DCIT 7(3), MUMBAI vs. WYETH LTD ( FORMERLY KNOWN AS WYETH LEDERLE LTD), MUMBAI

(A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited O R D E R PER S. RIFAUR RAHMAN (AM)

1. The Commissioner of Income-tax (Appeals)-VII, Mumbai [hereinafter referred to as the CIT(A)] erred in holding that the Additional Commissioner of Income-tax, Special Range 23, Mumbai (Addl.CIT) was justified in disallowing commuted fees paid by your appellants to Atul Ltd. towards infrastructural facilities as capital in nature.

Page No. 2 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited Your appellants submit that on the facts and circumstances of the case CIT(A) should have held that this amount was allowable as revenue deduction in computing the business income. Your appellants pray that the Addl.CIT be directed to grant them deduction in respect of payment made to Atul Ltd. in computing their business income.

2. The CIT(A) erred in confirming the disallowance of the amalgamation expenses amounting to Rs.15,70,111 incurred by your appellants. Your appellants submit that on the facts and circumstances of the case the CIT(A) should have held that expenses on amalgamation were allowable as revenue deduction in computing their income. Your appellants pray that the Addl.CIT be directed to grant them deduction of Rs. 15,70,111/- in computing their total income.

3. The CIT(A) erred in holding that the Addl.CIT was justified in reducing book written down value of assets transferred by them in the scheme of demerger from the opening block of asset for the purposes of computing depreciation allowable to them. Your appellants submit that on the facts and circumstances of the case and having regard to the provision of Section 43(6) of the Income- tax Act, 1961 (the Act) the CIT(A) should have held that for the purposes of computing depreciation admissible under the Act only the tax written down value is required to be reduced from the opening block of assets. Your appellants pray that the Addl.CIT be directed to compute depreciation accordingly. The CIT(A) erred in holding that while computing deduction under Section 80HHC of the Act, the Addl.CIT was justified in: a) treating commission paid to Geoffrey Manners & Co. Ltd. [G.M.] as part of turnover.

Page No. 3 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited Your appellants submit that, having regard to the transactions with GM. and your appellants the CIT(A) should have held that commission paid to G.M. is not to be regarded as part of turnover. Your appellants pray that the Addl.CIT be directed not to consider commission paid to G.M. as part of turnover. b) including sale of scrap and unusable scrap material in the turnover of the business. Your appellants submit that the CIT(A) should have held that scrap sales and sale of unusable raw material cannot form part of total turnover. Your appellants pray that the Addl.CIT be directed to exclude these from total turnover. c) reducing the profits of business by 90% of (i) the amount received as manufacturing charges; (ii) amount received as miscellaneous receipts Your appellants submit that the CIT(A) should have held that the amount received as manufacturing charges and miscellaneous receipts do not fall within the ambit of clause (baa) of Explanation to Section 80HHC(4A) of the Act. Your appellants pray that the Addl.CIT be directed not to reduce 90% of the above receipts from the profits of the business in computing deduction under Section 80HHC of the Act.

5. The CIT(A) erred in holding that the Addl.CIT was justified in considering 2% of the dividend as expenditure for earning such income. The CIT(A) further erred in holding that Addl.CIT was justified in computing exemption under Section 10(33) of the Act accordingly. Your appellants pray that the Addl.CIT be directed to grant exemption under Section 10(33) of the Act as claimed in the Return of Income. Your appellants crave leave to add to, alter, amend, vary, omit or substitute the aforesaid grounds of appeal or add a new ground or grounds of appeal at any time before or at the time of hearing of the appeal as they may be advised.”

Page No. 4 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited 4. We proceed to adjudicate the issues ground wise in this appeal.

Page No. 5 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited 6. During the year, the assessee factory was located at Atul - Valsad in the state of Gujarat. Atul are the owners of the large chemical complex comprising land admeasuring about 1250 acres. M/s Cyanamid India Ltd (the assessee) had taken on lease land and premises admeasuring 90,000 sqmts approximately within the said complex. Atul Ltd over the years had developed various infrastructural facilities at their chemical complex which inter alia includes dams, water treatment plant, water supply lines, roads etc. The assessee had been using and enjoying infrastructural facilities at no significant cost or consideration from the time the original lease in 1966. Atul Ltd and the assessee held negotiations to pay such fees or compensation as is agreed to for use of infrastructural facilities. As a result of negotiations, an agreement dated February 14, 1997 was entered between Atul Ltd. and Cyanamid India Limited (refer copy of the agreement at pages 68-76 of the paper book). As per clause 3A(1) of the agreement, the assessee was required to pay a monthly fee of compensation of ₹.14,60,000 for the first year commencing from April 1, 1996. The monthly fee or compensation for the use of infrastructural facility was required to be upgraded as per clause 3A(ii) of the agreement.

Page No. 6 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited 7. The aforesaid agreement dated 14.2.1997 was modified vide letter dated February 4, 1998 (refer page 75-76 of the paper book) whereby it was agreed between the assessee and Atul Ltd. to commute the monthly fees payable at a sum of INR 15 crores less monthly fees already paid. Accordingly, net amount of INR 11,40,84,000 (ie., INR 15,00,00,000 less INR 3,59,16,000 already paid) was payable equally by the assessee and Cyanamid Agro Ltd. (being the resulting company consequent upon the demerger of agro undertaking of Cyanamid India Ltd.). Thus, the assessee was liable to pay a sum of INR 5,70,42,000 (ie., 50% of INR 11,40,84,000) which was paid by the assessee as under: i. INR 3,20,42,000 in February 1998; and ii. INR 2,50,00,000 in April 1998

Page No. 7 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited forward in the balance sheet and amortized the payment for 5 years and accordingly, 1/5th of the total amount of INR 5,70,42,000 was charged over a period of 5 years starting from the AY 1999-00. In this regard, it is submitted that in the subsequent years, the assessee is not claiming such amortized expenditure and the same is duly added back in the computation of income while calculating the business income as the same is already claimed as revenue expenditure in the subject AY 1998-99. It was also submitted that this fact may duly be verified from the computation of income of subsequent AY 1999-00 enclosed at pages 178-180 of the paper book filed for AY 1999-00.

