DCIT CORPORATE CIRCLE 2(2), CHENNAI vs. HEAL KRAFT INDIA PVT. LIMITED, CHENNAI

2 & 3345/Chny/2018 आदेश /O R D E R Per G Manjunatha, AM: These cross appeals filed by the assessee and Revenue are directed against order of learned Commissioner of Income Tax (Appeals) – 6, Chennai, dated 11.09.2018 and pertains to assessment year 2010-11. Since, facts are identical and issues are common, for the sake of convenience, these appeals are heard together and are being disposed off, by this consolidated order.

1. For that the order of the Commissioner of Income Tax (Appeals) is contrary to law, facts and circumstances of the case and is opposed to the principles of equity, natural justice and fair play.

2. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the order of the Assessing Officer is without jurisdiction.

3. For that the Commissioner of Income Tax (Appeals) erred in upholding the disallowance of sales promotion expenses made by the Assessing Officer amounting to Rs.1,18,67,354/- uls.37(1).

4. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the Indian Medical Council (Professional conduct, Etiquette and Ethics) regulations 2002, only restricts a medical practitioner from receiving any gift from any pharmaceutical or allied health care industry.

5. For that the Commissioner of Income Tax (Appeals) failed to appreciate that there is no prohibition on the pharmaceutical industry from giving freebies and gifts to distributors and retailers.

3 & 3345/Chny/2018 6. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the CBDT Circular No.5/2012 dated 01.08.2012 is contrary to law.

8. For that without prejudice to the contention that the sales promotion expenses cannot be disallowed u/s.37(1), the disallowance should have been restricted to freebies and gifts received by medical practitioners.

4 & 3345/Chny/2018 16. For that the Commissioner of Income Tax (Appeals) erred in confirming a sum of Rs.2,00,673/- as expenditure directly relating to income which does not form part of total income while computing the disallowance uls.14A read with Rule BD. 17 .For that the appellant objects to the levy of interest u/s 234B and 234C.

4. For these and other grounds that may be adduced at the time of hearing, it is prayed that the Order of the learned Commissioner of Income Tax (Appeals) be set aside and that of the Assessing Officer be restored.

5 & 3345/Chny/2018 1961 (hereinafter the ‘Act’). The assessment for the impugned assessment year has been computed u/s.143(3) of the Act on 05.02.2013 and determined total income at Rs.1,87,40,468/- by making additions towards disallowance u/s.14A r.w.rule 8D of Income Tax Rules, 1962 (hereinafter the ‘ IT Rules’) for Rs.3,67,943/- and disallowance of sales promotion expenses u/s.37(1) of the Act, for Rs.1,18,67,354/- and further recomputed deduction claimed u/s.80IC of the Act by excluding income relatable to marketing activity of Rs.1,89,90,584/-. The AO had also recomputed book profit u/s.115JB of the Act by adding disallowance u/s.14A r.w.rule 8D of IT Rules for Rs.3,67,943/-. The assessee carried the matter in appeal before the first appellate authority. The ld.CIT(A) for the reasons stated in her appellate order dated 11.09.2018 partly allowed the appeal filed by the assessee, where she has allowed partial relief in respect of disallowance of sales promotion expenses made by the AO towards cost incurred on free samples to physicians of Rs.71,23,230/-, but confirmed addition made by the AO towards sales promotion expenses incurred for distribution of free samples to medical practitioners. The ld.CIT(A) has also allowed partial relief towards disallowance u/s.14A r.w.rule 8D, where she had sustained addition made by the AO under Rule 8D(2)(i) & (iii), however directed the AO to recompute disallowance

6 & 3345/Chny/2018 under Rule 8D(2)(ii) after verification of claim of the assessee regarding availability of own funds. Aggrieved by the CIT(A) order, the assessee as well as the Revenue are in appeal before us.

8 & 3345/Chny/2018 2013-14 onwards. Since, the issue in question pertains to assessment year 2010-11, application of CBDT circular No.5 of 2012 to make disallowances is incorrect. The ld.AR further referring to Para 2.8 of Tribunal order submitted that the Tribunal had also considered the issue of deductibility of enhanced profit on account of disallowance of expenditure u/s.80IC of the Act and by following the decision of Hon’ble Bombay High Court in the case of CIT vs. Gem Plus Jewellery India Ltd., 330 ITR 175 held that enhanced profit on account of disallowance of expenses is eligible for deduction u/s.80IC of the Act.

7. The ld.DR on the other hand submitted that the CIT(A) has erred in allowing deduction u/s.80IC of the Act, without appreciating the fact that there is no nexus between sales promotion expenses incurred by the assessee and business activity, because the assessee is not marketing its products on its own. Therefore, question of allowing sales promotion expense does not arise.

