DCIT, CIRCLE - 12, KOLKATA, KOLKATA vs. M/S. RECKITT BENCKISER (INDIA) LTD., KOLKATA

आदेश / O R D E R

Per Dr. Arjun Lal Saini, AM:

“1.Your petitioner is engaged in the business of manufacture and trading of consumer goods and pharmaceutical products. 2(a) Your petitioner states that for the assessment year 2005-06, it had claimed deduction under sections 80-IB and 80-IC of the Income Tax Act, 1961 (hereinafter referred to as "the Act") in respect of income of the eligible units. (b) In computing the income of the eligible units, your petitioner did not take into consideration the bad debts written off by your petitioner in its consolidated accounts since such debts related to the business carried on by the non- eligible units during the financial years 2001-02 and 2002-03 before the eligible units were set up in the financial years 2003- 04 and 2004-05. (c) Your petitioner states that the total expenditure as per its profit and loss account for the previous year ended March 31,2005 amounting to Rs.717.26 crores included residual cost of Rs. 40.43 crores incurred at your petitioner's corporate office which could not be allocated to or identified with any single function or unit of your petitioner due to its general utility to all the units and functions of your petitioner. The major component of the said residual cost was employee remuneration and it also included establishment expenses like security services, office electricity, water, rent, printing and stationery, etc. and employee related business expenditure like travelling expenses, training expenses, mobile expenses, etc. Your petitioner states that having regard to the nature of such residual cost and the fact that your petitioner was engaged in manufacturing as well as trading activities and was in receipt of interest income, it was considered appropriate to first of all allocate such corporate office residual cost with reference to the number of employees at the corporate office whose work was directly linked to the manufacturing activities. Such residual cost allocated to the manufacturing activities was thereafter further allocated to the eligible units on the basis of turnover. 3.Your petitioner states that the Assessing Officer, overlooking the fact that the bad debts written off related to non-eligible units for business carried on prior to the coming into existence of the eligible units, allocated such bad debts also to the eligible units in the ratio of sales. On appeal, the Commissioner of Income Tax (Appeals) affirmed the said action of Page | 2

Reckitt Benckiser (India) Ltd. & Assessment Year: 2005-06 the Assessing Officer. In such circumstances, your petitioner in its appeal against the order dated September 23, 2009 of the Commissioner of Income Tax (Appeals), being ITA No. 2138/Kol/2009, had taken the following ground:- Ground No. 3:- "That, on the facts and in the circumstances of the case, the Ld. CIT(A) erred in upholding the action of AO in allocating bad debts written off to units eligible for deduction under sections 80IB & 80IC of the Act, without appreciating the fact that the said bad debts does not pertain to the eligible units. "

4. Your petitioner states that with regard to the corporate office residual cost, the Assessing Officer took the view that such cost was to be allocated amongst the eligible and non- eligible units in the ratio of workers of eligible units to the total number of workers across all manufacturing locations. Your petitioner states that the corporate office looked after all the activities of your petitioner including manufacturing and trading (the volume of which matched manufacture). Your petitioner states that the basis adopted by the Assessing Officer erroneously assumed that the corporate office only looked after manufacturing activities ignoring the other activities of the corporate office. Your petitioner states that on appeal, the Commissioner of Income Tax (Appeals) accepted your petitioner's contentions and directed the Assessing Officer to accept the allocation of the corporate office residual cost as made by your petitioner. Your petitioner states that against the said decision of the Commissioner of Income Tax (Appeals), the Assessing Officer in his appeal being Ground No. 2: "On the facts and in the circumstances of the case, Ld. CIT(A) erred in deleting the re-computation of deduction u/ s 80IB & 80IC made by the A. O. though re- allocation in the ratio of workers of eligible undertakings to the total number of workers of all manufacturing units made by the AO was more relevant. "

5. Your petitioner states that at the time of hearing before this Hon'ble Tribunal, with respect to Ground No.3 of your petitioner's appeal, on behalf of your petitioner, attention was invited to the details of bad debts written off submitted to the Assessing Officer in course of the assessment proceedings included in the Paper Book at pages 128 at 129 read with page 145 which went to show that the bad debts related to the business of your petitioner during the financial years 2001-02 and 2002-03 prior to the setting up of the eligible units in the financial years 2003-04 and 2004-05 and it was submitted that the authorities below had wrongly ignored the said fact. It was submitted that the correct factual position can be verified by the Assessing Officer. On behalf of the revenue, the learned CIT(DR) did not object to your petitioner's prayer for verification by the Assessing Officer.