9. During the assessment proceedings, Assessing Officer held that assessee has paid the amount of INR 5,70,42,000 for acquiring exclusive, unobstructed and uninterrupted use and enjoyment of the infrastructural facilities free from any other charge cost in future and the maintenance of the said facilities the sole obligation and responsibility of Atul Ltd. The assessee’s right of enjoyment of the above facility continues so long as the Assessee continues to be the lessee. As per the agreement dated December 31, 1966 between M/s Atul Products Limited (lessor) and M/s Cyanamid India Ltd (lessee), the lessee is in possession of the part of the land admeasuring 12 Acres and 12.5 gunthas. Page No. 8 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited 10. The aforesaid agreement dated December 31, 1996 vested in the Assessee along with the possession of a part of land, also all ways, passages, rights, easements and appurtenances' to the said piece of land. As per para 5 of Part II of the agreement the assessee was granted the right to use the demised land and the building and structure thereon for the purpose of manufacture of pharmaceuticals, chemicals and products which the assessee would manufacture according to the objectives stipulated in its memorandum. As per para 6 of Part II of the agreement, the Assessee was given the right for laying underground, overground or overhead pipes, drains, electric cable wires / boards, rail tracks and other such conveniences necessary for the assessee business. As per para 1 of Part III of the Agreement the assessee was granted the right of way or passage over the other adjoining property of the lessor so as to enable the employees of the Assessee to have passage to the world outside the demised land. Vide para 1 and 4 of Part IV of the Agreement the assessee was granted the right to construct any building or structure on the demised land for the purpose of carrying on its business. By the said agreement dated Dec 31, 1966, the lease agreement stood extended for a period of 99 years from Dec 1. 1960. (refer Para (iii) (a) & (iii)(b) of the AO order at pages 29-30 of the paper book).

Page No. 9 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited 11. The Assessing Officer concluded that the impugned sum of INR 5,70,42,000 was not connected at all with the manufacturing and business activity of the assessee’s chemical complex. Assessing Officer held that the penultimate objective of these agreements was a civil township of executives and other employees of the Assessee and their families with all the facilities for all age groups that would radiate in each aspect of a living a corporate benchmark that few employers can be credited with A modern township with all the amenities on a massive land stretch that is permanent and durable. In case of Assessee. lease is of 99 years and thus permanent in nature (refer para (iii)(i) and (iii)(1)(ii) of the AO order at page 37 of the paper book).

Page No. 11 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited 15. On appeal Ld.CIT(A), considering the submissions of the assessee, held that the expenditure was in the nature of enduring benefit. Ld.CIT(A) further held that the assessee, in its own accounts has not debited the above amount as expenditure for the subject AY 1998-99. The amount paid by the assessee amounting to INR 3,20,42,000 has been only shown as an advance in the balance sheet without any debit to the profit & loss account. Subsequently, after paying the balance amount of INR 2,50,00,000 in April 1998 the Assessee has amortised the total amount of INR 5,30,42,000 under the head 'miscellaneous expenditure' over a period of 5 years with effect from AY 1999-00. Thus, the Assessee in its accounts has itself treated the above payment as an 'advances' during the subject AY 1998-99 and from AY 1999-00 onwards, it has been treated as capital expenditure amortised over 5 years. There is another dimension to the issue that the Assessee is liable to make payments for the various items given in the "Second Schedule" to the agreement and these expenses relate to day-to-day running of the business and has been treated by the assessee as revenue expenditure. Ld. CIT(A) held that the Assessing Officer was justified in treating the payment of INR 5,70,42,000 as capital expenditures.

Page No. 12 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited 16. Being aggrieved, assessee is in appeal before us and Ld. AR of the assessee submitted that impugned expenditure is duly allowable as a deduction as per the provisions of section 37(1) of the Act. The expenditure covered in the agreement with Atul Ltd. relates to the use of infrastructural facility which is a business necessity and expediency and it is not personal in nature. Reliance in this regard is placed on the decision of the Hon'ble Gujarat High Court in the case of Sayaji Iron and Engg Co vs. CIT (2002) 253 ITR 749 wherein it is held that the companies are distinct assessable entities and hence cannot have any personal expense. Ld. AR submitted that Expense is not of capital nature, it is respectfully submitted that the expenditure covered under this agreement which relates to the use of infrastructural facilities is revenue in nature. In the present case, the Assessee had to pay monthly payments to Atul Ltd towards use of infrastructural facilities which had later converted into a lumpsum payment. The Assessee had not acquired any asset with the benefit of enduring nature. Merely on account of the fact that the parties to the contract have agreed to commute the expenses for the sake of convenience, will not change the nature of expenditure, accordingly, the expenditure of revenue nature will remain as it is and will not get converted into a capital expense. Reliance in this regard is placed on the Page No. 13 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited decision of Anglo-Persian Oil Company Ltd. v. Dale [1932] 16 Tax Cas. 253, wherein it has been said that if the payment of a lump sum closes the liability to make repeated and periodic payments in the future, it may generally be regarded as a payment of a revenue character.

17. He brought to our notice the decision in the case of Fenner Woodroffe & Co. Ltd. v. CIT [1976] 102 ITR 665 (Mad.), it has been observed by the Hon'ble Madras High Court that it is the aim and object of the expenditure that would determine the character of the sum, whether it is a capital or revenue expenditure and neither the source nor the manner of payment may be of any consequence.

18. Further, the magnitude of expenditure does not decide the nature of expenditure and allowability thereof. It is the real nature and quality of the payment and not the quantum or the manner of the payment which is decisive. In this regard, there are plethora of judgements passed by the various courts wherein it has been held that "Quantum of expenditure is not relevant factor-Whether the money paid is a revenue expenditure or capital expenditure depends not so much upon the facts as to whether the amount paid is large or small or whether it has been paid in lump sum or by instalments, as it does upon the purpose for which the Page No. 14 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited payment has been made and expenditure has been incurred it is the real nature and quality of the payment and not the quantum or the manner of the payment which would prove decisive".

19. Further, it is duly submitted that the allegation of the department that the lease is of 99 years and thus permanent in nature is absolutely baseless and incorrect. There are plethora of judicial precedents wherein it has been held that rental charges paid under the lease period of 99 years are revenue in nature and hence are allowable expenditure. Recently the Hon'ble Delhi High Court in the case of Coforge Ltd. v. ACIT: [2021] 436 ITR 546, has held that the entire lease rent of 90 years paid by the Assessee as a commuted and discounted one-time lease rent instead of paying it on yearly basis is revenue in nature.

20. It is submitted that Expenditure is incurred wholly and exclusively for the purpose of business. Further, it is duly submitted that the said expenditure has been incurred to obtain uninterrupted flow of infrastructure facility provided by Atul Ltd. It must be appreciated that such infrastructural facilities were required to be paid for day to day running of the business of Assessee. Thus, the expenditure is wholly and Page No. 15 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited exclusively for the purpose of the business. In view of above, the amount paid to Atul Ltd. is duly allowable under section 37(1) of the Act.

