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Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: VIKAS AWASTHY & SHRI N.K.PRADHAN
आदेश/ ORDER
PER VIKAS AWASTHY, J.M.:
These cross appeals by assessee and Revenue are directed against the order of Commissioner of Income Tax (Appeals)-56, Mumbai (in short ‘the CIT(A)’) dated 30/08/2016 for the assessment year 2010-11.
2. The assessee in appeal has raised following grounds:
“1. Gift & Sales promotion expenses:
1.1. The learned CIT (A) has erred in confirming the disallowance of Rs. 55,39,817/- out of gift & sales promotion holding the same given to the doctors as freebies and in violation of circular of medical council.
1.2. He, further, erred in applying the circular of CBDT (issued in financial year 2012-13) retrospectively to the present assessment year.
1.3. Without prejudice, he has also erred in not appreciating the fact that the items referred for the purpose of disallowance have been given to marketing personnel during various conferences and sales meets, to the customers, distributors etc.
1.4. Without prejudice, he has erred in confirming the approximate disallowances which is arbitrary without any base.
Adjustment made to Arm's Length Price (ALP):
2.1. Guarantee Fees
2.1.1. The learned Commissioner of Income Tax (Appeal) has erred in confirming CUP method to arrive at ALP in respect of guarantee fee chargeable to AE for guarantee given to bank for AE & proposing the adjustment of Rs. 7,33,100/-ignoring that there is no cost incurred to the appellant and the same was for appellant's business interest.
2.2. Interest on loan to AE
2.2.1. The learned Commissioner of Income Tax has erred in directing the AO to apply the rate of interest prevalent in Romania plus a spread of 300 bps ignoring the fact that the borrowing cost of foreign currency borrowing of the appellant company works out to 1.15%.”
(A.Y.2010-11 ITA NO.554/MUM/2017(A.Y.2010-11)
2.1 The assessee has also raised additional grounds, the same read as under:
“Additional Ground - Deduction in respect of Education Cess paid on income-tax and dividend distribution tax:
On the facts and circumstances of the case and in law, the Appellant prays that deduction in respect of education cess on income-tax paid during the year ought to be allowed as a deduction while computing the total income.
2. On the facts and in the circumstances of the case and in law, the Appellant prays that the Assessing Officer be directed to allow deduction under section 37(1) of the Income-tax Act, 1961 ('Act') in respect of education cess paid on the amount of dividend distribution tax as per section 115-0 of the Act during the year, while computing the total income”
Shri Percy J. Pardiwalla, appearing on behalf of the assessee submitted that the assessee is engaged in manufacturing, export and domestic sale of pharmaceutical products and bulk drugs. During the period relevant to assessment year under appeal the assessee has entered into international transactions with its Associated Enterprises (AEs). In the present appeal the assessee has raised grounds assailing addition on Transfer Pricing issues as well as corporate issues.
3.1 The ld. Counsel for the assessee submitted that ground No.1 of the appeal is in respect of disallowance of gift and sales promotion expenses. The ld.Counsel for the assessee pointed that similar disallowance on account of expenditure towards gifts and sale promotion expenses was made in the immediately preceding assessment year i.e. A.Y. 2009-10. The assessee carried the issue in appeal before the Tribunal in ITA No.6317/Mum/2014. The Tribunal vide order dated 16/04/2019 deleted the addition. The facts in the impugned assessment year are identical, therefore, the issue may be decided in accordance with the order of Tribunal in assessee’s own case for the preceding assessment year.
(A.Y.2010-11 ITA NO.554/MUM/2017(A.Y.2010-11)
3.2 The ld.Counsel for the assessee submitted that in ground No.2.1 of the appeal the assessee has assailed adjustment in respect of guarantee commission fees. He pointed that the issue in appeal is squarely covered by the decision of Tribunal in assessee’s own case in ITA No.6317/Mum/2014(supra). The Tribunal after holding that corporate guarantee is an international transaction has determined the Arm’s Length Price (ALP) of guarantee commission to AE at 0.5%.
