TMI Blog2017 (9) TMI 727X X X X Extracts X X X X X X X X Extracts X X X X ..... uthorities are fair enough in not disputing assessee’s basic plea that it had received the impugned bills only in the relevant previous year. The assessee’s case therefore is that all the said expenses have crystallized in the impugned assessment year. AO holds that there is no such evidence of crystallization of the expenses in question. We observe in these peculiar facts that the assessee could not have paid or claimed the impugned bills without receiving the same from its payees. Non receipt of the corresponding earlier assessment years forms a sufficient reason on assessee’s part in not raising its claim in earlier years. Both the lower authorities admittedly do not doubt genuineness of the above expenses. There is further no denial of the fact that the assessee has all along been taxed at uniform rate in said earlier as well as in the impugned assessment year. Hon’ble jurisdictional high court’s decision in PCIT vs. Adani Enterprises [2016 (7) TMI 1250 - GUJARAT HIGH COURT] holds that such prior period expenses ought not to be disallowed if an assessee is assessed at the same rate in the two sets of assessment years. We adopt the same analogy herein as well to delete the impug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... praise it about DSIR’s form 3CL instead of suo mottu making the impugned disallowance. We notice in this factual backdrop that a co-ordinate bench in assessee’s case holding that once an assessing authority accepts revenue expenditure claim regarding an amount spent on clinical trial/research & development, the very sum is eligible for the impugned weighted deduction as well since there is no stipulation incorporated in the Act that the same would be allowable only to the extent of relevant figures stated in Form no. 3CL . This is admittedly not the Revenue’s case that the assessee has not incurred the impugned expenditure for the above specified purpose u/s.35(2AB) of the Act. We therefore draw support from the above co-ordinate bench finding in assessee’s appeal for assessment year 2007-08 for directing the Assessing Officer to delete the impugned disallowance. Disallowing u/s.14A in relation to exempt income from dividends - Held that:- Both the learned representatives inform us very fairly that a coordinate bench in assessment year 2007-08 has already restricted an identical disallowance to the extent of exempt income amount. We therefore follow the very course of action ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment year in normal circumstances and such transactions should not exceed the total stock of the raw material or merchandise on hand including existing stocks as well as that acquired under the firms contract of purchases in order to be genuine and valid hedging contract of sales; respectively. Learned Departmental Representative fails to indicate any distinction therein vis-à-vis those involved in the instant adjudication. We therefore direct the Assessing Officer to delete the impugned disallowance. Disallowing sales promotion expenditure u/s. 37(1) deleted. Business promotion expenses are allowable as business expenditure not hit u/s. 37(1) explanation. - ITA Nos. 1117/Ahd/2012 And 848/Ahd/2016 And ITA No. 918/Ahd/2016 - - - Dated:- 11-9-2017 - SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER AND SHRI S. S. GODARA, JUDICIAL MEMBER For The Assessee : Shri S. N. Soparkar with Bandish Soparkar Parin Shah, A.R. For The Revenue : Shri O. P. Sharma, CIT. DR. ORDER PER S. S. GODARA, JUDICIAL MEMBER This batch of three appeals pertains to assessment years 2004-05 2011-12. Former assessment year 2004-05 involves assessee s appeal ITA No. 1117/Ahd/2012 prefe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made with a retrospective effect, the said amendment is applicable to this assessment year also. Considering this, assessing officer is justified in not allowing deduction under section 80 HHC on DEPB and other income. This ground is dismissed. 4. Heard both sides. Relevant finding perused. It emerges first of all from the CIT(A) above extracted findings that he has considered assessee s DEPB income in computing Section 80HHC deduction without taking into account net profit element therein. His conclusion therefore goes contrary to hon ble apex court s decision in Topman Exports case (2012) 342 ITR 49 (SC) holding the field till date that only the net profit component is to be taken as income. It further emerges that hon ble jurisdictional high court s judgment in Avani Exports vs. CIT (2012) 348 ITR 319 (Gujarat) has quashed retrospective operation of the above Section 80HHC amendments (supra) inserting two clauses as unconstitutional. We are informed that hon ble apex court has upheld the same in Civil Appeal No. 9273/2013. We therefore direct the Assessing Officer to finalize assessee s deduction claim u/s.80HHC afresh thereby computing the same as per law after affordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of income and expenses are different and the same cannot be netted. Whereas only current year's expense are allowed under section 37 (1) of IT act, prior period expenses not crystallized during the year are not allowable. As regards prior period income, if appellant wanted the same to be excluded from this year's income, it should have given details in this regard. In absence of necessary details and evidences, the prior period expenses are not allowable and similarly these cannot be set off against prior period income. This ground is therefore rejected. 