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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI JASON P. BOAZ
O R D E R Per N V Vasudevan, Vice President
These appeals in & 820/Bang/2017 are cross appeals filed by the assessee and revenue respectively against the order dated 31.01.2017 of the CIT(Appeals)-11, Bangalore relating to assessment year 2005-06.
The assessee has also filed Cross Objection in CO No.82/Bang/2017 against the appeal of the revenue. The grounds raised in the CO are only supportive of the order of the CIT(Appeals) and therefore do not require any separate adjudication.
We shall first take up for consideration the assessee’s appeal in . The grounds of appeal required for adjudication in this appeal are grounds No. 3 to 6 and 7 to 11.
4. Ground Nos. 3 to 6 raised by the assessee reads as follows:-
“3. The appellant denies itself liable to be assessed on a total loss of 45,52,13,325/- as determined by the learned assessing officer and confirmed by the learned Commissioner of Income- tax [Appeals], as against the reported loss by the appellant of 46,53,03,025/- on the facts and circumstances of the case.
4. The learned Commissioner of Income-tax [Appeals] was not justified in confirming the disallowances made by the learned assessing officer, claimed by the appellant under the facts and circumstances of the case.
& 820/Bang/2017 & CO No.82Bang/2017 Page 3 of 28 REGARDING CONTRIBUTION TO EMPLOYEEE BENEFIT SCHEME: 5. The officers below have erred in holding that the Appellant's employee benefit scheme is not approved by the Commissioner of Income Tax.
6. The officers below have erred in making the addition of contribution to the employee benefit scheme in the light of dicta, proposition, laid down by the Honourable Jurisdictional Tribunal Order in Appellant's own case for assessment year 1998-99, which amounted to denial of legitimate business expenditure under the facts and circumstances of the case.”
The assessee is a partnership firm. It is engaged in the business of manufacture and sale of Ayurvedic medicaments. In the course of assessment proceedings u/s. 143(3) of the Income-Tax Act, 1961 [“the Act”], the AO noticed that the assessee had made a payment of Rs.89,700 to Group Gratuity Insurance Scheme. The AO in the order of assessment has made a reference to the fact that similar expenditure was added back in the hands of the assessee in the immediately preceding year on the ground that the scheme or fund to which the assessee made payments towards Group Gratuity was not approved by the CIT. The AO accordingly disallowed the claim of the assessee for deduction of the aforesaid sum.
Before the first appellate authority, viz., CIT(Appeals), the assessee submitted that in the assessee’s own case for the AY 1999-2000, 2002-03 to 2004-05, identical issue was decided in favour of the assessee by the Tribunal. The AO, however, submitted before the CIT(Appeals) that the Tribunal has upheld the addition made by the AO. Taking cognizance of the remand report of the AO, the CIT(Appeals) upheld the addition made by the AO. & 820/Bang/2017 & CO No.82Bang/2017 Page 4 of 28
Before us, the ld. counsel brought to our notice the decision of the Tribunal in assessee’s own case for the AY 1998-99 in order dated 10.03.2006, wherein the Tribunal held as follows:-
“ We have heard both the parties. It has-been submitted by the learned Authorised Representative that premium is being paid to the LIC under group gratuity scheme for the last so many years. The learned Authorised Representative was not able to show any evidence in respect of application made to the CIT for approval but it was stated that approval was obtained and it has been lost. The revenue has allowed such deduction to the assessee in the earlier years. The learned jurisdictional High Court in the case of Sridev Enterprises, 192 ITR 165 held that consistency and definiteness of approach by the revenue is necessary in the matter of recognizing the nature of an amount maintained by the Assessee so that the basis of concluded asst. would not be ignored without actually reopening the asst. The learned Madras high court in the case of CIT Vs. Taxtool Company Ltd, 257 ITR 39 allowed the deduction in respect of contribution directly paid to LIC towards Group Gratuity Fund. The real intention behind allowing this deduction is to ensure that employees get gratuity and the funds contributed for payment of such gratuity are not utilized by the assessee. Such contributions are to be held by an approved gratuity fund under the irrecoverable trust. LIC of India set-up Group Gratuity Scheme for the assessees so that gratuity of such employees can be paid through such scheme provided the employer pays premium under such scheme. Hence, the Assessing Officer is directed to allow the deduction of premium paid under group gratuity scheme if it is only for the payment of the gratuity to the employees and the assessee company has no right to receive any part of the amount from that scheme for any purpose other than for payment of gratuity.”
& 820/Bang/2017 & CO No.82Bang/2017 Page 5 of 28
Similarly for the 1999-2000 and 2002-03 to 2004-05, the Tribunal in to 412/Bang/2007 by order dated 28.03.2008 on an identical issue held as follows:-
3. The second common issue is with regard to non-allowing of contribution made to the Employees’ Group Gratuity Scheme. On this issue, after considering the rival submissions, all that we feel is that the Assessing Officer should examine the recognition granted by the Commissioner of Income-tax to the Group Gratuity Scheme and on consideration of the same allow the same of the assessee.
