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Income Tax Appellate Tribunal, MUMBAI BENCH “C”, MUMBAI
O R D E R Per Bench : This bunch of 13 appeals filed by the assessee and the revenue are directed against separate, but identical orders of CIT(A), Mumbai passed on different dates for assessment years 1999-2000, 2000-01, 2001-02, 2002-03, 2003-04, 2004-05 & 2005-06. Since, facts are identical and issues are common, these appeals were heard together and are disposed of by this common order, for the sake of convenience.
The assessee as well as the revenue have raised more or less common grounds of appeal for all assessment years. The assessee, vide its grounds of appeal has challenged addition sustained by the Ld.CIT(A) in respect of disallowance on account of adjustment to closing stock towards unutilized Modvat credit, treatment of capital expenditure on brand ‘Epilex’, exclusion of 90% of other income while calculating deduction u/s 80HHC, disallowance of interest income and cash
3 Abbott India Ltd discount while granting deductions u/s 80I & 80IA, disallowance of expenditure incurred in relation to exemption income u/s 14A of the Income-tax Act, 1961, and disallowance of computer software expenses being capital in nature. The revenue, vide its grounds of appeal has challenged the action of the Ld.CIT(A) in allowing deductions towards professional fees paid to DSP Merryll Lynch while calculating deduction u/s 35AB of the Income-tax Act, 1961 and calculation of sales turnover exclusive of sales-tax, excise duty, trade discount, etc. while calculating deduction u/s 80HHC of the Income-tax Act, 1961.
The brief facts of the case extracted from for AY 1999-2000 are that the assessee is a company engaged in the business of manufacturing pharmaceuticals, filed its return of income for AY 1999-2000 on 28-12-1999 declaring total income of Rs.24,44,46,730.
The case was selected for scrutiny and notices u/s 143(2) and 142(1) of the Act were issued. In response to notices, the authorized representative of the assessee appeared from time to time and filed various details, as called for. The assessment has been completed u/s 143(3) on 04-01-2002 determining total income at Rs.26,08,92,689 by making various additions. The assessee carried the matter in appeal before the first appellate authority The Ld.CIT(A), for the detailed reasons recorded in his appellate order dated 27-08-2002, partly allowed
4 Abbott India Ltd appeal filed by the assessee wherein he has deleted additions made by the AO towards disallowance of professional fees paid to DSP Merryll Lynch while computing deduction u/s 35AB of the Income-tax Act, 1961 and calculation of sales turnover exclusive of tax, duty, trade discount, etc. while calculating deduction u/s 80HHC of the Income-tax Act, 1961.
The Ld.CIT(A); however, confirmed addition made by the AO towards exclusion of 90% of other income while calculating deduction u/s 80HHC, disallowance of interest income while calculating deductions u/s 80I and 80IA of the Income-tax Act, 1961. The Ld.CIT(A) also enhanced assessments in respect of disallowance on account of unutilized Modvat credit to make adjustment towards value of closing stock inclusive of unutilized Modvat credit and also treatment of capital expenditure on brand ‘Epilex’. Aggrieved by the order of CIT(A), assessee as well as revenue are in appeal before us. & ITA No. 6150/M/02 (AY 1999-2000)
The first issue that came up for our consideration from assessee’s appeal is disallowance on account of unutilized Modvat credit. The Ld.AR for the assessee, at the time of hearing submitted that this issue is covered in favour of the assessee by the decision of ITAT, Mumbai Bench “C” in assessee’s own case for AY 1998-99 in dated 14-05-2008 where the ITAT, by following the 5 Abbott India Ltd decision of the jurisdictional High Court in the case of CIT vs Indo Nippon Chemicals Co Ltd 245 ITR 384 (Bom) deleted the addition made by the AO towards addition on account of revaluation of closing stock including unused Modvat credit. The Ld.DR present for the revenue fairly accepted that the issue is covered in favour of the assessee by the decision of ITAT, Mumbai Bench “C” in assessee’s own case for AY 1998-99.
We have heard both the parties and perused the material available on record. The issue of addition towards revaluation of closing stock including unutilized Modvat credit has been considered by the co- ordinate bench in the light of decision of Hon’ble Bombay High Court in the case of CIT vs Indo Nippon Chemicals Co Ltd (supra) and held that where in the closing stock, unutilized Modvat credit is adjusted, similar adjustment should be made to opening stock also. The relevant portion of the order is extracted below:-
26. On this issue, we note that the Id. Commissioner of Income Tax (Appeals) has decided the issue in favour of the assessee by placing reliance upon the Hon'ble Bombay High Court decision in the case of CIT vs. Indo Nippon Chemical Co. Ltd. [2000] 245 ITR 384 (Bom). Hence, we do not find any infirmity in the order of the Id. Commissioner of Income Tax (Appeals) on this issue. The order of the Id. Commissioner of Income Tax (Appeals) in this regard may be gainfully referred as under: 10. As clearly mentioned in the assessment order for the assessment year 98-99, the case of the appellant is covered by the jurisdictional High Court decision in the case of CIT vs. Indo Nippon Chemical Co. Ltd. 245 ITR 384 (Bombay). The addition
6 Abbott India Ltd in this regard was made in this year just to keep the issue alive. The facts are identical in earlier three years too. Respectfully following the aforesaid decision of the Hon'ble jurisdictional High Court, the addition made in this regard in all the four years is deleted. 27. Accordingly, we confirm the order of the Ld. Commissioner of Income Tax (Appeals). 6. In this view of the matter and consistent with the view taken by the co-ordinate bench, we are of the considered view that the AO was erred in making adjustment towards unutilized Modvat credit only in respect of closing stock. Therefore, we set aside the issue to the file of the AO to make necessary adjustments towards opening stock as well as closing stock.
