ACIT 7(3), MUMBAI vs. M/S. WYETH LEDERLE LTD., MUMBAI
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Income Tax Appellate Tribunal, “H” BENCH, MUMBAI
Before: SHRI ABY T. VARKEY, JM & SHRI AMARJIT SINGH, AM
PER ABY T. VARKEY, JM: This is an appeal preferred by the revenue and the cross objection (CO) preferred by the assessee against the order of the Ld. CIT(A), Mumbai dated 22.03.2005 for the AY. 2000-01. 2. The ground no. 1 of the revenue and only ground raised by the assessee in the CO are dealt together. The ground is against the action of Ld. CIT(A) directing the AO to delete the addition of Rs.21,54,713/- (20% of the expenditure of Rs.1,07,73,564/-).
2 A.Y. 2000-01 M/s. Wyeth Lederle Ltd.
Brief facts on this issue are that during the year under consideration, assessee had claimed to have incurred expenditure amounting to Rs.1,95,87,451/- on account of advertisement and claimed it as expenditure. According to AO, out of the advertisement expenditure claimed to the tune of Rs.1,95,87,451/- , for the following (advertisement material/publicity material) there could be design/intangible right items, which is given in the chart below: - S. Particular Amount (in INR) No. 1 Advertisement of magazine 10,17,096 and newspaper 2 Circular and booklets 83,20,073 3 Audio Visual and other media 7,73,280 expenses 4 Display material and banners 6,63,115 Total 1,07,73,564
The AO, noted that assessee has not provided details regarding the amount spent on making and designing the content of advertisement material. The AO agreed with the assessee that expenses incurred on printing the advertisement, its distribution and display are Revenue in nature, but according to AO, the content of advertisement material become the proprietary material of the assessee and the copy- right of the same remains with the assessee. And according to AO, the details of payment of advertisement has not been furnished to him. Therefore, he estimated the amount spent on designing the content of the advertisements and disallowed it. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who observed that the designs and format of advertisement have been made on themes and ideas which are fast changing, thus, and therefore the same design cannot be used
3 A.Y. 2000-01 M/s. Wyeth Lederle Ltd.
We have heard both the parties and perused the records. It has been brought to our notice that similar issue arose in assessee’s own case for earlier assessment year i.e. 1991-92, 1996-97 and subsequent assessment year 2003-04 where the issue was decided in the favour of the assessee by Ld. CIT(A). And no further appeal was filed by department against the Ld. CIT(A)’s order in respect of this issue for assessment year 1991-92. And it has been brought to our notice that recently Tribunal in ITA. No. 2912/Mum/2005, by order dated 28.11.2022 in assessee’s own case has decided this issue in favour of the assessee. Be that as it may, we note that the assessee had claimed advertisement expenses to the tune of Rs.1,95,87,451/-. Thereafter, the AO had noted that the assessee might have spent on designing which content of it would be proprietary material and copy right of the same would be remaining with the assessee. According to AO, since the assessee has not given the details of expenditure on advertisement, he estimated that expenses of 20% [which might have been incurred for designing the content of the advertisement]. And therefore, made ad- hoc disallowance of 20% of expenditure to the tune of Rs.21,54,713/-. This action of the AO cannot be sustained for the simple reason that 4 A.Y. 2000-01 M/s. Wyeth Lederle Ltd. ad- hoc disallowance amounts to arbitrariness and cannot be allowed to sustain. Therefore, we concur with the action of the Ld. CIT(A) to delete the ad-hoc disallowance of 20% of expenses to the turn of Rs. 21,54,713/-. Therefore, we uphold the action of the Ld. CIT(A) and dismiss this ground of appeal of the revenue on the aforesaid reason as well as dismiss the CO of the assessee since it has become infructuous.
Ground no. 2 of the revenue is against the action of the Ld. CIT(A) deleting the disallowance of expenditure of Rs.1,38,15,082/- incurred by the assessee under Voluntary Retirement Scheme (VRS).