In the remand report filed by the assessee before the CIT(Appeals), the AO has only brought to the notice of CIT(Appeals) that the Tribunal has only remanded the issue to the AO for fresh consideration and that in the order giving effect passed by the AO, the addition has been retained. The ld. counsel also brought to our notice that the assessee company was earlier operating from Uttar Pradesh and therefore could not produce the original approval of the CIT on their transfer of business from Uttar Pradesh to Bangalore. He, however, drew our attention to the copy of the certificate issued by the LIC which is at page 313 & 314 of the assessee’s PB. We are of the view that it would be just and appropriate to set aside the order of the CIT(Appeals) and remand the issue of allowing the deduction for fresh consideration by the AO, as was done in the orders by the Tribunal for the AY 1998-99 & 1999-2000, 2002-03 to 2004-05. We hold and direct accordingly.
Ground Nos.7 to 11 raised by the assessee reads as follows:-
“REGARDING DISALLOWANCE OF AMOUNT SPENT UNDER THE HEADING DOCTORS RELATIONSHIP EXPENSES:
& 820/Bang/2017 & CO No.82Bang/2017 Page 6 of 28
7. The learned Commissioner of Income-tax [Appeals] was not justified in disallowing the claim of business expenditure incurred in connection with the doctors' relation, by placing reliance on the CBDT Circular No. 5/2012 dated 01-08-2012 which was nonexistent on statute books during the relevant assessment year 2005-06, prospective in nature, hence impossible to comply under the doctrine of supervening impossibility during the assessment year in question. The learned Commissioner of Income-tax [Appeals] was not justified in disallowing the claim of business expenditure incurred in connection with the doctors relation by importing the provisions and placing reliance on the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 which was effective only from 10-12-2009 and was nonexistent in statute books of this land during the relevant assessment year in question, hence impossible to comply.
8. The Commissioner of Income Tax (Appeals) erred in law and failed to appreciate that the Appellant is into manufacture of Ayurvedic Medicaments. Accordingly its products cater only to Ayurvedic Doctors. Ayurvedic Doctors are not governed by The Indian Medical Council Act, 1956. Further cross prescription of the medicines is not legally permissible in India. Hence disallowance of expenditure under Rules made under the Medical Council Act, 1956 is contradictory as the same is not applicable to the appellant. 9. Without prejudice to the above, the learned CIT (A) has erred in holding that each of the items is costlier costing more than 1,000/-, while, the appellant has provided the details of the expenses which are costing less than 1,000/-per item. Hence the provisions of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 as amended from 10-12- 2009 are not violated. Accordingly there is no violation of CBDT Circular Clause no. 3, hence addition needs to be deleted to the extent.
& 820/Bang/2017 & CO No.82Bang/2017 Page 7 of 28
10. The learned authorities below failed to appreciate that Appellant is not bound by the CBDT Circular under section 119 of the Act.
The learned authorities below failed to appreciate the fact that items given by the Appellant cannot be considered as gift as Appellant's logo was embossed on these items, though it was principally agreed that the said expenditure was incurred in connection with the sales promotion of its business and majority of the expenses pertain to the printed materials.” 11. As far as these grounds are concerned, the question to be decided is as to whether the revenue authorities were justified in not allowing deduction of a sum of Rs.1 crore out of the sum of Rs.1,11,46,943 claimed as deduction by the assessee under the head ‘Doctors relations’ expenditure. While examining the claim of assessee for deduction, the AO noticed that in the immediately preceding year, the expenditure under this head was only a sum of Rs.4,47,176. The assessee’s explanation before the AO was that it incurred the expenditure in question for improving the knowledge of Doctors on Ayurvedic products and impress upon them to prescribe Ayurvedic drugs. The break-up of expenditure claimed as expenditure by the assessee was as follows:-
Amount in Rs. Description of articles given to the doctors Printing materials 84,27,576.50 Courier charges 14,21,371.00 66,447.00 Refrigerators Jewelry 67,907.00 8,64,302.00 Lucky stones 10,300 Furniture VCD Players 33,800.00 & 820/Bang/2017 & CO No.82Bang/2017 Page 8 of 28
Suits Qty 3 numbers 15,900.00 56,900.00 Computers TV 1,32,860.00 Micro oven 27,580.00 Hospital bed 21,989.00 Total 1,11,46,942.50
On scrutiny of the aforesaid details, the AO was of the view that the expenditure incurred by the assessee included expenditure on giving TV, Refrigerators, Microwave Oven and Personal Computers to various Doctors. Such kind of gifts, according to the AO, cannot be considered as having any nexus with the purpose of incurring the expenditure and lawful expenditure. The AO was also of the view that the turnover of the assessee had decreased despite incurring of the aforesaid expenditure. Considering all these aspects, the AO was of the view that a sum of Rs.1 crore out of the expenses claimed by the assessee should be disallowed and added a sum of Rs.1 Crore to the total income of the assessee. Accordingly, Rs. 1 crore was added to the income of the assessee.