The next issue that came up for our consideration from assessee’s appeal is treatment of capital expenditure on brand ‘Epilex’. The Ld.AR for the assessee, at the time of hearing submitted that this issue is covered in favour of the assessee by the decision of ITAT, Mumbai Bench “C” in assessee’s own case in dated 14- 05-2008 for AY 1998-99 wherein the ITAT has deleted enhancement made by the Ld.CIT(A) towards treatment of capital expenditure on brand ‘Epilex’. The Ld.AR further submitted that the Ld.CIT(A) also deleted addition made by the AO towards professional charges paid to DSP Meryll Lynch for the purpose of computation of deduction u/s 35AB of the Income-tax Act, 1961. We find that the co-ordinate bench of ITAT
7 Abbott India Ltd has considered similar issue for AY 1998-99 and by following the decision of Hon’ble Bombay High Court in the case of CIT vs Glennmark Pharmaceuticals Ltd (2013) 30 taxmann.com 167 held as under:-
“22. We have heard both the counsel and perused the records. The Id. Counsel of the assessee submitted that the issue needs to be decided in favour of the assessee as the same is covered by the Hon'ble Bombay High Court decision in the case of CIT vs. Glenmark Pharmaceutical Ltd. [2013] 30 taxmann.com 167 (Bom).
23. Per contra, the Id. Departmental Representative relied upon the orders of the Id. Commissioner of Income Tax (Appeals).
24. Upon careful consideration, we find that the issue in dispute is the Id. Commissioner of Income Tax (Appeals)'s decision that marketing knowhow cannot be treated as knowhow for the purpose of claim of deduction u/s. 35AB. Hence, he has held that the marking knowhow should be excluded while computing the deduction u/s. 35AB and, hence, he had ordered the enhancement. We find that the Hon'ble Bombay High Court in the case of Glenmark Pharmaceuticals Ltd. (supra) has held that where marketing know-how agreement led to an improvement in assessee's existing business resulting in higher sales and, consequently, higher profitability, the amounts spent on marketing know-how would result in improving profits of business on acquired brands as this knowledge would assist in improving marketing strategy, expenses incurred by assessee for acquiring marketing know-how would be revenue, and merely because it was outsourced, it would not cease to be revenue expenditure. Here we find that it is not the case of the Revenue that the above said marketing knowhow has not lead to increase in sales and higher profitability as expounded by the Hon'ble Bombay High Court as above. In such circumstances, when the assessee only claims deduction u/s. 35AB, the same cannot be denied by the Id. Commissioner of Income Tax (Appeals) by holding it to be a capital expenditure not qualifying for deduction. When the entire expenditure is allowable no stretch of imagination, the claim of amortization allowed by the Assessing Officer needs to be set aside. Hence, we set aside the order of the Id. Commissioner of Income Tax (Appeals) and hold that the Id. Commissioner of Income Tax (Appeals) has erred in enhancing the assessment by excluding the cost of deduction amounting to Rs.4,84,50,000/- for the purpose of allowing deduction u/s. 35AB. As regards, the Id. Commissioner of Income Tax (Appeals)'s discussion to include the payment made to DSP Merryll Lynch for the purpose of computation of deduction u/s. 35AB, we find ourselves in agreement
8 Abbott India Ltd with Id. Commissioner of Income Tax (Appeals)'s reasoning. Hence, we uphold that aspect of the decision which has been challenged by the Revenue.”
In this view of the matter and consistent with the view taken by the co-ordinate bench, we are of the considered view that the Ld.CIT(A) was erred in making enhancements towards treatment of capital expenditure incurred on brand ‘Epilex’. Hence, we direct the AO to delete enhancement made by the Ld.CIT(A).
Insofar as computation of deduction u/s 35AB excluding professional fees paid to DSP Merryll Lynch, the ITAT has held that payment made to DSP Merryll Lynch towards professional fees for acquiring brand ‘Epilex’ is part of expenditure incurred and the same is required to be amortised as per the provisions of section 35AB of the Income-tax Act, 1961. Accordingly, we direct the AO to delete addition made towards disallowance of professional charges while computing deduction u/s 35AB of the Income-tax Act, 1961.
The next issue that came up for our consideration from assessee’s appeal is exclusion of 90% of other income while computing deduction u/s 80HHC of the Income-tax Act, 1961. The AO has excluded 90% of other income being insurance claim and sale of scrap for the purpose of computation of deduction u/s 80HHC of the Income-tax Act, 1961. It is the claim of the assessee that insurance claim received on transit
9 Abbott India Ltd insurance is part of core businesses activity of the assessee, therefore, it should be part of receipts forming part of deduction u/s 80HHC of the Act. The assessee further claims that sale of scrap is generated on sales of raw materials and packing materials which is also part of core business activity and whatever revenue generated from such sale needs to be included in computing deduction u/s 80HHC of the Act.
We have heard both the parties and perused the materials available on record. The issue of insurance claim received on transit insurance for the purpose of computation of deduction u/s 80HHC is no longer res integra. The Hon’ble Bombay High Court in the case of CIT vs Pfizer Ltd 330 ITR 62 (Bom) has considered similar issue in the light of deduction u/s 80HHC and held that insurance claim for loss of stock in trade must stand on the same footing as the income that would have been realized by the assesse on sale of stock in trade. Insurance claim on account of the stock in trade does not constitute an independent income or a receipt of any other similar nature to brokerage, interest, rent or charges as long as such a receipt would not be subject to deduction of 90% under Explanation to section 80HHC of the Act. Similarly, on the issue of sale of scrap, the Hon’ble High Court in the case of Bangalore Clothing Co vs CIT 260 ITR 371 (Bom) held that revenue generated from sale of scrap was akin to manufacturing activities relating to export
10 Abbott India Ltd business carried on by the assessee, did not fall within the scope of Explanation to section 80HHC and, therefore, 90% of such receipts could not be excluded from business profits while computing deduction u/s 80HHC of the Act. Even the Ld. CIT(A) for AY 2001-02 in assessee’s own case has deleted addition made by the AO towards re- computation of eligible profit u/s 80HHC by excluding insurance claim and sale of scrap and such decision has been accepted by the department and no appeal has been filed before the ITAT. Once, the department has accepted the fact that these two items are part of other income eligible for inclusion in the computation of deduction u/s 80HHC, then by following the rule of consistency, the department ought to have accepted the assessee’s claim for current year. Therefore, we are of the considered view that the AO was erred in excluding 90% of other income being insurance claim and sale of scrap for the purpose of computation of eligible profit u/s 80HHC of the Income-tax Act, 1961. Hence, we direct the AO to delete addition made towards re-computation of eligible profit u/s 80HHC excluding insurance claim and sale of scrap.
