/so recorded the relevant facts that not all brands which belong to the overseas owner were available in the Indian market and in the eventuality of the brand proprietor deciding to wind-up operations, its reputation would still remain intact. The CIT(A), however disagreed with this reasoning. The ITAT confirmed the order but with little or seconded or no reasoning.

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stated that since admittedly the benefit had accrued to the parent

company who was the owner of the brand, the expenditure has

been rightly disallowed by the authorities below.

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arguments of the Ld. Counsel for the assessee that there was no

reason/basis at all for holding that the advertisement /promotion

expenses benefited the parent AE and hence a portion of it was

liable to be disallowed as having not been incurred wholly and

exclusively for the purpose of the business of the assessee.

There is clear distinction between brand building and advertising

& marketing. While the end purpose of both may be the same, i.e

increasing sales/turnover, but the approach is definitely different.

While advertising only communicates what a business has to offer,

reaching out to the end customer and impacting immediate sales,

brand building exercise on the other hand creates an

identity/perception of the business, generating awareness about

the business using strategies and campaigns with the goal of

creating a unique and lasting image of the business in the market

place. Brand building creates a customer base establishing long

term relationship with the customer.

With this clear distinction between the two expenses, the onus to

establish incurrence of either of the expenses is on the party

claiming so. The Revenue claiming that the assessee has incurred

brand building expenses, the onus is on the Revenue to establish

the said fact. It cannot simply be derived from the fact that

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assessee has incurred huge expenses on advertisement and sale

promotion of products the brand of which belonged to another

entity, considering the clear distinction in the end objective of the

said expenses and the assessee consistently claiming that it had

acquired the exclusive license to manufacture and sell the products

in India and thus being the sole user of the brand name in India.

These contentions of the assessee have remained uncontroverted.

The entire benefit, in such circumstances, inured to the assessee

alone as it alone was operating in the Indian market. Benefit if any

to the AE was only incidental. And on account of such incidental

benefit accruing to a third party it cannot be said that the expense

was not wholly and exclusively for the benefit of the assessee. As

long as the objective /purpose for incurring an expenditure is to

benefit the assessee solely, the expenditure can be said to be

incurred wholly and exclusively for the benefit of the assessee.

Any incidental benefit accruing to a third party on account of the

same, being beyond the control of the assessee, does not dilute the

character of the expense.

We do not find any reason or basis therefore for holding a part of

the expense as pertaining to brand building. We therefore direct

deletion of the disallowance made on account of brand building

expenses amounting to Rs.8,94,33,333/-

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Ground of appeal No. 2 is allowed.

Counsel for the assessee related to the same issue of disallowance

made of amount paid to M/s GlaxoSmithKline Biological S.A.,

Belgium , being Rs.16,08,70,538/- for purchase of vaccine, on

account of non-deduction of tax at source thereon ,holding that

there was a permanent establishment of the said entity in India

and, therefore, the profits attributable to the purchases made by

the assessee from the said entity were liable to tax in India. The

grounds raised by the assessee read as under:

“2.2 That the Commissioner of Income-tax (Appeals) erred on facts and in law in sustaining disallowance of Rs. 90,20,655 under section 40(a)(i) of the Act, with respect to purchase of vaccine amounting to Rs.16,08,70,538 lacs made from GlaxoSmithKline Biological S.A. ('GSK, Bio’), Belgium, allegedly holding that the appellant has failed to deduct tax at source from such payment. 3.1 That the Commissioner of Income-tax (Appeals) erred on facts and in law in allegedly holding that GSK Bio has outsourced its core activity to the appellant and all the activities are undertaken under direct supervision and control of GSK Bio and thereby establishing that there is a constant touch between the appellant and GSK Bio for R&D activities.

3.3 That the Commissioner of Income-tax (Appeals) erred on facts and in law in holding that clinical trial activities constitute permanent establishment of GSKBio in India within the meaning of Double Taxation Avoidance Agreement (DTAA) between India and Belgium on account of the following: a. Fixed place of business in the form of place where clinical trials and research and development takes

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place including but not limited to CDMCI and BDSI, Bangalore under Article 5(1) of the DTAA; b. Premises used as a sales outlet or for receiving or soliciting orders with respect to vaccines under Article 5(2)(i) of the DTAA; c. CDMCI, Bangalore under Article 5(2)(c) of the DTAA; d. BDSI, Bangalore under Article 5(2)(c) of the DTAA; and e. Dependent agent PE in the form of the appellant under Article 5(4) of the DTAA. 3.4 That the Commissioner of Income-tax (Appeals) erred on facts and in law in alternatively holding that the assessee constituted business connection with GSK Bio within the meaning of section 9(1)(i) of the Act.”

CIT(A)’s order, are that the assessee company had made payment

amounting to Rs.16,08,70,538/- to Glaxosmithkline Biologicals SA

(hereinafter referred to as GSK Biologicals SA) at Belgium for

purchase of vaccine. The Assessing officer (AO) noted that no

TDS had been deducted on this payment as required u/s 195 of the

Act. He further noted that the assessee was responsible for

undertaking clinical trials as well as research and development

activities on behalf of M/s GSK Biologicals SA, for which reason

he held that the core activities of the Belgium Company were

being carried out in India, and therefore it constituted permanent

establishment of M/s GSK Biologicals SA in India within the

meaning of Article - 5 of the DTAA between in India and Belgium.

He also held that the assessee constituted "Business connection"

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of M/s GSK Biologicals SA SA within the meaning of section

9(1)(i) of the Act. Accordingly the AO held that the income of the

Belgium company was taxable in India and therefore, the assessee

was under obligation to deduct tax at source, which having not

been deducted, the amount paid to GSK Biologicals SA ,of Rs.

16,08,70,538/- was liable to be disallowed u/s 40(a)(i}of the Act.

Ld.CIT(A) against the aforesaid disallowance contending that no

PE of GSK Biologicals SA SA can be said to have been formed in

India as per Article 5 of Double Taxation Avoidance

Agreement(DTAA) between India and Belgium read with the facts

of the case and that even if it was presumed that there was a PE

of GSK Biologicals SA,SA, in India, no business could be

attributable to it since the purchase of vaccine took place on

principal to principal basis outside India for which even payment

was made outside India. The same find mention in para 9.2 of the

CIT(A)’s order. The Ld. CIT(A), however, dismissed the

contention of the assessee and upheld the disallowance made by

the AO.