On appeal by the assessee, the CIT(Appeals) confirmed the order of AO by placing reliance on CBDT Circular No.5/2012 dated 18.01.2012. In the aforesaid Circular, the CBDT has taken note of the fact that pharmaceutical and allied health sector Industries were also providing freebies to medical practitioners and doing so was in violation of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, which were issued on 10.12.2009 imposing a prohibition on medical practitioners from taking gifts, travel facilities etc. The CBDT has also opined that such expenses would be considered as unlawful expenses & 820/Bang/2017 & CO No.82Bang/2017 Page 9 of 28 prohibited by law within the meaning of Explanation to section 37(1) of the Act. Following the aforesaid Circular, the CIT(Appeals) upheld the order of the AO. Aggrieved by the order of CIT(Appeals), the assessee has raised ground No.7 to 11 before the Tribunal.
The first and foremost submission of the ld. counsel for the assessee before the tribunal was that IMC regulations referred to by the CBDT in its Circular No.5/2012 came into effect only from 10.12.2009; whereas the assessment year in the present appeal relates to AY 2005-06 and no such restrictions existed in AY 2005-06. The second submission was that the provisions of IMC regulations are not applicable to Ayurvedic Medical Practitioners and they are governed by Indian Medicine Central Council Act, 1970. Therefore, neither the CBDT Circular nor the IMC Regulations will be applicable to Ayurvedic Doctors. It was submitted that the assessee is a manufacturer of Ayurvedic Drugs and the expenses in question were incurred for the purpose of providing material to Ayurvedic Doctors. The third submission that the ITAT Chennai in the case of Citadel Fine Pharmaceuticals (P.) Ltd. v. ACIT [2018] 92 taxmann.com 79 (Chennai – Trib.) took the view CBDT Circular 5/2012 in F.No. 225/142/2012-ITA.II issued on 1.8.2012 pursuant to MCI regulations dated 10.12.2009, is applicable only from Asst Year 2013-14 only.
The ld. DR, on the other hand, filed before us a copy of the decision of the Hon’ble Punjab & Haryana High Court in the case of CIT v. Kap Scan and Diagnostic Centre (P.) Ltd., 344 ITR 476 (P&H). In the aforesaid decision, the question before the court was in relation to AY 1997-98, which was prior to coming into force of the IMC Regulations. In that case, the expenditure claimed was on account of commission paid to Doctors who referred Patients to the assessee for various diagnostic tests which was & 820/Bang/2017 & CO No.82Bang/2017 Page 10 of 28 disallowed by the revenue authorities. The Hon’ble High Court while deciding the question whether the practice of giving commission was an illegal payment hit by Explanation to section 37(1) of the Act, held that the payments were opposed to public policy and forbidden by law and therefore hit by section 23 of the Contract Act, 1887. The court also applied IMC regulations and ultimately came to the conclusion that such expenditure cannot be regarded as business expenditure.
The ld. DR drew our attention to the list of items that were incurred as expenditure under the head ‘Doctors relations expenses’ and submitted that these were clearly in the nature of gifts, though under a different nomenclature.
In the rejoinder, the ld. counsel for the assessee placed reliance on the decision of the Mumbai Tribunal in the case of DCIT v. PHL Pharma (P.) Ltd. [2017] 78 taxmann.com 36 (Mumbai – Trib.). In the aforesaid decision, the Mumbai Bench of the Tribunal was considering the IMC Regulations and the decision of the Hon’ble Punjab & Haryana High Court in the case of Kap Scan and Diagnostic Centre (P.) Ltd. (supra) in the context of allowability of expenses of gift articles and cost of free samples to Doctors by a Pharma company. The applicability of Explanation (1) to section 37(1) was also considered in the aforesaid decision and the Tribunal ultimately came to the conclusion that such expenses were promotional material distributed to Doctors for brand recognition and not for the purpose of granting gift or any other form of inducement to Doctors.
We have given a careful consideration to the rival submissions. In the case of PHL Pharma Pvt. Ltd. (supra), the question before the Tribunal was allowability of expenditure under the head ‘customer relationship & 820/Bang/2017 & CO No.82Bang/2017 Page 11 of 28 management’, which included expense for arranging National Level Seminar and Discussion Panels of eminent Doctors. It also included gift articles and free samples of medicines. The gift articles included various kinds of articles like diaries, pen sets, calendars, paper weights, injection boxes etc. embossed with bold logo of its brand name. The Tribunal after analyzing the entire aspects of the case, held that MCI regulation which is strictly meant for medical practitioners and doctors cannot be made applicable to pharmaceutical companies. The entire conduct relates to doctors and medical practitioners and lists out the censures and fines imposed upon them. The Tribunal held that what has not been provided in the MCI regulation cannot be supplied either by the court or by the CBDT. There has to be express provision under the law whereby pharmaceutical companies are prohibited to conduct conferences or seminar or give free samples. The Tribunal (in Paragraph-12 of its order) made the following observations on the applicability of the decision rendered in the case of Kap Scan (supra)
“Another strong reference has been made to the decision of Hon'ble Punjab & Haryana High Court in the case of CIT vs. Kap Scan and Diagnostic Centre (P.) Ltd. [2012] 25 taxmann.com 92, wherein commission was paid to the private doctors for referring the patients for diagnosis to the assessee company. In background of these facts and issues involved, the Hon'ble High Court held that said payment of commission is wrong and is opposed to be a public policy. It should be discouraged as it is not a fair practice. The ratio of said decision cannot be applied on the facts of the present case because there is no violation of any law or anything which is opposed to public policy. Similarly, there is reference to the decision of Hon'ble Supreme Court in the case of Eskayef (Now Known as Smithkline Beecham) Pharmaceuticals (India) Limited v. CIT (2000) 111 Taxman 561(SC), which was given in context of Section 37(3A) of the Act. In the said case the assessee had claimed expenditure on distribution of physician's samples u/s.
