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Income Tax Appellate Tribunal, “C”BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI MANOJ KUMAR AGGARWAL
This group of seven appeals comprises of two sets of cross appeals, an appeal by the Revenue arising out of order passed under section 154 of the Income Tax Act, 1961 (for short "the Act") and another two appeals by the assessee. All these appeals arise out of five separate orders passed by the learned Commissioner (Appeals), Mumbai, pertaining to the assessment years 2011–12, 2012–13, 2013–14 and 2014–15.
3 Indoco Remedies Ltd. 2. Since, all these appeals pertain to the same assessee involving common issues arising out of identical set of facts and circumstances, therefore, as a matter of convenience, these appeals were heard together and are being disposed off by way of this consolidated order.
./2017 Revenue’s Appeal – A.Y. 2011–12
The present appeal has been filed by the Revenue being aggrieved with the decision of learned Commissioner (Appeals) in annulling the order passed under section 154 of the Act by the Assessing Officer.
Brief facts are, the assessee, a resident company, is engaged in the business of manufacturing of pharmaceuticals and trading in bulk drug and formulations. For the assessment year under dispute, the assessee filed its return of income on 29th September 2011 declaring nil income under the normal provisions after claiming deduction under section 80IC of the Act. However, the assessee declared book profit of ` 56,88,44,331, under section 115JB of the Act. Subsequently, the assessee filed a revised return of income of income revising the book profit declared under section 115JB of the Act.
Be that as it may, the return of income filed by the assessee was selected for scrutiny and after calling for necessary information including the books of account and examining them, the Assessing
4 Indoco Remedies Ltd. Officer completed the assessment under section 143(3) of the Act vide order dated 12th February 2014. While doing so, the Assessing Officer examined assessee’s claim of deduction under section 80IC of the Act and apportioned/re–allocated certain common expenses to the unit at Baddi for which deduction under section 80IC of the Act was claimed. As a result of such re–allocation of expenditure, the deduction claimed under section 80IC of the Act was reduced by an amount of ` 4,07,02,900. Against the assessment order so passed, the assessee preferred appeal before the first appellate authority. In the meanwhile, the Assessing Officer, alleging incorrect allowance of deduction under section 80IC of the Act as well as R&D expenses under section 35 of the Act, initiated proceedings under section 154 of the Act and ultimately passed an order under section 154 of the Act on 29th July 2015. In the said order, the Assessing Officer held that while completing the assessment, the Assessing Officer has wrongly allocated the actual revenue expenditure instead of total R&D expenditure including the amount on which the assessee had claimed deduction under section 35(2AB) of the Act. Further, the Assessing Officer held that the deduction of R&D expenditure has to be allowed as per the amount mentioned in Form no.3CL, issued by the DSIR. Against the order passed under section 154 of the Act, the assessee preferred appeal before the first appellate authority.
5 Indoco Remedies Ltd.
After considering the submissions of the assessee in the context of the facts and material on record, learned Commissioner (Appeals) observed that the issues on which the Assessing Officer has invoked his powers under section 154 of the Act are debatable issues. Further, he observed that the allocation of expenditure between the Head Office and Baddi unit was examined by the Assessing Officer in course assessment proceedings and after taking note of all the relevant facts, the Assessing Officer has re–allocated certain expenditure to the Baddi unit. Thus, he held that the allocation of R&D expenditure to the Baddi unit should be made as per the assessment order. Accordingly, he allowed assessee’s appeal.
The learned Departmental Representative submitted, the issues on which the Assessing Officer exercised power of rectification under section 154 of the Act are not debatable issues, but only concerning the quantum of deduction allowed. Therefore, it is a rectifiable mistake.
