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Income Tax Appellate Tribunal, MUMBAI BENCH “A”, MUMBAI
Before: SHRI G.S.PANNU & SHRI PAWAN SINGH
ORDER PER G.S.PANNU,A.M:
The captioned appeal by the Revenue is directed against the order of the CIT(A)-17, Mumbai dated 04/03/2014, pertaining to the Assessment Year 2009-10, which in turn has arisen from the order passed by M/s.Zoetis Pharmaceutical Research Pvt. Ltd (Formerly known as Pfizer Pharmaceutical India Pvt. Ltd.,) the Assessing Officer dated 16/04/2013 under section 143(3) r.w.s.144C(3) of the Income Tax Act, 1961 (in short ‘the Act’).
The following Grounds have been taken by the Revenue in the A.Y.2009-10. 1. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of cross charges of Rs.54,01,000/- for non-deduction of IDS u/s.40{a)(ia) holding that these charges represent mere reimbursement without appreciating the fact that these payments were made for rendering business auxiliary services through invoices inclusive of the service tax and therefore, includes profit component and thus cannot be said to be pure reimbursement charges not liable for deduction of TDS". 2. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of cross charges of Rs.54,01,000/- for non-deduction of TDS u/s.40(a)(ia) holding that these charges represent mere reimbursement without appreciating the fact that the assessee has stopped itself from taking stand that these payments are mere reimbursement as it has taken a contrary stand before the Service Tax Authorities that the payments were made for providing business auxiliary services on which tax has been paid".
3. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to delete the disallowance made U/S.14A on the ground that AO has not recorded satisfaction that assessee's calculation of disallowance is incorrect by ignoring the fact that same was earnestly recorded by the AO in the Para 8.2 of the Assessment Order."
4. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to delete the disallowance made U/S.14A by ignoring the decision of the Jurisdictional High Court in the case of CIT Vs. Boyce Mfg. 234 CTR 1 (Bom) ".
The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the AO be restored.
The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary.
M/s.Zoetis Pharmaceutical Research Pvt. Ltd (Formerly known as Pfizer Pharmaceutical India Pvt. Ltd.,)
We may take up the issue raised in Ground of appeal Nos. 1&2 relating to disallowance of Rs.54,01,000/- representing cross charges paid by the assessee. In this context the relevant facts are that the appellant is a company incorporated in the Companies Act 1956 and is, interalia, engaged in the business of trading exports, trading in vegetable capsules, clinical trials primarily undertaking comprehensive data management for new drugs development, research and development activities in veterinary medicines on lab scale and other services like corporate internal audit, global security centre, information technology development, global sourcing India, global financial shared services, global contract manufacturing and global legal compliance etc., The appellant is a part of Pfizer Group of concerns and it has unit at Chennai which is recognised Software Technology Park Unit (STPI), eligible for the claim of deduction u/s.10A of the Act.
In the course of assessment proceedings, it was noticed that assessee had entered into a cost sharing agreement with M/s.Pfizer Limited, a sister concern, in terms of which it had paid a sum of Rs.54,01,000/-. On being asked to explain, assessee submitted that it was using field force facility of Pfizer Limited to promote its products in the market and the impugned payment represented reimbursement of expenses on travelling, fees to recruitment agencies, telephone expenses, miscellaneous expenses and salaries and wages incurred by M/s.Pfizer Limited. Assessee also pointed out that the payment is in the nature of reimbursement of expenses. The Assessing Officer also asked the assessee to explain as to why no tax was deducted at source on payments made to M/s.Pfizer Ltd.. Assessee pointed out that the payment was mere reimbursement of expenses incurred by M/s.Zoetis Pharmaceutical Research Pvt. Ltd (Formerly known as Pfizer Pharmaceutical India Pvt. Ltd.,)
Pfizer Ltd., without any mark up and therefore, there was no requirement of deducting tax at source. Further, assessee also asserted that Pfizer Limited had deducted the requisite tax at source on the salaries of field force and any other administrative expenses incurred by it and the same was deposited into the Government Treasury as per rules. The Assessing Officer however, did not accept the explanation furnished by the Assessee. According to the Assessing Officer, the money paid by assessee to M/s.Pfizer Limited in terms of cost sharing agreement could not be considered as reimbursement of expenditure because the payments made included an element of Service Tax. Secondly, as per the Assessing Officer, the payment was made in terms of a contract and therefore, it required deduction of tax at source in terms of Section 194C of the Act. Noticing the failure of the assessee to deduct tax at source, an amount of Rs.54,01,000/- was disallowed by applying Section 40(a)(ia) of the Act. The CIT(A) has since set aside the action of the Assessing Officer on two counts, firstly that the payments to the sister concern were pure reimbursement of expenditure and as such there was no requirement of deduction of tax at source. Secondly, the CIT(A) also referred to second proviso of Section 40(a)(ia) of the Act inserted by the Finance Act 2012 and deemed it fit to apply the same retrospectively to the instant Assessment Year also. The CIT(A) noted that since the assessee was not deemed to be an assessee in default as per the first proviso to Section 201(1) and complied with other requirements contained therein, the non-deduction of tax at source would not invite the disallowance u/s.40(a)(ia) of the Act because of the second proviso thereof. The action of the CIT(A) in deleting the disallowance made by the Assessing
M/s.Zoetis Pharmaceutical Research Pvt. Ltd (Formerly known as Pfizer Pharmaceutical India Pvt. Ltd.,)
Officer is the subject matter of challenge before us by way of Ground of appeal Nos.1 & 2 above.