Before us, at the outset itself, the Ld. Counsel for the assessee

contended that his plea on this ground raised was that the issue be

restored back for the reason that specific factual and legal

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contentions made before the Ld.CIT(A) had neither been

considered, nor dealt with by him while confirming the

disallowance. The Ld. Counsel for the assessee contended that it

had been pleaded before the Ld. CIT(A) that GSK Biologicals SA

SA did not have a PE in India in terms of any of the criterias

mentioned in the DTAA between India and Belgium. He contended

that it had been specifically pointed out to the Ld. CIT(A) that

there was neither any fixed place in India where the business of

GSK Biologicals SA was being carried out, nor could the activity

allegedly being carried out by GSK Biologicals SA in India, of

clinical trials and research and development, be said to constitute

its core activities, which is a pre-requisite for creation of PE in

India. He further contended that it had also been pointed out that

carrying out of research and development activities would not

create a PE in India as per Article 5(3) of DTAA in India and

Belgium and it had also been stated that agency PE had also not

been created in India since no agent had been appointed by GSK

Biologicals SA SA.It was contended that, the facts were shown to

the Ld.CIT(A) ,to the contrary, pointing out that an agreement had

been entered into between GSK Biologicals SA and GSK Pharma,

a company based in Mumbai for rendering services in relation to

research and clinical trials undertaken by GSK Biologicals SA in

the course of carrying out its business of production of vaccine in

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Belgium. It was pointed out that the said two entities had entered

into an agreement for provision of services in relation to

procurement, organization and coordination of clinical trials in

India by GSK Pharma to GSK Biologicals SA and also for

rendering services involving pretrial scientific activities, data

entry, data clinic, data analysis and reporting of clinical trials and

other medical data. The Ld. Counsel for the assessee pointed out

that GSK Biologicals SA did not have at its disposal, nor had legal

right or access to any fixed place for carrying out its business in

India and further even the activities carried out by GSK

Biologicals SA of rendering services in relation to conduct of

clinical trials could not be said to constitute the core business of

GSK Biologicals SA which need to be carried out from a fixed

place for constituting a PE in India as per Article 5(1) of the

DTAA. The Ld. Counsel for the assessee contended that it was

also pointed out that neither the assessee, nor GSK Pharma was

engaged in soliciting orders for or on behalf of GSK Biologicals

SA and, therefore, the assessee could not be said to be a dependent

agent PE in terms of Article(4) of DTAA. The Ld. Counsel for the

assessee also contended that in any case, the assessee had

procured vaccine directly from GSK Biologicals SA on principal

to principal basis and the purchases were not be attributable to PE,

if any, of GSK Biologicals SA and, therefore, also no profits on

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account of the said transaction could be attributable to the PE in

terms of the Double Taxation Avoidance Agreement. The Ld.

Counsel for the assessee drew our attention to the detailed

submissions made to the CIT(A), reproduced at pages 74 to 87 of

the Paper Book. He also drew our attention to all the necessary

documents substantiating the above arguments being copies of

agreement entered into between GSK Biologicals SA and GSK

Pharma which were also placed before the Ld. CIT(A). In this

regard a brief summary of the contentions made were also placed

before us which are as under:

“During the relevant previous year, the appellant purchased /imported vaccines for a sum aggregating to Rs. 16,08,70,538 from GSK Biologicals SA (GSK Biologicals SA), a group company incorporated under the Jaws of Belgium and engaged in the business of production of vaccines. GSK Biologicals SA for the purpose of manufacture of vaccines, undertakes intensive research and development with the objective of discovering and developing new and improved vaccines. GSK Biologicals SA has entered into the following agreements with GSK Pharma, a group company based in Mumbai. for rendering services in relation to research and clinical trials undertaken by GSK Biologicals SA in the course of carrying on of its business of production of vaccines in Belgium; (a) GSK Belguim and GSK Phanna entered into an Inter-company Agreement dated 6"1 April, 2004, which was replaced by a new Inter-company Agreement dated 25lh July. 2006, for provision of services in relation to the procurement, organization and coordination of clinical trials in India by SK Phanna to the GSK Biologicals SA. |Pg. 8-26 of PB-CL-I for AY 2006-07] (b) GSK Biologicals SA and GSK Pharma entered into Clinical Data Managemenl Center Agreement dated 1st December, 2004, (which was subsequently amended on 20lh

ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 30

February, 2008), for rendering of services by GSK Pharma to GSK Biologicals SA involving pre-trial scientific activities, data entry, data cleaning, data analysis and reporting of clinical trials and other medical data (Pg. 27-37 & 35 of PB-CL-1 for AY 2006- 07]. The assessing officer held that clinical trial activities constitute permanent establishment of GSK Biologicals SA in India within the meaning of Article 5 of Double Taxation Avoidance Agreement with Belgium (DTA A) [Pg. 52-77 of PB-CL-1 for AY 2006-07] on account of the following: (a) Fixed place of business in the form of place where clinical trials and research and development takes place including but not limited to CDMCI and BDS/, Bangalore under Article 5(1) of the DTAA; (b) Premises used as a sales outlet or for receiving or soliciting orders with respect to vaccines under Article 5(2)(i) of the DTAA; (c) CDMCI, Bangalore under Article 5(2)(c) of the DTAA; (d) BDSI. Bangalore under Article 5(2){c) of the DTAA; and (e) Dependent agent PE in the form of the appellant under Article 5(4) of the DTAA.

In coming to the conclusion that GSK Biologicals SA had a PE in India and. therefore, consideration paid by the appellant for import of vaccines were chargeable to tax in India, the assessing officer made ex-parte inquiries and investigation. From the various websites, the assessing officer gathered that appellant had got conducted clinical trials in India at centres in Mumbai and Bangalore. Based on the ex-parte enquie assessing officer came to the conclusion that all the core activities, related to vaccine development, were undertaken in India by the appellant on behalf of GSK Biologicals SA and under direct supervision and control of GSK Biologicals SA. The assessing officer inferred that the appellant was responsible for undertaking clinical trials as well as research and development activities on behalf of the applicant.

The assessing officer, accordingly, made a disallowance of Rs. 16,08,70,538 under section 40(a)(i) of the Act, with respect to purchase of vaccine being payment made to GSK Biologicals SA for purchase of vaccine, on the ground that the appellant failed to deduct tax at source from such payments. The CIT(A), on the basis of order passed by the assessing officer for the assessment year 2011-12, disallowed Rs. 90.20.655, in terms of aforesaid circulars 2/2014 and 3/2015 has made disallowance of 23% of net profit earned by GSK Bio., as against

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disallowance of entire sum of purchase made by the assessing officer in the year under consideration.

The disallowance of Rs. 90,20.655 under section 40{a)(i) of the Act, with respect to purchase of vaccine amounting to Rs. 1 6,08,70,538 made by the assessing officer and sustained by the C1T(A) is unlawful and not sustainable for the reasons submitted in our written submissions separately filed.