Per contra, the learned Counsel for the assessee heavily relying upon the observations of learned Commissioner (Appeals) submitted, the allocation of expenditure between eligible and non–eligible units being a debatable issue, the Assessing Officer could not have passed the order under section 154 of the Act. Further, he submitted, under identical facts and circumstances the Assessing Officer has passed an 6 Indoco Remedies Ltd. order under section 154 of the Act in assessee’s own case in assessment year 2010–11, which was reversed by the learned Commissioner (Appeals). He submitted, while deciding Revenue’s appeal, the Tribunal has agreed with the observations of learned Commissioner (Appeals) that the issues on which the Assessing Officer has exercised power under section 154 of the Act, are debatable issues. Thus, he submitted, the aforesaid decision of the Tribunal squarely applicable to the facts of the present appeal.
We have considered rival submissions and perused the material on record. A reading of the assessment order passed under section 143(3) of the Act clearly reveals that the Assessing Officer while examining assessee’s claim of deduction under section 80IC of the Act in respect of Baddi unit has examined all the relevant facts and has thereafter apportioned/re–allocated certain common expenditure to the Baddi unit resulting in disallowance of ` 4,07,02,900, out of the deduction claimed under section 80IC of the Act. It is also relevant to observe, the aforesaid decision of the Assessing Officer was challenged before learned Commissioner (Appeals) and the entire issue relating to the allocation of expenditure to the Baddi unit was subject matter of the appeal. As rightly observed by learned Commissioner (Appeals), while completing the assessment under section 143(3) of the Act, the Assessing Officer has allocated the common expenditure including R&D
7 Indoco Remedies Ltd. expenditure to different units on pro rata basis. It is also a fact that in the assessment order, the Assessing Officer has never given any finding that the eligible deduction under section 35 of the Act has to be allocated to various units. Thus, when the Assessing Officer after applying his mind to the facts and material on record in the course of assessment proceedings has computed deduction under section 80IC of the Act on re–allocation of certain expenditure, proceedings under section 154 of the Act could not have been initiated only because it is felt that certain expenditure has been improperly allocated. When the facts on record show that the assessee was maintaining separate books of account in respect of its various units, allocation of common expenses to different units by itself is a debatable issue. That being the case, the Assessing Officer having dealt with such debatable issue in the assessment order, it cannot be dealt with again in rectification proceedings under section 154 of the Act which is only meant to rectify mistakes apparent on the face of record. Notably, under similar facts and circumstances, the Assessing Officer had initiated proceedings and passed under section 154 of the Act in assessee’s own case in assessment year 2010–11 re–allocating, the R&D expenditure on the basis of deduction claimed under section 35(2AB) of the Act. The said order having been annulled by learned Commissioner (Appeals), the Revenue came in appeal before the Tribunal. The Tribunal while deciding the issue in ITA no.4627/Mum./2017, dated 27th August
8 Indoco Remedies Ltd. 2019, having agreed with the view expressed by learned Commissioner (Appeals) that the issues on which proceedings under section 154 of the Act, has been initiated are debatable issues, upheld the decision of learned Commissioner (Appeals). Facts being identical, the aforesaid decision of the Co–ordinate Bench will clearly apply. In view of the aforesaid, we uphold the decision of learned Commissioner (Appeals) by dismissing the grounds raised by the Revenue.
In the result, Revenue’s appeal is dismissed. ./2017 Assessee’s Appeal – A.Y. 2011–12
The only issue raised in the present appeal relates to disallowance of ` 4,07,02,900, out of deduction claimed under section 80IC of the Act.
As discussed earlier, in the return of income filed for the impugned assessment year, the assessee claimed deduction under section 80IC of the Act in respect of the Baddi unit. In the course of assessment proceedings, the Assessing Officer while examining the claim of deduction under section 80IC of the Act, noticed that the assessee has not apportioned the Head Office expenses and some other expenses in proper ratio to the Baddi unit. After calling for the necessary details and verifying them, the Assessing Officer observed that as against the total sales turnover during the year amounting to `
9 Indoco Remedies Ltd. 478.47 crore, the sale turnover of Baddi unit was ` 164.15 crore, working out to 35% of the total sales. Accordingly, on a pro rata basis he apportioned 35% of the common expenses to Baddi unit. This resulted in reduction of assessee’s claim of deduction under section 80IC of the Act by ` 4,07,02,900. Though, the assessee challenged the aforesaid disallowance before learned Commissioner (Appeals), however it was unsuccessful. The learned Counsel for the assessee submitted, while deciding similar issue in preceding years the Tribunal has restored the issue to the Assessing Officer.