7. We have heard rival submissions. Both the lower authorities are fair enough in not disputing assessee s basic plea that it had received the impugned bills only in the relevant previous year. The assessee s case therefore is that all the said expenses have crystallized in the impugned assessment year. The Assessing Officer holds that there is no such evidence of crystallization of the expenses in question. We observe in these peculiar facts that the assessee could not have paid or claimed the impugned bills without receiving the same from its payees. Non receipt of the corresponding earlier assessment years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... very course of action herein as well to restore the instant issue back to the Assessing Officer for afresh decision as finalized in preceding two assessment years. We are well conscious of the fact that our earlier remand order had restored the impugned ALP issue to the CIT(A). We however feel that the Assessing Officer needs to re-adjudicate the issue instead of the CIT(A) to avoid multiplicity of proceedings before the assessing authority and the CIT(A) since we have already restored first substantive ground hereinabove to former authority only. This substantive ground is therefore taken as accepted for statistical purposes. 10. Mr. Soparkar invites our attention to assessee s fourth substantive ground challenging correctness of net of depreciation in respect of foreign exchange laws of ₹ 42,66,137/-. He is very fair in informing us that the above co-ordinate bench decision in ITA No.1440/Ahd/2006 decided on 27.04.2012 for assessment year 2002-03(supra) has already upheld the CIT(A) s action affirming an identical disallowance. We therefore adopt judicial consistency to reject assessee s instant substantive ground. 11. The assessee s fifth substantive ground avers th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r law in the impugned assessment year. We therefore adopt the very reasoning herein as well to delete the impugned corporate guarantee adjustment of ₹ 60,83,440/-. 14. The assessee s second substantive ground challenges Section 36(1)(iii) interest disallowance of ₹ 1,68,88,558/- as made by both the lower authorities. The assessee s balance sheet schedule 10 revealed it to have advanced a gross amount of ₹ 5,40,74,507/- to its nine domestic and overseas sister concerns namely M/s. Casil Health Products Ltd., CPL Infrastructure Ltd., Apollo Hospitals International Ltd., Kadera Yakuhin Ltd., IRM Enterprise Pvt. Ltd., SOHL (UK), Cadila Pharmaceuticals (Ethopia) PLC, CPL Holdings Pvt. Ltd. and CPL Agro Products Ltd. The Assessing Officer observed in assessment order that it may be true that the nature of advances are strategic investments for the purpose of job work or any other purposes; nonetheless, it is also true that certain amount has remained outstanding during the year. In essence, the accounts of all these associate companies in the books of the assessee is a combined account of loans and advances . The Assessing Officer further took note of the fact that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de point no 21, before the AO and furnished the revised reconciliation in this regard as under: Annexure No Particular Amount. Rs Comment 1 Weighted Deduction for Capital Expenditure as per Auditor's Certificate in Appendix II To Annexure IV as per DSIR Guidelines 79,30,754 2 Weighted Deduction for Capital Expenditure approved as per Form 3CL 77,11,000 3=(l-2) Difference not approved in Form 3CLby DSIR 2,19,764 4 Weighted Deduction for Revenue Expenditure as per Auditor's Certificate in Appendix II To Annexure IV as per DSIR Guidelines (Capital Exp + Revenue Exp) 25,12,87,843 5 Weighted Deduction for Revenue Expenditure approved as per Form 3CL 18,93,38,930 6 Cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved by the DSIR authority. ( ii) The issue relating to the amount spent on the clinical trial expenses was decided in favour of the assessee by the Hon'ble ITAT, Ahmedabad in assessee's own case for A.Y. 2006-07. The assessee further mentioned that the Departmental appeal in that case was also dismissed by the High Court vide order dated 23.01.2015. 7. 