3.3 In respect of ground No.2.2 of the appeal relating to adjustment in respect of loan to AE, the ld. Counsel for the assessee submitted that the assessee had advanced loan to its AE in Romania. The assessee charged interest @3.5% from its AE. The Transfer Pricing Officer (TPO) computed arm’s length interest rate @ 11.75% per annum. In first appeal, the CIT(A) held that since the loans were given in EURO, the rate of interest prevalent in Romania needs to be considered for determination of arm’s length interest rate. The CIT (A) applied 300 BPS on the rate prevalent in Romania as arm’s length interest rate. The ld. Counsel for the assessee pointed that the Assessing Officer so far has not given effect to the order of CIT(A).
The ld. Counsel for the assessee made two fold submissions. First, the CIT(A) after having observed that the loan was given in EURO should have applied EURIBOR interest rate, as it is difficult to find interest rate prevalent in Romania. To substantiate that loan was granted in EURO, he referred to Loan Agreement at page 110 to 112 of the Paper Book. It was pointed that clause -1 & 2 of the agreement clearly state that the loan of EURO 2,50,000/- is granted by the assessee to Unique Pharmaceutical Laboratories, Romania. Secondly, as the underline currency for advancing loan was EURO, EURIBOR rates should be applied. To support his contention the ld. Counsel for the assessee placed reliance on the decision of Tribunal in the case of Tata Autocomp Systems Ltd. vs. ACIT, 149 TTJ 233(Mum).
3.4 The ld. Counsel for the assessee submitted that the assessee has raised additional ground of appeal claiming deduction in respect of Education Cess. He
(A.Y.2010-11 ITA NO.554/MUM/2017(A.Y.2010-11) contended that it is a legal issue and no new facts are required to be brought on record. In support of assessee’s claim of deduction on education cess paid on Income Tax and Dividend Distribution Tax, reliance is placed on the decision of Sesa Goa Ltd. vs. JCIT, 423 ITR 426 (Bom) and decision of Tribunal in the case of Sony Pictures Network India Pvt. Ltd. vs. Asstt.CIT in for assessment year 2014-15 decided on 21/09/2020.
On the other hand, Shri Sushil Kumar Mishra representing the Department vehemently defended the impugned order and prayed for dismissing the appeal of assessee. However, the ld.Departmental Representative fairly admitted that the issue raised by the assessee in ground No.1 has been adjudicated by the Tribunal in assessee's own case in the preceding assessment year. However, the ld.Departmental Representative placed reliance on the CBDT Circular No.5 dated 01/08/2012. The ld.Departmental Representative contended that the said circular is clarificatory and would apply retrospectively. The ld.Departmental Representative further submitted that the said circular specifically bars medical practitioners/ Doctors from accepting gift from pharmaceutical company. The aforesaid circular complements Indian Medical Council Regulations dated 10/12/2009. As regard the Transfer Pricing issue the ld.Departmental Representative submitted that the Tribunal in assessee's own case has held that guarantee fee is international transaction. On the issue of interest on loan to A.E, the ld.Departmental Representative placed reliance on the finding given in assessment order and upheld by CIT(A). On additional ground raised in appeal, the ld. Departmental Representative objected to raising of additional ground at belated stage. The ld. Departmental Representative submitted that no reason has been given by the assessee for not raising this ground before Assessing Officer or the CIT(A).