5. At the time of hearing, learned representative for the assessee pointed out that the decision of the CIT(A) is similar to his decision in the case of another sister concern M/s. Pfizer Products India Pvt. Ltd., wherein also the Assessing Officer had disallowed the cross charges paid to M/s.Pfizer Limited in terms of cost sharing agreement. It has been pointed out that in the case of M/s. Pfizer Products India Pvt. Ltd., the Assessing Officer had taken identical reasons to disallow the payment and the CIT(A) had deleted the same for similar reasons as assigned by him in the instant case. Learned representative pointed out that so far as the decision of the CIT(A) in the case of M/s. Pfizer Products India pvt. Ltd. is concerned, the same was challenged in appeal by the Revenue before the Tribunal, and vide order in dated 01/09/2017, the action of the CIT(A) has been affirmed by the Tribunal and disallowance made by the Assessing Officer out of cross charges for non-deduction of tax in terms of Section 40(a)(ia) has been found to be untenable. He, therefore, contended that in this view of the matter, the order of CIT(A) in the instant case also deserves to be affirmed.
6. Learned DR has not controverted the factual matrix and also the fact that the facts and circumstances prevailing with the Assessing Officer to make the impugned disallowance out of the cross charges paid to M/s. Pfizer Limited is similar to those considered by the Tribunal in the case of M/s.Pfizer Products India Pvt. Ltd., (supra), another group concern. Ofcourse, learned DR has reiterated the stand of the Assessing Officer, which M/s.Zoetis Pharmaceutical Research Pvt. Ltd (Formerly known as Pfizer Pharmaceutical India Pvt. Ltd.,)
we have also briefly noted in the earlier part of this order and is not being repeated for the sake of brevity.
Having considered the rival stands and also perusing the orders of the authorities below as well as the precedent dated 01/09/2017(supra), we find that the CIT(A) made no mistake in deleting the disallowance made by the Assessing Officer by invoking Section 40(a)(ia) of the Act. In the case of M/s. Pfizer Products India Pvt. Ltd., (supra) also, the issue related to cross charges paid to sister concern M/s.Pfizer Ltd., in terms of cost sharing agreement, which is similar to the agreement between the assessee before us and the sister concern M/s. Pfizer Limited. In this view of the matter, we may refer to the following discussion in the order of the Tribunal dated 01/09/2017(supra) wherein identical situation has been dealt with as under:-
“19. We have carefully considered the rival submissions. Factually speaking, in para 1.3.6 of his order, the CIT(A) has tabulated details of the expenditure of Rs.14,51,77,000/- which is under the heads ‘staff cost’, ‘travelling’, ‘advertising & promotional expenses’ and ‘other miscellaneous expenses’. Thereafter, the CIT(A) has noted the nature of the expenses under each of the four heads. The cross charges have been incurred by the assessee in terms of a cost sharing agreement with M/s. Pfizer Ltd. In terms of the agreement with M/s. Pfizer Ltd., assessee was sharing services of certain employees and other facilities which belonged to M/s. Pfizer Ltd. The reimbursement of such expenses due or paid to M/s. Pfizer Ltd. amounts to Rs.14,51,77,000/- and has been included under the aforesaid expenditure heads in the account books of the assessee. Detailed explanation has been filed by the assessee for each of the heads of expenditure and a common point is that the same was on account of reimbursement towards the expenses incurred by M/s. Pfizer Ltd. for and on behalf of the assessee. The aforesaid factual assertions of the assessee have been accepted by the CIT(A) by referring to the terms and conditions of the agreement with M/s. Pfizer Ltd. In para 1.3.2 of his order, the CIT(A) records the confirmation by M/s. Pfizer Ltd. that it had deducted tax at source at the appropriate rates on the payments made to outside vendors/employees wherever