21. Further, Ld. AR of the assessee submitted that Treatment of expense in the books of account is irrelevant for determining tax allowability of such expense. It is respectfully submitted that the contention by the department that the expense was not debited to the profit and loss account and the Assessee itself amortized the same in the subsequent year is irrelevant for ascertaining the allowability of deduction of the expenditure. Reliance in this regard is placed on the decision passed by the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg.Co. Ltd. v. CIT: [1971] 82 ITR 363 wherein it is held that entries in the books of accounts are not conclusive of the nature of expenditure i.e., revenue or capital and whether an assessee is entitled to a deduction or not would entirely depend upon the provisions of law and not treatment given to it in the books of accounts by the Assessee.

“Merely on account of the fact that the parties to the contract have agreed to commute the expenses for the sake of convenience will not change the nature of expenditure. i. CIT vs HMT Limited: [1993] 109 CTR 392 (Kar) ii. Coforge Ltd vs ACIT: [2021] 436 ITR 546(Del) iii. ACIT vs Delhi International Airport Private Limited: [2018] 89 taxmann.com 326 (Delhi) iv. CIT vs Gemini Arts Private Limited: [2002]254 ITR 201 (Mad) v. ACIT vs Balmer Lawrie & Co. Ltd: (Kolkata) vi. DCIT vs Sun Pharmaceuticals Industries Ltd: 329 ITR 479 (Guj) Cases wherein It is held that it is the real nature and quality of the payment and not the quantum or the manner of the payment which would prove decisive i. M.K. Bros. (P) Ltd. vs CIT [1972] 86 ITR 38 (SC) ii. Travancore Sugars & Chemicals Ltd. vs Page No. 18 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited iii. CIT [1966] 62 ITR 566 (SC) iv. CIT v. Madras Auto Services (P.) Ltd. 233 ITR 468 (SC) v. Empire Jute Co. Ltd. v. CIT 124 ITR 1 (SC) vi. Assam Bengal Cement Co. Ltd. Vs. Commissioner of ITC (27 ITR 34) (SC) vii. CIT vs B.N. Elias & Co. (P) Ltd. [1987] 168 ITR 190 (Cal.) viii. Gannon Norton Metal Diamond Dies Ltd. v. CIT [1987] 163 ITR 606 (Bom.) ix. FennerWoodroffe& Ltd. v. CIT [1976] 102 ITR 665 (Mad.) Cases wherein it is held that treatment in the books of accounts is irrelevant for determining the tax allowability of the expense i. Kedarnath Jute Mfg Co. vs CIT: [1971] 82 ITR 363 (SC) ii. Taparia Tools Ltd vs JCIT: [2015] 372 ITR 605 (SC) iii. Coforge Ltd vs ACIT: [2021] 436 ITR 546 (Del)

The monthly payments made till the modified agreement entered are to be adjusted, accordingly, the assessee settled the net amount of Rs. 11,40,84,000/-. It is relevant to note that the assessee has already claimed the lease rent as an expenditure during the relevant years. The balance amount was settled by the assessee in two parts, 50% of monthly commuted amount and the first installment was made by making payment of Rs. 3,20,42,000 on Feb.1998, Rs. 2,50,00,000 in April 1998 and the second installment was made in the subsequent year (1999). The assessee has claimed the lease rent as well as the first installment in the AY 1998-99 and the second installment of Rs. 5,70,42,000/- was treated as miscellaneous expenses in AY 1999-00 and amortized in subsequent five assessment years.

“14. It is relevant to note that, vis-à-vis this aspect of the matter, while the Tribunal has agreed with the appellant/assessee, the one-time lease rent was incurred by it to run its business both, effectively and efficiently, the Tribunal has gone on to hold that the amount involved should be spread over the tenure of the lease, albeit, in equal proportion. The reasoning of the Tribunal is given in paragraph 9.6 to 9.9 of the impugned orders; the same is extracted hereafter. Signature Not Verified Digitally Signed By:VIPIN KUMAR RAI Signing Date:06.07.2021 10:14:02 "9.6 We have heard the rival submission and perused the relevant material on record. The assessee has filed a Page No. 20 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited copy of the lease deed under reference. In terms of the lease deed, the assessee has made following payments to GNIDA: (a) one-time lease premium of 2,83,56,515/- (b) commuted one time lease rent of 77,98,042/- 9.7 As far as payment of one-time lease premium is concerned, the assessee has capitalized the said amount in its books of accounts. The Ground No. 4 of the appeal of the Revenue is factually incorrect because the premium has already been capitalized by the assessee and the issue in dispute is only in respect of the commuted one timely lease rent. 9.8 The Ld. CIT(A) after considering the decisions on the issue of when a particular expenditure has to be considered as capital expenditure, in the case of Empire Jute Co. Vs CIT 124 ITR 1 (SC); Lakshmiji Sugar Mills Co P Ltd Vs CIT 82 ITR 376 (SC) and Madras Auto Services (P) Ltd 233 ITR 468 (SC) allowed the claim of the assessee observing as under: "8.5.2 The appellant submitted that it had claimed deduction of Rs.77,98,042 on account of payment of commuted lease rentals to Greater Noida Authority for Plot No. 2A taken on lease situated in Greater Noida Industrial Development Area District, Gautam Budh Nagar. The appellant had the option to either pay (a) the advance annual rent on yearly basis ; or (b) commuted one time lease rent for the period of lease and no lease rent would be payable by the appellant during the lease period. The appellant opted for option (b). The deed of lease was executed on 12th January, 2007. The lease term is of 90 years commencing from 12th January, 2007, with the right of the Greater Noida Industrial Development Authority reserved. It is submitted that the appellant under the lease deed with the Greater Noida Industrial Development Authority has agreed to develop SEZ in Greater Noida by constructing the project with integrated, ready to use office space and land and social