Further, it has been repeatedly held by the Courts in the following decisions that the question of existence of the Permanent Establishment and consequent taxability of payment in the hands of the payee in India is dependent on the outcome of the assessment of the payee: CIT vs Samsung Electronics Co Ltd: 185 Taxman 313 (Kar) [Pg. 313 of PB-CL-2 for AY 2006-07] CIT, International Taxation, Bangalore vs Sonata Information Technology Ltd: 232 CTR 20 (Kar) [Pg. 339 of PB-CL-2 for AY 2006-07] Van Oord ACZ India (P) Ltd vs CIT: 189 Taxman 232 (Del) [Pg. 339 of PB-CL-2 for AY 2006-07] Mahindra & Mahindra Ltd vs DCIT: 122 TTJ 577 (Mum)(SB) [approved by the Bombay High Court in the case reported as DIT(IT) vs Mahindra and Mahindra Ltd: 365 ITR 560 (Bom)] [Pg. 352-387 of PB-CL-2 for AY 2006-07]

It is submitted that GSK Biologicals SA under section 245Q(1) of the Act filed application before the Authority of Advance Rulings to decide, whether it would result in a Permanent Establishment in India within the meaning of Article 5 of the Double Taxation Avoidance Agreement between India and Belgium. The Hon'ble Authority of Advance Rulings, however, vide order dated 21-07-2015 dismissed the application of the assessee as not maintainable on the grounds that questions raised in the application had been decided in the assessment of the captioned assessee and were pending before the CIT(A). Also the cases of GSK-Balguim for assessment year 2005-06 to 2009-10 were reopened by the issuing officers under section 148 of the Act in order to bring to tax its income holding existence of permanent establishment in India. The assessee has challenged the re-assessments in writ petitions before the Delhi High Court, which are admitted and are also pending disposal.

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It would be appreciated that the question in the above appeal as to whether GSK-Belgium has a permanent establishment in India can only be decided in the hands of the payee company, which matters are pending at present before the Hon'ble Delhi High Court.”

above specific and detailed submissions made by the assessee the

Ld. CIT(A) gave no cognizance to the same and upheld the

disallowance reiterating the order of the AO. He drew our

attention to para 9.3 of the Ld. CIT(A) which is reproduced as

under:

“9.3 The submission of the appellant have been considered. It is seen that M/s GSK Biologicals SA has outsourced its core activity to the assessee company and all the activities are undertaken under the direct supervision and control of M/S GSK Biologicals SA. Thus there is a constant touch between Indian center and the center of the assessee of the abroad for R&D activities. This arrangement where assessee is responsible for undertaking clinical trial as well as R&D activities on behalf of GSK Biologicals SA constitute permanent establishment of M/s GSK Biologicals SA in India within the meaning of DTAA between India and Belgium as under: Fixed place of business in the form of place where clinical trials and research and development takes place including but not limited to CDMCI and BDSt Bang/ore under Article 5(1} of the DTAA. “a. Premises used as a sales outlet or for receiving or soliciting orders with respect to vaccines under Ariicle-5(2)(i) of the DTAA. b) CDMCI, Bangalore under Article 5(2)(c) of the DTAA. c) BDSI, Bangalore under Article 5(2}(c) of the DTAA. d) Dependent Agent PE in the form of the assessee under Article 5(4) of the DTAA," a) The assessee company also constitutes 'business connection' of M/s GSK Biologicals SA SA within the meaning of section 9(1)(i) of the Act as discussed above: Therefore, M/s GSK Biologicals SA is chargeable to tax in India for the payment received on account of

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vaccine purchase from the assessee company. The appellant company has failed to deduct TDS u/s 195 of the Act and therefore provisions of section 40(a)(i) are attracted. Appellant has also submitted that the entire disallowance is not called for in terms of CBDT circular no 2/2014 and 3/2015. I have perused these circulars and it is seen that these circulars have been followed by the assessing officer in AY 2011-12 in the case of the appellant. The appellant filed copies of assessment order u/s i43{3) for AY 2011-12 in the case of the assessee and copy of annual accounts of Glaxosmithkline Biologicals SA for the year ending December, 2004 and December 2005 as additional evidence. These additional evidence were forwarded to AO for his report. The report of the AO is as under: “The Circular states that, for the purpose of making disallowance of 'other sum chargeable' u/s 40(a)(i) of the Act, the appropriate portion of the sum which is chargeable to tax under the Act shall form the basis of such disallowance and shall be the same as determined by the AO having jurisdiction. The assessee has also submitted the copy of the assessment order for AY 2011-12 passed by the AO to show the method of arriving at the disallowance to be made u/s 40(a)(i). With respect to the above it should be state that the circulars came in to force only during the FY 2013-14 and FY 2014-15 and cannot be used as a basis of disallowance made by the AO for AY 2005-06. The circulars were issued in the light of decision of supreme court of India in the case of G£ Technology Pvt. Ltd. vs CIT and Transmission Corporation of AP Ltd. vs. CIT. It should also be stated here that these decisions came much after the assessment was completed under section 143(3) of the IT Act and could not be adopted by the AO for the year under consideration. Without prejudice to the above, the AR of the assessee has restricted the income attributable to the applicant (PE) in India at 15.38%. However, this is not acceptable. In this case reliance is placed on the decision of Motorola Inc vs. DCIT 96 TTJ 1 and M/s National Petroleum Construction Co. vs. Add!. Director of International Taxation ITA No. 5168/Del/2010 where the tribunals have held that the income attributable to the PE is 20% to 25%. The AO during the AY 2011-12 has also adopted 22.5% based on the above decisions. Hence, the assessee's version of 15.38% is on the lower side and is not acceptable." b) The additional evidence filed by the appellant are admitted as these go to the route of the matter and AO has also not objected for admission. Circular 2/2014 came much after the relevant assessment was completed in the light of the decision of Hon'ble Supreme in the case of GE Technology Pvt. Ltd. vs. CIT and Transmission Corporation of AP Ltd. vs. CIT. But the circular is clarificatory in

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nature as this was issued against various references received from the field officers by the CBDT in which clarification was sought whether the tax is to be deducted under sub section 1 of section 195 on the whole sum being remitted to a non-resident or only the portion representing the sum chargable to tax particularly if no application has been made under subsection 2 of section 195 of the Act to determine the sum. Vide circular No 3/2015 dated 12.02.2015 CBDT has clarified as under: "4. As disallowance of amount under section 40(a)(i) of the Act in case of a deductor is interlinked with the sum chargeable under the Act as mentioned in section 195 of the Act for the purposes of tax deduction at source, the Central Board of Direct Taxes {'CBDT"}, in exercise of powers conferred under section 119 of the Act, hereby clarifies that for the purpose of making disallowance of 'other sum chargeable" under section 40(a)(i) of the Act, the appropriate portion of the sum which is chargeable to tax under the Act shall form the basis of such disallowance and shall he the same as determined by the assessing officer having jurisdiction for the purpose of sub-section (1) of section 195 of the Act as per instruction No.2/2014 dated 26-02-2014 of CBDT. Further, where determination of 'other sum chargeable' has been made under sub- section (2), (3) or (7) of section 195 of the Act, such a determination will form the basis for disallowance, if any, under section 40(a)(i) of the Act." c) Following the above circulars which have been followed by Assessing Officer, in AY 2011-12 in the case of the appellant, the disallowance of the appellant is computed as per the principle followed by the AO in A.Y 2011-12. The appellant has worked out the ratio of operating profit to operating income of the deductee i.e. GSK Biologicals SA SA @ 24.38%. By applying the same rate of profit on the sale transactions of vaccines to the assesse, the amount of Rs.3,92,20,237/- (i.e.24.38% of Rs.16,08,70,538/-) is attributable to the net profit earned by the GSK Biologicals SA SA on the sale of vaccines to the assessee. The Assessing Officer has worked out the net profit attributable to PE services taking the average of the percentages held as net profit of the company attributable to the PE services in the case of Motorolla Inc. Vs DCIT (Supra) and M/s National Petroleum Construction co,(Supra) as 20% and 25% of gross receipts respectively. By applying the average @ 23%, the net profit attributable to PE functions of the GSK Biologicals SA SA is determined at Rs.90,20,655/- (being 23%o f Rs.3,92,20,237/-. Therefore the disallowance u/s 40(a)(i) is restricted to Rs.90,20,655/-. The grounds of appeal nos. 5, 5.1 to 5.11 are partly allowed.” 16. Referring to the above, he pointed out that the Ld.CIT(A)

