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Income Tax Appellate Tribunal, MUMBAI BENCH “A”, MUMBAI
Before: SHRI G.S. PANNU & SHRI RAM LAL NEGI
The captioned appeal by the assessee is directed against the order of CIT(A)-4, Mumbai dated 09.09.2011, pertaining to the Assessment Year 2006-07, which in turn has arisen from the order passed by the Assessing Officer, Mumbai dated 22.11.2010 under section 115WE(3) r.w.s. 115WG of the Income Tax Act, 1961 (in short ‘the Act’).
In this appeal, assessee has raised the following Grounds of appeal:-
2 M/s. Aristo Pharmaceuticals Pvt. Ltd.
“1. For that the Ld. CIT (A) has erred in upholding the action of the Assessing Officer in initiating proceeding u/s 115WG / 115WH of the Income-tax Act. 2. For that the Ld. CIT (A) has erred in holding that the value of free samples of medical formulation distributed to doctors and others has escaped assessment within the meaning of section 115WG & 115WH.
3. For that the Ld. CIT (A) has erred in holding that the non-inclusion of the value of FBT on account of distribution of free samples of medical formulations to doctors and others by the then Assessing Officer passing order u/s 115WE(3) dated 25/11/2008 was a mistake and hence the initiation of the present proceeding u/s 115WG & 115WH is not vitiated.
For that the Ld. CIT (A) has erred in holding that the speech of Finance Minister will not override the provisions of the Act which were passed by the Parliament.
5. For that the Ld. CIT (A) has erred in holding that the amendment under Clause (vii) of Section 115WB(2)(D) has no retrospective effect and it is also not clarificatory in nature. 6. For that the Ld. CIT (A) has failed to appreciate that proceeding u/s 115WG & 115WH has been initiated on mere change of opinion. 7. For that the order of the Ld. CIT (A) affirming the initiation of proceedings u/s 115WG & 115 WH is wholly illegal and ab initio void. 8. For that the Ld. CIT (A) has erred in-upholding addition on account of value of fringe benefit of Rs.4.01 Crores (being 20% of total expenses of Rs.20.05 Crores). 9. For that the Ld. CIT (A) has erred in holding that the Circular of CBDT bearing No.8 of 2005 dated 29/08/2005 (Q.No.64) explains the inclusion of the value of FBT on account of distribution of free samples of medical formulations. 10. For that the Ld. CIT (A) has erred in upholding that the applicability of amendment in Clause (vii) of Section 115WB(2)(D) is on and from AY. 2007- 08.
3 M/s. Aristo Pharmaceuticals Pvt. Ltd.
For that the Ld. CIT (A) has erred in affirming reliance by the Assessing Officer on the decision of the Hon'ble Apex Court in the case of Eskayef Ltd. reported in 245 ITR 116 while upholding the addition of Rs. 4.01 Crores.
For that the addition of Rs.4.01 Crores on account of value of FBT in respect of distribution of free samples of medical formulations to doctors & others is wrong, illegal and unjustified on the facts and in the circumstances of appellant's case.
For that the whole order is bad in law and fact of the case and is fit to be quashed.”
Although there are multiple Grounds of appeal raised, but the singular substantive dispute revolves around the action of Assessing Officer in including a sum of Rs.4,01,40,143/- representing free samples distributed for the purposes of charging Fringe Benefit Tax (FBT).