We have heard the submissions made by rival sides and have examined the orders of authorities below. In ground No.1 of the appeal, the assessee has assailed
(A.Y.2010-11 ITA NO.554/MUM/2017(A.Y.2010-11) disallowance of expenditure towards gifts and sales promotion holding the same to be freebees given to doctors and medical practitioners. We find that in the immediate preceding assessment year similar disallowance on expenditure incurred towards gifts and sales promotion was made by Assessing Officer. The issue travelled to the Tribunal. The Co-ordinate Bench after considering CBDT Circular No.5 of 2012 (supra) and various decisions rendered on this issue held as under:
7. We have considered rival submissions and perused material on record. Undisputedly, the assessee has incurred expenditure of Rs.2,26,34,864 towards gifts, travel facilities and hospitality provided to doctors. customers and medical practitioners in medical conferences held both in India and abroad. Out of the aforesaid amount, the AO Has segregated an amount of Rs. 1,25,44,723, for computing disallowance towards expenditure incurred in India. As could be seen from the assessment order, the gift items provided by the assessee are T-shirts, suit lengths, umbrella, electronic goods, etc. It is the contention of the assessee that the aforesaid gift items bearing assessee's name and logo are only for sales promotion. The aforesaid factual position has not been controverted by the AO. The only reason for making an ad hoc disallowance of 40 per cent is, CBDT Circular No. 5 of 2012, dt. 1st Aug., 2012, wherein the prohibition imposed by Indian Medical Council with regard to acceptance of gift by medical practitioner/doctor was imposed w.e.f. 10th Dec., 2009. Thus, as could be seen, the prohibition imposed by Indian Medical Council against acceptance of gift is on the medical practitioner and doctor and not on the pharmaceutical companies. The applicability of the aforesaid CBDT circular as well as prohibition imposed by Indian Council on Pharmaceutical companies came up for judicial scrutiny before the Tribunal in Dy. CIT vs. PHL Pharma (P) Ltd. (supra). The Co-ordinate Bench after examining the regulation issued by the Medical Council of India as well as the CBDT circular referred to above, ultimately concluded that the prohibition imposed by the Indian Medical Council Regulation are not applicable to pharmaceutical companies. Further, the said view was again reiterated by the Co-ordinate Bench in Solvay Pharma India Ltd. (supra). The Co-j ordinate Bench has also held that the CBDT circular referred to by the Departmental authorities will not apply retrospectively. No contrary decision on the issue has been brought to our notice by the learned Departmental Representative. In view of the aforesaid, following the ratio laid down by the Co-ordinate Bench in the decisions referred to above, we allow assessee's claim of expenditure. Consequently, the disallowance made of Rs. 50,17,890, is deleted. This ground is allowed.
Both sides are unanimous in stating that the nature of expenditure disallowed in the impugned assessment year is identical to the assessment year 2009-10. No contrary decision has been brought to our notice by the Revenue. We find no reason to deviate from the view already taken by the Co-ordinate Bench on this issue in assessee's own case. For parity of reasons cited by the Tribunal in assessee’s own
(A.Y.2010-11 ITA NO.554/MUM/2017(A.Y.2010-11) case for assessment year 2009-10, the findings of CIT(A) on this issue are set-aside and the ground No.1 of appeal is allowed.
In ground No.2.1 of the appeal, the assessee has assailed transfer pricing adjustment of Rs.7,33,100/- in respect of guarantee fee. The ld. Counsel for assessee has pointed that the issue of guarantee fee was decided by the Tribunal in assessee's own case for assessment year 2009-10. We find that the Co-ordinate Bench after placing reliance on the decision rendered in the case of Everest Kento Cylinders Ltd. 378 ITR 57(Bom.) held that Corporate Guarantee fee paid @ 0.5% would be at arm’s length. Respectfully following the decision of Tribunal in assessee's own case in for assessment year 2009-10, the ground No.2.1 of the appeal is partly allowed in the same terms.