The next issue that came up for our consideration is disallowance of interest income and cash discount while computing deductions u/s 80I & 80IA of the Income-tax Act, 1961. The Ld.AR for the assessee at the time of hearing submitted that this issue insofar as interest from 11 Abbott India Ltd customers is covered in favour of the assessee by the decision of ITAT, Mumbai Bench ‘C’ in assessee’s own case for AY 1998-99 wherein the ITAT, by following the decision of Hon’ble Bombay High Court in the case of CIT vs Vidyut Corporation 324 ITR 221 (Bom) held that interest from customers qualified for being eligible for computation of deductions u/s 80I & 80IA. The Ld.AR further submitted that even though the assessee has not considered other receipts for AY 1998-99, because the assessee did not press the issue, but fact remains that cash discount received from customers forms part of receipts eligible for deduction u/s 80I & 80IA as the Hon’ble Madras High Court in the case of CIT vs Madras Motors 257 ITR 60 has considered similar issue and held that cash discount is part of receipts being eligible for deductions u/s 80I & 80IA of the Income-tax Act, 1961.
We have heard both the parties and perused material available on record. The ITAT has considered interest from customers on delayed payments in the light of provisions of sections 80I & 80IA and by following the decision of Hon’ble Bombay High Court in the case of CIT vs Vidyut Corporation (supra) held that interest from customers is eligible for computation of deductions u/s 80I& 80IA of the Income-tax Act, 1961. Insofar as cash discount is concerned though the issue has come up for our discussion for first time during the year under 12 Abbott India Ltd consideration, fact remains that the assessee has failed to furnish evidence to prove that cash discount is part of its core business activity of income eligible for deductions u/s 80I & 80IA of Income-tax Act.
Therefore, we are of the considered view that the AO was right in disallowing cash discount while computing deductions u/s 80I & 80IA of the Income-tax Act, 1961. Accordingly, we uphold disallowance made by the AO and reject ground taken by the assessee.
The next issue that came up for our consideration from departmental appeal is disallowance of professional fees paid to DSP Merryll Lynch while computing deduction u/s 35AB of the Act. The Ld.AR for the assessee, at the time of hearing submitted that this issue is covered in favour of the assessee by the decision of ITAT, Mumbai Bench “C” in assessee’s own case for AY 1998-99 IN where under similar circumstances, the ITAT upheld findings of the Ld.CIT(A) deleting addition made by the AO towards disallowance of professional charges paid to DSP Merryll Lynch for the purpose of computation of deduction u/s 35AB of the Income-tax Act, 1961. We find that the ITAT has considered similar issue for AY 1998-99 and held that professional fees paid to DSP Merryll Lynch should be included while computing deduction u/s 35AB of the Act.
Facts remain unchanged. The revenue fails to bring on record any 13 Abbott India Ltd contrary evidence against the findings given by the ITAT for AY 1998-99.
Therefore, consistent with the view taken by the co-ordinate bench, we direct the AO to include professional fees paid to DSP Merryll Lynch while computing deduction u/s 35AB of the Act.
The next issue that came up for our consideration from revenue’s appeal is calculation of sales turnover exclusive of sales-tax, excise duty, trade discount, etc. while computing deduction u/s 80HHC of the Act. The Ld.AR for the assessee, at the time of hearing submitted that this issue is also covered in favour of the assessee by the decision of ITAT, Mumbai Bench “C” in assessee’s own case for AY 1998-99, wherein the ITAT, by following the decision of Hon’ble Bombay High Court in the case of CIT vs Sudarshan Chemicals Industries Ltd 245 ITR 769 (Bom) held that for the purpose of determination of sales turnover for calculating deduction u/s 80HHC sales-tax, excise duty, trade discount, etc. shall be excluded. We find that similar issue has been considered by the ITAT in the light of judgement of Hon’ble Bombay High Court in the case of CIT vs Sudarshan Chemicals Industries Ltd (supra) and held that for the purpose of determination of sales turnover for calculating deduction u/s 80HHC sales-tax, excise duty, trade discount, etc. shall be excluded. The relevant portion of the order is extracted below:-
14 Abbott India Ltd
“28. On this issue we note that the Ld.Commissioner of Income Tax (Appeals) has decided the issue by placing reliance upon the decision of Hon'ble jurisdictional High Court in the case of CIT vs. Sudarshan Chemical Industries Ltd. 245 ITR 769 (Bom). Hence, we do not find any infirmity in the order of the Id. Commissioner of Income Tax (Appeals). The order of the Id. Commissioner of Income Tax (Appeals) in this regard may be gainfully referred as under:
13. The appellant had excluded sales-tax, excise duty and trade discount from"" the total turnover in working out the profits derived from the export in accordance with the apportionment formula laid down in section 80HHC(3). The A.O. however included these items in the total turnover and thus reduced the profits derived from the export by increasing the denominator in the formula. The issue regarding exclusion of sales tax and excise duty from the total turnover for the purpose of section 80HHC is squarely covered by the jurisdictional High Court decision in the case of CIT vs. Sudarshan Chemcial Industries Ltd. 245 ITR 769 (Bom). In this decision it was held that it is only the actual sale price which is relevant to the total turnover and the profits derived from the export cannot be reduced artificially by including in the denominator such levies as sales tax and excise duty. The High Court has further held that in view of the use of common word 'turnover' in export turnover as well as total turnover, the two must have common ingredients. Since no discount is available in respect of export turnover, there is no rationale for including in the total turnover the trade discount obtained in respect of local turnover. Trade discount does not represent actual sale proceeds. This ground therefore succeed. The A.O. is directed to re-work the deduction u/s. 80HHC accordingly. 29. Accordingly, we confirm the order of the Id. Commissioner of Income Tax (Appeals).”
In this view of the matter and consistent with the view taken by the co-ordinate bench, we are of the considered view that the AO was erred in including sales-tax & excise duty and also trade discount while computing sales turnover for the purpose of determination of deduction
15 Abbott India Ltd u/s 80HHC of the Income-tax Act, 1961. The Ld.CIT(A), after considering relevant submissions has rightly deleted addition made by the AO. We do not find any error in the order of Ld.CIT(A). Hence, we are inclined to uphold the findings of the Ld.CIT(A) and reject ground taken by the revenue.