In the background of such claim the Hon'ble Apex court held that, if the expenditure falls & 820/Bang/2017 & CO No.82Bang/2017 Page 12 of 28 within the bare minimum it will not be caught by subsection (3A) of section 37. On the contrary, the Hon'ble Apex Court observed that physicians samples are necessary to ascertain the efficacy of medicine and introduce it in the market for circulation and it is only by this method the purpose is achieved. In such cases giving a physician samples for reasonable period is essential to the business of manufacture and sale of medicine. It is only if a particular medicine has been introduced by the market and its uses are established then giving of free samples could only be the measure of sale/ promotion and development would thus be hit by subsection (3A). Said decision no way prohibits the nature of expenditure which has been incurred in the case of the assessee. Therefore, such a reference to a Hon'ble Apex Court decision is not germane to the issue involved. Thus, in our opinion, the aforesaid decision of this Tribunal is clearly distinguishable and cannot be held to be applicable and also we have already given our independent finding as to allowability of expenses in the hands of the assessee as business expenditure.”
It can be seen from the aforesaid decision rendered by the Mumbai Bench of the ITAT that the decision of the Hon’ble Punjab & Haryana High Court in the case of Kap Scan and Diagnostic Centre (P.) Ltd. (supra) was distinguished as a case, where commission was paid to Doctors for referring the patients for diagnosis tests and such case will stand on a different footing to a case where promotional material are to be given to medical practitioners.
As far as applicability of MCI Regulations are concerned, it has been held by the Hon’ble Himachal Pradesh High Court in the case of Confederation of Indian Pharmaceutical Industry (SSI) v. CBDT, 353 ITR 388 (Himachal Pradesh) that MCI regulations are applicable only to medical practitioners and not to pharmaceutical industries and allied healthcare industries and that the CBDT Circular cannot be given retrospective effect. This was also noticed by the Tribunal in the case of PHL Pharma (P.) Ltd.(supra). & 820/Bang/2017 & CO No.82Bang/2017 Page 13 of 28
As far as the applicability of Explanation to section 37(1) of the Act is concerned, we are of the view that the nature of expenses incurred and its relation with the business of the assessee needs to be looked into. We have already given a break-up of sum of Rs.2,11,46,942 claimed as deduction by the assessee under the head ‘Doctors relationship management expenses’. The expenses of printing material like prescription pads, annual diary, poster costs, etc. can be considered as promotional in nature. So also, the courier charges. Similarly, Microwave Oven, Refrigerators and Hospital bed, assuming they were used in Clinics of the Doctors can be regarded as promotional material. Regarding other expenses like Jewellery, Furniture, VCD Players, Suits, Computers and TV, the same cannot be regarded as having any promotional value. They are clearly in the nature of gifts. To the aforesaid extent, we are of the view that the disallowance of expenses is justified. We hold and direct accordingly. Thus, ground Nos. 7 to 11 are partly allowed.
In the result, the appeal by the assessee is partly allowed.
Ground Nos. 1 to 6 raised by the revenue reads as follows:-
“1. Whether on the facts and circumstances of the case, the Ld.CIT(A) erred in deleting the entire addition of Rs 2,45,79,931/- on the Himalaya stores shop-in-shop expenses, holding that the addition in the assessment order on these expenses was made on an ad-hoc basis by only comparing the expenses in the previous year? 2. Whether on the facts and circumstances of the case, the Ld.CIT(A) erred in deleting the addition of Rs 2,45,79,931/ - on the Himalaya stores shop-in-shop expenses, holding that the AO in the remand report has confirmed that the appellant has filed & 820/Bang/2017 & CO No.82Bang/2017 Page 14 of 28 copies of the agreements and details of the expenses, when no such observation was made in the remand report? 3. Whether on the facts and circumstances of the case, the Ld.CIT(A) erred in deleting the addition of Rs 2,45,79,931/ - on the Himalaya stores shop-in-shop expenses, holding that the expenses are revenue expenses resulting in increase in turnover for subsequent years, when the expenses are not entirely revenue in nature? 4. Whether on the facts and circumstances of the case, the Ld.CIT(A) erred in deleting the addition of Rs.1,58,51,269/- on Franchisee expenses Credit notes, merely on the premise that there is good growth in the subsequent years? 5. Whether on the facts and circumstances of the case, the Ld.CIT(A) erred in deleting the addition of Rs.1,58,51,269/- on Franchisee expenses Credit notes, after examining the copies of the franchisee stores agreements and the details of these expenses, without giving the AO an opportunity to examine these documents which are in the nature of additional evidence.