Brief facts of this issue is that during the relevant assessment year, the assessee incurred a liability of Rs.1,38,15,082/- towards VRS payment made to its retiring employees and has accordingly claimed the same as revenue expenses and pointed out to AO that Chief Commissioner of Income Tax, Mumbai had duly approved the scheme for the purpose of section 10(10C) of the Act read with Rule 2BA of the Income Tax Rules, 1962 (hereinafter “the Rules”). However, the AO disallowed the entire sum of Rs.1,38,15,082/- considering it to be of capital nature. The Ld. CIT(A) deleted the disallowance made by the AO and held that VRS compensation paid to the employees in pursuance of the scheme approved by the Chief Commissioner of Income Tax was neither for acquiring any asset nor was it in the nature of capital expenditure, rather it was incurred to reduce the cost to ensure smooth conduct of the business in an efficient and profitable manner and that the assessee did not acquire any income yielding asset by incurring this expenditure.
5 A.Y. 2000-01 M/s. Wyeth Lederle Ltd.
Aggrieved, the revenue is before us.
We have heard both the parties and perused the records. It has been brought to our notice that in assessee’s own case, this Tribunal for AY 1984-85 and AY 1985-86 held in favour of the assessee on this issue. And we note that the Ld. CIT(A) for given relief to the assessee by relying on the decision of the Hon’ble Bombay High Court in the case of CIT Vs. Bhor Industries Ltd. (264 ITR 180) wherein the Hon’ble High Court held that expenses relating to Voluntary Retirement Scheme is revenue expenditure and must be allowed in its entirety in the year in which incurred. We also note this Tribunal in assessee’s own case for AY. 1999-2000 (supra) has upheld the action of the Ld. CIT(A) on this issue. Therefore, respectfully following the order of this Tribunal and also taking into consideration of Hon’ble Bombay High Court decision in case of Bhor Industries Ltd. (supra), we uphold the action of the Ld. CIT(A) and dismiss this ground of appeal of the revenue.
Ground no. 3 (a) & (b) of the revenue are against the action of the Ld. CIT(A) directing the AO to exclude excise duty from the total turn over while computing the deduction u/s 80HHC of the Act by relying on the decision of the Hon’ble High Court in CIT Vs. Sudarshan Chemicals Ltd. (2000) 245 ITR 769 (Bom).
Brief facts, the assessee while claiming the deduction of u/s 80HHC of the Act excluded the excise duty and sales tax from the total turn-over for the relevant assessment year for the purpose of computing deduction u/s 80HHC of the Act. However according to 6 A.Y. 2000-01 M/s. Wyeth Lederle Ltd. AO as per the section 145A of the Act, inserted from April 1, 1999, the purchases and sales are to include Sales tax and Excise Duty. And further explanation (ba) to Section 80HHC(4B) of the Act does not define turnover. According to AO, after the insertion of section 145A of the Act, sales have to include sales tax and excise duty and since these have not been specifically excluded in explanation (ba) to section 80HHC(4B) of the Act, the total turnover has to include sales tax and Excise duty. Aggrieved the assessee, preferred on appeal before the Ld. CIT(A) who took note of decision of the Hon’ble Bombay High Court in the case of CIT Vs. Sundarshan Chemicals & Industries Ltd (245 ITR 796)(Bom) directed the AO to exclude excise duty and sales tax from the total turnover while computing deduction u/s 80HHC of the Act. Aggrieved the revenue is before us.
We have heard both the parties and perused the record. We note that the AO’s action to include the excise duty and sales tax from the total turnover while computing u/s 80HHC of the Act was reversed by the Ld. CIT(A) by relying on the decision of the Hon’ble juri ictional ITR 796) wherein the Hon’ble High Court has held that Section 80HHC is a separate code by itself, and hence, the general definition of the word “turnover” or the case law dealing with the said definition under the Sales Tax Act which is a State levy, cannot be imported into Section 80HHC of the Act. And further the the Hon’ble High Court observed that the emphasis must be given to the words “profits derived from the export”, therefore, weightage must be given to such profits.