The learned Departmental Representative also agreed with the aforesaid submissions of the learned Counsel for the assessee.
We have considered rival submissions and perused the material on record. The Head Office expenses which were allocated to the Baddi unit by the Assessing Officer are as under:–
R&D Expenses ` 3,26,94,848 Depreciation on Head ` 80,08,052 Office Assets Total:– ` 4,07,02,900
It is seen from the material on record that similar allocation of R&D expenses and depreciation on Head Office assets were made in assessee’s own case in assessment year 2009–10. The Tribunal while deciding the issue in ITA no.4478/Mum./2012, dated 9th October 2013,
10 Indoco Remedies Ltd. restored the issue to the Assessing Officer. Further, while considering identical issue in assessee’s own case in the assessment year 2010– 11, the Tribunal in ITA no.4538/Mum./2017, dated 27th August 2019, following its order in assessment year 2009–10 also restored the issue to the Assessing Officer for re–adjudication. Facts being identical, respectfully following the consistent view of the Tribunal in assessee’s own case as noted above, we restore the issue to the Assessing Officer for re–adjudication after due opportunity of being heard to the assessee. Ground is allowed for statistical purposes.
In the result, assessee’s appeal is allowed for statistical purposes. ./2017 Revenue’s Appeal – A.Y. 2011–12
In grounds no.1 to 4, the Revenue has challenged the deletion of disallowance of expenditure incurred towards gifts/freebies given to the doctors.
Brief facts are, in the course of assessment proceedings the Assessing Officer noticed that the assessee had claimed expenditure of ` 1,45,84,149, towards gift and presentation articles given to Doctors. Stating that such gifts are in contravention of Medical Council of India (MCI) Regulations, wherein, it has been provided that making such personal gifts to the doctors is an unethical act, the Assessing Officer
11 Indoco Remedies Ltd. held that the expenditure claimed cannot be allowed in view of Explanation to section 37(1) of the Act. Being aggrieved with such disallowance, the assessee preferred appeal before learned Commissioner (Appeals).
After considering the submissions of the assessee in the context of the facts and material on record as well as the judicial precedents cited before him, learned Commissioner (Appeals) held that the MCI Regulations are applicable to the doctors and medical practitioners and not to pharmaceutical companies. Further, he held that CBDT circular no.5 of 2012 dated 1st August 2012, would apply prospectively. While doing so, he also relied upon the decisions rendered by the Tribunal in assessee’s own case in the preceding assessment years. Thus, on the aforesaid premises, he deleted the disallowance made by the Assessing Officer.
The learned Departmental Representative submitted, before the Assessing Officer assessee had not furnished the break–up of the gift items given to the doctors. Thereafter, referring to the observations of the Assessing Officer as well as MCI Regulations and CBDT circular no.5 of 2012 dated 1st August 2012, the learned Departmental Representative submitted, the disallowance made by the Assessing Officer should be restored.
12 Indoco Remedies Ltd.
The learned Counsel for the assessee strongly relying upon the observations of learned Commissioner (Appeals) submitted, MCI Regulations are applicable only to the doctors and not pharmaceutical companies. Therefore, by relying upon MCI guidelines, the expenditure claimed by the assessee cannot be disallowed. Further, he submitted, CBDT circular no.5 of 2012 dated 1st August 2012, cannot enlarge the scope of MCI guidelines or the provisions of the Act in the absence of any enabling provisions. Therefore, even the CBDT circular no.5 of 2012 cannot be pressed into action to disallow assessee’s expenditure irrespective of whether such circular will apply prospectively or retrospectively. Further, he submitted, identical issue has been decided in favour of the assessee in its own case in the preceding assessment years. Additionally, the learned Counsel for the assessee submitted that the issue is otherwise squarely covered by the following decisions of the Tribunal:–
i) Medley Pharmaceuticals Ltd. v/s DCIT, Mum./2018, dated 22.07.2020; ii) DCIT v/s PHL Pharmaceuticals Ltd., 78 taxmann.com 36; iii) Aishika Pharma Pvt. Ltd. v/s ITO, 106 taxmnn.com 192 (Del.); iv) Peerless Hospitex Hospital and Research Centre Ltd. v/s DCIT, 144 taxmann.com 583; v) Aristo Pharmaceuticals Pvt. Ltd. v/s ACIT, 107 taxmann.com 119; vi) DCIT v/s India Medtronics Pvt. Ltd., 112 taxmann.com 119;
13 Indoco Remedies Ltd. vii) Solvay Pharma India Ltd. v/s PCIT, 89 taxmann.com 249; and viii) DCIT v/s Piramal Enterprises, 117 taxmann.com 970.
