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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEYAND SHRI MANOJ KUMAR AGGARWAL
Date of Hearing – 16.07.2019 Date of Order – 31.07.2019
O R D E R PER SAKTIJIT DEY. J.M.
These are a set of cross appeals for the assessment year 2011– 12 and appeal by the assessee for the assessment year 2012–13. All these appeals arise out of two separate orders passed by the learned Commissioner of Income Tax (Appeals)–56, Mumbai.
./2016 Assessee’s Appeal – A.Y. 2011–12
The learned Authorised Representative has filed a letter dated 15th July 2019, stating that the assessee has instructed him not to 3 Glenmark Pharmaceuticals Ltd. contest grounds no.1 to 3. In view of the aforesaid, we dismiss grounds no.1, 2 and 3. 3. The only surviving effective ground, being ground no.4, is on the issue of disallowance made under section 14A r/w rule 8D.
It is necessary to observe, the Revenue has also challenged the decision of the learned Commissioner (Appeals) on the very same issue in its appeal in ITA no.4972/Mum./2016 and the corresponding ground being ground no.5 and 6. Therefore, for the sake of convenience, we propose to dispose of both the grounds together.
Brief facts are, in the course of assessment proceedings the Assessing Officer noticed that during the year under consideration, the assessee has earned exempt income by way of dividend from shares and mutual funds amounting to ` 3,627. Since, the disallowance of expenditure for earning of exemption made by the assessee was not in terms of rule 8D, the Assessing Officer called upon the assessee to explain why disallowance should not be computed by applying rule 8D. In response, it was submitted by the assessee that following the decision of the Tribunal in its own case it has disallowed 10% of the dividend income. Hence, no further disallowance should be made. The Assessing Officer, however, did not find merit in the submissions of the assessee and proceeded to disallow an amount of ` 13,60,49,335.
4 Glenmark Pharmaceuticals Ltd. 6. The assessee challenged the aforesaid disallowance before learned Commissioner (Appeals). After considering the submissions of the assessee, learned Commissioner (Appeals) granted partial relief by directing the Assessing Officer to exclude the expenditure relating to investment made in the subsidiary companies which are for the purpose of business.
The learned Authorised Representative submitted, the disallowance under section 14A r/w rule 8D should not exceed the exempt income earned by the assessee during the year. He submitted, while deciding identical issue in assessee’s own case in assessment year 2010–11, the Tribunal has held that disallowance under section 14A of the Act cannot exceed the exempt income earned during the year. Further, he submitted, while computing book profit under section 115JB of the Act, the adjustment in terms of Explanation–1(f) should also be restricted to the exempt income earned during the year.
The learned Departmental Representative relied upon the observations of the Assessing Officer.
We have considered rival submissions and perused the material on record. As regards the disallowance made under section 14A r/w rule 8D under the normal provisions of the Act, it is relevant to observe that during the year under consideration the assessee had 5 Glenmark Pharmaceuticals Ltd. earned exempt income of ` 3,267 only. Different High Courts have held that disallowance under section 14A r/w rule 8D cannot exceed the exempt income earned by the assessee in a particular assessment year. In this context, we may refer to the following decisions:–
i) Joint Investments v/s CIT, 372 ITR 694 (Del.); and ii) PCIT v/s State Bank of Patiala, 393 ITR 476 (P&H).
In fact, in assessee’s own case in assessment year 2010–11, the Tribunal, while deciding identical issue in ITA no.1654/Mum./2016, dated 1st February 2019 has held that disallowance under section 14A of the Act has to be restricted to the exempt income earned during the year. In view of the aforesaid, we direct the Assessing Officer to restrict the disallowance under section 14A r/w rule 8D to ` 3,267, i.e., the exempt income by the assessee during the year. As regards the adjustment made to the book profit computed under section 115JB of the Act on account of expenditure incurred for earning exempt income, though, we agree with the learned Authorised Representative that while making such adjustment the Assessing Officer cannot invoke the provisions of section 14A r/w rule 8D, however, it is equally true that the Assessing Officer can make adjustment to the book profit towards expenditure incurred for earning exempt income as per Explanation– 1(f) of section 115JB of the Act. Therefore, in the facts of the present case, we direct the Assessing Officer to restrict the adjustment under 6 Glenmark Pharmaceuticals Ltd. Explanation–1(f) to section 115JB of the Act to the amount of exempt income earned by the assessee during the year. Ground no.4 of the assessee’s appeal and grounds no. 5 and 6 of Revenue’s appeal are accordingly disposed of.