7 A.Y. 2000-01 M/s. Wyeth Lederle Ltd. And accordingly, such profits cannot be reduced artificially by including statutory levies in the denominator namely, total turnover. Therefore, the Ld. CIT(A) held that the turnover should be restricted to such receipts which have an element of profit in it. And accordingly, it is only the actual sale price which is relevant. And anything charged by the assessee by way of excise duty and sales tax cannot be taken into account as they do not have any element of profit. And the Ld. CIT(A) noted that even, according to accounting principles, such levies do not form part of the profit and loss account. And that they are shown as liability in the balance-sheet. In the circumstances, according to him the Sale tax and Excise duty cannot be included in the total turnover. We find in the light of the Hon’ble High Court decisions in the case of Sudarshan Chemical India Ltd (supra), the action of the AO cannot be countenenced because section 80HHC of the Act is a complete code of itself as held by the Hon’ble High Court (supra) and we completely concur with the reason given by Ld CIT(A) to allow the ground of appeal on this issue by rightly relying on the decision in CIT Vs. Sudarshan Chemical India Ltd (supra). Therefore, we do not find any infirmity in the view taken by the Ld. CIT(A) and the impugned action of Ld CIT(A) directing the AO to exclude the excise duty and sales tax from the ‘ total turnover” while computing deduction u/s 80HHC of the Act is confirmed. Ground no. 3 (a) of appeal of the revenue is dismissed.
8 A.Y. 2000-01 M/s. Wyeth Lederle Ltd.
Ground no. 3(b) is against the action of the Ld. CIT(A) for not following the ratio of the decision of the Gujarat bench of ITAT in the case of Gujrat Alkali Chemicals reported in 77 TTJ 304 (Ahd). We note that the Ld. CIT(A)’s impugned decision is based on the ratio/binding decision of the Hon’ble juri ictional High Court, and therefore, the Ld. CIT(A) has rightly decided the issue as per the binding precedent/decision of the Hon’ble juri iction High Court in the case of CIT Vs. Sudharshan Chemical India Ltd. (245 ITR 769), therefore, this ground no. 3(b) also stand dismissed.
Ground no. 4 is against the action of the Ld. CIT(A) directing the AO to grant benefit of provision of section 80HHC(3) of the Act in respect of Advance Import Licence of Rs.1,30,25,976/- by holding that it is covered under clause (iiib) of section 28 of the Act.
The AO excluded a sum of Rs 1,30,25,976/- being the income in the nature of custom duty benefit accrued to the assessee on account of Advance Import Licenses, from the ‘profit of the business’ eligible for deduction u/s 80HHC of the Act on the premise that these receipts are not derived from the business of exports of the assessee. In doing so, the AO relied on the decision of the Hon’ble Supreme Court in the case of Sterling Foods Ltd. (1999) 237 ITR 579 (SC).
Aggrieved, the assessee filed an appeal before the Ld. CIT(A) who has followed the decision of his predecessors for earlier years and directed the AO to grant benefit to the assessee. Aggrieved, the revenue is before us.
9 A.Y. 2000-01 M/s. Wyeth Lederle Ltd.
We note that this issue is no longer res-integra. Similar issue came up for under consideration before this Tribunal for AY. 1999- 2000 & AY. 2003-04 ITA. No. 2912/Mum/2005 & 2285/Mum/2007 dated 28.11.2022 and the Tribunal in assessee’s own case for AY 1995-96 & AY 1996-97 by order dated 22 Feb 2007, has considered this issue after taking note of AO’s reliance on the Hon’ble Supreme Court decision in CIT vs. Sterling Foods (supra) and held as under wherein the Tribunal has noted as under: -
In the appeals filed by the revenue, following common grievances and raised for both the years “1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the Assessing Officer to gram benefit of provisions of section 80HHC in respect of advance import license of Rs 31,10,980 by holding wrongly that it is covered under clause (iiib) of section 28. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing the appeal of the assessee on the point of cost of steam recorded from Cyanamid Agro Ltd. relying on the decision of juri ictional High Court in the case of Bangalore Clothing Co. (260 ITR 371) though the Department has not accepted the decision"
We will first take up the second ground of appeal. The ground of appeal itself states that the issue is covered by the judgment of Hon'ble Bombay High Court in favour of the assessee. We need not go farther. It is trite that merely because a decision of the Hon'ble Court or Tribunal is challenged in the higher forum, it does not lose its binding character on the lower tiers of judicial hierarchy. Accordingly, the views expressed by the Hon’ble Bombay High Court ere binding on us and we must respectfully follow the same The conclusions arrived at by the CIT(A) being in conformity with these views are approved and 10 A.Y. 2000-01 M/s. Wyeth Lederle Ltd. confirmed. We decline to interfere so far as this grievance of the revenue in concerned.
