POPULATION SERVICES INTERNATIONAL,NEW DELHI vs. CIT(E), NEW DELHI

The assessee was granted registration under section 12A of the Act on 06.12.1991 and under section 80G of the Act on 2 | P a g e 20.09.2007. The assessee was granted approval under section 10(23C)(iv) by the Central Board of Direct Taxes (CBDT) vide notification issued on 31.01.2007 and such approval was renewed in subsequent assessment years. In course of scrutiny assessment for assessment year 2016-17, the Assessing Officer while verifying the information gathered and available on record, was of the view that the assessee has violated the conditions of approval granted under section 10(23C)(iv) of the Act. The reasons for coming to such conclusion are as under: • The foreign contributions received by the assessee have been shown differently in FCRA audited accounts and annual financial statements. Whereas, the assessee failed to explain the discrepancy between the figures. • The books of account are not complete and entries made are not supported by proper vouchers. • Figures of income and expenditure account are unverifiable

Basis aforesaid allegations of the Assessing Officer and Special Audit Report, learned CIT(Exemption) issued a show- cause notice to the assessee to explain, why the approval granted under section 10(23C)(iv) of the Act should not be revoked. In response to the show-cause notice, the assessee furnished a detailed reply vehemently objecting to the proposed withdrawal of approval granted under section 10(23C)(iv) of the Act.

After considering the submissions of the assessee, observations of the Assessing Officer and the Special Audit Report, learned CIT (Exemption) observed that the assessee could not come with a satisfactory explanation to reconcile the 7 | P a g e difference in the figures of foreign contribution as per the FCRA Account in Form FC-4 and as declared in the income and expenditure account. Further, he observed, though, the assessee claims itself to be a non-profit and non-Government organization with a mandate to assist Government of India and State Governments in the field of reproductive health, HIV/AIDS prevention, eradication of tuberculosis and maternal and child health with its main objects, in reality, it is indulging in business activity with a profit motive and not doing any charitable work.

Sh. Ajay Vohra, learned Senior Counsel appearing for the assessee submitted, in accordance with its objects, the assessee undertakes activities in the fields, such as, health services, nutrition and other related fields and to deal with malnutrition problems of people living in India. He submitted, for achieving these objects, the assessee enlists the services of doctors, paramedical personnel, mid wives, social scientists, gynecologists and other specialists and consultants and/or social workers, nurses and volunteers to complement the efforts of the Government of India in priority health areas of maternal and 9 | P a g e child health, sanitation, tuberculosis, family planning, and gender-based violence. Using Marketing approaches, the assessee facilitates to fill gaps and addresses needs of the vulnerable population in the public health space of the country.

Drawing our attention to the Memorandum of Association of assessee society, he submitted, the activities of the assessee are not at all commercial in nature but to serve the low income and vulnerable people of India for their health and well-being. He submitted, the objects of the assessee, includes, to promote, distribute and sell contraceptives, family welfare and/or planning devices and drugs through social marketing techniques and to make them more popular for the Indian masses. He submitted, social marketing is a Government of India Scheme started in 1968. Under this scheme, contraceptives are made available to people in India at highly subsidized rates. These contraceptives are distributed through social marketing organizations, like 10 | P a g e assessee. He submitted, as per the Government of India guidelines, the social marketing organizations are required to distribute and sale contraceptives at the price determined and controlled by the Government, as, contraceptives include condom, which is treated as essential drug, both, under the Drugs and Cosmetics Act as well as under the Essential Commodities Act. Government permits such social marketing organizations to develop their own brands that will receive additional promotion and packaging subsidy to create awareness and acceptance of family planning amongst low-income population. He submitted, in order to achieve the charitable objects and also to promote the Government formulated scheme for family planning etc., the assessee is working across the range of health issues to include promotion of institutional deliveries, construction of toilets, cervical cancer screening and treatment, prevention of gender-based violence, family planning and population control, management of tuberculosis, prevention of HIV and sexually transmitted diseases and prevention of non- communicable diseases. He submitted, in this regard, the assessee has established non-financial Memorandum of Understanding (MoU) with different State Governments to 11 | P a g e technically assist in the implementation of Government sponsored health program and activities. He submitted, the work done by the assessee has been appreciated by various State Governments. In this regard, he drew our attention to the letters of appreciation issued by various State Governments.