In the result, appeal filed by the assessee is partly allowed for statistical purpose and appeal filed by the revenue is dismissed.
ITA No.7824/Mum/2004 & (AY 2000-01)
The first issue came up for our consideration from assessee’s appeal is disallowance of interest expenditure u/s 14A of the Income-tax Act, 1961. The AO has disallowed interest expenditure of Rs.17,02,063 on the ground that the assessee has invested interest bearing funds in investments which yielded exempt income, but failed to disallow interest attributable to such investments in view of specific provisions provided u/s 14A of the Act. Therefore, he worked out proportionate interest debited to P&L Account and made addition of Rs.17,02,063. It is the claim of the assessee before the AO that its own funds in the form of share capital and reserves plus interest free funds are more than the amount of investments in shares and securities which yielded exempt income. Therefore, no disallowance could be made towards interest expenditure when its own funds are more than the amount of 16 Abbott India Ltd investments. In this regard, relied upon the decision of Hon’ble Bombay High Court in the case of HDFC Bank Ltd 366 ITR 505 (Bom) and also CIT vs Reliance Utilities & Power Ltd 313 ITR 340 (Bom).
We have heard both the parties and perused the material available on record and gone through the orders of authorities below. We have also considered case laws relied upon by the assessee. The issue of disallowance of interest u/s 14A when mixed funds are more than the amount of investments in shares and securities which yielded exempt income is no longer res integra. The jurisdictional High Court in the case of CIT vs HDFC Bank Ltd (supra) has considered the issue and held that when mixed funds, i.e. interest free and interest bearing funds are used to make investment in shares and securities, which yielded exempt income, then a presumption is drawn that investments in shares and securities is out of its own funds and no part of interest expenditure could be disallowed u/s 14A of the I.T. Act. This legal proposition is further strengthened by the decision of Hon’ble Bombay High Court in the case of CIT vs Reliance Utilities & Power Ltd (supra) wherein the ratio laid down in CIT vs HDFC Bank Ltd has been re-iterated.
Therefore, we are of the considered view that once assessee proved with necessary evidence that its own funds including interest free funds are more than the amount of investments, then no interest could be 17 Abbott India Ltd disallowed u/s 14A of the Act. But, the facts are not emerging from the orders of the lower authorities that the assessee has filed evidence to prove that its interest free funds are more than the amount of investments in shares and securities. Therefore, we set aside the issue to the file of the AO and direct him to cause necessary enquiry to ascertain the position of funds as on the date of investment and if found that the assessee is having its own funds, then no disallowance could be made towards interest expenditure u/s 14A of the Act.
The next issue that came up for our consideration is disallowance of deduction claimed u/s 35AB in respect of payment of marketing know how for brand ‘Epilex’. We have considered similar issue in ITA No.6606/Mum/2002. The reasons given by us in preceding paragraphs in shall mutatis mutandis apply to this appeal also. Therefore, for similar reasons, we direct the AO to delete addition made towards payment of marketing know how’ for brand ‘Epilex’.
The next issue that came up for our consideration is deduction u/s 80I & 80IB in respect of sale of scrap. We have considered similar issue in ITA No.6606/Mum/2002. The reasons given by us in preceding paragraphs in shall mutatis mutandis apply to this appeal also. Therefore, for similar reasons, we direct the AO to follow the reasons given by us in ITA No.6606/Mum/2002 for this appeal,
18 Abbott India Ltd too.
The next issue that came up for our consideration is adjustment to closing stock towards unutilized Modvat credit. We have considered similar issue in ITA No.6606/Mum/2002. The reasons given by us in preceding paragraphs in shall mutatis mutandis apply to this appeal also. Therefore, for similar reasons, we set aside the issue to the file of the AO and direct him to make adjustment towards unutilized Modvat credit to opening stock as well as closing stock to ascertain difference, if any, to make adjustment to returned income.
The next issue that came up for our consideration from revenue’s appeal is exclusion of professional fees paid to DSP Merryll Lynch while computing deduction u/s 35AB of the Act. We have considered similar issue in ITA No.6606/Mum/2002. The reasons given by us in preceding paragraphs in shall mutatis mutandis apply to this appeal also. Therefore, for similar reasons, we direct the AO to delete addition made towards professional fees paid to DSP Merryll Lynch.
The next issue that came up for our consideration from revenue’s appeal is sales-tax, excise duty, trade discount, etc. to be included in total turnover for computation of deduction u/s 80HHC of the Act. We have considered similar issue in ITA No.6606/Mum/2002. The reasons
19 Abbott India Ltd given by us in preceding paragraphs in shall mutatis mutandis apply to this appeal also. Therefore, for similar reasons, we direct the AO to exclude sales-tax, excise duty, trade discount, etc. while computing total turnover for computation of deduction u/s 80HHC of the Act.
In the result, appeal filed by the assessee is partly allowed for statistical purpose and appeal filed by the revenue is dismissed.
ITA 5625/Mum/2005 & ITA 4367/Mum/2005 (AY 2001-02)
The first issue that came up for our consideration is disallowance of interest expenditure u/s 14A of the Act. We have considered similar issue in /Mum/2004. The reasons given by us in preceding paragraphs in ITA No.78214 /Mum/2004 shall mutatis mutandis apply to this appeal also. Therefore, for similar reasons, we set aside the issue to the file of the AO to ascertain whether the assessee is having sufficient interest free funds in excess of amount invested in shares & securities which yielded exempt income and direct him to delete additions made towards disallowance of interest expenditure if assessee proves that interest free funds are more than the amount of investment .
The next issue that came up for our consideration is denial of deduction u/s 35AB in respect of payment of marketing know how’ for brand ‘Epilex’. We have considered similar issue in ITA
20 Abbott India Ltd No.6606/Mum/2002. The reasons given by us in preceding paragraphs in shall mutatis mutandis apply to this appeal also. Therefore, for similar reasons, we direct the AO to delete addition towards disallowance of deduction u/s 35AB in respect of payment of marketing know how’ for brand ‘Epilex’.