As regards the first ground of appeal, we have to examine the same in the light of the following grievances raised by the assessee in the cross objections:
“2. The CIT(A) erred in holding that in determining the deduction under section 80HHC of the Act, the Assessing Officer was justified in reducing the profits of the business, by a sum of Rs. 31,10,980 being export benefits received by your respondent. Your respondent submit that the export benefits received by them cannot be reduced from the profits of the business. Your respondent pray that the Assessing Officer be directed to compute the deduction under section 80HHC of the Act without reducing van of Rs. 31,10,980 from the profits of the business.
The CIT(A) erred in holding that, the Assessing Officer was justified in reducing business profits by 90% of the sum of Rs. 5,07,239 recovered for cost of steam supplied. Your respondent submit that the CIT(A) ought to have held that, the sand receipt do not fall within the ambit of clause (baa) of the Explanation to section 80HHC of the Act. Your respondent pray that the Assessing Officer be directed to reduce mess profits by 90% of the above receipt in computing deduction under section 80HHC of the Act" This grievance in the appeals is this interlinked with the issue raised the cross objection. We therefore, take up all these issues together
To appreciate the issue requiring our fact, it is necessary to set out some relevant material fact first. The assessee is an exporter. The assessee mote exports to the tune of Rs.
11 A.Y. 2000-01 M/s. Wyeth Lederle Ltd. 4,40,62,657 for the assessment year 1995-96 and Rs 11,72,11,147 for the assessment year 1996-97. In the relevant previous year, the assessee has obtained and used some advance licenses. The Assessing Officer was of the view that the value of these advance licenses, which was reflected by the difference between in value of duty free imports of the imports -- the market value of such imports, was in the nature of an income under section 28(iv) of the Act, and hence includible in assessee's income. Even as the Assessing Officer noted that all the advance licenses have been actually utilized by the assessee for imports, he quantified the value of these licenses at Rs. 1,09,97,290 for the assessment year 1996-97 and at Rs. 30,09,980 for the assessment year 1997-98. The valuation of benefit was done on the basis of information supplied by the assessee and by taking the duty which the assessee would have paid on the imports under the advance license, but for the concession of duty free import available by the virtue of such advance licenses. The Assessing Officer held that these imports grant a benefit to the assessee, and that in terms of the provisions of section 28(iv) of the Act, irrespective of whether or not such benefit is convertible in money, "the benefit in terms of exemption from payment of duty accrued to the assessee as soon as it received the license to import duty free". The Assessing Officer also observed that, in accordance with the mercantile method of accounting, the assessee should have reflected this benefit in the profits and loss account by disclosing the amount of duty exempted as a credit item therein, and that "the assessee has indirectly accounted for the same by accounting for purchases at net invoice value. In the background of this analysis by the 12 A.Y. 2000-01 M/s. Wyeth Lederle Ltd. Assessing Officer, while he did not make separate addition for advance license benefits, as the same were accounted for by booking the purchases at net invoices values, the Assessing Officer did hold that the benefit on account of advance license was not derived from the business of exports, but is on account of export promotion policy of the Government of India. Relying upon the judgment of Hon'ble Supreme Court, in the case of CIT v. Sterling Foods Ltd (1999) 237 ITR 529, the Assessing Officer declined exemption under section 80HHC in respect of the same. Aggrieved by the order of the Assessing Officer, assessee carried the matter in appeal before the CIT(A) but without complete success. The CIT(A) held that the case laws on DEPB (Duty Exemption Pass Book Scheme) will equally apply on the cases of issue regarding taxability of advance license benefits, and, therefore, it is to be considered as an export incentive under section 28(b) of the Act. Learned CIT(A) did take note of the fact that while DEPB license is transferable. Advance licence is not transferable. Yet, according to him, it was not a material difference. He, however, held that the proviso to section 80HHC(3) will apply and, accordingly, only 90% of such incentives can be added to the eligible profits. The stand of the Assessing Officer was thus upheld on a different ground, and to a limited extent. None of the parties is satisfied by us Revenue is aggrieved that the advance licence benefit is not covered by section 28(iiib) and, accordingly, 90% of the same cannot be added to the eligible profits for deduction under section 80HHC The assessee, on the other hand, is aggrieved that CIT(A) ought to have held the assessee did not have any 13 A.Y. 2000-01 M/s. Wyeth Lederle Ltd. income from on account of what has been termed as, advance licences benefits.