Drawing our attention to specific allegations of the departmental authorities as well as Special Audit Report, learned counsel submitted, during the assessment year 20016-17, the assessee had received grants from National AIDS Control Association (NACO) to support NACO in preventing HIV and sexually transmitted diseases and unwanted pregnancies by promoting and marketing the condoms supplied by the Government under the social marketing scheme. He submitted, amongst various indicators of performance under this contract, one of the indicators was, assessee will distribute Government owned brand condoms, i.e., Deluxe Nirodh, and assessee’s own brand Masti condoms in the ratio of 70:30, respectively. However, both the products are supplied by Government itself under the Government sponsored social marketing scheme. He submitted, as per the agreement with the Government, the assessee had to place its indent and make payment for supply of both the brands 12 | P a g e of condoms. However, the Government failed to supply according to indent. Therefore, the assessee had to invoke the arbitration clause in the agreement and the Hon’ble High Court appointed an arbitrator and concluded the proceedings in favour of the assessee. He submitted, the allegation of CIT (Exemption) that the assessee is undertaking commercial activities is unfounded and baseless. He submitted, the expression ‘business/commercial activities’ would mean activities undertaken systematically for earning profit. He submitted, organized course of activity for earning profits as ‘profit motive’ is an essential requisite for conducting business. In this regard, he drew our attention to the decision of the Hon’ble Supreme Court in case of CIT Vs. Distributors (Baroda) P. Ltd. 83 ITR 377 (SC).

He submitted, even assuming that the assessee undertook sale of its own branded products, by no stretch of imagination it can be labeled as ‘business’/’commercial activity’, as, there is no profit motive, much less, any question of profit actually being generated on sale of such products. He submitted, as per the agreement, the assessee has to sale products, including its own branded products, as per the price fixed by the Government. As a result, he submitted, the assessee has suffered losses year-on- 13 | P a g e year and no profit has actually been generated. He submitted, if the grant received from the Government and PSI International is excluded, the assessee will actually be in loss. Thus, he submitted, the allegation that the assessee is indulging in business and commercial activities with profit motive is far from truth. He submitted, the Government itself distributes 55% of the condoms free or at highly subsidized prices in the interest of general public, therefore, to allege that the assessee is generating profit, in such a case, is unacceptable. In this context, he drew our attention to a decision of the Hon’ble Delhi High Court in case of Reckitt Benckiser (India) Ltd. Vs. UOI, WP(C) No. 7705/2013, dated 10.07.2015.

Referring to the specific allegation of learned CIT (Exemption) regarding sale of Masti brand condoms, learned counsel for the assessee submitted, the CIT (Exemption) himself has stated that the purchase price of Masti brand condoms from the manufacturer is Rs.1.64 per piece and sale price is 1.93 per piece. From the small margin retained, the assessee had to incur substantial expenditure on distribution and social marketing.

As regards the allegation of the departmental authorities in respect of ‘PEHEL Project’, learned counsel submitted, the project is an initiative of the assessee to contribute millennium development goal through limiting births and reducing maternal mortality amongst low-income women of reproductive age in 30 districts across three states, Uttar Pradesh, Rajasthan and Delhi.

Referring to the specific allegation of the departmental authorities, learned counsel submitted, merely because 50% of total grants received from the parent organization have been incurred on ‘PEHEL Project’, does not make the activities non- genuine or commercial in nature. He submitted, allegation of the Revenue that the Intra-Uterine Contraceptive Device, Freedom 5 and Freedom 10 are promoted by the assessee to market its own brand, is wholly without basis. He submitted, the assessee has followed the principle of social marketing by introducing a brand with a Maximum Retail Price (MRP) mandated by National Pharmaceutical Pricing Authority (NPPA) so as not to undercut or distort the Indian IUCD market to unfairly capture market share.