9 & 3345/Chny/2018 where the Tribunal by following various decisions including decision of Mumbai Tribunal in the case of Macleods Pharmaceuticals Ltd., vs. Addl.CIT, 161 ITD 291 and also circular issued by CBDT vide Circular No.5 of 2012, held that sales promotion expenditure incurred by an assessee in the business of manufacture and selling of pharmaceutical products cannot be disallowed by enlarging the scope of circular issued under different regulation. The relevant findings of the Tribunal are as under:- “2.2. We have heard the rival submissions and perused the materials available on record. We find that the assessee is a manufacturer of pharmaceutical products. The various arguments of the ld AR could be summarized as under:- a) The assessee, who is a manufacturer of pharmaceutical products had marketed its products through Tablets (India) Ltd. Based on an agreement with Tablets (India) Ltd, the assessee had accepted to share a part of the sales promotion, advertisement and publicity expenses. It is a commercial decision taken by the assessee and the same cannot be questioned by the revenue. The ld AR relied on the decisions of the Hon’ble Supreme Court in the case of S.A.Builders Ltd V. CIT reported in 288 ITR 1 (SC) and in the case of Hero Cycles (P) Ltd V. CIT reported in 379 ITR 347 (SC) and also the decision of Hon’ble Delhi High Court in the case of CIT V. Dalmia Cement (Bharat) Ltd reported in 254 ITR 377 (Del), wherein it was held that the assessee’s nexus between the expenditure and the purpose of the business had to be looked into from the point of view of businessman and not from the point of the revenue. The ld AO cannot step into the shoes of the assessee to decide whether the expenditure is required to be incurred by the assessee or not.

10 & 3345/Chny/2018 b) The ld AR stated that the CBDT Circular No.5 / 2012 which the ld AO relied on to hold the expenditure incurred by the assessee is an offence is dated 01.08.2012 and hence the same would not be applicable to the impugned assessment year i.e. AY 2012-13. In support of this proposition, he relied on the co-ordinate bench decision of Mumbai Tribunal in the case of Macleods Pharmaceuticals Ltd V. Additional CIT reported in 161 ITD 291 and Syncom Formulations (I) Ltd V. DCIT in ITA No.6429 / Mum / 2012, wherein it has been held that the Circular was introduced w.e.f. 01.08.2012 and hence effective from assessment year 2013-14 onwards. c) The ld AR also stated that the assessee company had not distributed the freebies namely DVD players and silver coins to any medical practitioner but only to Tablets (India) Ltd which is marketing the assessee’s products and hence the said expenditure would not be covered by Circular No.5 / 2012 of the CBDT. d) The ld AR by placing reliance on the co-ordinate bench decision of Mumbai Tribunal in the case of Solvay Pharma India Ltd V. PCIT reported in 169 ITD 13 , submitted that the Indian Medical Council (Professional Conduct Etiquette and Ethics) Regulations, 2002 is applicable only to the medical practitioners and not to the Pharma companies and further that the CBDT cannot enlarge the scope and applicability of “Indian Medical Council Regulation 2002” by making it applicable to the pharmaceutical companies. e) The ld AR in support of Additional Ground No.13 raised by the assessee claimed that the expenditure disallowed by the Assessing Officer goes to increase the gross profit of the assessee and that the same is eligible for deduction u/s.80IC. In support of this proposition, he placed reliance on the decision of Hon’ble Bombay High Court in CIT V. Gem Plus Jewellery India Ltd reported in 330 ITR 175 (Bom). He also placed placed reliance on the CBDT Circular No.37 / 2016 dated 02.11.2016 where it has been stated as follows:- “3. In view of the above, the Board has accepted the settled position that the disallowances made under sections 32, 40(a)(ia), 40A(3), 43B, etc. of the Act and other specific

11 & 3345/Chny/2018 disallowances, related to the business activity against which the Chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business, and that deduction under Chapter VI-A is admissible on the profits so enhanced by the disallowance.”

2.3. Per Contra, the ld DR vehemently argued that the expenditure incurred by the assessee is in violation of the provisions of section 37(1) and that they are hit directly by the CBDT Circular No.5 of 2012 and accordingly the said expenditure is not eligible for deduction u/s 37(1) of the Act. He also argued that the CBDT Circular needs to be extended to Pharma companies also as it is the paying hands (i.e the persons distributing the various gifts etc) and the medical practitioners are the receiving hands ( i.e the persons receiving the various gifts etc). Hence there is no need to segregated between two parties and that the Circular should be read in totality.