6. Whether on the facts and circumstances of the case, the Ld.CIT(A) failed to appreciate that the expenses on Himalaya stores shop-in-shop expenses and Franchisee expenses Credit notes, are not revenue expenditure relating to the assessee's business for the current year.”
Ground Nos.1 to 3 raised by the revenue relates to the deletion of addition of Rs.2,45,79,931 under the head ‘Himalaya Stores shop-in-shop expenses’, while ground Nos. 4 & 5 relates to the deletion of addition of Rs.1,58,51,269 under the head Franchisee expenses credit notes by the CIT(Appeals). Ground No.6 is common for both the aforesaid addition.
The facts with regard to addition on account of Himalaya Stores shop-in-shop expenses are as follows. The assessee had claimed a sum of Rs.8,77,14,144 as deductible expenses under the head Himalaya Store & 820/Bang/2017 & CO No.82Bang/2017 Page 15 of 28 Expenses. A sum of Rs.2,57,79,931 under the head shop-in-shop expenses and a sum of Rs.1,58,51,269/- under the head Franchise expenses was part of the expenses claimed under the head Himalaya Store Expenses. The AO called upon the assessee to furnish the details of Himalaya Store Expenses and break-up was given by the assessee for the AY 2004-05 & 2005-06 as follows:-
F.Y.2004-05 F.Y.2003-04 S. No Item
1 2,57,79,931 12,08,393 Shop-in-shop expenses 2 Franchise expenses credit 1,58,51,269 0 notes 3 Franchise expenses 1,15,72,060 1,79,26,010 4 Exhibition stall 18,38,689 5,91,809 5 Promotional aids 27,45,650 1,01,890 6 Rent 62,01,088 29,82,148 7 Special allowance 13,00,668 2,81,030 TOTAL 8,77,14,144 3,78,85,979
The assessee further explained the nature of shop-in-shop expenses of Rs.2,57, 79,931/- as expenses which are reimbursement of the expenses towards 800 retail outlet shops across India. The Assessee claimed that it entered into shop-in-shop arrangement with various retail outlets for promotion of products of the company whereby the outlet would be provided in the form of a shell which also would promote the products of the Assessee. The Assessee would engage its own sales girls to promote the products. Such sales girls, when a customer walks into the shop, would take them to Assessee’s enclosure and educate the customer about & 820/Bang/2017 & CO No.82Bang/2017 Page 16 of 28 Assessee’s products and induce them to purchase the products. The expenses incurred towards the salary of the sales girls and other incidental expenses would be reimbursed to the retail outlets.
The AO firstly noticed that expenditure under the head claimed in the immediately preceding year was only Rs.12,08,393 and there was an increase of 200 times of expenses under this head. He also observed that by incurring these expenses, there was no drastic increase in the turnover. The AO also noticed that the purpose for which the expenses were incurred were not made clear. He also was of the view that going by the nature of certain expenses, it was doubtful as to whether they were really incurred for the purpose of business of the assessee. For all the above reasons, the AO restricted the expenses under this head to Rs.12 lakhs and disallowed the remaining sum of Rs.2,45,79,931.
As far as franchisee expenses are concerned which are subject matter of grounds No.4 & 5 by the revenue, the AO disallowed a sum of Rs.1,58,51,269. The nature of Franchise expense was explained by the Assessee as reimbursement of day to day operational expenses at franchise stores. It was explained that the Assessee assures the franchisee that in case his sales falls short of the minimum return, the Assessee would reimburse him various cost. Such expenses are classified as Franchise expenses. The AO disallowed the claim for deduction, for the following reasons:
“9.11 I have gone through the assessee's explanation and find it untenable. It is important to consider over here that no such expenditure was incurred in the immediately preceding year. It is further important to mention over that assessee is separately claiming an expenditure of Rs. 1,15,72,060 as franchisee expenses. Accordingly it is not clear as to what is the need of & 820/Bang/2017 & CO No.82Bang/2017 Page 17 of 28 incurring further expenditure of Rs. 1,58,51,268/-in the form of franchisee credit notes. Further, such expenditure has not resulted into any increase in the turnover and on the contrary the turnover has fallen. Considering the facts of the case, I hold the entire expenditure of Rs. 1,58,51,268/- is totally superfluous, unnecessary and unjustified. Accordingly, I disallow the total amount of Rs. 1,58,51,268 and add back the same in the hands of the assessee. (Addition: Rs.1,58,51,268/-)”
Before the CIT(Appeals), a remand report was obtained from the AO because the assessee filed fresh evidence and made submissions with regard to disallowance of shop-in-shop expenses. The evidence filed by the assessee before the CIT(Appeals) were as follows:-
SI. no. Documents furnished Date Page no Submiss ion made to 1. Ld. AO Ledger extract transaction wise details 17.09.2017 27 2. Ld. AO 17.09.2017 30 Details of reimbursement & incidental expenses incurred on shop-in shop expenses 3. Ld. AO Photographs of typical shop in shop concept 12.11.2007 2 4. 03.08.2011 10 Ld. Ledger extract- transaction wise details, copy of CIT(A) bills of all expenses above 50,000/- 5. 03.08.2011 10 Ld. Copy of invoices which are in round figures for CIT(A) observation of Ld. AO in Para no. 9.7 of order in Annexure 2 of the submission 6. Sample copy of Claims made, bills in Ann- 2. 29.06.2015 3 Ld. CIT(A) & 820/Bang/2017 & CO No.82Bang/2017 Page 18 of 28
7. 20.06.2016 2 Ld. Analysis of business performance from FY 2002- CIT(A) 03 to 2015-16, containing Turnover, GP, NP in Ann 2 8. Turnover details 2003-04 to 2012-13 22.11.2016 8 Ld. CIT(A) 9. 22.11.2016 14 Ld. Submission as to why no rejoinder on shop in CIT(A) shop was not filed.