held that GSK Biologicals SA had PE in India was based on his

ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 35

findings that GSK Biologicals SA had outsourced its core

activities to assessee company and all activities were undertaken

under direct supervision and control of GSK Biologicals SA.

These findings he contended had no basis at all except some data

collected by the AO from the internet and this despite specific

submissions made by the assessee before him that there was no

agreement between GSK Biologicals SA and the assessee and even

the core activities of GSK Biologicals SA were not being carried

out in India. The Ld. Counsel for the assessee contended that since

all the factual submissions made by the assessee and even the

position of law stressed upon by the assessee have been

completely ignored by the Ld.CIT(A), the matter needs

reconsideration.

He further stated that GSK Biologicals SA had approached the

AAR for a ruling whether it had a PE in India, which application

had been dismissed finding that the issue had been decided by the

AO in the case of the present assessee and the matter was before

the CIT(A), without giving any findings on merit . That the cases

of GSK Bilogicals SA had been reopened u/s 148 of the Act for

A.Y 2005-06 TO 2009-10, against which a writ had been filed to

the Hon’ble Delhi High Court which had been admitted and was

pending for disposal. Ld. Counsel contended that the fact of PE of

ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 36

GSK Biologicals SA could be established in its own case and even

the DRP had stated so while dealing with identical issue in the

objections of the assessee to the draft order passed in the case of

the assessee for subsequent year i.e., 2006-07.Thatsince the

determination of PE of GSK Biologicals SA was pending before

the Hon’ble High Court therefore also the issue needed to be

restored back for deciding on the basis of the disposal of the same.

9.3(c) of the order of the Ld.CIT(A) as reproduced above and

stated that the disallowance had been upheld by the Ld.CIT(A)

based on the principle followed by the AO in assessment year

2011-12. She further referred to Ground No.3.1,3.3 & 3.4 raised

by the assessee challenging the order of the CIT(A) holding that

GSK Biological SA had outsourced its key activities to the

assessee, that clinical trial activities constituted PE of GSK Bio

and that of the assessee constituting business connection of GSK

Bio. She contended that the AO had given detailed findings on the

above, based on facts before him and she heavily relied on the

order of the AO in this regard.

through the orders of the authorities below as also the documents

referred to by the Ld. Counsel for the assessee before us. On going

ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 37

through the same and after carefully considering the same we find

merit in the contention of the Ld. Counsel for the assessee that the

issue needs reconsideration.

The AO has held PE of GSK Biologicals SA in India based on his

findings that clinical trials and R &D are core activities in vaccine

development which is got done by GSK Biologicals in India

through the assessee and other affiliates. These findings we find

are based on, as mentioned in the assessment order at page 35

“facts extracted from various websites of the assessees group

companies which throw light on the vaccine business of the group

and role of Indian affiliates”. The role of the assessee is based on decision taken in the 63 rd meeting of the Genetic Engineering Approval Committee on the 8 th February 2006.The AO has

contended that GSK Biologicals is carrying on vaccine

development activity through these fixed place of business. That

all intellectual property in the vaccine vests with GSK

Biologicals, while R&D activity is carried out in India, the

assessee is economically dependent on GSK Biologicals SA and

has no other business. The Ld. CIT(A) ,we have noted has merely

reiterated the findings of the AO.

ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 38

The assessee on the other hand, we find has made specific factual

and legal submissions countering the findings of the AO/CIT(A),

pointing out that the facts are to the contrary that there was no

agreement of GSK Biologicals SA with the assessee but in fact it

had entered into two agreements with GSK Pharma, an Indian

Company, for carrying out clinical research and data management.

Copies of the agreement had been placed on record. It was also

pointed out that in terms of the DTAA with Belgium, there was no

fixed place PE of GSK Biologicals SA in India as it did not have

any such place at its disposal. That conducting clinical trials did

not constitute the core activity of GSK Biologicals SA, which was

engaged in manufacturing vaccines. That neither GSK Pharma nor

the assessee were acting as agents of GSK Biologicals SA, and

that in terms of DTAA, PE did not include maintaining premises

for research and development . That without prejudice to the

aforestated arguments, even if there was a PE of GSK Biologicals,

no purchases made by the assessee of vaccines were attributable to

the PE and therefore also no profits on account of the said

purchases were taxable in India ,therefore requiring no taxes to be

deducted at source.

None of these factual and legal contentions we find have been

dealt with by the Ld. CIT(A).

ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 39

On the contrary it was brought to our notice that the AO’s

findings were based on data/information extracted from websites

none of which was related to the assessee. That even the

information extracted regarding conducting of clinical trials at

pages 39-47 of the AO’s order did not mention the assessee as the

site where trials were to be carried out. That even the Genetic

Engineering Committee report did not relate to the impugned year, being dated 8 th February 2006.That the findings to the effect that

no other activity was being carried out by the assessee except

clinical trials was incorrect as the assessee was manufacturing Eno

and Crocin.

The findings of the AO therefore that the assessee was carrying

out clinical trials for GSK Biologicals, we find, has been

demonstrated before us to be not based on relevant facts. And the

Ld. CIT(A) has merely reiterated the findings of the AO despite

specific factual and legal contentions made by the assessee to the

contrary. We have also noted that the determination of PE of GSK

Biologicals SA, is pending before the Hon’ble Delhi High Court in

writ petitions filed by GSK Biologicals SA against proceedings

initiated u/s 148 of the Act on the basis that there exists PE, for

A.Y 2005-06 TO 2009-10.

ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 40

Considering the above, we are of the view that it would be in the

fitness of matter to restore the issue back to the AO for

adjudication afresh in accordance with law after giving due

opportunity of hearing to the assessee and after considering all

factual and legal contentions raised by it.