The next issue that came up for our consideration is deduction u/s 80IB in respect of sale of scrap. We have considered similar issue in ITA No.6606/Mum/2002. The reasons given by us in preceding paragraphs in shall mutatis mutandis apply to this appeal also. Therefore, for similar reasons, we direct the AO to follow the findings given by us in ITA No.6606/Mum/2002 for this year also.
The next issue that came up for our consideration is disallowance on computer software expenses on the ground that it is in the nature of capital expenditure. The AO has disallowed expenditure incurred under the head computer software expenses of Rs.19,97,050 on the ground that the assessee has obtained advantage or benefit of enduring nature by acquiring computer software. It is immaterial that such software may become obsolete after some time and assessee may have to develop new software. Software procured by the company was intended to provide benefit over a period of time. Therefore, he opined that software
21 Abbott India Ltd expenditure is in the nature of capital expenditure which cannot be allowed u/s 37(1) of the I.T. Act, 1961. It is the contention of the assessee that expenditure incurred under the head ‘software expenses’ is a routine expense paid for acquiring licence to use software which facilitate smooth carrying on of business operations. Assessee also paid fees for annual maintenance expenses of certain software which are in the nature of revenue expenditure. Therefore, the AO was erred in disallowing software expenditure.
We have heard both the parties and perused material available on record. Any expenditure to be qualified for deduction u/s 37(1) of the Act it should be expended wholly and exclusively for the purpose of business of the assessee and it should not be in the nature of personal expenses or capital expenses. If any expenditure incurred is in the nature of capital expenditure which gives enduring benefit to the assessee, then such expenditure needs to be capitalized. In this case, the claim of the assessee is that expenditure incurred under the head software expenses are routine expenses paid for acquiring licence to use software and also in the nature of annual maintenance expenses, therefore, the AO was incorrect in disallowing such expenditure only on the ground that these are in the nature of capital expenditure. We find that the assessee has incurred software expenses, which are in the 22 Abbott India Ltd nature of cost of service of personnel, licence fees for software and AMC expenses for various softwares including software for accounting sales and debtors, software support for pay roll division, software maintenance and support for marketing royalty obligations and other day to day obligations, which are in the nature of revenue expenditure. Therefore, we are of the considered view that the AO was erred in disallowing software expenses on the ground that it is in the nature of capital expenditure which gives enduring benefit to the assessee. Further, the Hon’ble Bombay High Court in the case of CIT vs Raichem RPG Ltd 346 ITR136 (Bom) has considered similar issue and held that amount paid for acquiring licence to use softwares which facilitate smooth carrying on of business operation, fees paid for said licence was revenue expenditure allowable u/s 37(1) of the Income-tax Act, 1961. Therefore, considering the facts and circumstances of the case and also by following the decision of Hon’ble Bombay High Court in the case of CIT vs Raichem RPG Ltd (supra), we direct the AO to delete addition made towards software expenses.
The next issue that came up for our consideration from revenue’s appeal is deduction u/s 35AB on professional fees paid to DSP Merryll Lynch. We have considered similar issue in ITA No.6606/Mum/2002.
The reasons given by us in preceding paragraphs in ITA
23 Abbott India Ltd No.6606/Mum/2002 shall mutatis mutandis apply to this appeal also.
Therefore, for similar reasons, we direct the AO to delete addition made towards professional fees paid to DSP Merryll Lynch.
The next issue that came up for our consideration is inclusion of sales-tax, excise duty, trade discount, etc. in total turnover while computing deduction u/s 80HHC of the Income-tax Act, 1961. We have considered similar issue in ITA No.6606/Mum/2002. The reasons given by us in preceding paragraphs in shall mutatis mutandis apply to this appeal also. Therefore, for similar reasons, we direct the AO to follow the findings given by us in ITA No.6606/Mum/2002 for this year also.
In the result, appeal filed by the assessee is partly allowed, for statistical purpose and appeal filed by the revenue is dismissed.
ITA No.5099/Mum/2007 & (AY 2002-03)
The first issue that came up for our consideration is disallowance of interest u/s 14A of the I.T. Act, 1961. We have considered similar issue in for AY 2000-01. The reasons given by us in preceding paragraphs in ITA No.7824 /Mum/2004 shall mutatis mutandis apply to this appeal also. Therefore, for similar reasons, we set aside the issue to the file of the AO with similar directions.
The next issue that came up for our consideration is disallowance of 24 Abbott India Ltd marketing know how paid for brand ‘Epilex’. We have considered similar issue in ITA No.6606/Mum/2002. The reasons given by us in preceding paragraphs in shall mutatis mutandis apply to this appeal also. Therefore, for similar reasons, we direct the AO to delete addition towards disallowance of deduction u/s 35AB in respect of payment of marketing know how’ for brand ‘Epilex’ and professional fees paid to DSP Merryll Lynch.
The next issue that came up for our consideration is exclusion of 90% of other income being insurance claim and sale of scrap while computing deduction u/s 80HHC of the Income-tax Act, 1961. We have considered similar issue in ITA No.6606/Mum/2002. The reasons given by us in preceding paragraphs in shall mutatis mutandis apply to this appeal also. Therefore, for similar reasons, we direct the AO to follow the findings given by us in ITA No.6606/Mum/2002 for this year also.
The next issue that came up for our consideration is disallowance of interest income for computation of deduction u/s 80I & 80IA of the Income-tax Act, 1961. We have considered similar issue in ITA No.6606/Mum/2002. The reasons given by us in preceding paragraphs in shall mutatis mutandis apply to this appeal also. Therefore, for similar reasons, we direct the AO to include interest
25 Abbott India Ltd income from customers on late payments for determination of deductions u/s 80I & 80IA of the Income-tax Act, 1961.
The next issue that came up for our consideration is disallowance of computer software expenses. We have considered similar issue in ITA No.5625/Mum/2005. The reasons given by us in preceding paragraphs in for AY 2001-02 shall mutatis mutandis apply to this appeal also. Therefore, for similar reasons, we direct the AO to delete addition made towards computer software expenses.