These documents are available at page Nos. 1 to 177 of PB-3 filed by the assessee before the Tribunal.
The AO in his remand report had given the following submissions of shop-in-shop expenses:-
“ii) The assessee has explained that it expanded its business activities by Franchisee stores, shop-in shop arrangement and exclusive stores to distribute its products. The assessee has stated that this expansion activity commenced during F.Y 2003-04 and at present more than 90 exclusive stores and 800 shop-in shops exist across India. Therefore, considerable amount of expenditure would have been incurred in the initial years of expansion though without immediate effect on turnover i.e., in 1-2 years. The effects on increase in turnover would be seen only in long term perspective. As regards Franchisee credit notes, the assessee's explanation is that day to day expenses and reimbursement to the owner if a minimal return is not achieved by sales, gives rise to these expenses. The disallowance in the assessment order is based on the fact that such expenditure is not incurred in the previous year and has not resulted in increase in Turnover. The fact that the payment has been made to the franchisees, owners of shop-in-shop/owners of the premises where exclusive shops have been started has not been doubted, only that the exact nature of the reimbursement of expenses have not been spelt out. However, Agreements with the Franchisee's, owners of exclusive stores and owners of shop-in shop outlets have not been called for or verified. Moreover, in view of the assessee's explanation of & 820/Bang/2017 & CO No.82Bang/2017 Page 19 of 28 expansion, the turnover increase/decrease should have been compared with 3-4 preceding/succeeding years.”
It can be seen from the aforesaid remand report that as far as shop- in-shop expenses are concerned the AO has accepted that expansion activity commenced during F.Y 2003-04 (AY 2004-05) and during AY 2005- 06 more than 90 exclusive stores and 800 shop-in shops existed across India and therefore, considerable amount of expenditure would have been incurred in the initial years of expansion though without immediate effect on turnover i.e., in 1-2 years. The AO has also accepted that the effects on increase in turnover would be seen only in long term perspective. As far as shop-in-shop expenses are concerned, the AO in the remand report has accepted that payments were made to the franchisees and that was not doubted by the AO and it was only the AO’s case that the exact nature of reimbursement of expenses was not spelt out. The AO has also stated in the remand report that Agreement with the franchisee’s owners were not called for or verified.
The Assessee in its objections to the remand report of the AO pointed out as follows:-
“2. As regards agreement was not furnished: a. The Respondent Firm had filed the following documents including copies of agreement details Shop in shop expenses expenditure to the officers below:
& 820/Bang/2017 & CO No.82Bang/2017 Page 20 of 28 (Exhibit 2) Sl. Submission Documents Date Internal Enclosed the No. made to furnished Page same Page no. No. of this Paper book 1. Ld. AO Ledger extract 17.09.2007 27 Page Nos. transaction 139-167 of wise details Paper Book relating to No.1 of this Shop in shop Submission Expenses 2. Ld. AO Details 17.09.2007 30 Page Nos. of 139-167 of reimbursement Paper Book & No.1 of this incidental Submission expenses incurred on shop-in-shop expenses as shown in the narration in each transaction 3. Ld. AO Photographs of 12.11.2007 2 Page Nos. typical shop in 189-192 of shop concept Paper Book No.2 of this Submission.