As regards the allegation of the Special Auditor that the assessee has nexus with another related party, viz., PSI India 17 | P a g e Pvt. Ltd., engaged in similar business, learned counsel submitted, PSI India Pvt. Ltd. is only a tenant of the assessee. He submitted, though, Mr. Shankar Narayanan was recruited by the assessee as a Senior Managing Director, however, he resigned from his service in 2016 before joining PSI India Pvt. Ltd. Therefore, nothing much can be read into the alleged relationship between the assessee and PSI India Pvt. Ltd. He submitted, generation of surplus cannot be a determinative factor for determining whether a particular activity is for charitable purpose or commercial nature. In this context, he drew our attention to the following decisions:

Proceeding further, he submitted, the assessee was earlier granted approval under section 10(23C)(iv) of the Act for the assessment year 2007-08 and it was renewed year after year till its withdrawal by the impugned order. He submitted, when the objects of the assessee have not changed, merely because of 18 | P a g e introduction of proviso to section 2(15) of the Act w.e.f 01.04.2009, the activity carried on by the assessee cannot become commercial. He submitted, even registration granted under section 12A and 80G of the Act still subsists. Therefore, charitable status of the assessee is established. He submitted, even if, it is assumed that the assessee has generated some surplus/profit from some commercial activity, however, they are incidental or ancillary to the main charitable object of the assessee.

As regards the allegation of learned CIT (Exemption) that the assessee has not maintained separate books of account for its business and charitable activities, thereby, has violated 7th proviso to section 10(23C)(iv) of the Act, learned counsel submitted, irrespective of the fact that the assessee is not involved in business activity, there is no requirement for maintaining separate books of account as the assessee maintains them on ERP software. He submitted, ERP software can be used to compute figures for any segment of activity carried on by the assessee. For such proposition, he relied upon the following decisions:

Without prejudice, he submitted, the CIT (Exemption) could not have withdrawn the approval granted under section 10(23C)(iv) of the retrospectively. In support of such proposition, he relied upon the following decisions:

Strongly relying upon the observations of the departmental authorities as well as Special Auditor, learned Departmental Representative submitted, various details called for by the Assessing Officer were not furnished in course of assessment proceeding relating to assessment year 2016-07. Drawing our attention to the observations of the Assessing Officer, he submitted, the assessee did not produce complete books of account and other details in course of assessment proceeding. He 20 | P a g e submitted, even before CIT (Exemption) also, the assessee did not furnish all the books of account required to be maintained by the assessee and reconciliation statements. He submitted, the Special Auditor has made allegation in similar lines. Thus, he submitted, the fact that the assessee has violated the conditions of section 10(23C)(iv) of the Act is clearly established. He submitted, merely because the assessee was granted approval under section 10(23C)(iv) in earlier assessment years or has been registered under section 12A and 80G of the Act cannot automatically entitle the assessee to exemption under section 10(23C) of the Act. He submitted, whether the assessee has fulfilled the conditions of section 10(23C) is the subject matter of review depending upon change in facts and circumstances. He submitted, if in subsequent years it is found that the assessee has violated the conditions of section 10(23C) of the Act, the competent authority is empowered to withdraw the approval granted. Thus, he submitted, there is no reason to interfere with the order passed by CIT (Exemption).

We have considered rival submissions and perused the materials on record. We have also applied our mind to the decisions relied upon. No doubt, the issue arising for 21 | P a g e consideration before us is the validity of the order passed by learned CIT (Exemption) withdrawing the approval granted under section 10(23C)(iv) of the Act, that too, with retrospective effect.

As regards the first allegation relating to the alleged difference in foreign contribution shown in the income and expenditure account and the FCRA return in Form FC-4, from the stage of Assessing Officer itself, the assessee has explained 23 | P a g e that as per the FCRA Regulations, the assessee has to show the actual receipts received during the year. Whereas, in the income and expenditure account, the assessee, in terms with Income Tax Act has to show the foreign contribution on accrual basis. On a perusal of the statutory audit report for the year ended 31st March, 2016, it is observed, in a note forming part of the financial statements, the auditor has specifically stated that donations/grants received, other than the grants for specific purposes, are regarded as income when it is reasonably expected that the ultimate collection will be made during the year. Thus, from the aforesaid, it is observed that the income/fund shown in the income and expenditure account is on accrual basis, as, the assessee was reasonably certain that it will receive the grant/fund. From the details available on record, it is observed that in FCRA return filed in Form FC-4, the assessee has shown foreign contribution of Rs. 93,45,00,516/-, whereas, in the income and expenditure account, the assessee has shown such figure at Rs.107,61,69,730/-. Thus, the explanation of the assessee that the foreign contribution in FCRA return has to be shown on receipt basis is acceptable.

The allegation of the Special Auditor that the assessee has not maintained separate books of account for the purpose of foreign contribution under the Foreign Contribution Regulation Act, 2010, is equally unacceptable. As brought to our notice by learned counsel for the assessee, there is no mandate under the Foreign Contribution Regulation Act, 2010 to maintain separate books of account for foreign contribution and business activities.