In the result, assessee’s appeal is partly allowed. ./2016 Revenue’s Appeal – A.Y. 2011–12
In ground no.1, the Revenue has challenged the deletion of addition of ` 3,58,478, made by the Assessing Officer under section 41(1) of the Act.
Brief facts are, during the assessment proceedings, the Assessing Officer after verifying the details relating to sundry creditors furnished by the assessee, found that an amount of ` 3,58,478, pertaining to 46 creditors are pending for more than three years. Thus, he concluded that assessee’s liability with regard to such creditors have ceased to exist in terms of section 41(1) of the Act and accordingly, added back to the income of the assessee. While deciding assessee’s appeal on the issue, learned Commissioner (Appeals), following the decision of the Tribunal and the first appellate authority in assessee’s own case for the preceding assessment year deleted the addition.
7 Glenmark Pharmaceuticals Ltd.
We have considered rival submissions and perused the material on record. The only reason on the basis of which the Assessing Officer has made the impugned addition under section 41(1) of the Act is, they are pending for more than three years. However, he has neither made any enquiry or brought any material on record to demonstrate that the liability relating to the concerned creditors have ceased to exist in terms with the conditions prescribed under section 41(1) of the Act. It is further relevant to observe, while deciding identical issue in assessee’s own case for the assessment year 2010–11, the Tribunal, in ITA no.1654/Mum./2016, dated 1st February 2019, has upheld the decision of learned Commissioner (Appeals) deleting similar disallowance made by the Assessing Officer on identical reasoning. That being the case, we do not find any reason to interfere with the decision of the learned Commissioner (Appeals) on this issue. This ground is dismissed.
In ground no.2, the Revenue has challenged the deletion of addition of ` 5,44,38,514, on account of R & D expenses allocated to Baddi and Solan Units of the assessee.
Brief facts are, during the assessment proceedings, the Assessing Officer, while verifying assessee’s claim of deduction under section 80IC of the Act, found that in the earlier assessment year assessee had allocated various expenditures including R & D expenses to its 8 Glenmark Pharmaceuticals Ltd. Baddi and Solan Units in the ratio of their sales turnover. However, in the impugned assessment year, the assessee has not allocated any R & D expenses to its Baddi and Solan Units and all the expenses were allocated to non–exempt Units. He, therefore, called upon the assessee to explain why R & D expenses should not be allocated to Baddi and Solan Units. Though, the assessee objected to the proposed action of the Assessing Officer, however, rejecting the submissions of the assessee, the Assessing Officer reduced a part of expenditure allocated to the other units by reallocating them to Baddi and Solan Units. This resulted in disallowance of R & D expenses of ` 8,54,86,997. The assessee challenged the aforesaid disallowance before the first appellate authority.
The learned Commissioner (Appeals) taking note of the order passed by the first appellate authority in assessee’s own case in assessment year 2010–11 and various other decisions, ultimately held that the Assessing Officer was not justified in apportioning R & D expenses incurred in other Units to Baddi and Solan Units. Thus, he allowed assessee’s claim.
We have considered rival submissions and perused the material on record. The learned Authorised Representative fairly submitted befor us that the Tribunal while deciding identical issue in assessee’s own case in assessment year 2010–11 has restored it to the Assessing
9 Glenmark Pharmaceuticals Ltd. Officer with certain directions. He submitted, similar direction may be issued in the impugned assessment year.
The learned Departmental Representative agreed with the aforesaid submission of the learned Authorised Representative.