Page No. 21 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited infrastructure, etc. The appellant is obligated under the lease deed to complete the construction of the whole project and facilities within 7 years. It is submitted that the object and purpose of such lease deed, is only to facilitate IT Industries and IT enabled services and expansion of the business of the appellant. That apart from the aforesaid benefit, which is in the revenue field, there is no advantage in the capital field as there is no acquisition of any capital asset inasmuch the plot of land is not under the ownership of the appellant and remains the property of Greater Noida Industrial Development Authority. It is submitted that payment of commuted lease rentals did not result in creation of a capital asset having enduring benefit in the capital field. The amount in question was essentially revenue expenditure allowable deduction. 8.5.3 Hon'ble Supreme Court in the case of Empire Jute Co. v CIT: 124 ITR 1, held that the test of enduring benefit is not certain or conclusive test in determining whether the expenditure is capital or revenue in nature and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. The Supreme Court further laid down that what is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. 8.5.4 In the case of Lakshmiji Sugar Mills Co. P. Ltd. v. CIT : 82 ITR 376, Hon'ble Supreme Court held that the contribution made by the assessee under a statutory obligation for the development of roads which were originally the property of the Government and remained so even after the improvement had been done, being Page No. 22 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited expenditure incurred for running of the business efficiently and conveniently and not for acquiring a capital asset was of revenue nature and not of a capital nature. 8.5.5 In the case of Madras Auto Service (P) I limited (233 ITR 468) the assessee tenant had spent the amounts in question in order to construct a new building after demolishing the old building. The new building, however, from inception was to belong to the lessor and not to the assessee. The assessee, however, had the benefit of the existing lease in respect of the new building at the agreed rent for a period of 39 years The assessee claimed deduction for the entire amount spent on construction of the building as revenue expenditure. Hon'ble Supreme Court in the said case observed: "In order to decide whether this expenditure is revenue expenditure or capital expenditure, one has to look at the expenditure from a commercial point of view. What advantage did the assessee get by constructing a building which belonged to somebody else and spending money for such construction? The assessee got a long lease of a newly constructed building suitable to its own business at a very concessional rent. The expenditure, therefore, was made in order to secure a long lease of new and more suitable business premises at a lower rent. In other words, the assessee made substantial savings in monthly rent for a period of 39 years by expending these amounts. The saving in expenditure was a saving in revenue expenditure in the form of rent. Whatever substitutes for revenue expenditure should normally be considered as revenue expenditure. Moreover, the assessee in the present case did not get any capital asset by spending the said amounts The assessee, therefore, could not have claimed any depreciation. Looking to the nature of the advantage which the assessee obtained in a commercial sense, the expenditure appears to be revenue expenditure." 8.5.6 The above decisions of Apex Court are squarely applicable in the case of the appellant. In the case of the appellant, also it did not acquire title / ownership of any Page No. 23 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited capital asset. The plot of land on which construction would be carried on by the appellant under the lease deed of 99 years, would remain the property of Greater Noida Industrial Development Authority at all times. In lieu of incurring the expenditure, the appellant would be entitled to enjoy the property as a tenant under long term lease. Such an advantage even though, enduring in nature, could not be regarded as in the capital field as the expenditure only facilitates the carrying out of business more efficiently and profitably by making available suitable premises for the business of the appellant. The expenditure on account of commuted lease rentals paid by the appellant company has been incurred in respect of premises used wholly and exclusively for the purposes of the business of the company; and the same represents commuted payment in lieu of regular lease rental and hence is in the nature of revenue expenditure. In view of the above, the AO has erred in making the disallowance of the commuted lease rentals. The appeal is allowed in this ground no. 7 of appeal. Since appeal is allowed in ground no. 7 of appeal, therefore, the plea of the appellant in ground no. 8 of appeal is infructuous and not necessary to be adjudicated." 9.9 We find that the Ld. CIT(A) has distinguished the expenditure in the capital field and expenditure incurred only to facilitate the carrying of the business more efficiently and profitably, which is revenue in nature. The one- time premium paid by the assessee has already been considered by the assessee as capital expenditure. The assessee had the option to pay the lease rental on year-to-year basis or as a one-time expenditure. The assessee has substituted the revenue expenditure which was to be paid on year-to-year basis and the nature of the expenditure remained same though it has been paid as a composite payment. Thus, it is clear that the expenditure incurred by the assessee is not capital expenditure. The expenditure was to be incurred on year to year basis for the period of lease of 90 years. The lesser gave the assessee two option. The first option was Page No. 24 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited to pay on year to year basis and claim the same as revenue expenditure. The second option was provided by the lessor was to pay a composite amount for the period of lease as onetime payment. The lessor provided some benefit for making onetime payment. The assessee has chosen the second option and paid the entire lease rent of 90 years as composite onetime payment. Thus, in our opinion, the liability of 90 years has been paid in one year only. In such circumstances, the liability of lease rent relatable to year under consideration would be 1/90th of the amount paid and balance amount would be pre-paid advance rent only. The assessee is entitled to claim 1/90th of the amount every year till the period of lease of 90 years as revenue expenditure. Even according to the matching principles of income and expenditure the entire expenditure is not justified for allowance in one year (i.e. the year under consideration) when the income corresponding to expenditure of subsequent years will be reflected in relevant year only. The expenditure not being relatable to the year under consideration cannot be allowed as revenue expenditure in the instant year. For the year under consideration, only 1/90th of the amount of Rs.77,98,042/- has been incurred wholly and exclusively for the purposes of the business for the year under consideration. Accordingly, we allow 1/90th of Rs.77,98,042/- as revenue expenditure in the year and balance be characterized as advance rent in the financial statement as on 31.03.2007. Accordingly, the Ground Nos. 3 & 4 of the appeal of the Revenue are partly allowed." [Emphasis is ours] 14.1. As is evident from the reasoning adopted by the Tribunal, the Tribunal while finding no difficulty with the stand of the appellant/assessee that, although, paying commuted and discounted one-time lease rent gave the appellant/assessee an enduring benefit, it allowed the appellant/assessee to run its business effectively. 14.2. Having said that the Tribunal, in our opinion, needlessly went on to direct that the amount incurred i.e. Rs. 77,98,042/- should be spread equally over the tenure of the lease. As correctly argued on Page No. 25 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited behalf of the appellant/assessee, this was not the stand of the revenue before the Tribunal. The stand of the revenue was that the one-time lease rent amount paid to GNIDA was capital expenditure and not that it needed to be deferred over the tenure of the lease. As has been correctly argued on behalf of the appellant/assessee, there is no concept of deferred revenue expenditure under the Act. An expenditure can be spread over a time span, only if it so provided, in the Act. Section 35DD of the Act, which we have discussed above, is one such example. The observations of the Supreme Court in Taparia Tools Ltd. vs. JCIT, (2015) 372 ITR 605 (SC), being relevant in this regard, are extracted for the sake of convenience. "14. The High Court has also observed that it was a case of deferred interest option. Here again, we do not agree with the High Court. It has been explained in various judgments that there is no concept of deferred revenue expenditure in the Act except under specified sections, i.e. where amortization is specifically provided, such as Section 35-D of the Act. (Emphasis is ours) 15. What is to be borne in mind is that the moment [the] second option was exercisedby the debenture holder to receive the payment upfront, liability of the assessee to make the payment in that very year, on exercising of this option, has arisen and this liability was to pay the interest @ Rs. 55 per debenture. In Bharat Earth Movers v. CIT [2000] 245 ITR 428/112 Taxman 61 (SC), this Court had categorically held that if a business liability has arisen in the accounting year, the deduction should be allowed even if such a liability may have to be quantified and discharged at a future date. Following passage from the aforesaid judgment is worth a quote: "The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the Page No. 26 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain." (Emphasis is ours) The present case is even on a stronger footing inasmuch as not only the liability had arisen in the assessment year in question, it was even quantified and discharged as well in that very accounting year.

