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Income Tax Appellate Tribunal, DELHI BENCH ‘D’, NEW DELHI
Before: Sh. Amit ShuklaDr. B. R. R. Kumar
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the revenue against the order of the ld. CIT(A)-7, New Delhi dated 23.11.2015.
Following grounds have been raised by the revenue:
1. On the facts and in the circumstances of the case, the ld. CIT(A) has erred in law in deleting the addition of Rs.6,25,414/- since the assessee is not entitled to claim deduction u/s 80IC on the products which are being manufactured by other company without appreciating the facts that the assessee has failed to submit the details material with evidence.
2. On the facts and in the circumstances of the case, the ld. CIT(A) has erred in deleting the addition of Rs.1,08,92,321/- made on account of 'sale promotion expenses' without appreciating the facts that the assessee has failed to submit the details material with evidence.
2 Ozone Pharmaceuticals Ltd. 3. On the facts and in the circumstances of the case, ld. CIT(A) has erred in deleting the addition of Rs.35,23,254/- made on account of 'sale promotion expenses' claimed in the name of sister concerns' without appreciating the facts that the assessee has not established that the expenditure on sale promotion with reference to the fair market value of services for which the payment has been made to sister concern of the assessee.
4. On the facts and in the circumstances of the case, the ld. CIT(A)has erred in law and in deleting the disallowance of Rs.5,92,303/- out of the total disallowance of Rs.6,16,593/- made by AO u/s 14A r.w.r. 8D(2)(ii) by ignoring the mandatory provisions of sub-rule 2 of rule 8D r.w.s. 14A of the Income Tax Act, 1961.”
Deduction u/s 80IC:
The assessee company has disclosed sales of Rs.51,39,96,470/- at its Guwahati Unit and profit therefrom has been claimed as exempt u/s 80IC at Rs.1,25,68,495/-. The Assessing Officer on perusal of details of purchases of Rs.2,55,76,711/- from M/s Ozone Ayurvedics, a sister concern, enquired as to why deduction claim on trading activity for the medicines purchased from M/s Ozone Ayurvedics be not disallowed. The Assessing Officer held that the deduction u/s 80IC cannot be granted for the profit derived on the purchase and sale of finished products (trading goods).
Before the ld. CIT (A), it was submitted that the trading goods were purchased for the Baddi unit and not for the Guwahati Unit, on which the claim of Section 80IC is sought. The ld. CIT (A) after examination of the P&L account of the eligible unit held that there was no trading activity undertaken
3 Ozone Pharmaceuticals Ltd. by the Guwahati Unit. Even before us, during the arguments, these facts has not been disputed or controverted by the revenue. Hence we hereby hold that, since the trading goods have been purchased by the non-eligible unit, the deduction u/s 80IC for the eligible unit cannot be altered. Appeal of the revenue on this ground is dismissed.
Sales Promotion Expenses:
The AO added back an amount Rs.1,08,92,321/- representing 7.5% of expenses claimed on the total sales promotion and incentives amounting to Rs.14,52,30,941/- claimed in the P & L A/c. The said disallowance was made on the ground that bills/vouchers relating to this expense were not furnished fully and there was failure on the part of the appellant to substantiate its claim that the said expense had yielded substantial growth in the business of the appellant company. The AO has stated that in the past similar disallowance has been made on these grounds. The ld. CIT (A) on going through the submissions made by the assessee before him, noted that complete details in respect of these expenses were submitted before the AO by the appellant company. Before us, the ld. AR stated that since the appellant company is in the business of manufacturing and trading of allopathic medicines it requires vast sales promotion activity. It was argued that the AO has not pointed out any specific defect in bills/vouchers produced before him. We find that it is not the case of the AO that the expenses claimed is not genuine or incurred for non business purpose. As per the assessment order, the appellant was asked to show
4 Ozone Pharmaceuticals Ltd. cause as to why disallowance should not be made at 10% of the expenses claimed. The AO however, disallowed 7.5% of the expenses claimed finally. There appears to be no ground for ad- hoc disallowance. The similar disallowance was deleted by the ITAT in A. Y. 2006-07, and again by the CIT(Appeals) for A. Y. 2008-09, 2009-10 & 2010-11. Since no cogent reason is put forth by the AO for the disallowance and the fact that the appellant has been consistently allowed relief over the years, we do not find any reason to uphold the disallowance. The addition of Rs. 1,08,92,321/- is hereby ordered to be deleted. Appeal of the revenue on this ground is dismissed.
Disallowance u/s 40A(2)(b):
In order to have a comprehensive view of the disallowance made, the relevant portion of the assessment order is reproduced in toto as below: “6.1 The assessee company has claimed Sales Promotion Expenses in the name of its sister concern detailed below:
i. M/s Ozone Ayurvedics 2,11,25,462 ii. M/s Fourth Dimension Media Pvt. Ltd. 1,10,78,100 iii. M/s Fourth Dimension IMC Pvt. Ltd. 30,00,000 iv. M/s Ozone Mission 28,978 Rs.3,52,32,540
6.2 The assessee company was required to prove genuineness of the expenses and also as to whether the expenses are on Arm’s Length Price. In compliance thereto the assessee company stated that we have purchased magazines from M/s Fourth Dimension Media Pvt. Ltd. at market rate and the payments to other parties also on comparable market rates, therefore, the provisions of section 40A(2)(b) are not applicable in this case.