The next issue that came up for our consideration from revenue’s appeal is inclusion of scrap sales as part of profit eligible for deduction u/s 80IB of the Income-tax Act, 1961. We have considered similar issue in ITA No.6606/Mum/2002. The reasons given by us in preceding paragraphs in for AY 1999-2000 shall mutatis mutandis apply to this appeal also. Therefore, for similar reasons, we direct the AO to follow the findings given by us in ITA No.6606/Mum/2002 for this year also.
In the result, appeal filed by the assessee is allowed for statistical purpose and appeal filed by the department is dismissed.
ITA 5922/Mum/2010 & ITA 5988/Mum/2010 (AY 2003-04)
The first issue that came up for our consideration from assessee’s appeal is disallowance of computer software expense. We have 26 Abbott India Ltd considered similar issue in /Mum/2002. The reasons given by us in preceding paragraphs in ITA No.5625/Mum/2005 for AY 2001- 02 shall mutatis mutandis apply to this appeal also. Therefore, for similar reasons, we direct the AO to delete addition made towards computer software expenses.
The next issue that came up for our consideration is disallowance of deduction u/s 35AB in respect of payment of marketing know how’ for brand ‘Epilex’ and professional fees paid to DSP Merryll Lynch. We have considered similar issue in ITA No.6606/Mum/2002. The reasons given by us in preceding paragraphs in shall mutatis mutandis apply to this appeal also. Therefore, for similar reasons, we direct the AO to recompute deduction u/s 35AB in respect of payment of marketing know how’ for brand ‘Epilex’ and professional fees paid to DSP Merryll Lynch.
The next issue that came up for our consideration from assessee’s appeal is deduction u/s 80IB in respect of other income being interest on housing loan to employees, interest on car loan, interest others and other interest including sundry receipts. The Ld.AR for the assessee, at the time of hearing, submitted that he did not want to press the ground and hence, ground taken by the assessee is dismissed, as not pressed.
The next issue that came up for our consideration from revenue
27 Abbott India Ltd appeal is deduction u/s 80M in respect of dividend declared for Rs.1,68,13,000. The facts with regard to the impugned dispute are that during the year, the assessee company has received dividend income of Rs.1,68,13,000 from wholly owned subsidiary company. The assessee also declared dividend of Rs.18,33,61,200. The assessee has claimed deduction u/s 80M in respect of dividend income of Rs.1,68,13,000, since it has declared dividend in the year under consideration. The AO has disallowed deduction claimed u/s 80M on the ground that deduction claimed u/s 80M is notpermissible because the assessee has declared dividend on or after 01-04-2003 and paid dividend distribution tax u/s 115-O(1) of the Income-tax Act, 1961. It is the claim of the assessee that where the gross total income of a domestic company in any previous year includes any income by way of dividend income from other domestic company, there shall be in accordance with and subject to the provisions of this section, be allowed in computing the total income of such domestic company a deduction by an amount equal to so much of the amount of income by way of dividend income of another domestic company as it does not exceed the amount of dividend distributed by the domestic company on or before the due date. The assessee further claimed that it has received dividend income of Rs.1,68,13,000, whereas it distributed dividend of Rs. 18,33,61,200 on or before due date of 28 Abbott India Ltd furnishing return of income and hence, eligible for deduction u/s 80M of the Income-tax Act, 1961.
We have heard both the parties and perused material available on record. As per the provisions of section 80M of Income-tax Act, 1961 where any domestic company receives dividend income from another domestic company and distributes dividend during the year, then an amount equal to the amount received from another domestic company shall be deducted from total income of the company u/s 80M of the Income-tax Act, 1961. In this case, the assessee has received dividend income of Rs.1,68,13,000 and distributed dividend of Rs. 18,33,61,200.
The dividend income received by the assessee is less than the amount of dividend declared by the assessee in the year under consideration.
Therefore, as per the provisions of section 80M, the assessee is eligible for deduction u/s 80M to the extent of dividend income received or dividend income declared, whichever is less. Since the assessee has distributed dividend more than the amount of dividend income received for the year under consideration, it has rightly claimed deduction u/s 80M to the extent of dividend income received of Rs.1,68,13,000. This proposition is further supported by the decision of Hon’ble Bombay High Court in the case of Godrej Agrovet Ltd vs DCIT (2010) 323 ITR 97 (Bom) and also the decision of ITAT, Pune Bench in the case of Jaihind
29 Abbott India Ltd Investments Pvt Ltd vs ACIT in ITA 1222/PN/2009. Therefore, we are of the considered view that the assessee is eligible for deduction u/s 80M in respect of dividend received from wholly owned subsidiary company.
Hence, we direct the AO to delete addition made towards disallowance u/s 80M of the Act.
In the result, the appeal filed by the assessee is partly allowed and appeal filed by the revenue is dismissed.
ITA No.6192/Mum/2010 (AY 2005-06)
The first issue that came up for our consideration is disallowance of expenditure incurred in relation to exempt income u/s 14A of the Act.
The AO has determined disallowance of expenditure incurred in relation to exempt income u/s 14A of the Act, by invoking rule 8D(2) of I.T.
Rules, 1962. The AO has determined disallowance of Rs1,60,488 u/r 8D(2)(i) as per the working furnished by the assessee, vide its letter dated 24-11-2008. The AO also determined disallowance of interest expenses of Rs.7,61,589. The AO further disallowed a sum of Rs.97,00,341 @0.5% of the average value of investments as per Rule 8D(2)(iii). It is the claim of the assessee that Rule 8D(2)(ii) & 8D(2)(iii) & section 14A are prospective in nature and, therefore, for years prior to such insertion, disallowance to be made on reasonable basis without resorting to provisions of Rule 8D(2) of Income-tax Rules, 1962. The 30 Abbott India Ltd assessee further contended that in respect of direct expenses, there is no dispute because it has suo moto filed a statement for disallowance of direct expenses incurred in relation to exempt income. In respect of interest expenses, the assessee claims that since its own funds are more than the amount of investment, no disallowance could be made towards interest expenses. As regards other administrative expenses, the assessee pleads for a reasonable disallowance without resorting to the provisions of Rule 8D(2) of I.T. Rules, 1962.