We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.
In order to adjudicate on this controversy, it is necessary to first of all appreciate the nature of advance licence benefit under the Export Import Policy There is no variations in the perceptions of the parties so far as the basic traits of this scheme are concerned. The expression "advance licence, it is necessary to appreciate, broadly refers to a licence to import input components of the goods that an exporter seeks to export on the understanding that the input components so imported shall be so used only for the purposes of manufacturing the specific goods for the purposes of exports. The advance licence is for the actual user only and thus selling the goods so imported in the open market is prohibited. In other words, the facility to import the raw material and other inputs comes with a corresponding obligation to export the requisite quantity of specific goods that the unit is to produce. In case the person using such advance licence fails to meet this obligation, he has to refund this concession of duty free imports by paying the same, along with such additional levies as may be prescribed under the rules, to the Government. The other consequence of these imports under the advance licence is that since the exporter is allowed to import the input components free of duties, he is not entitled to duty drawback that an exporter is normally entitled to claim because such duty drawback only seeks to neutralize the 14 A.Y. 2000-01 M/s. Wyeth Lederle Ltd. additional costs, duty to payment of import duties of imported components, to the exporter.
In this narrow compass of material facts, we must first address ourselves to the fundamental question whether an advance licence can at all be said to be a benefit of income nature.
The very advance licensing scheme envisages that an exporter is allowed to import duty free input components on the understanding a legally binding understanding non- fulfillment of which, inter-alia, results in recovery of applicable import duties plus other additional levies - that the exporter will make exports of the specified quantities and specified nature of goods, and the assessee shall not claim duty drawback in respect of such exports. The benefit of importing the input components duty free, is thus coupled with corresponding obligation to make necessary exports and not to claim duty drawback in respect of the same. It is indeed a concession inasmuch as the funds that an exporter has to block in the inventories of inputs get reduced by the import duty components on such inputs, but then the import duty itself is not a benefit of income nature since the assessee has a corresponding export obligation. The duty free imports of inputs by itself do not amount to a benefit of income nature. To that extent, the stand of the authorities below is incorrect. The question of parity with DEPB is also irrelevant because, as rightly noted by the Ld. CIT(A), advance licence is non- transferable as against transferable benefits of the DEPB. The goods imported under advance licence admittedly cannot be sold by the importer in the open market. An advance licence is not a benefit on account of exports made by the an exporter
15 A.Y. 2000-01 M/s. Wyeth Lederle Ltd. but an assistance given for exports to be made by an exporter- by way of allowing an exporter to import the input components duty free and thus lower his finance requirements for the inventories. In the light of the discussion above our answer is in negative Once we come to the conclusion that it is not in income nature, all other questions about the scope of section 28(iiib) or 28 (iv) become academic and do not require our adjudication: Perhaps a benefit could be said to arise when the relevant exports are made and to that extent, the obligation of an exporter, to pay the import duty on imported inputs, gets discharged, but than we are right now we are only in seisin of the limited question whether the fact of duty free imports, under advance licence, could be said to be a benefit of income nature. In any event, even at the time of the actual benefit, if it can be so said to arise when the expert obligation is discharged and the corresponding liability to pay the import duties comes to un end, the benefit is a part of the business profits anyway because when accounting for inputs done at the actual price and without including notional import duties, as are the admitted facts of this case, the profits from the business inherently take into account that benefit. By no stretch of logic, however benefit of income nature can be said to arise when the assessee avails the advance licence and imports the input component duty free, with a corresponding obligation to either export the goods in which such put components are used or pay the import duties waved plus additional levies, in case of failure to discharge these export obligations.