Ground No 2.2 – 3.4 are accordingly restored back to the AO with

the above directions and therefore stand allowed for statistical

purposes.

grounds before us under Rule 11 of the Income Tax Rules, 1962 vide application dated 20th day of May 2021. The additional

grounds raised read as under:

“1. That on the facts and circumstances of the case and in law, the assessing officer ought to have allowed, in pursuance to law clarified by the Hon'ble Rajasthan High Court in the case of Chambal Fertilisers and Chemicals Ltd vs JCIT: D.B. ITA No.52/2018 and Hon'ble Bombay High Court in the case of Sesa Goa Ltd vs JCIT: 117taxmann.com 96 (Bom HC), deduction of Rs. 43,95,675, being education cess computed on returned income, paid by the Appellant before the due date of filing return of income for the subject assessment year. 2. That on the facts and circumstances of the case and in law, pursuant to law clarified in the case of Chambal Fertilisers and Chemicals Ltd (supra) and Sesa Goa Ltd (supra), the assessing officer also ought to have allowed further deduction in respect of any additional amount paid by the Appellant towards education cess during the financial year relevant to the subject assessment year."

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Counsel for the assessee contended that the issue raised in the

additional grounds related to claim of the assessee of education

cess paid as allowable deduction. The Ld. Counsel for the assessee

contended that the issue stood squarely covered by the decision of

the Hon'ble High Courts of Bombay and Rajasthan in the case of

Sesa Goa Ltd. Vs. JCIT, 117 Taxmann.com 96 (Bom) and Chambal

Fertilizers & Chemicals Ltd. Vs. JCIT (DB) in ITA No.52/2018,

order dated 31.07.2018 respectively. He further contended that

following the aforesaid decision the ITAT in a number of cases

had held education cess as an allowable claim. He further stated

that there was no contrary decision of any other High Courts on

the issue. In view of the above he contended that since a legal

ground has been raised requiring no fresh investigation into the

facts the same be admitted. In this regard he relied upon the

decisions of the Hon'ble Apex Court in the case of N.T.P.C.

Limited Vs. CIT, 229 ITR 383 and Jute Corporation of India Vs.

CIT, 187 ITR 688. On the merits of the case, he relied upon the

decision of the Hon’ble High Courts as referred to above, stating

that the issue was squarely covered in favour of the assessee.

additional ground but contended that since the same were being

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raised for the first time, they needed to be restored to the CIT(A) ,

pointing out that the Hon'ble Madhya Pradesh High Court in the

case of Commissioner of Income Tax vs Tollaram Hassomal(MP)

298 ITR 22 had held that the additional grounds admitted by the

Tribunal and raised for the first time before it, need to be restored

back to the CIT(A) for adjudication.

To this the Ld. Counsel for the assessee contended that as per Rule

11 of the Rules, the ITAT is entitled to admit the additional

grounds and the admission is not restricted to mere admitting it

only and not adjudicating it. That the decision relied upon by the

Ld. DR was rendered in the facts of those case wherein it was

considered expedient by the Hon'ble High Court to restore the

issue to the CIT(A) for proper adjudication after admission of the

additional grounds raised by the assessee. He contended that the

decision relied upon by the Ld. DR could not by any stretch be

said to be laying down a blanket proposition that additional

grounds raised need to be considered by the ITAT only for the

purpose whether they can be admitted or not and the adjudication

of the same has invariably to be left and restored to the CIT(A).

On the merits of the issue, the Ld. DR stated that the issue was

covered against the assessee by the decision of the Hon'ble Apex

Court in the case of CIT Vs. K.Srinivasan, 83 ITR 346 wherein the

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Hon'ble Apex Court had held that all surcharge and additional

surcharge levied on income tax were in the nature of income tax

itself and the education cess, therefore, was in the nature of

income tax and thus not allowable as deduction by virtue of the

provisions of section 40(a)(ii) of the Act. The Ld. DR pointed out

that the decision of the Hon'ble High Court’s relied upon by the

Ld.Counsel for the assessee had not considered the decision of the

Hon'ble Apex Court in the case of K.Srinivasan (supra) and being

the decision of the Hon'ble Apex Court, the same would prevail.

admission of the additional ground raised as above before us, the

assessee has raised a legal ground relating to admissibility of

education cess paid as a deduction and the adjudication of the

same surely does not require any investigation of fresh facts. Even

the Ld. DR has not objected to the admission of the same. The

additional grounds raised are accordingly admitted for

adjudication. The order was pronounced during the course of

hearing.

Now coming to the contention of the Ld. DR that the additional

ground, having not been raised before the CIT(A) and thus not

dealt with by him ,needs to be sent back to him for adjudication,

we are not convinced with the contention of the Ld. DR. Section

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253 of the Act grants right of appeal to the assessee, aggrieved by

any of the orders specified therein , to the ITAT. As per Section

254 of the Act, the ITAT may after giving both the parties to the

appeal an opportunity of being heard, pass such orders thereon as

it deems fit. Rule 11 of the ITAT Rules,1963,which deals with

Grounds which may be taken in appeal, permits raising of

additional grounds by appellants, being other than those raised in

the memorandum of appeal, subject to the same being heard by the

leave of the Tribunal. The Rule further permits the Tribunal to not

confine itself to the grounds raised while deciding an appeal.

Reading the above together, there is no restriction to the

power of the Tribunal in entertaining an additional ground raised

before it for adjudication. As long as all facts are available on

record all additional grounds, including those raised for the first

time can be adjudicated by the ITAT. This issue stands settled by

the apex court in the case of NTPC Limited (supra) where on the

question whether the Tribunal has jurisdiction to examine a

question of law not raised before the lower authorities, it was

categorically held that the power of the ITAT in dealing with

appeals has been expressed in the statute in the widest possible

terms. That there is no restriction of its power to deal only with

those issues which arise from the CIT(A)’s order and any question

ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 45

of law ,facts relating to which are on record ,can be raised before

the Tribunal for the first time. It was emphasized in the decision

that the purpose of assessment proceedings is to correctly assess

the tax liability of assessees in accordance with law and to this

end the power of the Tribunal cannot be restricted only to decide

issues which arise from the CIT(A)’s order. The decision of the

Hon’ble apex court on the issue 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 ?"

ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 46

absence of any statutory provision, the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter. There is no good reason to justify curtailment of the power of the AAC in entertaining an additional ground raised by the assessee in seeking modification of the order of assessment passed by the ITO. This Court further observed that there may be several factors justifying the raising of a new plea in an appeal and each case has to be considered on its own facts. The AAC must be satisfied that the ground raised was bona fide and that the same could not have been raised earlier for good reasons. the AAC should exercise his discretion in permitting or not permitting the assessee to raise an additional ground in accordance with law and reason. The same observations would apply to appeals before the Tribunal also.