Ld. CIT(A) Ledger extract- 03.08.2011 10 246-369 of transaction Paper Book wise details, No.2 of this copy of bills submission of all expenses above 50,000/- & 820/Bang/2017 & CO No.82Bang/2017 Page 21 of 28
5. Ld. CIT(A) Copy of 03.08.2011 10 Page Nos.292- invoices which 293, 310-322., are in round 337-349, 357A figures for to 357N, 358- observation of 362 & 364-369 Ld. AO in Para of Paper Book no. 9.7 of order No.2 of this in Annexure 2 submission of the submission 6. Ld. CIT(A) Sample copy 29.06.2015 3 Same as above. of Claims made, bills in Ann- 2. Page Nos. 87 7. Ld. CIT(A) Analysis 20.06.2016 2 &-88 of Paper of Book No.1 business performance from FY 2002- 03 to2014-15, containing Turnover, GP, NP in Ann 2. 8. Ld. CIT(A) Turnover 22.11.2016 8 Page Nos. 565 to 566 details 2003- of Paper 04 to 2012-13 Book No. 3 of this submission 9. Ld. CIT(A) Submission as 22.11.2016 14 Page No.571 of Paper to why no Book No.3 rejoinder on of this shop in shop submission. was not filed. & 820/Bang/2017 & CO No.82Bang/2017 Page 22 of 28 b. The Ld. AO having gone through these evidences and has not made any adverse comments or pointed any defects as to evidences furnished during the course of assessment in her remand report. c. Further, elaborate submissions were made even during the course of Commissioner (Appeals). Under the facts, the basis and elaborate details of expenses were furnished to the officers below and no aberrations were noticed and it is accepted on merits of the case. d. It is pertinent to note that Ld. Commissioner (Appeals) who is always bestowed with the powers vested u/s 250 and S. 251 of the Act, held enquiry on the materials placed before the officers below and prevailing legal position of the issue. e. Hence, the action of the Ld. Commissioner (Appeals) in allowing the expenditure is correct and there is no error in the order of the Ld. Commissioner (Appeals) to this extent and hence the Appellant's appeal needs to be quashed as the same is devoid of merit as discussed herein above. Hence, the new allegation by the Ld. AO is incorrect and contrary to the materials. f. Further in the remand report the Ld. AO himself acknowledged in Page no. 7, Para 8. B) as under: "There is no specific evidence or fact brought that the expenditure under various heads of "Himalaya Store expenses" are bogus or not incurred for the purpose of business or not admissible as per appointment letters or not incurred as per terms of agreement between the assessee and franchise/shop in shop owners/exclusive store owners.
The CIT(Appeals) after considering the remand report and the objections of the assessee, deleted the additions made by the AO by observing as follows:-
& 820/Bang/2017 & CO No.82Bang/2017 Page 23 of 28
“a. Himalaya Stores Expenses of Rs. 2,45,79,931: The AO has disallowed this amount on the ground that it is excessive when compared to only a sum of Rs. 12,08,393.00 incurred in the earlier years. Entire incremental expenses has been disallowed. The appellant has however submitted that they have gone for substantial expansion of own and franchise stores across India. The appellant has submitted that due to this new method of selling the goods, during the year, they have incurred huge expenses. The appellant has also produced details of such expenses and along with proof of expenses. In para 8A (a) of the remand report, the AO has indicated that the expenses incurred by the assessee are not doubted as the assessee has established 90 exclusive shops and 800 shop in shops and considerable amount would have been incurred without immediate effect on turnover on 1-2 years. The AO has further observed that instead of comparing the increase in the turnover with the previous years, if the future increase is compared, it would have been more appropriate. The appellant has filed the turnover details for the subsequent years which shows a good growth trend. The turnover of the appellant has grown over the years as under: FY Gross Sales (Rs. In Crs.) 2002-03 285.71 2003-04 317.74 2004-05 306.74 2005-06 293.05 2006-07 347.34 2007-08 416.57 2008-09 530.67 2009-10 642.57 2010-11 759.92
I find that the turnover of the appellant has increased substantially over the years. The AO in her remand report also has confirmed that the appellant has also filed the copies of the & 820/Bang/2017 & CO No.82Bang/2017 Page 24 of 28 agreements and the details of expenses and there is no negative observation in respect of such expenses. Since the disallowance is made on an ad hoc basis by merely comparing the expenses in the previous year, genuineness of the expenses are not doubted by the AO in her Remand Report and it is evident that the appellant has increased their sales through the stores substantially by establishing new stores and hence, I hold that this disallowance needs to be DELETED. b. Franchisee expenses credit notes of Rs. 1,58,51,269 : The AO has disallowed this amount on the ground that there was no such expenditure in the earlier years and hence, entire expenditure incurred has been disallowed. The assessee had franchisee expenses reimbursement and franchisee credit notes. The AO has disallowed the entire credit notes issued to the franchisees as there was no increase in the turnover and there was no such expenditure in the earlier years. The appellant has however submitted that they have gone for substantial expansion of franchise stores across India. The appellant has submitted that due to this new method of selling the goods, during the year, they have incurred huge expenses. The appellant has also produced details of such expenses and along with proof of expenses and also copies of the agreements with the franchisee stores. In para 8A of the remand report, she has stated that the disallowance in the assessment order is based on the fact Act such expenditure is not incurred in the previous year and has not resulted increase in Turnover. The fact that the payment has been made to the franchisees, owners of shop-in-shop/ owners of the premises where exclusive shops have been started has not been doubted, only that the exact nature of the reimbursement of expenses have not been spelt out. However, Agreements with the Franchisee's, owners of exclusive stores and owners of shop-in shop outlets have not been called for or verified. Moreover, in view of the assessee's explanation of expansion, the turnover increase/decrease should have been compared with 3-4 preceding/succeeding years. The appellant has produced copies of franchise stores agreement and also details of the expenses. Further, it is argued that this & 820/Bang/2017 & CO No.82Bang/2017 Page 25 of 28 amount represents the minimum guaranteed return on the investment by the franchisee which is also supported by the copies of the agreements filed. Since these expenses have been genuinely incurred and since there is good -growth in the subsequent years, the disallowance is hereby DELETED.”