M/s.Zoetis Pharmaceutical Research Pvt. Ltd (Formerly known as Pfizer Pharmaceutical India Pvt. Ltd.,) applicable and also the fact that M/s. Pfizer Ltd. has not claimed any deduction for the expenditure in question. As a consequence, the CIT(A) has proceeded to conclude that in the absence of any element of income embedded in the reimbursement of expenses to M/s. Pfizer Ltd., there was no requirement of deducting tax at source. Quite clearly, payments by way of reimbursement of expenses incurred on behalf of the payer cannot be construed as income chargeable to tax in the hands of the payee, a proposition which is approved by the Hon'ble Bombay High Court in the case of CIT vs. Siemens Aktiongesellschaft (supra). Moreover, in a similar situation, the Mumbai Bench of the Tribunal in the case of Bayer Material Science Pvt. Ltd. vs. Addl CIT, (2012) 134 ITD 0582 has noted that where the cost sharing agreement envisaged exact reimbursal of the costs without any mark-up or margin, there was no element of income in the hands of the payee so as to require the payer to deduct tax at source. In our considered opinion, having regard to the fact-situation brought out by the CIT(A), which is not assailed, the ratio of the decision of the Mumbai Bench of the Tribunal in the case of Bayer Material Science Pvt. Ltd. (supra) as well as the reasoning approved by the Hon'ble Bombay High Court in the case of CIT vs. Siemens Aktiongesellschaft (supra) clearly supports the conclusion drawn by the CIT(A) that there was no default on the part of the assessee in not deducting tax at source on the impugned payments to M/s. Pfizer Ltd. In this view of the matter, we, therefore, find no reasons to interfere with the ultimate conclusion of the CIT(A) in setting-aside the disallowance made by the Assessing Officer by invoking Sec. 40(a)(ia) of the Act. Thus, on this aspect, Revenue fails in its appeal.
Before parting, we may also refer to another aspect noted by the CIT(A). The CIT(A) noted the second proviso to Sec. 40(a)(ia) of the Act inserted by the Finance Act, 2012 which prescribes that if an assessee fails to deduct tax at source, but is not deemed to be an assessee in default as per the first proviso to Sec. 201(1) of the Act, then, no disallowance u/s 40(a)(ia) of the Act is required to be made in respect of such expenditure. The CIT(A) referred to the first proviso to Sec. 201(1) of the Act as inserted by the Finance Act, 2012 and noted that a person who has failed to deduct tax at source in respect of a sum paid shall not be treated as an assessee in default where the payee has (a) furnished return of income u/s 139; (b) taken into account the stated sum for computing the income in the return of income; and (c) paid the tax due on the income returned and there is a Certificate of a Chartered Accountant to this effect. The CIT(A) found that all the aforesaid features were complied by the payee, i.e. M/s. Pfizer Ltd. and thus, the first proviso to Sec. 201(1) of the Act stood complied, which implies that the assessee-company could not be considered as an M/s.Zoetis Pharmaceutical Research Pvt. Ltd (Formerly known as Pfizer Pharmaceutical India Pvt. Ltd.,)
assessee in default. On this basis also, he concluded that there was no question of making any disallowance u/s 40(a)(ia) of the Act in respect of the cross charges paid by the assessee to M/s. Pfizer Ltd. The aforesaid amendments were understood by the CIT(A) to be retrospective and applicable for the instant year also, following the ratio of the decision of the Rajkot Bench of the Tribunal in the case of Gujarat Pipavav Port Ltd. vs. DCIT, TDS, (2014) 149 ITD 0023 (Rajkot). For the said reasons also, he has set-aside the invoking of Sec. 40(a)(ia) of the Act to make the impugned disallowance.
Notably, in the Grounds of appeal
raised before us, there is no challenge to the aforesaid conclusion of the CIT(A). Consequently, even if the Revenue was to succeed on other pleas, in the absence of any challenge to the aforesaid conclusion by the CIT(A), the disallowance made by the Assessing Officer would not survive. Be that as it may, it is notable that the aforesaid proposition advanced by the CIT(A) is fully supported by the decision of the Hon'ble Delhi High Court in the case of CIT vs. Ansal Land Mark Township (P.) Ltd., dated 26.08.2015. The decision of the Mumbai Bench of the Tribunal in the case of R.K.P. Company vs. ITO, ITA No. 106/RPR/2016 dated 24.06.2016 is also on the same lines and supports the conclusion drawn by the CIT(A).
22. Thus, considering the entirety of facts and circumstances of the case, we find no reason to interfere with the ultimate decision of the CIT(A) in deleting the disallowance of Rs.14,51,77,000/- representing cross charges paid to M/s. Pfizer Ltd.