2.4. We find that the expenditure incurred by the assessee towards sales promotion, advertisement and publicity expenses were incurred in line with the business of the assessee and that the revenue had not doubted the genuineness of the incurring of such expenditure. We find that the only grievance of the revenue is that the assessee need not have incurred that expenditure (i.e getting into the propriety of a transaction) and further the said expenditure is hit by the CBDT Circular No.5 / 2012. It is well settled that the revenue cannot step into the shoes of the assessee to decide whether the expenditure is required to be incurred by the assessee or not where the genuineness of the same is not questioned. The ld AO has to see whether the particular expenditure incurred is not personal in nature , is not capital in nature and incurred wholly and exclusively for the purpose of business of the assessee. When assessee is able to provide the business nexus of incurrence of certain expenditure with supporting documents, it cannot be simply denied / rejected by the revenue merely on the ground of propriety, which action would lead to, travelling beyond the brief and stepping into the shoes of the assessee by the revenue. The various apex court decisions relied upon by the ld AR supra clearly point out this ratio. We therefore hold

2.5. It is not in dispute that the assessee had only distributed the DVD players, silver coins, calenders and diaries to Tablets India Ltd which was marketing the products of the assessee. There was absolutely no distribution of gifts made by assessee to any medical practitioners and hence the applicability of CBDT Circular No. 5/2012 itself deserves to be rejected. Reliance in this regard had been rightly placed on the co-ordinate bench decision of Mumbai Tribunal in Solvay Pharma India Ltd V. PCIT 169 ITD 13 wherein it was held as follows:- “23. Now coming to the Explanation to Section 37(1) invoked by the CIT, the Explanation provides an embargo upon allowing any expenditure incurred by the assessee for any purpose which is an offence or which is prohibited by law. This means that there should be an offence by an assessee who is claiming the expenditure or there is any kind of prohibition by law which is applicable to the assessee. Here in this case, no such offence of law has been brought on record, which prohibits the pharmaceutical company not to incur any development or sales promotion expenses. A law which is applicable to different class of persons or particular category of assessee, same cannot be made applicable to all. The regulation of 2002 issued by the Medical Council of India (supra), provides limitation/curb/prohibition for medical practitioners only and not for pharmaceutical companies. Here the maxim of 'ExpressioUniusEstExclusioAlterius' is clearly applicable, that is, if a particular expression in the statute is expressly stated for particular class of assessee then by implication what has not been stated or expressed in the statute has to be excluded for other class of assessee. If the Medical Council regulation is applicable to medical practitioners then it cannot be made applicable to Pharma or allied health care companies. If section 37(1) is applicable to an assessee claiming the expense then by implication, any impairment caused by Explanation 1 will apply to that assessee only. Any impairment or prohibition by any law/regulation on a different 13 & 3345/Chny/2018 class of person/assessee will not impinge upon the assessee claiming the expenditure under this section.

2.6. We hold that the Circular issued by the CBDT cannot enlarge the scope of a different regulation issued under a different act so as to impose any kind of hardship or liability to the assessee.

2.7. We further hold that Circular No.5 / 2012 is effective only from 01.08.2012 (i.e from Asst Year 2013-14 onwards) as held by the Mumbai Tribunal in Macleods Pharmaceuticals Ltd referred to supra. Hence the same would not be applicable to the impugned assessment year i.e AY 2012-13 and hence disallowance cannot be made based on the said Circular. We therefore, direct the ld AO to allow the claim of sales promotion, advertisement and publicity expenses u/s.37 of the Act. “

8.1 As regards, re-computation of deduction claim u/s.80IC of the Act, by excluding disallowance made towards sales promotion and publicity expenses including free samples given to medical practitioners, the Tribunal by following the decision of Hon’ble Bombay High Court in the case of CIT vs. Gem Plus Jewellery India Ltd., supra, held that enhanced profit on account of disallowance of expenses is eligible for deduction u/s.80IC of the Act. The relevant findings of the Tribunal are as under:-

“2.8. Now let us come to the Additional Ground raised by the assessee on the aspect of whether the disallowance of aforesaid expenditure would correspondingly go to increase the claim of deduction u/s 80IC of the Act. We find that this is a legal claim made by the assessee which could be raised for the first time before this tribunal and accordingly deem it fit to admit the same and take up for adjudication. The issue of whether deduction u/s.80IC of the Act should be computed on the profits as increased by the disallowance u/s.37(1) of the Act is covered in favour of the assessee by the 15 & 3345/Chny/2018 decisions in CIT V.Gem Plus Jewellery India Ltd 330 ITR 175 (Bom) and DCIT V. Vertex Infosoft Solution (P) Ltd 37 ITR (Trib) 521. Further it would be pertinent to hold that the issue now stands settled by the CBDT Circular No.37 / 2016 dated 02.11.2016 where the Board had clarified that the deduction under Chapter VI-A will be on such profits including disallowance under sections 32, 40(a)(ia), 40A(3), 43B etc of the Act which will include disallowance made u/s.37(1) as well.