In ground No.2.2 of the appeal the assessee has assailed charging of interest on loan to A.E. by applying rate of interest prevalent in Romania + 300 B.P.S. The assessee has advanced loan to its Romanian A.E. As per terms of Loan Agreement the assessee has charged interest @ 3.5%. The TPO computed the ALP of interest to AE at 11.75%. In first appeal, the CIT(A) held that since the loan was granted to a Romanian entity the interest be charged at the rate prevalent in Romania + 300 B.P.S. The contention of the assessee is that since the loan was granted in EURO, therefore, EURIBOR rate should be applied. The assessee has placed on record loan agreement at page 110 of the Paper Book. A perusal of the terms and conditions of the loan agreement reveal that the assessee has advanced loan of EURO 2,50,000 to its A.E in Romania. The ld. Counsel for the assessee has placed reliance on the decision rendered in the case of Tata Autocomp Systems Ltd. (supra) to contend that since loan is advanced to AE in EURO, EURIBOR rate should be applied. We have observed that in the case of Tata Autocomp Systems Ltd. (supra) loan was advanced to AE in Germany and the Tribunal held that EURIBOR rate should be applied. The relevant extract of the order of Tribunal reads as under:
(A.Y.2010-11 ITA NO.554/MUM/2017(A.Y.2010-11)
“19. In the present case the AE is a German company. Eurobior rates are based on the average interest rates at which a panel of more than 50 European banks borrow funds from one another. There are different maturities, ranging from one week to one year. These rates are considered to be the most important rate in the European money market. The interest rates do provide the basis for the price and interest rates of all kinds of financial products like interest rate swaps, interest rate futures, saving account and mortgages. We find that the RBI in respect of export credit to exporters at internationally competitive rates under the scheme of pre-shipment credit in foreign currency (PCFC) and Rediscounting of Export Bills abroad (EBR), has permitted banks to fix the rates of interest with reference to ruling LIBOR, EURO LIBOR or EURIBOR, wherever applicable and thereto appropriate percentage ranging from 1% to 2%. The reference to the said circular is at page -80 of the Assessee's paper book. In our view the claim of the Assessee to adopt EURIBOR rate as stated before the TPO is reasonable and deserves to be accepted. Following the ruling of the tribunal in the aforesaid cases, we are of the view that the claim made by the Assessee in this regard has to be accepted. The AO is directed to work out the TP adjustment accordingly. Gr.No.1 to 4 are thus partly allowed.” The above decision of Tribunal has been upheld by the Hon'ble Bombay High Court in an appeal filed by the Revenue, Re: CIT vs. Tata Autocomp Systems Ltd. reported as 374 ITR 516(Bom).
In the case of Baba Global Ltd. vs. Dy. CIT 70 taxmann.com 338 (Delhi - Trib.), the Tribunal held that loan having been advanced by assessee to its AE in foreign currency, rate of interest has to be with reference to foreign currency in which loan has been advanced. Similar view has been taken in the case of DCIT vs. Teleperformance Global Services (P) Ltd. 120 taxmann.com 405 (Mum. - Trib.). The Tribunal has been consistently holding that where assessee has advanced loan to its AE, the rate of interest would be based upon rates prevailing in country where loan is utilised.
Thus, in the light of the facts and decisions discussed above, we find merit in the contentions of the assessee. In the instant case, it is evident from the loan agreement that the assessee had advanced loan to its AE in Romania in EURO, therefore, the interest should be charged in EURIBOR. In principle, we accept the assessee’s submissions, however, to determine interest rate we deem it appropriate to restore this issue to the Assessing Officer with a direction to applying EURIBOR +
(A.Y.2010-11 ITA NO.554/MUM/2017(A.Y.2010-11) base points, if required. Consequently, the ground No.2.2 of the appeal is allowed for statistical purpose.
The ground No.3 of the appeal is general in nature, hence, require no adjudication.
The assessee has raised an additional ground claiming deduction in respect of Education Cess paid on income tax and dividend distribution tax. The ld.Departmental Representative opposed the additional ground raised by the assessee at such a belated stage. We find that the additional ground raised by the assessee is legal in nature and no fresh evidence is required to be adduced. It would be relevant to mention here that this appeal was filed by the assessee in 2016. The Hon'ble Jurisdictional High Court rendered the judgment in the case of Sesa Goa Ltd. vs. JCIT (supra) in February, 2020. Thus, at the first appellate stage or at the time of filing of second appeal before the Tribunal, the assessee had no cause to raise this legal issue. The additional ground of appeal raised by the assessee is admitted in the light of the decision rendered in the case of National Thermal Power Co. Ltd. vs. CIT, 229 ITR 383(SC).
13. On merits of the additional grounds raised, we observe that one of the substantial question of law before Hon'ble Jurisdictional High Court in the case of Sesa Goa Ltd. (supra) was:
“Whether on the facts and in the circumstances of the case and in law, Education Cess and Higher Secondary Education Cess is liable as deduction in the year of payment?”