8. Even before us, similar situation prevails and therefore, in view of the decision of the Tribunal in the case of M/s. Pfizer Products India Pvt. Ltd., (supra), we may affirm the order of the CIT(A) and accordingly, Revenue fails on this aspect.
In so far as Ground of appeal
Nos. 3 & 4 are concerned, the same arise from the action of the CIT(A) in deleting the enhanced disallowance worked out by the Assessing Officer over and above the disallowance suo-moto made by the assessee u/s.14A of the Act.
10. Relevant facts in this context are that in the revised return of income filed by the assessee, it made a suo-moto disallowance in terms of Section M/s.Zoetis Pharmaceutical Research Pvt. Ltd (Formerly known as Pfizer Pharmaceutical India Pvt. Ltd.,)
14Aof the Act to the extent of Rs.6,36,48,961/- which comprised of Rs.6,31,48,961/- out of interest expenditure and Rs.5,00,000/- out of other administrative expenses. The Assessing Officer, however, applied the provisions of Rule 8D of Income Tax Rules, 1962 in order to compute the disallowance u/s.14A which resulted in an enhanced disallowance by a sum of Rs.69,23,825/-.
When the matter came up before the CIT(A), assessee made varied submissions both in law and on facts. One of the points asserted by the assessee was that the Assessing Officer did not record the requisite satisfaction contemplated u/s.14A(2) of the Act as to why the computation of disallowance made by the assessee was incorrect and therefore, the enhanced disallowance was not maintainable. The CIT(A) has upheld the aforesaid plea of the assessee and in particular his finding in this regard is as under:- “The Ld. AO did not record any finding as to why the computation of disallowances is not correct and apply the provisions of rule 8D and provisions of section 14A mechanically to arrive at the disallowances which is not permissible under the current scheme of section 14A read with rule 8D.”
On the aforesaid basis, the CIT(A) concluded that the Assessing Officer has mechanically applied the provisions of Section 14A read with rule 8D of the Rules and therefore, he set aside the disallowance of Rs.69,23,825/- made by the Assessing Officer. Against such a decision of the CIT(A), Revenue is in further appeal before us.
M/s.Zoetis Pharmaceutical Research Pvt. Ltd (Formerly known as Pfizer Pharmaceutical India Pvt. Ltd.,)
Before proceeding further, on this aspect, the learned representative for the assessee pointed out that the cross appeal of the assessee arising from the impugned order of CIT(A) had come up before the Tribunal vide dated 28/10/2016. In the cross appeal, assessee had challenged entire disallowance made in the assessment and the said appeal was disposed of by adverting to a preliminary point that an Additional Ground raised by the assessee before the CIT(A) was not disposed of by him. Such Additional Ground was on account of the fact that since assessee had not earned any exempt income during the year, no disallowance was permissible u/s.14A of the Act. The Tribunal in its order dated 28/10/2016(supra) noted the aforesaid Additional Ground being raised before the CIT(A) and in the absence of any finding thereof by the CIT(A), the matter was restored back to the file of the CIT(A).
We may clarify here that so far as the present appeal of the Revenue before us is concerned, the same relates to the disallowance deleted by the CIT(A) to the extent of Rs.69,23,825/-. Notably, the CIT(A) while setting aside the said disallowance, directed the Assessing Officer to restrict the disallowance to the extent of amount suo-moto disallowed by the assessee in the revised return of income. Be that as it may, the relief allowed by the CIT(A) i.e., setting aside of the disallowance of Rs.69,23,825/-, is the subject- matter of dispute before us.
We have heard the rival stands. Quite clearly, the emphasis made by the CIT(A) for existence of the satisfaction contemplated u/s.14A(2) of the Act as to why the computation of disallowance of the assessee is incorrect
M/s.Zoetis Pharmaceutical Research Pvt. Ltd (Formerly known as Pfizer Pharmaceutical India Pvt. Ltd.,) before applying Rule 8D of the Rules, is justified in view of the judgment of Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Ltd. Vs. DCIT and Anr. 234 CTR (Bom)1 (2010) which has in turn been affirmed by the Hon’ble Supreme Court in its order dated 8th May 2017 on this aspect. The finding of the CIT(A) which we have reproduced in the earlier part of this order on this aspect is clearly borne out of the reading of the assessment order and is therefore, affirmed. As a consequence, we upheld the action of the CIT(A), deleting the disallowance made by the Assessing Officer of Rs.69,23,825/- u/s.14A read with Rule 8D of the Rules. Thus, the Ground of appeal raised by the Revenue is dismissed.
16. Resultantly, appeal filed by Revenue is dismissed.