4. In brief, the relevant facts are that originally the assessee filed a return of FBT disclosing the value for FBT to the extent of Rs.5,41,64,140/-, which was subject to an assessment in terms of Sec. 115WE(3) of the Act dated 25.11.2008, wherein the returned FBT value was accepted. Subsequently, the assessment was reopened by invoking Sec. 115WG of the Act by issuance of notice u/s 115WH of the Act on 20.11.2009. The assessment was reopened on the ground that expenditure incurred by the assessee by way of distribution of free samples was in the nature of sales promotion as per the decision of Hon'ble Supreme Court in the case of Eskayef vs. CIT, 245 ITR 116 (SC) and CBDT Circular no. 8/2005 dated 29.8.2005 and, therefore, the same is includible. According to the Assessing Officer, such expenditure was liable to be included for the purposes of FBT, which had escaped
4 M/s. Aristo Pharmaceuticals Pvt. Ltd. assessment at the time of earlier assessment dated 25.11.2008. In the ensuing assessment, assessee pointed out that reopening was not in accordance with law and, in any case, it was sought to be pointed out that expenditure on distribution of free samples was not liable to be included for FBT. One of the points raised by the assessee was that the nature of expenditure does not fall under the category of sales promotion. The Assessing Officer disagreed with the assessee and noticing that such expenses have been held to be in the nature of sales promotion by the Hon'ble Supreme Court in the case of Eskayef (supra), he included the sum of Rs.4,01,40,143/- on account of cost of free samples distributed within the purview of FBT. The CIT(A) has also affirmed the action of Assessing Officer, against which assessee is in further appeal before us.
Before us, as the Grounds of appeal reveal, various arguments have been raised by the assessee. The preliminary Ground raised is that the initiation of proceedings u/s 115WG & 115WH of the Act was illegal inasmuch as the reopening is based on a mere change of opinion. On merits of the addition also, assessee has pointed out that the action of the Assessing Officer is untenable and one of the arguments raised was based on the judgment of Hon'ble Bombay High Court in the case of Tata Consultancy Services Ltd., 374 ITR 112 (Bom.).
On the other hand, the ld. DR has relied upon the reasoning adopted by the Assessing Officer, which we have already adverted to in the earlier paras and is not being repeated for the sake of brevity.
5 M/s. Aristo Pharmaceuticals Pvt. Ltd.
We have carefully considered the rival submissions. The relevant facts are that the assessee is engaged in the business of manufacture of pharmaceutical products of various types. In its business, assessee distributes free samples to Doctors and others and the claim of assessee was that such expenditure is not covered within the meaning of sales promotion for the purposes of FBT. On the contrary, the lower authorities have concluded that free samples distributed by pharmaceutical companies are in the nature of sales promotion based on the judgment of the Hon'ble Supreme Court in the case of Eskayef (supra) and, therefore, the Assessing Officer included the free samples distributed to Doctors and others in the FBT. In our considered opinion, without going into any other arguments, the stand of assessee is liable to be upheld in view of judgment of Hon'ble Bombay High Court in the case of Tata Consultancy Services Ltd. (supra). In the case before the Hon'ble High Court, assessee was engaged in the business of rendering technical consultancy services, marketing of software and hardware products and also export of software. Assessee had claimed expenses on account of payment to one M/s. Tata Sons towards Tata brand equity contribution. The Assessing Officer included such expenditure while computing the value of FBT as according to him it was in the nature of sales promotion. The CIT(A) held that subscription fee could not be treated as falling under the head ‘sales promotion’ and he allowed the claim of assessee that such amount was not includible for the purposes of FBT. The said stand of CIT(A) was upheld by the Tribunal, which has been affirmed by the Hon'ble High Court. In the said case, it was noticed that expenditure by way of subscription had been incurred in terms of contractual agreement between Tata
6 M/s. Aristo Pharmaceuticals Pvt. Ltd.
Consultancy Services Ltd. and Tata Sons and that there was no employer-employee relationship between the two. The Hon'ble High Court observed that the basis of FBT is the benefit or perquisite which emanates out of employer-employee relationship. As a consequence, it is safe to deduce that in order to justify the levy of FBT, establishing of employer-employee relationship is a pre-requisite. In the present case, no case has been made out by the income-tax authorities that the expenditure incurred by assessee on distribution of free samples to Doctors and others involved any employer-employee relationship between the assessee and the recipients of such samples. Therefore, at the very threshold, following the ratio of judgment of the Hon'ble Bombay High Court in the case of Tata Consultancy Services Ltd. (supra), action of Assessing Officer is untenable and is hereby set-aside. Thus, assessee succeeds on its plea.
Since the assessee has succeeded on this aspect, the other pleas which are manifested in the Grounds of appeal are rendered academic and are not being addressed since the necessary relief has been allowed to the assessee.
In the result, appeal of assessee is allowed, as above.
Order pronounced in the open court on 25th January, 2017.