2.9. We also find from the computation of income made by the ld AO, that the ld AO had disallowed the entire Sales promotion, advertisement and publicity expenses u/s 37(1) of the Act separately. Further he had again reduced the claim of deduction u/s 80IC of the Act by the very same amount of sales promotion, advertisement and publicity. This would effectively result in double disallowance made by the ld AO which we direct the ld AO to rectify.”

8.2 In this view of matter and consistent with view taken by the Co-ordinate Bench, we are of the considered view that the AO as well as the ld.CIT(A) were erred in disallowing sales promotion expenses u/s.37(1) of the Act, by considering guideline issued by the Medical Council of India under different legislation. Hence, we direct the AO to delete addition made towards disallowance of sales promotion and publicity expenses and further, allow deduction claim u/s.80IC of the Act, without reducing disallowance made towards sales promotion and publicity expenses.

9. The next issue that came up for our consideration from both the appeals is disallowance u/s.14A r.w.rule 8D of the IT Rules. The 16 & 3345/Chny/2018 facts with regard to the impugned dispute are that the assessee has received dividend income of Rs.4,91,788/- and claimed exemption u/s.10(34) of the Act. The assessee has not made suo-moto disallowance of expenditure relatable to exempt income. Therefore, the AO has invoked provisions of rule 8D of IT Rules and computed disallowance of Rs.3,67,943/-. On appeal, the ld.CIT(A) has confirmed disallowance made by the AO towards direct expenditure under Rule 8D(2)(i) and other expenses under Rule 8D(2)(iii), but set aside disallowance of interest expenditure under Rule 8D(2)(ii) to verify the claim of the assessee with regard to availability of own funds.

10. The ld.AR for the assessee submitted that the ld.CIT(A) has erred in upholding disallowance u/s.14A r.w.rule 8D of IT Rules without appreciating the fact that the AO has not recorded satisfaction as required u/s.14A(2) of the Act having regard to books of accounts of the assessee that claim of the assessee that no expenditure has been incurred to earn exempt income is incorrect. The ld.AR further submitted that the ld.CIT(A) has erred in sustaining addition made by the AO towards direct expenses under Rule 8D(2)(i) and other expenses under Rule 8D(2)(iii) ignoring the fact that no expenditure was incurred by the assessee for earning

17 & 3345/Chny/2018 exempt income. He further submitted that as regards interest expenditure, the assessee has sufficient own funds which is in excess of investments made in shares and securities which yielded exempt income and thus, interest expenses cannot be disallowed.

12.1 As regards disallowance of interest expenditure, it was the claim of the assessee that it has sufficient interest free funds in excess of investments made in shares and securities, which yielded exempt income. It is a well settled principle of law by the decisions of various High Courts including the decision of Hon’ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd., (2014) 366 ITR 505, where it was clearly held that if assessee had mixed funds including borrowed funds then, general presumption comes in favor of the assessee that investment in shares and securities is out of interest free funds. In this case, the ld.CIT(A) has accepted the 19 & 3345/Chny/2018 plea of the assessee and has directed the AO to examine availability of interest free funds. Therefore, we are of the considered view that there is no error in the findings recorded by the ld.CIT(A) to restore the issue to the file of the AO and to determine disallowance of interest expenses under Rule 8D(2)(ii), on the basis of availability of interest free funds.

12.2 As regards disallowance of other expenses under Rule 8D(2)(iii) at the rate of 0.5% of average value of investments, when the assessee has not made any suo-motto disallowance towards expenses relatable to exempt income, then the AO left with no option but to apply prescribed procedure provided under Rule 8D(2)(iii) of the IT Rules. Hence, there is no error in disallowance made by the AO towards other expenses. Accordingly, we reject the ground taken by the assessee.

12.3 As regards excluding investments which does not yield exempt income, we find that it is a well settled principle of law by the decision of ITAT, Special Bench in the case of ACIT vs. Vireet Investment Pvt. Ltd., 165 ITD 27, where it was clearly held that only those investments which yielded exempt income for the relevant assessment year needs to be considered for the purpose of 20 & 3345/Chny/2018 disallowance of other expenses under Rule 8D(2)(iii) of IT Rules. Therefore, we direct the AO to consider only those investments which yielded exempt income for the purpose of computing average value of investments and further to disallow other expenses at the rate of 0.5% of average value of investments.

Order pronounced in the court on 8th September, 2021 at Chennai.