We thus reject first ground of appeal raised by the revenue, and uphold the second and third ground of cross
16 A.Y. 2000-01 M/s. Wyeth Lederle Ltd. objection raised by the assessee. As for the first ground of cross objection, i.e. on the CIT(A) upholding validity of reassessment proceedings, the assessee did not press for the same and it is dismissed for want of prosecution.
To sum up, while the appeals filed by the revenue are dismissed, the cross objections filed by the assessee are allowed to the extent indicated above.
“6. On the Second disputed issue with respect to non-grant of benefit of provisions of Sec. 80HHC in respect of advance import license by holding the same was covered under clause (iiib) of Sec. 28 of the Act. The Ld. AR relied on the decision in the assessee own case for the A.Y 1996-97, [2007] 108 TTJ 889 (Mum). We consider it appropriate to refer to the observations of the CIT(A) at page 16 Para 13.1 as under: …….The value of Advance Import License amounting to INR 1,23,80,893 is an export incentive within the meaning of clause 28(iiib) of section 28 of the Act. This is owing to the reason that Duty Entitlement Passbook Scheme ("DEPB") is a cash assistance covered under clause (iiib) of section 28 of the Act and both Advance Import License and DEPB License have common features as both provide the benefit of duty drawback. The only difference between the two is that the Advance Import License is not transferrable whereas DEPB License is transferrable. However, export incentive is not a part of the profits of the business u/s 80HHC (1), but it is entitled for the benefit of the proviso to section 80HHC(3). Accordingly he AO is directed to 17 A.Y. 2000-01 M/s. Wyeth Lederle Ltd. grant the benefit of the proviso to sec 80HHC(3) in respect of export benefit of INR. 1,12,80,893/-.” 7. ……………….
The Ld. DR could not controvert the observations of the CIT(A) with any cogent material or information to take a different view and accordingly we do not find any infirmity in the order of the CIT(A) and uphold the same and dismiss the grounds of appeal of the revenue.”
Respectfully following the action of this Tribunal in assessee’s own case as noted (supra), we dismiss the appeal of the revenue as well as cross objection (CO) of the assessee are dismissed.
In the result, the appeal of the revenue as well as CO of the assessee are dismissed. Order pronounced in the open court on this 28/02/2023. (AMARJIT SINGH) JUDICIAL MEMBER मुंबई Mumbai; दिनांक Dated : 28/02/2023. Vijay Pal Singh, (Sr. PS)
18 A.Y. 2000-01 M/s. Wyeth Lederle Ltd. आदेश की प्रनिनलनि अग्रेनर्ि/Copy of the Order forwarded to : अपीलार्थी / The Appellant 1. प्रत्यर्थी / The Respondent. 2. 3. आयकर आयुक्त(अपील) / The CIT(A)- 4. आयकर आयुक्त / CIT 5. दवभागीय प्रदतदनदि, आयकर अपीलीय अदिकरण, मुंबई / DR, ITAT, Mumbai 6. गार्ड फाईल / Guard file.
आदेशधिुसधर/ BY ORDER, सत्यादपत प्रदत //// उि/सहधयक िंजीकधर /(Dy./Asstt.