16. Judgment in Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR802/91 Taxman 340 (SC) was cited by the learned counsel for the Revenue to justify the decision taken by the courts below. We find that the Court categorically held even in that case that the general principle is that ordinarily revenue expenditure incurred wholly and exclusively for the purpose of business is to be allowed in the year in which it is incurred. However, some exceptional cases can justify spreading the expenditure and claiming it over a period of ensuing years. It is important to note that in that judgment, it was the assessee who wanted spreading the expenditure over a period of time and had justified the same. It was a case of issuing debentures at discount; whereas the assessee had actually incurred the liability to pay the discount in the year of issue of debentures itself. The Court found that the assessee could still be allowed to spread the said expenditure over the entire period of five years, at the end of which the debentures were to be redeemed. By raising the money collected under the said debentures, the assessee could utilise the said amount and secure the benefit over number of years. This is discernible from the following passage in that judgment on which reliance was placed by the learned counsel for the Revenue herself: "15.. The Tribunal, however, held that since the entire liability to pay the discount had been incurred in the Page No. 27 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited accounting year in question, the assessee was entitled to deduct the entire amount of Rs.3,00,000 in that accounting year. This conclusion does not appear to be justified looking to the nature of the liability. It is true that the liability has been incurred in the accounting year. But the liability is a continuing liability which stretches over a period of 12 years. It is, therefore, a liability spread over a period of 12 years. Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Thus in the case of Hindustan Aluminium Corporation Ltd. vs. CIT, (1982) 30 CTR (Cal) 363: (1983) 144 ITR 474 (Cal) the Calcutta High Court upheld the claim of the assessee to spread out a lump sum payment to secure technical assistance and training over a number of years and allowed a proportionate deduction in the accounting year in question.

i. Wyeth Laboratories Limited ii. John Wyeth (India) Limited iii. Wyeth (India) Private Limited

S.No. Name Amount (in INR) 1. Lazard Credit Capital Limited 46,323/- amalgamation negotiations 2 Roger Perreira Press Co-coordinators 6,15,57/- 3. Counsel Fees- Others 3,16,667/- 4 Solicitor Fees 3,28,787/- 5. Meeting expenses 2,62,762/- Total 15,70,111/-

“Cases wherein legal and professional fees are allowable as revenue expenditure i. CIT vs Bombay Dyeing & Mfg. Co. Ltd: 219 ITR 521 (SC) ii. CIT Vs. Bush Boake Allen (India) Ltd. (135ITR 306) (Mad) iii. Madras Race Club Vs. CIT (151 ITR 675) (Mad) iv. Akme Electronics & Control (P) Ltd. (36 ITD 102) (Ahmedabad)

Page No. 34 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited related expenses. In the similar case, the Hon’ble Supreme Court held in the case of Bombay Dyeing & Mfg. Co. Ltd (supra) as under:

“1. These appeals are preferred against the judgment of the Bombay High Court rejecting an application under Section 256(2) of the Income Tax Act. The revenue had applied for referring the following two questions for the opinion of the High Court: "(i) Whether on the facts and in the circumstances of the case, the Tribunal professional charges paid by the assessee company to its Solicitors for effecting the amalgamation of Nawrosjee Wadia ginning & pressing company with it, was of revenue nature and should be allowed as a deduction in the computation of its total income? … The facts concerning the first question are the following: a company named Nawrosjee Wadia Ginning & Pressing Company was amalgamated with the assessee-company. In that connection an expenditure of Rs.10,350/- was incurred by the assessee company towards the professional charges paid to the firm of Solicitors. In the assessment proceedings the said amount was claimed as a revenue expenditure. The assessee's case was that Nawrosjee Wadia Ginning & Pressing Company was engaged in the same business as the assessee. In other words, the business of both the companies were "complimentary". The directors of both the companies thought that it would be advantageous if both the companies are amalgamated. Accordingly, a scheme of amalgamation was evolved. It was submitted that the legal expenses incurred in connection with the said amalgamation are in the nature of revenue expenditure. The Income Tax Officer did not agree nor did the Appellate Assistant Commissioner. On further appeal, the Tribunal upheld the assessee's contention. It disagreed with the Revenue's contention that inasmuch as the said amalgamation resulted in acquisition of the other company by the assessee, which acquisition was in the nature of acquisition of a capital asset, the legal expenses incurred in that behalf partake the nature of capital expenditure. The Tribunal was of the opinion that "as both the companies were carrying on complimentary business and their amalgamation was necessary for the smooth and efficient conduct of the business", it is an expenditure laid out wholly and exclusively for the purpose of the business of the assessee. In view of the said finding and also in view of the decision of this Court in Bombay Steam Navigation Company Private Limited v. Page No. 35 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited Commissioner of Income-Tax, Bombay (56 I.T.R. 52), we are of the opinion that the Tribunal was right in its conclusion. The decision in Bombay Steam Navigation also pertains to amalgamation of two shipping companies. The assessee-company took over the assets of the other company and part of the price was treated as a loan secured by a promissory note and hypothecation of all movable properties of the assessee company. The loan was to carry simple interest at 6 per cent. The question that arose in the said case was whether the interest paid upon the said loan was deductible as revenue expenditure. It was held by this Court that it was an expenditure deductible under Section 10(2)(xv) of the Income Tax Act. It was held that transaction of acquisition of the asset was closely related to the commencement and carrying on of the assessee's business and, therefore, interest paid on the unpaid balance of the consideration for the assets acquired had, in the normal course, to be regarded as expenditure for the purpose of the business which was carried on in the accounting periods. In the course of the judgment this Court referred to the earlier decision of this Court in State of Madras v. G.J.Coelho (53 I.T.R. 186) wherein it was held that the interest on the amount borrowed for acquiring a capital asset is deductible as revenue expenditure. It is true, that in the said decision this Court re-affirmed the well established principle that any expenditure laid out for acquiring an asset of a permanent character would be capital expenditure, held at the same time that inasmuch as the acquisition of the other company was in the course of carrying on of the assessee's business, the interest paid thereon was deductible under Section 10(2)(xv) of the Act. In this case too, the Tribunal has recorded a finding that the acquisition of Nawrosjee Wadia Ginning & Pressing Company was necessary for the smooth and efficient conduct of the assessee's business. Following the ratio of the aforementioned decisions of the Court, we hold that the expenditure incurred towards professional charges of the Solicitors firm for the services rendered in connection with the said amalgamation was in the course of carrying on of the assessee's business and, therefore, deductible as a revenue expenditure. In this view of the matter, it is not necessary for us to deal with the other decisions cited before us on this question.”