We have heard both the parties and perused the material available on record. There is no dispute with regard to the fact that the provisions of Rule 8D(2) are not applicable to the years prior to assessment year 2008-09. This proposition has been laid down by the Hon’ble Bombay High Court in the case of CIT vs Godrej Boyce & Mfg Co Ltd 328 ITR 81 (Bom). Therefore, without going into provisions of Rule 8D(2), the expenditure incurred in relation to exempt income needs to be determined having regard to the quantum of exempt income earned by the assessee and expenditure incurred in relation to such exempt income. In this case, the assessee has suo moto filed a statement insofar as direct expense is concerned and determined an amount of Rs.1,60,488. Therefore, we are of the considered view that the AO was right in disallowing direct expenses attributable to exempt income of 31 Abbott India Ltd Rs.1,60,488. Insofar as interest expenses, we find that a similar issue has been considered for earlier years in the light of claim of the assessee that its own funds are more than the amount of investments in shares and securities which yield exempt income. In such case, interest expense could not be disallowed. Therefore, in respect of interest expenses, we set aside the issue to the file of the AO to ascertain the availability of interest free funds as on the date of investments in the light of decision of Hon’ble Bombay High Court in the case of CIT vs HDFC Bank Ltd (supra). As regards disallowance of other expenses @0.5% of the average value of investments, we find that the provisions of Rule 8D(2) has no application prior to AY 2008-09. Hence, disallowance contemplated u/s 14A has to be determined on reasonable basis having regard to the quantum of dividend income earned and related expenditure incurred for the year under consideration. The assessee claims that various Courts and Tribunals have directed the AO to estimate 1 to 2% of exempt income towards expenses incurred in relation to exempt income. The assessee has relied upon the decision of ITAT, Mumbai in the case of Greaves Leasing Finance Ltd 52 SOT 22, where the ITAT has restricted disallowance to the extent of 1% of exempt income. The Hon’ble Delhi High Court in the case of Oriental Structure Engineers Pvt Ltd in IT 605 of 2012 has directed the AO to 32 Abbott India Ltd restrict disallowance to 2% of exempt income. Although the Courts have considered various rates for the purpose of determination of disallowance contemplated u/s 14A, yet, the fact remains that prior to AY 2008-09 disallowance should be worked out on reasonable basis having regard to the quantum of dividend income earned by the assessee and expenditure incurred for the relevant period. In this case, the assessee has earned huge dividend income of Rs.6,84,37,043, therefore, considering the facts and circumstances of this case and also keeping in view of various judicial precedents, we are of the considered view that 5% of exempt income towards expenses incurred in relation to exempt income would meet the ends of justices. Therefore, we direct the AO to restrict the disallowance determined towards other expenses at 5% of exempt income.
The next issue that came up for our consideration is deduction u/s 80IB in respect of interest from customers and cash discount. We have considered similar issue in ITA No.6606/Mum/2002. The reasons given by us in preceding paragraphs in shall mutatis mutandis apply to this appeal also. Therefore, for similar reasons, we direct the AO to follow our directions issued earlier.
In the result, appeal filed by the assessee is partly allowed, for statistical purpose.
33 Abbott India Ltd ITA Nos 3362/M/2010 & (AY 2004-05)
The first issue that came up for our consideration from assesse’s appeal is disallowance of software expenses. We have considered similar issue in /Mum/2005. The reasons given by us in preceding paragraphs in ITA No.5625 /Mum/2005 shall mutatis mutandis apply to this appeal also. Therefore, for similar reasons, we direct the AO to follow our directions issued earlier.
The next issue that came up for our consideration from assessee’s appeal is disallowance of expenditure incurred in relation to exempt income u/s 14A of the Act. We have considered similar issue in /Mum/2010. The reasons given by us in preceding paragraphs in ITA No.6192 /Mum/2010 shall mutatis mutandis apply to this appeal also. Therefore, for similar reasons, we direct the AO to follow our directions issued earlier.
The next issue that came up for our consideration from revenue’s appeal is deduction u/s 35AB of the Act, in respect of payment of marketing know how’ for brand ‘Epilex’ and professional charges paid to DSP Merryll Lynch. We have considered similar issue in /Mum/2002. The reasons given by us in preceding paragraphs in ITA No.6602/Mum/2002 shall mutatis mutandis apply to this appeal also.
Therefore, for similar reasons, we direct the AO to follow our directions
34 Abbott India Ltd issued earlier.
The next issue that came up for our consideration from revenue’s appeal is disallowance of advertisement expenditure. The AO has disallowed advertisement expenditure incurred by the assessee on the ground that the same was not spent wholly and exclusively for the purpose of business of the assessee and also such expenditure has benefited the parent company of the assessee. The AO further observed that although the assessee has claimed advertisement expenses after netting off of reimbursement received from its parent company, failed to file necessary evidence to justify expenditure incurred in respect of medical conference expenses of Rs.1,76,07,027 and giveaways of Rs.2,89,30,776. The assessee was also not able to justify the expenditure with any supporting evidence. Therefore, he disallowed net advertisement expense of Rs.3,42,24,626 (Rs.9,57,98,037 – Rs.6,15,73,411). It is the claim of the assessee that expenditure incurred under the head ‘advertisement & publicity’ are wholly and exclusively incurred for the purpose of business of the assessee and no part of the expense is incurred to benefit the parent company. The expenditure incurred under the head ‘advertisement & publicity’ mainly relates to promoting sales of the assessee which includes medical conference, giveaways and other expenses. Out of the total expenses
35 Abbott India Ltd of Rs.9,57,98,037, a sum of Rs. 6,15,73,411 has been reimbursed by M/s Navnordisk which has been credited to the advertisement expenditure account. Therefore, merely for the reason that the assessee is marketing its products under the brand name of its parent company, the parent company is deriving benefit out of expenditure incurred by the assessee towards advertisement expenditure is incorrect.
We have heard both the parties and perused the materials available on record. The AO has disallowed net advertisement expenses on two grounds, i.e. the expenditure was not incurred wholly and exclusively for the purpose of business of the assessee, secondly, the brand name owned by the parent company of the assessee and the assessee was only paying royalty. Therefore, any expenditure incurred towards publicity and advertisement is indirectly benefitted the parent company and hence, the same cannot be considered as expended wholly and exclusively for the purpose of business of the assessee. It is the claim of the assessee that expenditure incurred under the head ‘publicity & advertisement’ is wholly and exclusively incurred for the purpose of business of the assessee and the same cannot be disallowed merely on the ground that the said expenses were indirectly benefitted the parent company of the assessee.