6. Your petitioner states that in respect of Ground no. 2 of the revenue’s appeal regarding allocation of corporate office residual cost, the learned CIT (DR) only relied upon the order Page | 3 Reckitt Benckiser (India) Ltd. & Assessment Year: 2005-06 of the Assessing Officer and did not make any other submission. As such, on behalf of your petitioner, reliance was placed on the order of the Commissioner of Income Tax (Appeals).”

3. This appeal was initially heard by this Tribunal and Ground No.3 raised by the assessee and Ground No.2 raised by the revenue were set aside to the Assessing Officer for fresh assessment. The assessee filed M.A No.73 & 74/Kol/2017 and pointed out certain apparent errors in the order of the Tribunal dated 06.01.2017. By an order dated 15.09.2017 in M.A No.73 & 74/Kol/2017 of this Tribunal, in its order dated 06.01.2017 in so far as it relates to Ground No.3 raised by the assessee, in its appeal and Ground No.2 raised by the revenue in its appeal, were recalled. Thereafter, this appeal was listed for hearing on Ground No.3 in assessee’s appeal and Ground No.2 in revenue’s appeal.

4. As far as Ground No.3 raised by the revenue is concerned, it is seen that the details of the bad debts written off, given at Page No.128 and 129 of the assessee’s Paper Book read with Page 145 of the Paper Book. The details of bad debts written off, as given in Page 145 of the P.B is as follows:

The deduction claimed by the assessee was in respect of Unit 1,2,3 & 4. The Unit 1 commercial operation commenced only on 02.02.2004 which is evidenced by the audit report in Form 10CCB which is placed at Page 90 of the assessee’s Paper Book. The Unit No.2 commenced commercial operation only w.e.f. 03.04.2004 Page | 4

Reckitt Benckiser (India) Ltd. & Assessment Year: 2005-06 which is evidenced by Form No.10CCB, placed at Page 79 of the assessee’s Paper Book. The Unit No.3 commenced commercial operation only on 08.12.2004 as it is evidenced by the Form No.10CCB, copy of the Page 101 of the assessee’s Paper Book. The Unit No.4 commenced commercial operation w.e.f, 02.02.2005 which is evidence by Form No.10CCB from placed at Paper Book page 68. It can thus perusal of the bad debts written off would show that all the debts pertained to assessment year 2002-03 and earlier Financial Years. The units for which deduction u/s 80-IB and 80-IC were claimed by the assessee, came into existence only in F.Y. 2004-05. Thus, it is clear that the bad debts written off which was claimed as deduction did not pertain to any of the units for which the assessee claimed deduction u/s 80-IB and 80-IC of the Act. Therefore, apportionment of bad debt written off to the eligible units and registering profit of those eligible units for the purpose of allowing deduction u/s 80-IB and 80-IC, as done by the revenue authorities is unsustainable. The apportionment is directed to be deleted. Ground No.3 raised by the assessee is allowed.

5.As far as Ground No.2 raised by the revenue is concerned, this issue again pertains to apportionment of residual cost of Rs.40.43 crores. The total cost as per the Profit & Loss A/c of the assessee is a sum of Rs.717.26 crores. The details of the other expenses isgiven in Schedule 16 to the Profit & Loss A/c. As far as residual cost is concerned, the assessee allocated residual cost amount tothe eligible and non-eligible units in the ratio of number of employees at the corporate office who are directly involved in the management of these eligible units like production, procurement, quality, logistics etc. to the total number of employees at the corporate office. According to the assessee these expenses primarily relates to the corporate office of the company. The benefit of which is derived by the whole organization including the eligible units, the allocation of cost incurred on account of residual cost among eligible and non-eligible units should have to be done in the ratio of eligible workers of eligible undertakings to the total number of workers across all the manufacturing units. The Assessing Officer, however, was of the following views:

Reckitt Benckiser (India) Ltd. & Assessment Year: 2005-06 “Regarding the issue of bifurcation of residual cost as has been discussed in detail in the earlier part of the order, the assessee has not applied the provisions of section 80IB of the Act properly especially sub-section (5) thereof which dearly states that the profit of the eligible unit has to be determined as if this is the only source of income of the assessee. The profit of the eligible unit has to be calculated in such a way as if this is the only source of income of the assessee. The relevant portion of the Section is reproduced as under- "(5) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made. (emphasis supplied)". As per Section 80IA(5) r/w Section 80IB(13) and 80IC(7), for the purposes of computing the quantum of allowable deduction u/s 80IB, the profits and gains of the eligible unit of the assessee has to be computed as if such eligible business were the only source of income of the assessee during the year. The above expenses, even though booked centrally in the head office books, have been incurred for all the units of the assessee company. Hence; in order to arrive at the true and correct value of the profits & gains derived from the eligible units, these expenses are required to be allocated to all the units in the proper manner. The best way to divide these expenses would be to allocate among eligible and non-eligible units in the ratio of workers of eligible undertakings to the total number of workers across all the manufacturing locations from where the assessee has sourced its requirements, instead of in the ratio of number of executives at the corporate office who are directly involved in the management of these eligible units to the total number of executives at the corporate office as has been done by the assessee company. This is because the expenditure incurred by the assessee company on the residual functions have also been used and benefited the whole company including the eligible units hence it has to be bifurcated in the ratio of total workforce of the eligible units with total number of workers of the company to arrive at the correct and true profit. This is also supported by the fact that on an average all the expenditures which has either been bifurcated in the ratio of sales or on the basis of actuals are in the percentage of almost average of 22% whereas the percentage of these particular expenditures are around 5.69%. This Itself proves beyond doubt that this expenditure has not been bifurcated properly by the assessee company. Moreover, the assessee's arguments that the accounts of the company are audited does not have a bearing on the deduction being claimed u/s 80IB/IC of the Act. The income-tax Act specifically provides that the profits of these undertakings is required to be computed in the manner as if these are independent and only source of income of the assessee company. This effect has probably not been given by the auditor who has filed the accountants report along with claim of deduction. This is also proved by the fact that this has not been mentioned by the auditor who has submitted the accountants report as per the provisions of section Reckitt Benckiser (India) Ltd. & Assessment Year: 2005-06 80IB/IC as to the procedure for bifurcating the expenditure for the eligible units. In view of this, there is no force in the assessee’s arguments and the same are rejected. The assessee was asked to furnish the revised working after allocating the residual cost in the manner as detailed above which was submitted by the a vide letter dated April 11, 2008 and made part of this order as Annexure A of this order.”

7.3.3. With regard to change in the basis of allocation of residual cost by the AO. I find merit in the appellant’s argument that the residual costs pertain to those cost which could not be allocated or identified with single function or unit due to the general utility to all the functions and units of the company. The basis of allocation of this cost is the number of executive. These costs include the residuary costs of all the support functions which have not been allocated to the Cost of Goods Sold. As per the appellant, at corporate office level there were 101 persons during the FY 2004-05 out of which, persons were working in supply function which is directly linked to factory operation. This worked out to 21.78%. The ratio of sale of fiscal units to overall sales was 26.10%. The effective percentage of residual cost thus worked out to 5.68% (21.78% * 26.10%), which the appellant applied for allocating the residual cost to the eligible units. For allocation expenses, the appellant has taken into consideration number of person as well as sales of the eligible units. The AO has allocated the residual costs of the corporate office on the basis of the number of workers. Hence, I find more logic on the basis of allocation of expenses adopted by the appellant as the appellant has also taken turnover of the eligible units into consideration.

7.We have heard the rival submissions, the ld. DR reiterated the stand of the Assessing Officer as reflected in the order of the assessment. The ld. Counsel for the assessee relied on the order of the ld. CIT(A). We have given a careful consideration to the rival submissions, we note that the basis of allocation of residual cost to the eligible units has been done by the Assessing Officer is as follows:

Reckitt Benckiser (India) Ltd. & Assessment Year: 2005-06 It can be seen from the above Chart that the allocation done by the assessee on the basis of number of employees who are directly linked with the factory operation is more logical. The residual cost is incurred at the head office and is not capable of being identified with any of the units which are running by the assessee. It is only because of this difficulty that the Assessing Officer and the assessee resorted to allocation of residual cost. When it comes to allocation of residual cost, it cannot be done arbitrarily. The allocation should have due regard to the efforts put at the head office level to be eligible. That can be done only by allocation on the basis of number of employees linked to factory operation divided by total number of employees into corporate office into sales of the eligible units divided by total sales. This allocation of residual cost done by the assessee was logical and we find no infirmity in the action of the CIT(A) in accepting this basis of allocation. We, therefore, do not find any merit in Ground No.2 raised by the revenue and the same is dismissed.

Reckitt Benckiser (India) Ltd. & Assessment Year: 2005-06 In the result, the Ground No.3 raised by the assessee is allowed and the Ground No.2 raised by the revenue is dismissed.

Order pronounced in the open court on this 20/04/2018.