In view of the settled position as above, we do not find any

merit in the argument of the Ld. DR and even the case law relied

upon by the Ld. DR, we find, is of no assistance as it does not lay

a blanket proposition as canvassed by the Ld. DR, but has been

rendered in the facts of the case before the Hon’ble High Court. In

the said case the Hon’ble High Court found that the ITAT had set

aside the order of the CIT(A) and annulled the order of the AO by

deciding the appeal on the additional grounds raised after

ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 47

admitting them for adjudication. That instead of concentrating on

the issues already decided by the CIT(A) ,the Tribunal only

concentrated on the grounds which had not been taken before him

and decided the appeal annulling the assessment. In this

background the Hon’ble High court held that the Tribunal had

exhibited undue haste in deciding the appeal by adjudicating only

the issues which were not even there before the CIT(A) and that

such approach was neither legal nor proper. In the present case it

is not that the outcome of the entire appeal depends on the

additional ground raised. On the contrary the additional ground

impacts only one claim of the assessee to deduction of education

cess paid, which neither requires any facts to be uncovered or even

verified or investigated. There is no finding of fact to be recorded

vis a vis the impugned issue and hence no impediment to the ITAT

in adjudicating the issue. Therefore we find there is no reason to

restore it for adjudication to the CIT(A). The contention of the Ld.

D.R. therefore that the additional ground raised should be

restored to the CIT(A) is accordingly dismissed.

Now coming to the issue to be adjudicated, whether the education

cess paid by the assessee and calculated as proportion of the

income tax, is allowable as expenditure. This issue arises in the

context of the provisions of section 40(a)(ii) of the Act which

ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 48

deals with certain amounts which are not allowable while

computing the income under the head ‘business and profession’

and sub-clause(ii) thereof mentions taxes paid on profits and gains

of business and profession as not allowable. The relevant

provisions of section reproduced as under:

“40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",— (a) in the case of any assessee— (i) ……………………… …………………………… (ii) any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains. Explanation 1.—For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes and shall be deemed always to have included any sum eligible for relief of tax under section 90 or, as the case may be, deduction from the Indian income-tax payable under section 91. Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes any sum eligible for relief of tax under section 90A.”

the assessee of the Hon'ble High Courts of Bombay and Rajasthan

have categorically held education cess to be not covered u/s

40(a)(ii) of the Act. The reasoning being that this provision

ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 49

originally included cess also which was specifically omitted later

on and even the CBDT in Circular No.91/58/66-ITJ(19) dated 18-

05-1967 clarified that cess was not covered u/s 40(a)(ii). But at

the same time we are aware of and even the Ld DR has pointed out

the decision of the Hon'ble Apex Court in the case of K.

Srinivasan (supra) wherein it has been categorically held that the

“tax on income” would include all surcharge and additional

surcharge levied on it. The Hon’ble Apex court was seized with

the issue whether surcharge is to be paid by assessees on their

income considering that it is not mentioned in the charging section

of the Act. The Hon’ble apex court , in a detailed order tracing the

concept of surcharge in taxation laws, its legislative history ,its

dictionary meaning and the language employed in the Finance

Bills specifying rates of taxes to be levied and the surcharge and

additional surcharge to be paid thereon, found that it only

increased the rate of tax. Accordingly the Hon’ble apex court held

that surcharge and additional surcharged levied under the Act

formed part of tax and therefore was liable to be paid as per the

charging provision of the Act. The relevant portion of the order of

the Hon’ble apex court in this regard is as under;

“Sec. 2 of the Finance Act, 1964, which is headed as "Income- tax and super- tax" provides in sub-s. (1) that income-tax and super-tax shall be charged at the rates specified in Parts I and II of the First Schedule respectively and that in

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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.

ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 51

conclusion that income-tax and super-tax did not include surcharge and that these were called by different nomenclature in all the statutory provisions.

"Subject to the provisions of this section, the rates of income-tax and rates of super-tax...imposed by sub-s. (1) of s. 7 of the Indian Finance Act, 1940, shall, in respect of the year beginning on the first day of April, 1940, be increased by a surcharge for the purposes of the Central Government."

Similar phraseology was employed in respect of surcharge on super-tax. The provisions relating to surcharge were omitted in the Finance Acts of 1946 to 1950. It was reintroduced in the Finance Act of 1951 and the same has been continued in the Finance Acts of subsequent years. Special surcharge came to be levied in the Finance Acts of 1958 to 1964 and 1966 to 1971 and the additional surcharge was levied only by the Finance Act of 1963.

ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 52

"The provisions of s. 2 of, and the First Schedule to, the Finance Act, 1951, shall apply in relation to income-tax and super-tax for the financial year 1952-53 as they apply in relation to income-tax and super-tax for the financial year 1951- 52...."

There was no specific mention whatsoever of surcharge in s. 2 nor was there any modification of the First Schedule to the Finance Act of 1951 which contained the rates, etc., relating to the surcharge. Similar state of affairs existed with regard to the Finance Acts of 1953, 1954 and 1957. Sec. 2 of the Finance Act, 1971, is to the effect that the provisions of s. 2 and of the First Schedule to the Finance Act, 1970, shall apply in relation to income-tax for the assessment year or, as the case may be, the financial year commencing on the first day of April, 1971, as they apply in relation to income-tax for the assessment year commencing on the first day of April, 1970, with certain modifications set out in the section. The First Schedule to the Finance Act of 1970 was modified and the Schedule so modified contains provisions for surcharge on income-tax. It is significant that s. 2 of the Finance Act of 1971 speaks only of income-tax and not of any surcharge. It is only in the modifications made in the Schedule to the Finance Act of 1970 that there is provision for a surcharge.

ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 53

surcharge for the purposes of the Union. The word "surcharge" has thus been used to either increase the rates of income-tax and super-tax or to increase these taxes. The scheme of the Finance Act of 1971 appears to leave no room for doubt that the term "income-tax" as used in s. 2 includes surcharge.

ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 54

section yet income-tax can be charged only where the Central Act which, in the present case, will be the Finance Act, enacts that income- tax shall be charged for any assessment year at the rate or rates specified therein. The distinction made by the High Court that the surcharges are levied only under the Finance Act and income- tax under the Act may not hold good if the above view which has been pressed on behalf of the revenue were to be accepted. In our judgment it is unnecessary to express any opinion in the matter because the essential point for determination is whether surcharge is an additional mode or rate for charging income-tax.

ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 55

enacted for the current year it would entail considerable administrative work in the form of a refund or collection in the final assessment. Since by the Finance Act of 1967, this method or procedure was dropped we do not consider that much significance can be attached to this aspect.

Considering the decision of the Hon'ble Apex Court, when applied

to the provisions of section 40(a)(ii) of the Act, it is abundantly

clear that the tax levied on profits or gain of any business or

profession, which is not allowable as per the said sub-section,

would include all surcharge and additional surcharge levied

thereon.