2 Discussion and Directions of DRP: 7.2.1 The DRP has considered the submissions of the assessee. The assessee in this revised reconciliation table itself worked out the difference to be disallowed in the assessment ( as per Form 3CL issued by DSIR) ₹ 4,67,54,326/-. Therefore the addition proposed by AO is confirmed to this extent. 7.2.2 The issue on account of amount incurred on the clinical trial expenditure has been decided by the Hon'ble ITAT, Ahmedabad in favour of the assessee in its own case. Further appeal before Hon'ble Gujarat High Court has also been decided in favour of assessee. The relevant part is reproduced below: The question of law involved was ( A) Whether the appellate tribunal has substantially erred in law in holding that the expenses i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... covered for deduction under section 35(2AB) of the Income Tax Act, 1961. 11.1 The Hon'ble High Court- of Gujarat after examining the entire issue, came to the conclusion that the Tribunal committed no error. Respectfully following the judgement of Jurisdictional High Court in the- case of CIT vs. Cadila Healthcare Ltd. (supra), we hereby direct the AO to follow the claim of the assessee. Thus, this ground of assessee's appeal is allowed. 4. The aforesaid shows that the Tribunal for allowing this particular ground/ question in favour of the assessee, has relied upon the decision of this Court in the case of CIT vs. Cadila Healthcare Limited, reported in (2013) 31 Taxmann.com 300 (Gujarat). We find that as the question is already covered by the said decision of this Court, such question A would not arise being substantial question of law to be considered in the present appeal, as canvassed. 7.2.4 In view of the above, the AO is directed to delete the proposed disallowance of ₹ 1,94,85,000/-. 18. Heard both the learned representatives. Relevant findings perused. It is evident that the DRP has worked out the impugned disallowance me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4,58,692/- out of total claim of ₹ 53,25,79,553/-; as made by the lower authorities. The above disallowance figure involves excise duty refund amount of ₹ 8,12,71,702/-. The DRP quoted hon ble apex court s decision in Liberty India vs. CIT (2009) 317 ITR 218 in concluding the above excise refund to be not an income derived from the eligible industrial undertaking. We find that earlier co-ordinate bench in assessment year 2007-08(supra) had followed hon ble apex court s recent decision in CIT vs. Meghalaya Steels Ltd. Civil Appeal no 7622/2014 in holding that such a refund by way of an incentive subsidy results in reimbursement of cost of production as covered u/s.28 of the Act. The Revenue fails to rebut this factual and legal position. We therefore treat assessee s above excise refund component to be an income eligible for Section 80IB deduction. 22. Next comes latter component of allocation of research and development expenses by both the lower authorities in proportion to turn over in Jammu unit amounting to ₹ 8,21,86,990/-. The assessee s total research and development expenditure reads a figure of ₹ 32,27,73,501/- as incurred on inhouse R D relating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business including the indirect or common or head office expenses have to be booked to all the ongoing projects, if not to the s. 80 - IB projects exclusively.- 11.2.4 In view of this, the DRP is of the considered opinion that no interference should be made on the addition proposed by the AO/TPO on this ground. The objection raised by the assessee is rejected. 24. We have heard both the parties at length. The assessee admittedly has three production divisions at Jammu, Ankleshwar and Dholka; respectively. Case records at page 396 indicate the same to be operating exclusively for formulation (domestic sales), bulk drugs (domestic and export sales) and formulations (domestic and international sales); respectively. The assessee pleaded before the DRP at page 409 that it had not done any research and development for any of the formulation product manufactured in Jammu unit in relevant previous year. The same has neither been specifically rebutted nor accepted in DRP s directions. Nor is there any specific material quoted to disturb assessee s accounts separately maintaining each and every minute detail pertaining to these three units in question. It thus emerges that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of hedging of US Dollars loan, wherein dollar loan is the underlying asset. He further observed that the currency swap made by the assessee was by way of 'over the counter' contracts entered into with the banks and settled on maturity by issue of debit/credit advice by the banks. Therefore as per explanation to clause (d) of section 4 3(5) of the Act, was not an eligible transaction, and hence speculative loss not allowable as business expenditure The assessing officer thus disallowed foreign currency loss of ₹ 25,39,60,000/- treating the same as speculation loss . 