Aggrieved by the order of the CIT(Appeals), the revenue has raised the aforesaid grounds of appeal before the Tribunal.
The ld. DR submitted before us that the AO in the remand report before CIT(A) did not admit that agreement copies with various franchisees in so far as shop-in-shop expenses were furnished by the Assessee and the observations of the CIT(A) to the contrary in the order of the CIT(A) is not correct. The learned DR drew our attention to ground No.2 in the grounds of appeal. As far as franchisee expenses are concerned, the Assessee had filed Agreements with franchisee only before CIT(A). It was submitted that if such agreements had been filed before the CIT(Appeals), the CIT(Appeals) should have first called upon the AO to file his objection on the admissibility of additional evidence and after giving a ruling on the admissibility of additional evidence, he ought to have called upon the assessee to file objections with regard to the merits of additional evidence admitted by the CIT(Appeals). The learned DR relied on the order of the AO in other respects and reiterated the stand of the revenue as reflected in Grounds 2 to 6 raised before the Tribunal.
The ld. counsel for the assessee submitted that there was no violation of Rule 46A and all the documents were confronted to the AO. It was submitted by him that no separate opportunity to admit additional evidence need be given to the AO, as held by the Tribunal in the case of & 820/Bang/2017 & CO No.82Bang/2017 Page 26 of 28 ACIT v. Esaote India (NS) Ltd. [2018] 96 taxmann.com 624 (Ahmedabad – Trib.).
37. We have given a careful consideration to the rival submissions. It is clear from the objections to the remand report filed by the assessee before the CIT(Appeals), copy of which is placed at pages 1 to 28 of assessee’s PB-3 that the assessee has clearly pointed out that all details and Agreements had been filed before the AO. Remand report was obtained on 30.08.2016 and in the remand proceedings, these documents have been furnished by the assessee. The assessee has also filed ledger extract of expenses. All these were in possession of the AO. It is clear from the remand report of AO filed before CIT(A) copy of which is at page 291-297 of paper book-2 filed by the Assessee that in para B at page 7 the AO has admitted the allowability of these expenses. The remand report of AO on non-production of agreement with franchisees appears to refer to absence of production of such agreements before the AO when the original assessment proceedings were concluded and not in the course of remand proceedings pursuant to the directions of the CIT(Appeals). In any event, the remand report of the AO does not specifically say that the agreements were not filed before him in the course of the remand proceedings. In these circumstances, we are of the view that there has been no violation of Rule 46A of the Income-tax Rules. We are also of the view that the basis of disallowance has been disproportionate increase in the quantum of expenses, compared to the increase in turnover of assessee. This was not a relevant criterion. Even the AO in the remand report accepts that effect of expenditure on sales would be reflected only in future and not immediately. The observations of the AO in the remand report is that agreement with the Franchisee’s owners of exclusive stores and owners of shop-in-shop outlets have not been called for or verified. Whether these & 820/Bang/2017 & CO No.82Bang/2017 Page 27 of 28 observations relate to the stage of assessment or remand proceedings is not clear. Nevertheless Gr.No.5 the revenue admits that the agreements were filed before CIT(A) but the CIT(A) did not confront these agreements relating to franchisee expenses to the AO by calling for a remand report. The Assessee in the objection to the remand report has asserted that all agreements were filed before AO in the remand proceedings. We are also of the view that there was no violation of Rule 46A of the Rules. We are of the view that no separate opportunity to admit additional evidence need be given to the AO, as held by the Tribunal in the case of ACIT v. Esaote India (NS) Ltd. [2018] 96 taxmann.com 624 (Ahmedabad – Trib.). Once documents are forwarded to the AO and a remand report is called for, it is the duty of the AO to raise all objections regarding admissibility of the document as well as the effect of the documents on the issues under consideration in the appeal.
In the given facts and circumstances of the case, we have to conclude that the plea of non-production of agreements with owners of shop-in-shop and franchisees is not very material plea as the ground of disallowance by the AO was on the ground that increase in expenditure compared to earlier AY did not result in increase in turnover compared to earlier AY. When this is the basis of disallowance by the AO, a new plea regarding non production of agreements with the owners of shop-in-shop or franchisee in our view would not help the case of the Revenue. We find no grounds to interfere with the orders of the CIT(Appeals), who has held that expenses were revenue in nature. There is no basis for the revenue to contend in Gr.No.3 & 6 that expenses were not revenue expenses, as such a case was not made out by the AO. Consequently, the appeal by the revenue is dismissed. & 820/Bang/2017 & CO No.82Bang/2017 Page 28 of 28
In the result, the appeal by the revenue and the CO by the assessee are dismissed, while the appeal by the assessee is partly allowed.
Pronounced in the open court on this 25th day of January, 2019.