We have considered rival submissions and perused the material on record in the light of decisions relied upon. Undisputedly, the expenditure incurred towards providing gifts/freebies to doctors/medical professionals was disallowed by the Assessing Officer purely on the ground that as per MCI Regulations, 2002, doctors/medical practitioners are debarred from accepting any gift, travel facility, hospitality/cash or monetary grant from pharmaceutical and allied health sector industries. Further, in the course of hearing, the learned Departmental Representative has also referred to CBDT circular no.5 of 2012 dated 1st August 2012, while justifying the disallowance of the aforesaid expenditure by the Assessing Officer. It is the say of the assessee from the very beginning that the expenditure incurred by the assessee in providing gifts/freebies is only for the purpose of business promotion as such gift items bear assessee’s logo. It has been submitted by the assessee that the exception provided under the Explanation to section 37(1) of the Act would not be applicable as the assessee cannot be accused of infraction of any law. It is the say of the assessee that the MCI Regulations are only applicable to the doctors/medical practitioners and not to the pharmaceutical companies.
14 Indoco Remedies Ltd.
In our view, the aforesaid contention of the assessee deserves acceptance. The Co–ordinate Bench in PHL Pharma Ltd. (supra) has held that MCI Regulations are applicable only to the doctors/medical practitioners and not to pharmaceutical companies. Therefore, the MCI Regulations cannot be brought into play to invoke Explanation to section 37(1) of the Act for disallowing expenditure claimed by the assessee. The Bench has also held that CBDT circular no.5 of 2012 dated 1st August 2012, cannot enlarge the scope of MCI Regulations de hors any enabling provision either under the Act or the MCI Regulations. The Bench has observed, though, CBDT can tone down the rigors of law in order to ensure a fair enforcement of the provisions by issuing circulars for clarifying the statutory provisions, however, it is divested of all its power to create a new impairment adverse to an assessee or to a class of assessees without any sanction or authority of law. The aforesaid legal propositions have been subsequently reiterated in a number of decisions rendered by the Tribunal which are as under:–
i) Aristo Pharmaceuticals Pvt. Ltd. v/s ACIT, 107 taxmann.com 119; ii) Medley Pharmaceuticals Ltd. v/s DCIT, Mum./2018, dated 22.07.2020; and iii) Aishika Pharma Pvt. Ltd. v/s ITO, 106 taxmnn.com 192 (Del.).
15 Indoco Remedies Ltd.
Thus, from the ratio laid down in the aforesaid decisions, it can be safely concluded that neither the MCI Regulations 2002 nor the CBDT circular no.5 of 2012 dated 1st August 2012, would be applicable to the pharmaceutical companies. That being the case, the expenditure incurred by the assessee cannot be disallowed alleging infraction of law in terms of Explanation–1 to section 37(1) of the Act. The decisions relied upon by the learned Counsel for the assessee clearly supports the aforesaid view. That being the case, the disputed expenditure claimed by the assessee is allowable. Therefore, we do not find any infirmity in the decision of learned Commissioner (Appeals) in deleting the disallowance made by the Assessing Officer. These grounds are dismissed.
In ground no.5, the Revenue has challenged restriction of disallowance on account of bogus purchase.