Having considered the rival submissions, we find that while deciding identical issue in assessment year 2010–11, the Tribunal in ITA no.1654/Mum./2016, dated 1st February 2016, has restored the issue to the Assessing Officer with the following directions:–
“32. We have heard the contentions of both parties and perused the material on record. We find that the ITAT in assessee's own case for A.Y. 2009-20 has restored identical issue to the file of the AO to give finding as to the utilization of R & D expenditure with respect to these units. In this view of the matter, in our considered opinion, the doctrine of stare decisis mandates that we follow the ITAT’s order of earlier year. Accordingly, following the same finding of the ITAT in the earlier year we remit the issue to the file of the AO with direction to the AO to decide the issue after granting reasonable opportunity of hearing to the assessee.”
Facts being identical, following the aforesaid decision of the Co– ordinate Bench, we restore the issue to the Assessing Officer for deciding afresh in terms with the directions of the Tribunal in the preceding assessment year and only after due opportunity of being heard to the assessee. This ground is allowed for statistical purposes.
In ground no.3, the Revenue has challenged the decision of the first appellate authority in deleting the addition of ` 8,54,86,997, on 10 Glenmark Pharmaceuticals Ltd. account of interest expenditure allocated by the Assessing Officer to Baddi and Solan Units while computing deduction under section 80IC of the Act.
Brief facts are, while verifying assessee’s claim of deduction under section 80IC of the Act in the course of assessment proceedings, the Assessing Officer noticed that the assessee had allocated interest expenditure to its Baddi and Solan Units as per actual. However, he was of the view that since the assessee has general pool of funds which is being utilized by all the Units, the allocation of interest should be on the basis of sales turnover of each unit. Accordingly, he allocated the interest expenditure to all the Units on the basis of their respective sales turnover and computed deduction under section 80IC of the Act. This resulted in a disallowance of ` 8,54,86,997. The assessee challenged the aforesaid disallowance before the first appellate authority.
After considering the submissions of the assessee in the light of certain judicial precedents as referred to by him, learned Commissioner (Appeals) held that interest expenditure cannot be apportioned on the basis of sales turnover. Accordingly, he deleted the disallowance made by the Assessing Officer.
11 Glenmark Pharmaceuticals Ltd. 25. The learned Departmental Representative relied upon the observations of the Assessing Officer.
The learned Authorised Representative submitted, identical issue has been decided in favour of the assessee in the assessment year 2010–11.
We have considered rival submissions and perused the material on record. As could be seen, the assessee has allocated interest expenditure on the basis of utilization of borrowed funds in different Units. Since no borrowed funds were utilized at Baddi Unit, which is in existence since the year 2006–07, the assessee had not allocated any interest expenditure to the Baddi Unit, while allocating interest expenditure to other two Units. It is apparent, before the Departmental Authorities the assessee has demonstrate that no borrowed funds were utilized at Baddi Unit. Whereas, without factually examining assessee’s claim the Assessing Officer has arbitrary allocated a part of interest expenditure to the Baddi Unit on the basis of sales turnover. It is relevant to observe, while deciding identical issue in assessee’s own case for the assessment year 2010–11, the Tribunal in ITA no.1654/Mum./2016, dated 1st February 2019, has upheld the decision of learned Commissioner (Appeals) with the following observations:– 12 Glenmark Pharmaceuticals Ltd. “38. We have considered the rival submissions and perused the material on record. Upon careful consideration, we find that the factual details submitted corroborate that the baddi unit had huge accumulated profit. In fact, its operational cash flow is being used by the head office. In the balance sheet, the debit balance of Head Office account is Rs.2,470,281,148/- as on 31.03.2010. There is no borrowing secured or unsecured for this unit. In fact, the balance sheet shows that the unit has huge reserve and surplus amounting to Rs.3,920,730,627/- covering the entire assets of the unit.