6.3. I have considered all the facts of the case, plea of the assessee and of the view that the assessee has not proved that 5 Ozone Pharmaceuticals Ltd. the expenses incurred for Sales Promotion in the name of sister concerns are at Arm’s Length Price, therefore, the provisions of section 40A(2)(b) are clearly applicable in this case. After considering all the facts of the case, plea of the assessee, 10% of the total expenses of Rs.3,52,32,540/- which comes at Rs.35,23,254/- are hereby disallowed and added in the total income of the assessee company u/s 40A(2)(b) of the Act.”
The ld. CIT (A) deleted the addition on the grounds that the Assessing Officer has merely stated that the appellant has not proved that the expenses incurred for sales promotion by way of transaction entered with the sister concern were not at Arm’s length price. This cannot be sufficient ground for making disallowance u/s 40A(2)(b) of the Act. The genuineness of the payment is not doubted. The ld. CIT (A) held that, in effect there is no finding to conclusively establish that the payment made to related parties was excessive are unreasonable with reference to the fair market value of the services received.
Section 40A(2)(b) reads as under: “40A. (1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head "Profits and gains of business or profession".
(2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub- section, and the [Assessing] Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction :
6 Ozone Pharmaceuticals Ltd. [Provided that [for an assessment year commencing on or before the 1st day of April, 2016] no disallowance, on account of any expenditure being excessive or unreasonable having regard to the fair market value, shall be made in respect of a specified domestic transaction referred to in section 92BA, if such transaction is at arm's length price as defined in clause (ii) of section 92F.]
(b) The persons referred to in clause (a) are the following, namely :—
(i) where the assessee is an individual any relative of the assessee;
(ii) where the assessee is a company, firm, association of persons or Hindu un- divided family any director of the company, partner of the firm, or member of the association or family, or any relative of such director, partner or member;”
We have gone through the facts of the case and perused the material on record.
Elements of Commercial expediency in achieving the large turnover and earning a taxable profit cannot be ignored while invoking the provisions of Section 40A (2)(b). In the instant case, the Provisions of Sec. 40A (2)(b) of the Act have not been complied by the revenue to the extent of quantifying the element of unreasonable and excessive nature of expense if any claimed by the appellant in the opinion of the AO. The 10% disallowance on the entire expenses has been made on the sole consideration that it was allowed to associated concerns, whereas the value and volume of expenses made from the associated concerns was a very minor part considering the total volume of expenses. Payment cannot be disallowed u/s 40A (2)(b) merely because it was made to a related person, merely because a payment is made to a related person it cannot be understood as being non genuine or that is excessive or 7 Ozone Pharmaceuticals Ltd. unreasonable. In the absence of such finding in this regard, the payment could not be disallowed. [Shree Construction & Investment Co. Vs. Asst. CIT (2003) 262 ITR 73(Guj)] There is no doubt as to the judicial proposition as to whether the payment is excessive or reasonable is a question of fact. However, the fact of excessive or reasonable is required to be established only by finding out as to what would be reasonable amount for the services obtained. It was for the AO to dispute the claim on some cogent evidence and material which has not been done by him.
As per the provisions of Section 40A(2)(a), some justification on the basis of comparables and bench marking is required to prove the existence and quantify the unreasonableness of the expenses to be considered for disallowances. The AO did not ascertain Fair Market Value (F.M.V.) of the services and other connotations to establish that appellant has paid unreasonable amount and quantum of payment does not commensurate with the services rendered. The intention behind the provision of Section 40A(2)(a) is to prevent the intentional reduction in tax liability by certain assessee’s by diverting business profits to close relatives and concerns in the form of excessive payments for goods and services received. The facts and circumstances of the case does not indicate any such tax evasion plan.
Hence relying on the judicial pronouncements discussed above and also because the nature of transaction is genuine and in the absence of any revenue loss and in the absence of determination of FMV by the Assessing Officer, the disallowances made is directed to be deleted. Appeal of the revenue on this ground is dismissed.
Disallowance u/s 14A:
The assessee made investments to the tune of Rs.85,15,314/- against which disallowance of Rs.6,16,593/- has been made by the Assessing Officer. The records reveal that the assessee has earned exempt income of Rs.21,290/- only. Hence, keeping in view the judgment of Hon’ble Jurisdictional High Court in the case of Cheminvest Ltd. v. CIT (2015) 378 ITR 33 (Delhi), we hereby restrict the disallowance to the amount of exempt income earned. Appeal of the revenue on this ground is dismissed.
In the result, the appeal of the revenue is dismissed. Order Pronounced in the Open Court on 28/02/2020.