12.2 Assessee's Submission: 12.2.1 The Assessee has submitted that it has earned a foreign exchange gain of ₹ 1,49,17,753/-on realization of export sales and the same has been offered to tax during the year under assessment and apart from the aforesaid Foreign Exchange Gain, the Assessee Company entered into a Forex Contract with the State Bank of India based on its total foreign currency exposure in the Import and Export Transactions. The assessee has claimed that the said contract has been entered into in compliance with the RBI guidelines and it is in nature of hedg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uctuation exposure on account of Forex Contract is in line with its Exports Turnover and Export Realization and claimed that it has not engaged in any kind of speculative transaction and the fluctuation loss has incurred during the course of business which is allowable as deductible expenditure under section 37 of the Income Tax Act. 12.2.3 The assessee further claimed that fluctuation loss or gain incurred by it falls under the provisions of clause (a) of Section 43(5) which reads as under: Section 43 (5) 24 speculative transaction 25 means a transaction in which a contract for the purchase or sale of any commodity25, including stocks and shares25, is periodically or ultimately25 settled25 otherwise than by the actual delivery25 or transfer of the commodity or scrips: Provided that for the purposes of this clause - ( a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or . . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the fact that the loss has occurred on account of an independent Put Call contracts with SBI where underlying exposure for export turnover was 2 million USD which was not dependent on actual delivery25 or transfer of the commodity. Therefore the plea of the assessee that foreign currency fluctuation has ben incurred during the course of business as prescribed under the provisions of Clause (a) to Section 43(5), hence it should be granted as business expenditure, can not be accepted. 12.3.3 The objection raised by the assessee is thus rejected. 26. We have heard rival submissions. The assessee s case throughout has been that it had entered into a forex contract with the State Bank of India on the basis of its foreign currency exposure in import/export transactions with public sector banks to cover fluctuation risk upto ₹ 200crores. One of the bank namely Bank of Baroda is stated to have issued a certificate dated 12.02.2015 claiming realization of ₹ 123,71,57,417/- which could be realized to the tune of ₹ 111,72,18,092/- as on 31.03.2011. Its SBI contract enabled it to book losses against the above unrealized bills. Lower authorities as well as learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion expenditure of ₹ 10,89,29,928/- u/s. 37(1) of the Act. We deem it appropriate at this stage to reproduce learned DRP s discussion as under: 13.2.1 The DRP has considered the submissions of the assessee company on this issue, the legal position under the I.T. Act 1961. 13.2.2 In this regard, reference may be made to the CBDT's Circular No. 5/2012 dated 1 Aug 2012, which clearly states that freebies in the nature of gift, travel facility, hospitality, cash or monetary grant received by medical practitioners and their professional associations from the pharmaceutical and allied health sector are to be disallowed under the Explanation to Section 37(1) of the I.T. Act 1961. The content of the Board's Circular being clearly applicable is reproduced below: - CIRCULAR NO. 5/2012, DT. 1ST A UGUST, 2012 Inadtnissibility of expenses incurred in providing freebees to medical practitioner by pharmaceutical and allied health sector industry 01/08/2012 Business Expenditure SECTION 37(1), It has been brought to the notice of the 'Board that some pharmaceutical and allied health sector Industries are providing freebees (fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircular is effective from its date of issue i.e. from the financial year 2012-13 relevant to the A.Y.2013-14. The argument of the assessee is not acceptable as Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (the regulations) on 10-12-2009 which forms the basis of the disallowance by the AO was very much in existence during the year. The claim of deduction by the assessee is determined on the basis of provisions of the Income Tax Act and not on the basis of the Circular issued by the board. The Circular is merely clarificatory in nature. 13.2.4 As regards the claim of deduction by the assessee the panel finds that the assessee was asked to submit supporting evidence by the assessee vide order sheet entry, and it made a detailed submission before the AO to justify the claim of expenditure and further furnished the following details: Particulars Total Amount Rs. Nature of Expense Expenditure related to Business Conference 10,19,12,419 Expenditure incurred on Employees, Speakers Faculties for attending business related co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticals. The assessee could have engaged the doctors as consultants, as researchers, as treating doctors or in any other professional capacity for its business. The doctors have not been engaged for any of the purpose specified. Therefore the claim of the assessee is not bonafide and hence rejected. 