Now coming to the nature of education cess,the Finance Bill, by

virtue of which the rate of taxes are determined in Schedule-1

thereof, deals with the levy of education cess at Chapter-II(12) as

under:

(12) The amount of income-tax as specified in sub-sections (4) to (10) and as increased by the applicable surcharge, for the purposes of the Union, calculated in the manner provided therein, shall be further increased by an additional surcharge, for the purposes of the Union, to be called the “Health and Education Cess on income-tax”, calculated at the rate of four per cent of such income-tax and surcharge so as to fulfil the

ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 56

commitment of the Government to provide and finance quality health services and universalized quality basic education and secondary and higher education:

additional surcharge levied by the Union. Considering that tax on

income has been so defined by the Hon'ble Apex Court as above as

including surcharge and additional surcharge, it stands settled

therefore, that the education cess is in the nature of tax levied on

the income from the business and profession and thus specifically

not allowable as per the provisions of section 40(a)(ii) of the Act.

There is no scope for any other interpretation/ view on the issue

considering the decision of the apex court in K. Srinivasan (supra)

read with the Finance Bill levying education cess.

We therefore hold that education cess falls within the scope of

amounts not allowed as deduction u/s 40(a)(ii) of the Act.

The additional grounds raised by the assessee are, therefore,

dismissed.

In effect the appeal of the assessee is partly allowed for

statistical purposes.

We now take up the appeal of the assessee in ITA

No.532/Chd/2014 for assessment year 2006-07.

ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 57

ITA No. 532/Chd/2014(A.Y.2006-07):

general and hence requires no adjudicated.

“2. That the assessing officer erred on facts and in law in disallowing a sum of Rs.6,12,00,000, being 1/3rd of the expenditure on advertisement and publicity of Rs.18,36,00,000 incurred by the appellant holding that the expenditure was incurred for brand building for the entities owning the brand.

2.1 That the assessing officer erred on facts and in law in holding that there was a strong nexus between the advertisement expenditure and revenues of the associated enterprises and, therefore, the associated enterprises should contribute towards advertisement expenditure incurred by the assesses in India. 2.2 That the assessing officer erred on facts and in law in not appreciating that the assessee is the exclusive licensee authorized to manufacture and sell products under the brand name in India and the entire benefit of such expenditure accrued to the appellant and no one else. 2.3 That the DRP erred on facts and in law in affirming the order passed by the assessing officer allegedly holding that "there is no denying of the fact that incurring of advertisement expenses has resulted in promotion of brand name owned by the foreign associated enterprise……… It cannot be said that entire expenses have been incurred exclusively and wholly for the purpose of the business of the appellant." 2.4 That the assessing officer erred on facts and in law in not appreciating that the advertisement and publicity expenses were incurred by the appellant in the course of carrying on of its business and were allowable deduction as business expenditure.”

ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 58

grounds was identical to that raised in ground No.1 of ITA

No.2453/Del/2016 and our decision rendered therein at para 6

shall apply mutatis mutandis to these grounds also.

Ground No.2 -2.4 accordingly are allowed.

“3. That the assessing officer erred on facts and in law in making disallowance of purchase of vaccine amounting to Rs.19,80,75,340 from GlaxoSmithKline Biological S.A., invoking provision of section 40(a)(i) of the Act alleging that the appellant had failed to deduct tax at source from such payments. 3.1 That the assessing officer erred on facts and in law in holding that GSK Biological SA had a permanent establishment in India and was, therefore, taxable in India in as much as (i) vaccine development activities of GSK Biological SA was being carried out through the fixed place of business in India, (ii) GSK Biological SA was conducting its business in India through the facilities in India, (iii) the core business activities of GSK Biological SA were being carried out in India and (iv) GSK Biological SA had a centre for vaccine clinical trial of R&D in Bombay, Bangalore and Delhi. 3.2 That the assessing officer erred on facts and in law in holding that the appellant was responsible for undertaking any clinical trial as well as research and development activities on behalf of GSK Biological SA, the resultant new/ improved product of which belongs to GSK Biological SA. 3.3 That the assessing officer erred on facts and in law in holding that clinical trial activities constitute permanent establishment of GSK Biological SA in India within the meaning of Article 5 of Double Taxation Avoidance Agreement (DTAA) between India and Belgium on account of the following:

ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 59

b. Premises used as a sales outlet or for receiving or soliciting orders with respect to vaccines under Article 5(2)(i) of the DTAA; a. Fixed place of business in the form of place where clinical trials and research and development takes place including but not limited to CDMCI and BDSI, Bangalore under Article 5(1) of the DTAA; c. CDMCI, Bangalore under Article 5(2)(c) of the DTAA; d. BDSI, Bangalore under Article 5(2)(c) of the DTAA; and e. Dependent agent PE in the form of the appellant under Article 5(4) of the DTAA. 3.4 That the assessing officer erred on facts and in law in alternatively holding that the assessee constituted business connection with GSK Biologicals SA SA within the meaning of section 9(1)(i) of the Act. 3.5 That the assessing officer erred on facts and in law in holding that "all the core activities related to vaccine development are undertaken in India on behalf of M/s. GSK Biologicals SA instead of operating a full- fledged centre in the form of a branch has outsourced its core activity to the Indian company, the assessee". 3.6 That the assessing officer erred on facts and in law in holding that "in fact M/s. GSK Biological SA is getting its works done in India through the appellant and other affiliates of the GSK group, which have no intellectual property right in the vaccines they develop or undertake clinical trials for". 3.7 That the DRP erred on facts and in law in upholding the aforesaid findings of the assessing officer on the basis of assumption and surmises without appreciating the merits of the matter. 3.8 That the assessing officer erred on facts and in law in not appreciating that the appellant did not carry out any clinical trial and research and development activity on behalf of GSK Biological SA in India.

ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 60

3.9 That the assessing officer erred on facts and in law in not appreciating that no clinical trial / research and development was undertaken in India in respect of various vaccines imported by the appellant during the relevant previous year.”

grounds was identical to that raised in ground No. 2.2 -3.4 in

ITA No.2453/Del/2016 and our decision rendered therein at para

18 of our order above, shall apply with equal force to these

grounds also.

The issue raised accordingly is restored back to the AO for

adjudication afresh in accordance with the direction in ITA

No.2453/Del/2016 and Ground No. 3-3.9 stand allowed for

statistical purposes.