39. In these circumstances, when no loan is there for baddi unit and the unit is generating huge profits, the case law relied by the ld. Counsel of the assessee duly support the proposition that only the interest expenses which have direct nexus in earning the income of the tax exempt unit should be considered. Since the documentary evidence duly support the plea that there is no direct nexus between the expenses allocated by the A.O. to the unit, we do not find any infirmity in the order of the ld. CIT(A) in this regard.”
Facts being identical, respectfully following the aforesaid decision of the Co–ordinate Bench in assessee’s own case, we uphold the decision of learned Commissioner (Appeals). Ground raised is dismissed.
In ground no.4, the Revenue has challenged the deletion of disallowance of ` 15,30,84,266, made by the Assessing Officer on the reasoning that the expenditure is prohibited by law as per Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulation, 2002.
Brief facts are, during the assessment proceedings, the Assessing Officer noticed that the assessee has debited to the Profit & Loss account an amount of ` 15,30,84,266 towards expenditure incurred on 13 Glenmark Pharmaceuticals Ltd. gifts, freebies given to doctors and medical professionals. After calling for the details of expenditure, the Assessing Officer observed that such gifts and freebies provided to doctors and medical professionals is in violation of clause 6.8 of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Amendment Regulations 2009. Further, he observed, subsequently the Central Board of Direct Taxes (CBDT) has also issued a circular bearing no.5/2012, date 1st August 2012, prohibiting allowance of deduction in respect of expenditure incurred towards gift and freebies, to doctors and medical professionals in violation of Indian Medical Council Regulation. Thus, in the aforesaid premises, he disallowed assessee’s claim of deduction. Being aggrieved with the aforesaid disallowance, assessee preferred appeal before the first appellate authority.
After considering the submissions of the assessee in the context of facts and material on record as well as the case laws cited before him, learned Commissioner (Appeals) held that the prohibition imposed in Medical Council of India guidelines applies to doctors and medical professionals and not to the pharmaceutical companies. Further, he held that CBDT Circular no.5, dated 1st August 2012, would be applicable only from assessment year 2013–14. Accordingly, he deleted the disallowance made by the Assessing Officer.
14 Glenmark Pharmaceuticals Ltd. 32. The learned Departmental Representative relied upon the observations of the Assessing Officer.
The learned Authorised Representative strongly supporting the decision of the learned Commissioner (Appeals) submitted, Medical Council of India guidelines are applicable to doctors and medical professionals and not to pharmaceutical companies. Therefore, the expenditure incurred by the assessee for the purpose of business cannot be disallowed by referring to the Medical Council of India guidelines. He further submitted, the CBDT Circular no.5 dated 1st August 2012, is applicable prospectively and not to the impugned assessment year. He submitted, while deciding identical issue in assessee’s own case in assessment year 2010–11, the Tribunal has allowed assessee’s claim. Further, he relied upon the decision of the Tribunal in ACIT v/s J.B. Medical Pharmaceuticals Ltd., [2019] 199 TTJ (Mum.) 600.
We have considered rival submissions and perused the material on record. As could be seen, the Assessing Officer referring to the Medical Council of India guidelines and regulations as well as CBDT Circular no.5/2012, dated 1st August 2012, has disallowed the expenditure incurred by the assessee towards gifts to doctors and medical professionals. Undisputedly, the guidelines issued by the Medical Council of India as well as the regulations framed under the 15 Glenmark Pharmaceuticals Ltd. Indian Medical Council Regulations are applicable to doctors and medical professionals and not to pharmaceutical companies. Therefore, though, under the Medical Council of India guidelines and regulations, doctors and medical professionals are prohibited from accepting gifts, such restriction does not apply to the pharmaceutical companies. Of course, CBDT Circular no.5/2012, dated. 1st August 2012, speaks of disallowance of expenditure incurred by pharmaceutical companies towards gifts given to doctors and medical professionals. However, the said circular would apply prospectively from the assessment year 2013–14 and not to the impugned assessment year. In fact, considering the aforesaid factual legal position, the Tribunal, while deciding identical issue in assessee’s own case for the assessment year 2010–11, vide appeal being ITA no.2546/Mum./2017, dated 23rd August 2017, has upheld the decision of the learned Commissioner (Appeals) in allowing the expenditure incurred by the assessee towards gifts to doctors and medical professionals. In case of J.B. Medical and Pharmaceuticals Ltd. (supra), the Tribunal has also expressed similar view. In view of the aforesaid, respectfully following the decisions of the Tribunal referred to above, we uphold the order of the learned Commissioner (Appeals) on the issue. Ground raised is dismissed.