Page No. 36 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited 38. With regard to Ground No. 3 which is in respect of Reduction of book written down value ("WDV") (instead of WDV as per the Income-tax Act) of the assets transferred in the scheme of demerger from the opening block of asset for the purposes of computing depreciation allowable to the assessee.

Page No. 38 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited owned subsidiary of the Assessee and accordingly for the purpose of computing depreciation, written down value of assets transferred was reduced from the block of assets as per Explanation 2 to Section 43(6)(c) of the Act.

Page No. 39 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited "Explanation 2A-Where in any previous year, any asset forming part of a block of assets is transferred by a demerged company to the resulting company, then, notwithstanding anything contained in clause (1), the written down value of the block of assets of the demerged company for the immediately preceding previous year shall be reduced by the book value of the assets transferred to the resulting company pursuant to the demerger."

"Explanation 2A Where in any previous year, any asset forming part of a block of assets is transferred by a demerged company to the resulting company, then, notwithstanding anything contained in clause (1), the written down value of the block of assets of the demerged company for the immediately preceding previous year shall be reduced by the [written down value of the assets]" transferred to the resulting company pursuant to the demerger ['substituted for "book value of assets" by the Finance Act, 2000, w.e.f. 1-April-2000]"

Page No. 41 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited written down values from its block of assets, thus making the transaction tax neutral.

“Cases wherein it is held that only tax WDV of transferred assets of demerged company would constitute WDV of the block of assets of resulting company and the amendment brought in Explanation 2B to section 43(6) is curative and thus, retroactive. i. Godrej Industries Limited vs ACIT: [2008] 26 SOT 445 (Mumbai) ii. DCIT VS Nirma Limited: 1599/Ahd/2013 (Ahmedabad) (Ahmedabad) Cases wherein it is held that if amendment if curative in nature then it has a retrospective effect i. A.Y. Garments International (P) Ltd.vs DCIT: [2020] 117 taxmann.com 665 (Karnataka High Court) ii. CIT v. Alom Extrusions Ltd., [2009] 185 Taxman 416 (SC) iii. CIT v. Podar Cement (P) Ltd. [1997] 92 Taxman 541 (SC)

Original cost of the assets Rs. 1000 Depreciation already claimed Rs. 200 Net Block Rs. 800 Depreciation before transfer Rs. 100 WDV as on date of demerger Rs. 700

“The CIT(A) erred in holding that while computing deduction under section 80HHC of the Act, the AO was justified in a) Treating commission paid to Geoffrey Manners & Co. Ltd. [GM] as part of turnover. b) Including sale of scrap and unusable scrap material in the turnover of the business c) Reducing profits of business by 90% of - The amount received as manufacturing charges; amount received miscellaneous receipts as The CIT(A) should have held that scrap sales and sale of unusable raw material cannot form part of total turnover”

Page No. 46

ITA NO. 1154/MUM/2002 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited “3. The second ground of the assessee relates to computation of deduction u/s. 80HHC. The dispute is regarding including the following three items in total turnover for the purpose of calculating deduction u/s 80HHC a) Sale of scrap b) Sales tax c) Commission paid to Geoffrey Manners & Co. Ltd Regarding sale of scrap and sales tax, it was contended by the learned AR of the assessee that both these issues are fully covered in favour of the assessee by the Tribunal order in assessee's own case for AY 1991 92 as per dated 16.4.2002 In this Tribunal order, reliance has been placed on the Judgement of the Hon ble Jurisdictional High Court in the case of CIT Vs. KantilalChhotalal reported in 246 ITR 439 and it was held that the scrap sales cannot be included in the total turnover and regarding sales tax, the Tribunal has followed the Judgement of the Hon'ble Jurisdictional High Court in the case of CIT Vs. Sudarshan Chemicals Industries Ltd. & Ors., 245 ITR 769 and it was held that sales tax collected by the assessee cannot form part of the total turnover for the purposes of section 80HHC. The learned DR also agreed and accordingly, we hold that the sale of scrap and sales tax collected by the assessee cannot form part of the total turnover for the purposes of section 80HHC 4. Regarding payment of commission to Geoffrey Manners & Co. Ltd., the Ld. AR of the assessee contended that it is not a case of payment of commission of the income of the assessee but is a case of diversion of the income the source itself. Our attention was drawn to the agreement dated 01. 05.63 between the assessee and Geoffrey Manners & Co distributor. It was contended that this agreement is a principal to principal agreement and as per clause No. 9 of the agreements appearing on page No. 4, only the net amount after deducting commission at the rate of 10% of net value of sale was receivable by the assessee from the distributor. Our attention was also drawn to clause No. 7 & 8 of the agreement and it was contended that the sale were to be affected by the distributor, payment was to Page No. 47 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited be collected by the distributor and rights of the company and obligation of the distributor are guided by article 9 of this agreement, as per which the net value of sales after deducting commission due thereon to the distributor was to be credited to the account of the assessee. The learned AR contended that although the agreement was not drafted perfectly as the same was drafted long back in the year 1963 but the sum and substance of the agreement is that the assessee company has a claim only on the 90% of the net sale proceeds and the balance 10% is the income of the distributor and not the income of the assessee at any point of time. Reliance was placed by the learned AR on the following two Judgments of the Hon'ble Jurisdictional High Court:- a) CIT Vs. Sudarshan Chemicals Industries Ltd. & Ors., 245 ITR 769 b) CIT VS. Kantilal Chhotalal, 246 ITR 439 It was held in the Judgement of the Sudarshan Chemicals Industries Ltd. (supra) that "the turnover should be restricted to such receipts which have an element of profit in it It was held in the case of KantilalChhotalal (supra) that the "total turnover cannot include reassortment charges, labour charges, commission, interest, rent or receipts of similar nature. The learned AR contended that since there is no element of profit involved in the amount of 10% retained by the distributor, the same cannot be included in the turnover of the assessee. The learned AR also contended that even such items which are generally construed as part of turnover like freight and insurance attributable to the transport of the goods are specifically excluded from the definition of export turnover and total turnover as per Explanation (b) and (ba) to section 80HHC. Our attention was drawn to the profit and loss account of the assessee company as per which the sales is shown at Rs. 3,962.97 lakhs, breakup of which is given in Schedule-L and detail thereof is also furnished, which includes sale to Geoffrey Manners & Co. Ltd., at Rs. 2319.39 STAY OF LAB A copy of the certificate from Geoffrey Manners & Co. Ltd. is also submitted as per which, the sales affected by the Geoffrey Manners & Co. td. on account of the assessee as reported to the Commissioner of Sales Tax of Maharashtra, Mumbai is the same at Rs. 2,171.89 lakhs plus excise duty Rs. 1,474.50 lakhs totaling to Rs 2,319.39 Page No. 48 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited lakhs. It was Coned that the total sale amount as per distributor on which sales was paid by them and reported to Commissioner of Sales Tax has been accounted for by the assessee. In the income assessment also, no addition has been made on account of lower sales accounted for by the assessee and therefore there is no justification in adding the amount of said commission of distributor in the total turnover of the assessee only for the purpose of calculating the deduction allowable u/s. 80HHC.