“4. That the assessing officer erred on facts and in law in disallowing product development expenses amounting to Rs.14,55,000 on the alleged ground that the said expenditure was capital in nature and gave enduring benefit to the appellant. 4.1 That the assessing officer erred on facts and in law in not appreciating that the aforesaid expenses were operational expenses incurred by the appellant in the course of carrying on its business and the same did not result in the creation of a capital asset nor any advantage in the capital field so as to be regarded as capital expenditure.”

of Product Development & Research Expenses to the tune of

ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 61

Rs.14.55 lacs which was not allowed to the assessee. These were

incurred by the assessee for carrying out consumer survey

market research & consumer analysis in respect of products that

from part of the assessee’s line of business. The Ld. Counsel for

the assessee contended that the issue stood squarely covered in

favour of the assessee by the decision of the ITAT in the case of

GlaxoSmithKline Consumer Healthcare Ltd. for assessment

years 1998-99 to 2004-05. Copy of the said order was placed

before us. Our attention was drawn to the relevant portion of the

order. It was also pointed out that identical issue stood

adjudicated in the case of the assessee by the ITAT in earlier

years and the issue had been restored back to the AO. Our

attention was drawn to the order of the ITAT in the case of the

assessee for A.Y 1998-99 and 1999-2000 in ITA

No2099/Del/2002 421/Del/2003 and ITA

No.2645/Del/2002,1316/Del/2003,Relevant portion is as under:

“After hearing both the parties we are of the view that both the

authorities below have disposed off the issue by making general

observations without discussing the nature and impact of such

expenditure.We therefore set aside the orders of the CIT(A) for

both the years on this issue and restore the matter to the AO for

fresh adjudication after examining the nature and impact of the

ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 62

expenditure by the assessee vis a vis the existing business in

terms of section 37”

had been raised by the assessee before the DRP also which on

nothing that the expenses were incurred before actual launch of

the project, held that the reliance placed by the Ld. Counsel for

the assessee on the decision of the ITAT in the case of

GlaxoSmithKline Consumer Healthcare Ltd. (supra) was

misplaced. She further pointed out from the findings of the DRP

at page 32 of its order that the DRP noted that the impugned

expenses were capital in nature as the produce enduring benefit

in respect of the new project being launched, she, therefore,

contended that the plea of the Ld. Counsel for the assessee was,

therefore, not maintainable.

arose in the preceding year also in the case of the assessee and

the ITAT deemed it fit to restore it back to the AO for

adjudication afresh after examining the nature and impact of the

expenses vis a vis the existing business of the assessee. In the

present case also the Revenue has decided the issue based on

general observations without examining the nature and impact of

the expenses on the existing business of the assessee. Even the

ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 63

decision of the ITAT in the case of Glaxo Smithkline consumer

Health care Ltd.(supra), relied upon by the Ld. Counsel for the

assessee ,we find, rendered its judgment after examining the

facts relating to the expenses vis a vis its nature and impact on

business. The issue therefore, we hold, needs to be reconsidered

by the AO for which purpose we restore it to the AO with the

direction to adjudicate it in accordance with the direction of the

ITAT in the case of the assessee for A.Y 1998-99 and 1999-

2000.

Ground of appeal No 4 & 4.1 are allowed for statistical

purposes.

vide its application under Rule 11 of the Income Tax Rules,

1962, dated 15.03.2019 as under:

Additional ground dated 22.11.2018: "That on the facts and circumstances of the case and in law, the impugned order passed by the assessing officer giving effect to the appellate order passed by the Hon'ble Tribunal, is barred by limitation and therefore, is liable to be quashed. "

Additional ground dated 26.11.2018: “Without prejudice, that the assessing officer erred on facts and in law in not appreciating that disallowance of expense under section 40(a)(i) of the Act ought to be restricted to the appropriate proportion of the sum chargeable to tax out of the total payment of Rs. 19,80,75,340 made by the appellant to GlaxoSmithKline Biological S.A.”

ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 64

Additional ground dated 20.05.2021: "1. That on the facts and circumstances of the case and in law, the assessing officer ought to have allowed, in pursuance to law clarified by the Hon'ble Rajasthan High Court in the case of Chambal Fertilisers and Chemicals Ltd vs JCJT: D.B. ITA No.52/2018 and Hon'ble Bombay High Court in the case of Sesa Goa Ltd. vs JCIT: 117 taxmann.com 96 (Bom HC), deduction of Rs. 50.38,687, being education cess computed on returned income, paid by the Appellant before the due date of filing return of income for the subject assessment year. 2. That on the facts and circumstances of the case and in law, pursuant to law clarified in the case of Chambal Fertilisers and Chemicals Ltd (supra) and Sesa Goa Ltd (supra), the assessing officer also ought to have allowed further deduction in respect of any additional amount paid by the Appellant towards education cess during the financial year relevant to the subject assessment year."

raised in all the grounds were legal and all the facts for

adjudicating the same were on record. He, therefore, pleaded

that the grounds be admitted for adjudication.

Ld.DR did not object to the same.

The additional grounds raised are legal grounds and admittedly

require no investigation of facts,there is ,we find, therefore no

impediment in admitting them for adjudication ,as held by the

apex court in the case of NTPC Ltd. Vs. CIT, 229 ITR 383(SC).

Order was pronounced during the course of hearing itself.

ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 65

application dated 20-05-2021 relate to allowability of education

cess. It was common ground that the issue raised in the above

grounds was identical to that raised in the additional grounds

raised in ITA No.2453/Del/2016.Our decision rendered therein

at para 22 shall apply mutatis mutandis to these grounds also.

Accordingly the additional grounds raised vide application dated

20-05-2021 stand dismissed.

on the order passed by the AO giving effect to the order of the

ITAT being barred by limitation, the ld. counsel for the assessee

fairly concededed that identical issue stood decided by the

ITAT, Delhi Bench against the assessee in the case of Religare

Capital Markets Limited vs DCIT ITA No. 1881/Del/2014

dated10-10-2019. The said additional ground is, therefore,

dismissed.

22.11.2018 relates to the issue of apportionment of profits to the

PE of M/s GlaxoSmithKline Biological SA. Since this issue is

interrelated and dependent on determination of existence of

Permanent Establishment of M/s GlaxoSmithKline Biological SA

which issue has been contested by the assessee in ground Nos.3

ITA No.2453/Del/2016 A.Y. 2005-06 & ITA No.532/Del/2014 A.Y. 2006-07 66

to 3.9 raised before us and on noting that the aforestated

grounds have been restored back by us to the AO while dealing

with the said grounds at para 29 of our order above, this issue

is also restored back to the AO to be adjudicated alongwith the

issue of determination of PE of M/s GlaxoSmithKline Biological

SA raised ground Nos.3 to 3.9 above. This additional ground is,

therefore, allowed for statistical purposes.

In the result, the appeal of the assessee is partly allowed

for statistical purposes.

In effect both the appeals are partly allowed for statistical purposes.

Sd/- Sd/- (R.L. NEGI) (ANNAPURNA GUPTA) �याय�क सद�य/Judicial Member लेखा सद�य/Accountant Member Dated: 30th July, 2021 *रती* आदेश क� ��त�ल�प अ�े�षत/ Copy of the order forwarded to : • अपीलाथ�/ The Appellant • ��यथ�/ The Respondent आयकर आयु�त/ CIT • आयकर आयु�त (अपील)/ The CIT(A) • �वभागीय ��त�न�ध, आयकर अपील�य आ�धकरण, च�डीगढ़/ DR, ITAT, • CHANDIGARH • गाड� फाईल/ Guard File

आदेशानुसार/ By order, सहायक पंजीकार/ Assistant Registrar