36 Abbott India Ltd
Having heard both the sides, we find that although there is merit in the claim of the assessee that merely the parent company of the assessee derives certain benefit out of advertisement expenses incurred by the assessee, such expenses cannot be disallowed when the assessee has filed necessary evidences to prove that the same has been incurred wholly and exclusively for the purpose of business of the assessee. In this case, it is not the case of the AO that the assessee has undertaken to promote the brand name of the parent company by spending on ‘publicity & advertisement’. Whatever expenses incurred on behalf of the parent company, has been reimbursed to the assessee and the same has been credited to ‘advertisement expenditure’ account which is evident from the fact that the AO has accepted this fact and made addition to only net advertisement expenditure incurred by the assessee. Therefore, we are of the considered view that the AO was erred in disallowing advertisement & publicity expenses incurred by the assessee on the ground that such expenditure has indirectly benefitted the parent company of the assessee.
Coming to the second observation of the AO. The AO has disallowed advertisement & publicity expenses on the ground that the assessee has failed to file any evidences to justify medical conference expenses and giveaways. The AO further observed that the assessee
37 Abbott India Ltd was not able to justify the expenditure and also failed to clarify the break of such huge amount with proper supporting evidences. Although the assessee claims to have filed various details before the AO to justify advertisement expenditure incurred for the year, the fact remains that the AO has recorded categorical finding any that assessee failed to file any evidence to justify such expenditure. Therefore, we are of the considered view that the issue needs to be re-examined by the AO in the light of claim of the assessee that it has furnished necessary evidence to prove advertisement expenses. Hence, we set aside the issue to the file of the AO and direct him to consider the explanation of the assessee in the light of our discussion in preceding paragraphs. If the assessee is able to file necessary evidence with proper justification for incurring such expenses, then the AO is directed to allow advertisement expenses incurred by the assessee.
The next issue that came up for our consideration is addition towards disallowance of deferred sales-tax liability. The AO has disallowed deferred sales-tax liability under the head ‘liabilities’ on the ground that the assessee has sold Jejuri undertaking in FY 2002-3 and as per the terms of agreement dated 19-06-2002, sales-tax, if any, payable including all other out of pocket expenses in connection with and relating to the transfer of said undertaking shall be borne and paid
38 Abbott India Ltd by BRIOCIA alone. The AO further observed that though the assessee has transferred the undertaking, deferred tax liability relates to such undertaking is continued to be in the books of account of the assessee, therefore, opined that such liability is no longer payable and accordingly made addition u/s 41(1) of the Income-tax Act, 1961. It is the claim of the assessee that deferred sales-tax liability is related to Jejuri undertaking was paid by the assessee even after transfer of undertaking to another company and the AO has misconstrued the provisions of clauses of agreement dated 19-06-2002 to come to the conclusion that deferred sales-tax liability is no longer payable. The assessee further contended that such liability has been paid by the assessee and proof of such payment has been furnished before the AO. Therefore, the AO was incorrect in making addition towards deferred sales-tax liability even though the said liability is continued to exist in the books of account of the assessee.
We have heard both the parties and perused the materials available on record. It is an undisputed fact that deferred sales-tax liability shown under the head ‘current liabilities’ pertain to Jejuri undertaking of the assessee and this fact has been accepted by the AO. The AO has made addition towards deferred sales-tax liability only for the reason that the said undertaking has been transferred to another undertaking w.e.f
39 Abbott India Ltd 19-06-2002 and as per the clauses of agreement dated 19-06-2002 any taxes, cesses, levies of any nature, whatsoever of the Jejuri undertaking shall be borne and paid by the purchaser of the unit.
Having considered material available on record, we do not find any merit in the findings of the AO for the reason that the assessee has transferred Jejuri undertaking to another undertaking vide agreement dated 19-06-2002. As per the said agreement, it was agreed between the parties that all taxes, cess, levies of any nature, whatsoever of the Jejuri undertaking upto the date of transfer shall be borne and paid by the assessee. We further observe that one more condition embedded in the agreement at para 11 says that sales-tax, if any, payable and all other out of pocket expenses in connection with and relating to the transfer of the said undertaking shall be borne and paid by the purchaser. The AO has misconstrued the facts to come to the conclusion that sales-tax, if any, payable in relation to the transfer of the said undertaking shall mean ‘whatever taxes payable upto the date of transfer of the undertaking’. On the other hand, the assessee has filed necessary evidence to prove that such liability continue to exist in its books of account, even after transfer of Jejuri undertaking and also the said liability has been discharged by the assessee to the department in subsequent period. Therefore, we are of the considered view that the 40 Abbott India Ltd AO was erred in making addition towards deferred sales-tax liability u/s 41(1) when such liability is existing in the books of account of the assessee. Therefore, we direct the AO to delete addition made towards deferred sales-tax liability u/s 41(1) of the I.T. Act, 1961.
The next issue that came for our consideration from revenue’s appeal is exclusion of interest income and sale of scrap for the purpose of determination of deduction u/s 80IB of the Act. We have considered similar issue in ITA No.6606/Mum/2002. The reasons given by us in preceding paragraphs in shall mutatis mutandis apply to this appeal also. Therefore, for similar reasons, we direct the AO to follow our directions issued earlier.
In the result, appeal filed by the assessee is partly allowed, for statistical purpose and appeal filed by the revenue is also partly allowed, for statistical purpose.
As a result, appeals filed by the assessee for AYs 2002-03 & 2003- 04 are allowed; appeals filed by the assessee for all other years are partly allowed, for statistical purpose; and appeals filed by the revenue for AYs 2002-03 & 2003-04 are dismissed; appeal filed by the revenue for AY 2004-05 is partly allowed, for statistical purpose; and appeals filed by the revenue for all other years are partly allowed.
41 Abbott India Ltd
Order pronounced in the open court on _____ August, 2018.