5. As against this, the learned DR of the revenue contended that as per normal accounting principal, turnover also includes commission to distributor and therefore the Assessing Officer has rightly included the amount of commission in total turnover. It was also contended that the method of accounting as agreed to by both the parties cannot change the character of the receipts. Our attention was drawn to article No. 11 on page No. 5 of the agreement as per which, it is said that "the company agrees to pay the distributor a commission equal to 10% on the net value of sales..........” It was contended by the learned DR that the very language of this article shows that the assessee has the claim an entire sales value out of which, it agrees to pay the distributor a commission equal to 10% and therefore it has to be included in the total turnover of the assessee. Our attention was also drawn to para 6.5 to 6.7 of the order of the learned CIT(A) and reliance was placed by the learned DR on the order of the learned CIT(A) and the same was strongly supported.

8. The last ground of this appeal relates to treating cost of steam supplied as part of turnover for computing deduction u/s. 80HHC. It was contended by the learned AR of the assessee that this issue was not decided by the learned CIT(A) and therefore it should be set aside to the file of learned CIT(A) for a decision thereon. The learned DR also agreed and accordingly, we set aside this issue and restore it to the file of learned CIT(A) with a direction to decide this issue on merit after providing reasonable opportunity of being heard to the assessee.

Page No. 51 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited amounts received as manufacturing charges and miscellaneous receipts as these are not in the nature of brokerage, commission, interest, rent or charges of similar nature. Hence 90% of the receipt cannot be deducted in computing the deduction under section 80HHC of the Act

“Case laws wherein it is held that reducing 90% of the service charges, manufacturing charges and miscellaneous receipts from the profits of the business for calculating the deduction u/s 80HHC of the Act is not correct as the said amounts do not fall underthe purview of clause (baa) of the Explanation to section 80HHC (4A) of the Act Order passed by the CIT(A) in case of one of the amalgamating companies i.e., John Wyeth (India) Limited for AY 1995-96 (refer para 9 of the order at pages 147 to 150 ofthe case law compilation. Page No. 52 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited CIT vs Bangalore Clothing Co.: [2003] 260ITR 371 (Bom) CIT vs United India Shoe Corporation (P.) Ltd.: (2008) 302 ITR 326 (Mad) Aurobindo Pharma Ltd. vs CIT: [2015] 370 ITR 216 (AP).”

“1.1 It is respectfully submitted that the amount received as manufacturing charges and amount received as miscellaneous receipts form part of business income and hence, should form part of the profits of the business for calculating the deduction under section 80HHC of the Act. 1.2 The Assessing Officer ("AO") reduced 90% of the amount received as manufacturing charges of INR 1,68,79,626 and miscellaneous receipts of INR 1,14,43,660 from the profits of the Appellant for calculating the deduction under section 80HHC of the Act. 1.3 At this juncture, it is pertinent to Deduction in respect of profits retained for export business. 80HHC,. (1)…….. Explanation-For the purposes of this section,- (baa) "profits of the business means the profits of the business as computed under the head "Profits and gains of business or profession" as reduced by- (1) ninety per cent of any sum referred to in clauses (a), (b), (c), (d) and (e) of section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and (2) ………

Page No. 53 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited 1.4 In this regard, it is respectfully submitted that as per the provisions of clause (baa) of the Explanation to section 80HHC (4A) of the Act, 90% of sums referred to in clauses (a), (b) and (c) of section 28 of the Act or of any receipts by way of brokerage, commission, interest, rent, charges or any otherreceipt of similar nature are required to be deducted to arrive at the "profits of the business" forcomputing the deduction u/s 80HHC of the Act. 1.5 The relevant provisions of section 28 of the Act read as under Profits and gains of business or profession 28. The following income shall be chargeable to income- tax under the head "Profits and gains of business or profession"- ……… (iiia) profits on sale of a licence granted under the Imports (Control) Order, 1955, made under the Imports and Exports (Control) Act, 1947 (18 of 1947) (iiib) cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India. (iiic) any duty of customs or excise re-paid or re-payable as drawback to any person againstexports under the Customs and Central Excise Duties Drawback Rules, 1971: (iiid) any profit on the transfer of the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act 1992 (22 of 1992) (iiie) any profit on the transfer of the Duty Free Replenishment Certificate, being the Duty Remission Scheme under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992)

Page No. 54 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited (emphasis supplied) 1.6 The Appellant, during the subject assessment year, is engaged in manufacturing, sale and trading of pharmaceuticals, animal health and nutritional products. The amount received as manufacturing charges and miscellaneous receipts, being directly related to the business operations carried out by the Appellant, form part of business income. 1.7 In this regard, it is respectfully submitted that the above provisions do not apply to subject amounts received as manufacturing charges and miscellaneous receipts as these are not in the nature of brokerage, commission, interest, rent or charges of similar nature. Hence, 90% of the receipt cannotbe deducted in computing the deduction under section 80HHC of the Act 1.8 Reliance in this regard is placed on the decision of the Hon'ble Bombay High Court in the case of CIT vs Bangalore Clothing Co.: [2003] 260 ITR 371 (Bom) laid down important principles for ascertaining when a particular receipt has to be “14. …. Under that Explanation profits of the business, for the purposes of Section 80HHC, does not include receipts which do not have an element of turnover like rent, commission, interest, etc However, as some expenditure might be incurred in earning such incomes an ad hoc 10 percent deduction from such incomes is provided to account for those expenses. However, learned counsel for the Department cannot invoke Explanation (baa) in every matter involving receipts by way of brokerage, commission, interest, rent, labour charges, etc. These items of income have got to be seen in the context of the business activity of the assessee. To give an example, in the case of a manufacturing company which undertakes exports, receipt of interest or commission may not be operational income because they do not have the element of turnover and consequently Explanation (baa) will apply However, that will not be the case the assessee is carrying on the business of financing becaus in the case of financing, the interest income which accrues to the assessee will have the element