Now, the core issue which arises for consideration is, whether it can be said that the assessee is not carrying out charitable activity as envisaged in section 2(15) read with section 10(23C)(iv) of the Act. In this regard, the main allegation of the departmental authorities is in relation to activities undertaking by the assessee in two targeted projects, viz., ‘Pehel Project’ and ‘NACO Project’. As discussed earlier ‘Pehel Project’ is an initiative of assessee’s parent organization, Population Services International to contribute to millennium development goal through limiting births and reducing maternal mortality amongst low-income group women of reproductive age in 30 districts across three states, Uttar Pradesh, Rajasthan and Delhi. The said program is created for improving the health of women by preventing unintended pregnancies by promoting modern family planning methods including IUD and increasing access to safe 26 | P a g e and legal MTP through medical abortion project. The allegation of departmental authorities in this regard is twofold, firstly, in the garb of charitable activity the assessee is actually promoting its own products, viz., Freedom 5 and Freedom 10 and, secondly, the expenses incurred go to indicate that the donation received has been diverted to other business activities of the assessee. It is observed, for the “Pehel Project’ the assessee has entered into an agreement with its parent organization, a copy of which is at page 115 of the paper-book. As per the terms of the agreement, the assessee has to utilize the donation received for the purpose of promoting/educating the cause of unintended pregnancy which ultimately leads to improvement in nutrition and health of the low income group women. Towards this objective, the assessee has sold Freedom 5 and Freedom 10 at a price fixed by National Pharmaceutical Pricing Authority. It is observed, while alleging that the assessee earned profit from sale of these products, the departmental authorities have not taken note of the various costs incurred by the assessee, such as, distribution cost, advertisement cost, warehousing cost and other administrative cost. The departmental authorities have also ignored the fact that a substantial part of the contribution 27 | P a g e received was utilized for promotion and spreading awareness and increasing acceptance of an alternative method of family planning alien to the target population. It is a fact on record that the allegation made by the departmental authorities is unilateral.

As regards the allegation of the Departmental Authorities that the assessee has earned profit by selling products, viz., Masti Brand of condoms in NACO project. The facts on record reveal that, though, as per the agreement with the Government, the Government has to supply the assessee two different brands of condoms, viz., Delux Nirodh and Masti, which are to be sold in the ratio of 70:30 respectively. However, the Government failed to 28 | P a g e supply the required number of Delux Nirodh indented by the assessee, which resulted in breach of contract and the assessee had to invoke the arbitration clause and the Arbitrator passed an award in favour of assessee. Thus, short supply of Delux Nirodh by the Government compelled the assessee to sell more Masti condoms. It is a further fact on record that condom is categorized as essential drug and the pricing of condoms are regulated under the Government regulations. Therefore, they have to be sold at subsidized rates, as per ceiling fixed by the Government. No adverse material has been brought on record by the Revenue to demonstrate that the assessee has violated the pricing of the products, as per the Government mandate. Moreover, there is no allegation by any of the Government agencies, be it Central or State, regarding promotion of assessee’s own brand at the cost of Government brand of condoms. That being the factual position emerging on record, it cannot be said that the assessee has derived any undue benefit by promoting its own brand. In any case of the matter, the assessee was granted approval under section 10(23C)(iv) of the Act for the first time in the year 1991.

It is a fact on record that thereafter the authorities have renewed the approval year-after-year. In fact, learned Sr. Counsel appearing for the assessee has placed on record scrutiny assessment orders passed for assessment years 2004-05 to 2013-14, wherein, the Assessing officer has allowed exemption under section 10(23)(iv) of the Act. Therefore, once the assessee satisfies the threshold conditions of section 10(23C)(iv) of the Act, the approval granted cannot be withdrawn, that too, with retrospective effect, alleging violation of certain compliance conditions. The Departmental Authorities have failed to differentiate between the threshold conditions and compliance conditions. The compliance conditions have to be examined in each assessment year and, in case, there is any violation in compliance conditions in any assessment year, assessee’s claim of exemption for the said assessment year can be rejected.

In the aforesaid scenario, the approval under section 10(23C) of the Act cannot be revoked, more so, when the objects of the assessee have remained same. We, for a moment, do not say that the competent authority under no circumstances can revoke the approval granted under section 10(23C)(iv) of the Act.

In the result, the appeal is allowed.