The Hon'ble High Court after considering provisions of the Act and catena of judgments answered the aforesaid substantial question of law in affirmative by holding as under:-
(A.Y.2010-11 ITA NO.554/MUM/2017(A.Y.2010-11)
“28. In the Income Tax Act, 1922, Section 10(4) had banned allowance of any sum paid on account of 'any cess, rate or tax levied on the profits or gains of any business or profession'. In the corresponding Section 40(a)(ii) of the IT Act, 1961 the expression “cess” is quite conspicuous by its absence. In fact, legislative history bears out that this expression was in fact to be found in the Income Tax Bill, 1961 which was introduced in the Parliament. However, the Select Committee recommended the omission of expression “cess” and consequently, this expression finds no place in the final text of the provision in Section 40(a)(ii) of the IT Act, 1961. The effect of such omission is that the provision in Section 40(a)(ii) does not include, “cess” and consequently, “cess” whenever paid in relation to business, is allowable as deductable expenditure.
In Kanga and Palkhivala's “The Law and Practice of Income Tax” (Tenth Edition), several decisions have been analyzed in the context of provisions of Section 40(a)(ii) of the IT Act, 1961. There is reference to the decision of Privy Council in CIT Vs Gurupada Dutta 14 ITR 100, where a union rate was imposed under a Village Self Government Act upon the assessee as the owner or occupier of business premises, and the quantum of the rate was fixed after consideration of the 'circumstances' of the assessee, including his business income. The Privy Council held that the rate was not 'assessed on the basis of profits' and was allowable as a business expense. Following this decision, the Supreme Court held in Jaipuria Samla Amalgamated Collieries Ltd Vs CIT [82 ITR 580] that the expression 'profits or gains of any business or profession' has reference only to profits and gains as determined in accordance with Section 29 of this Act and that any rate or tax levied upon profits calculated in a manner other than that provided by that section could not be disallowed under this sub-clause. Similarly, this sub-clause is inapplicable, and a deduction should be allowed, where a tax is imposed by a district board on business with reference to 'estimated income' or by a municipality with reference to 'gross income'. Besides, unlike Section 10(4) of the 1922 Act, this sub-clause does not refer to 'cess' and therefore, a 'cess' even if levied upon or calculated on the basis of business profits may be allowed in computing such profits under this Act.”
Since, the issue has been raised for the first time before the Tribunal, we deem it appropriate to admit the additional ground and restore the issue back to the Assessing Officer for consideration in the light of ratio laid down in the case of Sesa Goa Ltd. (supra). The additional ground of appeal is thus, allowed for statistical purpose.
In the result, appeal by the assessee is partly allowed.
(A.Y.2010-11 ITA NO.554/MUM/2017(A.Y.2010-11)
(A.Y.2010-11)- Revenue’s Appeal:
The solitary issue raised in Revenue’s appeal is: "On facts circumstances of the case and in law, the Ld CIT(A) erred in directing the Assessing Officer to allow exemption u/s 80IB and 10B of the Act, 1961 on income derived from sale of scrap without taking into consideration the fact that income from sale of scrap is not an eligible profit for computing deduction u/s 80IB and 1OB of the IT. Act, 1961. "
The ld. Counsel for the assessee pointed that the appeal by the Revenue is liable to dismissed on account of low tax effect in the light of CBDT Circular No.17/2019 dated 08/08/2019.
The ld.Departmental Representative fairly admitted that the tax effect involved in the appeal by the Revenue is less than the monetary limit prescribed by CBDT.
Since tax effect involved in this appeal is less than Rs.50,00,000/-, the appeal by the Revenue is liable to be dismissed on account of low tax effect. Therefore, without adverting to the merits of the ground raised in the appeal, the appeal by Revenue is dismissed, on account of low tax effect.
To sum up, the appeal by assessee is partly allowed and the appeal of Revenue is dismissed.
Order pronounced in the open court on Tuesday the 23rd day of March, 2021