Page No. 55 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited of turnover and in such a case, receipts like interest, will not attract Explanation (bas). The point which we would like to make, therefore, is that in every matter the Assessing Officer will have to ascertain whether receipt of interest, commission, labour charges, etc., were a part of operational income. (emphasis supplied) 1.9 It has been held similarly by Courts in the following cases: i. CIT vs United India Shoe Corporation (P) Ltd. (2008) 302 ITR 326 (Mad) ii. Aurobindo Pharma Ltd vs CIT (2015) 370 ITR 216 (AP) 1.10 It is pertinent to highlight that the identical issue came up for consideration in the case of one of the amalgamating companies (ie, John Wyeth (India) Limited) into the Appellant for assessment year 1995-96. The CIT(A) decided the subject issue in favour by holding that the AO was not correct in reducing 90% of manufacturing charges and miscellaneous receipts from the profits of the business for calculating the deduction u/s 80HHC of the Act (refer para 9 of the order) 1.11 It is further submitted that the appeals filed by the Appellant for assessment years 1997-98, 1999-00 to 2004-05 were settled by the Appellant under the VSV Act. In this regard, it is submitted that Explanation to section 5 of the VSV Act clarifies that making a declaration under the VSV Act shall not amount to conceding the tax position and it shall not be lawful for the income-tax authority or the declarant being a party in appeal to contend that the declarant has acquiesced in the decision on the disputed issue by settling the dispute 1.12 in view of the above submissions, it is submitted that manufacturing charges and miscellaneous receipts should not be reduced for the purposes of computing deduction under section BOHHC of the Act”

Page No. 58 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited 72. Reliance in this regard is placed on the decision of the Hon'ble Bombay High Court in the case of CIT(LTU) vs Reliance Industries Ltd.: [2017] 86 taxmann.com 24 (Bombay) wherein it is held that only expenditure incurred for earning dividend income ought to be taken into consideration and there is no question of making an estimation or assumption while computing deduction u/s 80M of the Act.

Cases wherein it is held that only expenditure solely and exclusively incurred for earning dividend income has to be reduced for computation of deduction u/s 80M; there is no justification to reduce dividend income entitled to deduction u/s 80M by estimating expenditure i. CIT vs Reliance Industries Ltd: [2017] 86 taxmann.com 24 (Bom) ii. CIT vs Modern Terry Towers Ltd [2013] 357 ITR 750 (Bom) iii. United Phosphorus Ltd vs ACIT: [2015] 230 Taxman 596 (Guj) Cases wherein it has been held that disallowance of expenditure cannot be made on adhoc basis i. J.J. Enterprises vs CIT: [2002] ITR 216 (SC)

Page No. 59 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited ii. Roger Enterprises Pvt. Ltd. vs IAC: [1995] 52 TTJ 198 (Del) iii. CIT vs Aero Club: [2011] 336 ITR 400 (Del) iv. Mahendra Oil Cake Industries Pvt. Ltd. Vs ACIT (1996) 55 TTJ 711 (Ahd) v. Vijay C. Kamdar vs ITO: [2009] 118 ITD 577 (Mumbai Trib.) vi. Ador Technologies Ltd. Vs DCIT (2007) 112 TTJ 24 (Pune)

Page No. 60 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited ITA.No. 3508/Mum/2010 (A.Y. 2004-05) - (Revenue Appeal)

2. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in directing the A.O to include scrap sales in the business profit for the purpose of deduction u/s. 80HHC.

3. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in directing the A.O to include scrap sales income to business profit for the purpose of deduction u/s. 80-IB.

5. The appellant prays that the order of the Learned CIT(A) on the above grounds be set aside and that of the A.O. is restored. 6 The appellant craves leave to amend or alter any ground or add a new ground which may be necessary

"For the purposes of sub-section (1) – (a) Where the export out of India of goods or merchandise manufactured or processed bears to the profits of the business, the Page No. 63 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited same proportion as the export turnover by the assessee, the in respect of such by the assessee; (b) …………………….,. (c) …………………….., The term "profits of the business" used in the above section is specifically defined in Explanation (baa) which is reproduced as under:- "baa) "profits of the business" means the profits of the business as computed under the head "Profits and gains of business or profession" as reduced by-- (1) ninety per cent of any sum referred to in clauses (ilia), (b), (c), (iiid) and (iiie) of section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits and (2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India.”

Page No. 66 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited 90. In support of the above contentions, Ld. AR of the assessee relied on the following case laws: -

“Cases wherein it is held that the MODVAT credit is directly derived from the eligible business: - Madras Motors Ltd. (122 Taxmann 516) (Madras High Court) Cases where in the case of sterling Foods was distinguished: - Madras Motors Ltd. (122 Taxmann 516) (Madras High Court) - ACIT vs Galium Equipment (P.) Ltd.: (2001) 79 ITD 41 (Delhi)

Page No. 69 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited 97. He further submitted that issue pertaining to deduction under section 80IB eligible on receipt from scrap generated during manufacturing activity is now settled by various judicial precedents. Reliance in this regard is placed on the decision recently passed by the Hon'ble Calcutta High Court in the case of PCIT v. Berger Paints India Ltd.: [2022] 137 taxmann.com 312 wherein it is held that the issue concerning the claim for deduction under section 80IB on the sale of scrap is no longer res integra and there are several decisions which are in favour of the assessee and accordingly, the Assessee was granted relief.

“Cases wherein it is held that sale of scraps is eligible for deduction under section 80IB of the Act:- a. PCIT vs Berger Paints India Limited : (2022) 137 taxmann.com 312 (Calcutta) dated 02.02.2022. b. CIT vs Sadhu Forging Limited : (2011) 336 ITR 444 (Del) c. CIT vs Micro Inks Limited : TA No. 15/2011 (Guj) d. PCIT vs Hamilton Houseware Private Limited: TA No. 733/2017 (Guj) e. CIT vs JikarASaiyed: (2014) 221 Taxman 451 (Guj)

Page No. 71 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited formulations. The bulk drug viz Prednisolone used in the manufacture of Wysolone was either imported or manufactured indigenously.

Page No. 72 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited Period for which Amount of Page demand was Date of payment payment reference no. raised (in INR) April 2003 to June July 23, 2004 2,50,00,000 Refer page no. 2003 131 and 189 of July 2003 to March August 19,2004 52,98,300 the paper book 2004 Total 3,02,98,300

Page No. 74 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited 109. Aggrieved revenue is in appeal before us. Ld.DR relied on the order of the Assessing Officer and prayed that the order of the Ld.CIT(A) be set-aside.

Page No. 75 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited That it is settled that the liability under the DPCO is a statutory liability. That if the liability has accrued in the previous year, the Assessee would be entitled to deduction in the year of accrual, notwithstanding that the Assessee has not paid his demand or has disputed the demand.

Page No. 76 (A.Y: 1998-99) (A.Y: 2004-05) M/s. Wyeth Limited rates are rationalized, it will have only revenue neutral effect. Therefore, we are inclined to accept the findings of Ld CIT(A) and accordingly, the ground raised by the revenue is dismissed.

Order pronounced in the open court on 09th June, 2023