16 Glenmark Pharmaceuticals Ltd. 35. In grounds no.5 and 6, the Revenue has challenged the direction of learned Commissioner (Appeals) in respect of disallowance made under section 14A r/w rule 8D while computing the income under the normal provision as well as under section 115JB of the Act.
While dealing with the corresponding ground being ground no.4, of assessee’s appeal in ITA no.4923/Mum./2016 in the earlier part of this order, we have held that disallowance/addition relating to expenditure incurred for earning exempt income should be restricted to the amounts of exempt income earned by the assessee during the year while computing the income both under the normal provision of the Act as well as under section 115JB of the Act. In view of the aforesaid, these grounds of the Revenue have become redundant, hence, dismissed.
In grounds no.7 and 8, the Revenue has challenged the decision of learned Commissioner (Appeals) in accepting the arm’s length price of the corporate guarantee fee @ 0.53% as against 2.25% determined by the Transfer Pricing Officer.
Brief facts are, the Transfer Pricing Officer noticing that the assessee had provided corporate guarantee to its AE proceeded to determine the arm’s length price of the corporate guarantee fee by calling for information under section 133(6) of the Act from various
17 Glenmark Pharmaceuticals Ltd. banks. On the basis of information obtained from banks, the Transfer Pricing Officer determined the arm’s length price of corporate guarantee commission @ 2.25% which resulted in an adjustment of ` 5,70,44,209. While deciding assessee’s appeal on the issue, learned Commissioner (Appeals) having noticed that the Tribunal in assessee’s own case has accepted the guarantee commission for providing corporate guarantee to the AE @ 0.53% accepted the arm’s length price shown by the assessee, thereby, deleting the adjustment made by the Transfer Pricing Officer. While learned Departmental Representative relied upon the observations of the Transfer Pricing Officer, the learned Authorised Representative submitted that not only the issue is covered by the decisions of the Tribunal in assessee’s own case but the decision of the Tribunal has also been upheld by the Hon'ble Jurisdictional High Court and the Hon'ble Supreme Court.
We have considered rival submissions and perused the material on record. Undisputedly, this is a recurring dispute between the parties from the past assessment years. In fact, in assessment year 2008–09 and 2009–10, the matter went up to the Hon'ble Supreme Court and ultimately, the Hon'ble Supreme Court upheld the arm’s length price of guarantee commission @ 0.5%. Undisputedly, in the impugned assessment year, the assessee has shown the arm’s length price of guarantee commission by applying the rate of 0.53% which has been 18 Glenmark Pharmaceuticals Ltd. accepted by learned Commissioner (Appeals). Pertinently, while deciding assessee’s appeal in assessment year 2010–11, the Tribunal in ITA no.1654/Mum./2016, dated 1st February 2019, has held that arm’s length price of guarantee commission for all types of guarantee should be determined @ 0.53%. Facts being identical, respectfully following the aforesaid decision of the Co–ordinate Bench, we uphold the order of learned Commissioner (Appeals) on the issue. Grounds are dismissed.
Grounds no.9 and 10, relates to arm’s length price of comfort guarantee provided to the AE.
This issue is identical to the issue raised in grounds no.7 and 8. As observed earlier, while deciding identical issue in assessee’s own case in assessment year 2010–11 cited supra, the Tribunal has held that guarantee commission of all types of guarantee should be fixed @ 0.53%. In fact, as could be seen from the facts on record, the assessee has not charged any guarantee commission for providing comfort guarantee. In view of the aforesaid, since the Transfer Pricing Officer has charged guarantee commission @ 0.5% on comfort guarantee, the decision of the Transfer Pricing Officer on the issue deserves to be upheld. Accordingly, the decision of the learned Commissioner (Appeals) on the issue is reversed. Grounds no.9 and 10 are allowed.