Brief facts are, during the assessment proceedings, the Assessing Officer on the basis of information received from the Sales Tax Department that purchases worth ` 23,86,994 claimed to have been made from three parties are non–genuine, called upon the assessee to prove the genuineness of such purchases. Further, to independently verify the authenticity of such purchases, the Assessing Officer issued notices under section 133(6) of the Act to the concerned parties. It is alleged that all such notices returned back unserved. Thus, holding
16 Indoco Remedies Ltd. that genuineness of the aforesaid purchases could not be proved, the Assessing Officer disallowed the entire amount of ` 23,86,994. While considering such disallowance disputed by the assessee, learned Commissioner (Appeals) observed that the Assessing Officer has not rejected the books of account, hence, the consumption of the disputed purchases cannot be denied. Therefore, relying upon certain judicial precedents, learned Commissioner (Appeals) observed that in such circumstances, the entire purchases cannot be disallowed, but the profit element involved in such purchases can be considered for disallowance. Accordingly, he restricted the disallowance to 12.5% of the alleged non–genuine purchases.
We have considered rival submissions and perused the material on record. As rightly observed by learned Commissioner (Appeals), the Assessing Officer has not rejected the books of account. Further, he has not raised any doubt with regard to the consumption of goods and turnover of sales. Therefore, the only doubt which remains is with regard to the actual source of purchases. In such circumstances, as per the settled principle of law, the profit element embedded in such purchases can be considered for addition. Keeping in view the decision rendered in similar nature of case, we are of the considered opinion that the disallowance @ 12.5% is reasonable, hence, does not require any interference. Accordingly, upholding the order of learned
17 Indoco Remedies Ltd. Commissioner (Appeals), we dismiss the ground raised by the Revenue.
In the result, Revenue’s appeal is dismissed. ./2017 Assessee’s Appeal – A.Y. 2012–13
The only issue in dispute in this appeal is in relation to part disallowance of deduction claimed under section 80IC of the Act by re– allocating certain expenditure to Baddi unit which is eligible to claim deduction under section 80IC of the Act. As discussed earlier, the assessee in the return of income filed for the impugned assessment year had claimed deduction under section 80IC of the Act in respect of its manufacturing unit at Baddi. During the assessment proceedings, the Assessing Officer while verifying assessee’s claim under section 80IC of the Act was of the view that certain commission and Head Office expenses which have not been allocated to the Baddi unit should be allocated on pro–rata basis. Accordingly, he compared the total sales as against the sales effected by the Baddi unit and found that the sale of Baddi unit works out to 35% of the total sales. Thus, he allocated 35% of the expenditure incurred under the head packing and delivery charges, analytical expenses, advertisement and sales promotion expenses, R&D expenses and depreciation on Head Office assets to the Baddi unit. As a result of such allocation, the deduction
18 Indoco Remedies Ltd. claimed under section 80IC of the Act was reduced by an amount of ` 5,80,98,881. Though, the assessee challenged the aforesaid disallowance before learned Commissioner (Appeals), however, the disallowance was upheld.
We have considered rival submissions and perused the material on record. The learned Counsel for the assessee submitted, while deciding identical issue in assessee’s own case in the preceding assessment years, the Tribunal has fully allowed the expenditure relating to packing and delivery charges, analytical expenses, advertisement and sales promotion expenses. Whereas, the issue relating to the claim of R&D expenses and depreciation on Head Office assets has been restored back to the Assessing Officer for fresh adjudication. The learned Departmental Representative has not disputed the aforesaid factual position. On a perusal of record, we find that while deciding assessee’s appeal on identical issue in assessment year 2008–09 in ITA no.7373/Mum./2011, dated 23rd October 2012, the Tribunal has fully allowed assessee’s claim of expenditure relating to packing and delivery charges, analytical expenses, advertisement and sales promotion expenses. Whereas, while deciding assessee’s appeal for the assessment year 2009–10 in ITA no.4478/Mum./2012, dated 9th October 2013, the Tribunal has restored the issue relating to re–allocation of depreciation on Head Office assets and R&D expenses
19 Indoco Remedies Ltd. to Baddi unit back to the Assessing Officer for re–adjudication. Following the aforesaid orders, the Tribunal while deciding assessee’s appeal for the assessment year 2010–11 in ITA no.4538/Mum./2017, dated 27th August 2019, has directed the Assessing Officer to allow the expenditure incurred towards packing and delivery charges, analytical expenses, advertisement and sales promotion expenses, whereas, directed him to re–adjudicate afresh the issue of reallocation of R&D expenses and depreciation on Head Office assets to the Baddi unit. Facts being identical, respectfully following the consistent view of the Tribunal in assessee’s own case as noted above, we allow assessee’s claim of expenses with regard to packing and delivery charges, analytical expenses, advertisement and sales promotion expenses. Whereas, the issue relating to re–allocation of depreciation on Head Office assets and R&D expenses are restored back to the Assessing Officer for fresh adjudication after providing due opportunity of being heard to the assessee. Ground is partly allowed.