13.2.8 The Hon'ble High Court of Karnataka in the case of J.K.Panthaki Co. Vs. ITO reported in(2012) 246 CTR 0059 : (2011) 64 DTR 0283 : (2012) 344 ITR 0329 has held that if the assessee commits an offence under any law in the course of his business and incurs expenditure for any purpose in connection with the said offence, the said amount is not deductible under Section 37 of the I.T. Act 1961. The relevant excerpts of the judgment are reproduced here under:- The commission said to have been paid is not compensation to the directors of the company for any service rendered to the assessee. From the undisputed facts it is clear that a higher amount was agreed to be paid for performing the contract. Subsequently, the consideration for the contract was reduced. However, before the said reeducation in cost, the assessee had been paid the entire cost of the contract. If t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... offence has not been defined under the Act, However, Chapter XXII deals with offences and prosecutions. It refers to various sections under the Act and noncompliance with those provisions are punishable with punishment 'as prescribed therein. Willful attempt to evade tax is an offence under the Act. The word 'offence' has to be understood in the context of an offence generally under any Act. It follows that if the assessee commits an offence under any law in the course of his business and incurs expenditure for any purpose in connection with the said offence, the said amount is not deductible under s. 37. No expense which is paid by way of penalty for a breach of the law can be said to be an amount wholly and exclusively laid for the purpose of the business. Anything done which is an infraction of the law and is visited with a penalty cannot on grounds of public policy be said to be a commercial expense for the purpose of a business or a disbursement made for the purposes of earning the profits of such business. Penalties which are incurred for infraction of the law are not a normal incident of business and they fall on the assessee in some character other than that o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Judge or the Court which is declaring such act as immoral. The law declares it as immoral. Though law is different from morality, in the case of illegal gratification payable under an agreement there is convergence of views. There are laws in the country expressly declaring payment of bribe and receipt of bribe by public servants as an offence and punishable under the criminal law of the country. The civil law has wider application and it declares that such payment of bribe is immoral and the agreement is void ab initio. In this context the phrase prohibited by law used in the Explanation to s. 37, has wider connotation. It includes expenditure incurred by way of payment of bribe, although it is laid out or expended wholly or exclusively for the purpose of business. As the Indian laws declare such agreements as void, it is unenforceable. The doctrine or rule of pan delicto is the embodiment of the principle that the Courts will refuse to enforce an illegal agreement at the instance of a person who is himself a party to an illegality or fraud. It is a maxim of law, established, not for the benefit of either of the parties to the litigation, but is founded on the principles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion as above, the objection raised by the assessee is rejected. 28. We have heard both the parties. Mr. Soparkar is very fair in pointing out at the outset that this tribunal s decision in ACIT vs. Liva Healthcare Ltd. 161 ITD 63 (Mum) upholding such a disallowance in case of pharmaceutical companies offering free samples to doctor post introduction of the relevant product in market after establishing end use; is hit by Section 37(1) explanation. He however refers to another co-ordinate bench decision in Macleods Pharmaceuticals Ltd. vs. ACIT (2016) 161 ITD 291 (Mum) holding that the above Board s circular dated 01.08.2012 would not have any retrospective effect since not operating in assessment years 2010- 11. He further quotes another co-ordinate bench decision in DCIT vs. PHL Pharma Pvt. Ltd. (2017) 184 TTJ 1(Mum) distinguishing the above case law in Revenue s favour whilst deleting an identical disallowance on the ground that such business promotion expenses are allowable as business expenditure not hit u/s. 37(1) explanation. We afforded ample rebuttal opportunity to the Revenue. Learned Departmental Representative fails to indicate any distinguishing features therein. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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