19 Glenmark Pharmaceuticals Ltd.
In the result, Revenue’s appeal is partly allowed. ./2016 Revenue’s appeal : A.Y. 2012–13
Ground no.1, is on the issue of addition made under section 41(1) of the Act.
This issue is identical to the issue raised in ground no.1 of ITA no.4972/Mum./2016. Facts being identical, following our decision therein, we dismiss the ground raised.
Grounds no.2 to 4, relate to the issue of disallowance under section 14A r/w rule 8D.
The issue raised in these grounds is identical to the issue raised in ground no.4 of assessee’s appeal and grounds no. 5 and 6 of Revenue’s appeal for Assessment Year 2011–12 decided by us in the earlier part of the order. While the Assessing Officer computed disallowance by applying rule 8D, learned Commissioner (Appeals) directed the Assessing Officer not to make any disallowance of interest expenditure under rule 8D(2)(ii) as the assessee was having sufficient interest free fund. As regards, disallowance of administrative expenditure under rule 8D(2)(iii), learned Commissioner (Appeals) directed the Assessing Officer to compute disallowance after excluding
20 Glenmark Pharmaceuticals Ltd. the investments made in subsidiaries from the average value of investment.
Having considered rival submissions and perused material on record, we uphold the decision of learned Commissioner (Appeals) in deleting the disallowance of interest expenditure under rule 8D(2)(ii), since, the assessee was having sufficient interest free fund. However, we are unable to approve the direction of learned Commissioner (Appeals) to exclude investment made in subsidiaries for computing disallowance under rule 8D(2)(iii), in view of the decision of the Hon’ble Supreme Court in case of Maxopp Investment Ltd. v/s CIT, [2018] 402 ITR 640. Therefore, we direct the Assessing Officer to compute disallowance under rule 8D(2)(iii) by considering only those investments which have yielded exempt income during the year under consideration. Further, we make it clear, the disallowance under section 14A should not exceed the exempt income earned by the assessee during the year under consideration. In so far disallowance of expenditure for earning exempt income while computing book profit under section 115JB of the Act, we direct the Assessing Officer to restrict such disallowance to the exempt income earned during the year. These grounds are partly allowed.
Ground no.7, is on the issue of deletion of addition made on account of R & D expenditure allocated to Baddi and Solan Units.
21 Glenmark Pharmaceuticals Ltd.
This ground is identical to ground no.2 of ITA no.4972/Mum./ Mum./2016. Following our decision therein, we dismiss this ground.
Ground no.8, is on the issue of deletion of addition of interest expenditure allocated to the Baddi and Solan Units on the basis of sales turnover while computing deduction under section 80IC of the Act.
This ground is identical to ground no.3 of ITA no.4972/Mum./ 2016. Following our decision therein, we dismiss this ground.
Grounds no.9 and 10, relate to the issue of arm’s length price of guarantee commission on corporate guarantee and comfort guarantee respectively.
As could be seen from the facts on record, in the impugned assessment year, the assessee itself has charged guarantee commission on corporate guarantee @ 1%. Therefore, following the decision of the Tribunal in assessee’s own case in earlier assessment years, we uphold the decision of learned Commissioner (Appeals) on the issue.
As regards guarantee commission on comfort guarantee, following our decision in ITA no.4972/Mum./2016 in respect of gorund no.9, we direct the Assessing Officer to compute the arm’s length price
22 Glenmark Pharmaceuticals Ltd. of comfort guarantee fee @ 0.53%. Thus, ground no.9 is dismissed and ground no.10 is allowed.
In the result, Revenue’s appeal is partly allowed.
To sum up, assessee’s appeal as well as Revenue’s appeals is partly allowed. Order pronounced in the open Court on 31.07.2019