In the result, assessee’s appeal is partly allowed. ./2017 Revenue’s Appeal – A.Y. 2012–13
The only dispute in the present appeal relates to deletion of disallowance of expenditure incurred towards gift/freebies given to doctors.
20 Indoco Remedies Ltd.
This issue is identical to the issue raised in grounds no.1 to 4 of ITA no.4629/Mum./2017. Following our decision therein, we uphold the order of learned Commissioner (Appeals) by dismissing the grounds raised by the Revenue.
In the result, Revenue’s appeal is dismissed. ./2017 Assessee’s Appeal – for A.Y. 2013–14 ITA no.6533/Mum./2017 Assessee’s Appeal – for A.Y. 2014–15
The first common issue raised in ground no.1, in both the appeals relates to disallowance of expenditure incurred towards providing gift/freebies to doctors.
As could be seen, though, learned Commissioner (Appeals) had allowed the aforesaid expenditure claimed by the assessee in assessment years 2011–12 and 2012–13, however, he upheld the disallowance in the impugned assessment year on the reasoning that CBDT circular no.5 of 2012 dated 1st August 2012, would be applicable to the impugned assessment years. As discussed earlier by us while deciding similar issue in supra, CBDT circular no.5 of 2012 dated 1st August 2012, irrespective of the fact whether it will apply retrospectively or prospectively, would not be applicable to the pharmaceutical companies as the CBDT does not have any power
21 Indoco Remedies Ltd. to enlarge the scope of MCI Regulations in the absence of any enabling provisions either in the Act or MCI Regulations. Therefore, our reasoning/decision while allowing assessee’s claim of such expenditure as contained in Paragraphs 22 to 24 of this order, would apply mutatis mutandis to these appeals also. Therefore, the expenditure claimed by the assessee is allowed. Accordingly, we delete the disallowances made by the Assessing Officer and sustained by learned Commissioner (Appeals) in both the years. These grounds are allowed.
The next common issue as raised in ground no.2 of both the appeals relates to part disallowance of deduction claimed under section 80IC of the Act by re–allocating depreciation on Head Office assets and R&D expenses to Baddi unit.
The aforesaid issue is identical to the issue raised in ITA no. 4537/Mum./2017, dealt by us earlier. Following our decision in paragraph 14 and 15 of this order, we restore the issue to the Assessing Officer for fresh adjudication after providing due opportunity of being heard to the assessee. These grounds are allowed for statistical purposes.
In the result, appeals are partly allowed.
To sum up, assessee’s appeal in ITA no.4537/Mum./2017, is allowed for statistical purposes; assessee’s appeal in ITA
22 Indoco Remedies Ltd. no.4536/Mum./2017, is partly allowed; assessee’s appeal in ITA no. 6532/Mum./2017 & are partly allowed; and Revenue’s appeals being ITA no.4628/Mum./2017, ITA no.4629/Mum./2017 and ITA no.4591/Mum/2017 are dismissed. Order pronounced through notice board under rule 34(4) of the Income Tax (Appellate Tribunal) Rules, 1963 on 03.09.2020