TMI Blog2021 (9) TMI 542X X X X Extracts X X X X X X X X Extracts X X X X ..... allowance of expenses is eligible for deduction u/s.80IC AO as well as the ld.CIT(A) were erred in disallowing sales promotion expenses u/s.37(1) of the Act, by considering guideline issued by the Medical Council of India under different legislation. Hence, we direct the AO to delete addition made towards disallowance of sales promotion and publicity expenses and further, allow deduction claim u/s.80IC of the Act, without reducing disallowance made towards sales promotion and publicity expenses. Disallowance u/s 14A - Mandation of satisfaction as required u/s.14A(2) - HELD THAT:- In this case, the assessee has not made any suo-motto disallowance of expenses and hence, the question of recording satisfaction as required u/s.14A(2) of the Act does not arise. As regards, disallowance of direct expenses, the AO has given categorical finding towards expenses directly relatable to earning exempt income which does not form part of total income. According to the AO, the assessee has incurred ₹ 2,00,673/- which is directly relatable to exempt income. Once there is a categorical finding from the authorities on direct nexus between expenditure incurred for earning exempt income, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... JUNATHA, AM: These cross appeals filed by the assessee and Revenue are directed against order of learned Commissioner of Income Tax (Appeals) 6, Chennai, dated 11.09.2018 and pertains to assessment year 2010-11. Since, facts are identical and issues are common, for the sake of convenience, these appeals are heard together and are being disposed off, by this consolidated order. 2. The assessee has raised the following grounds of appeal:- 1. For that the order of the Commissioner of Income Tax (Appeals) is contrary to law, facts and circumstances of the case and is opposed to the principles of equity, natural justice and fair play. 2. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the order of the Assessing Officer is without jurisdiction. 3. For that the Commissioner of Income Tax (Appeals) erred in upholding the disallowance of sales promotion expenses made by the Assessing Officer amounting to ₹ 1,18,67,354/- uls.37(1). 4. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the Indian Medical Council (Professional conduct, Etiquette and Ethics) regulations 2002, only restricts a medical pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to income which does not form part of total income while computing the disallowance uls.14A read with Rule BD. 17 .For that the appellant objects to the levy of interest u/s 234B and 234C. 3. The Revenue has raised the following grounds of appeal:- 1.1 The Order of the learned Commissioner of Income Tax (Appeals) is contrary to the Law and facts of the case. 2.1 The CIT(A) erred in allowing the deduction u/s.80IC and holding that the expenditure on sales promotion and advertisement and publicity expenses were incidental to the manufacturing activities. 3.1 The CIT(A) erred in directing the AO to delete the disallowance made u/s.14A r.w.r. 8D(2)(ii), if the assessee s own funds are more than investments made in tax free investments, when there is no such exception provided in Rule 8D. 3.2 The CIT(A) ought to have considered the CBDT circular No.5/2014 wherein it is clarified that, disallowance u/s.14A r.w.r.8D has to be made even if the taxpayer in a particular year not earned any exempt income. 4. For these and other grounds that may be adduced at the time of hearing, it is prayed that the Order of the learned Commissioner of Income Tax (Appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee had entered into an exclusive marketing agreement with M/s. Tablets India Ltd., as per which part of sales promotion advertisement, publicity expenses incurred has been reimbursed by the assessee. The AO has disallowed marketing expenses incurred by the assessee on two grounds. According to the AO, when the assessee is not marketing its products on its own, the necessity of incurring sales promotion and publicity expenses does not arise. Therefore, he opined that expenditure incurred towards publicity and sales promotion is not wholly and exclusively incurred for the purpose of business of the assessee. The AO had also disallowed said expenditure under proviso to Section 37(1) of the Act, on the ground that Medical Council of India prohibited distribution of freebies to doctors and thus, any expenditure incurred towards freebies to doctors is in violation of proviso to Section 37(1) of the Act and hence, not allowable as deduction. Further, the AO has recomputed deduction claimed u/s.80IC of the Act, by reducing income pertains to marketing activity including sales promotion expenses and free samples given to the medical practitioners. On appeal, the ld.CIT(A) has allowed p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es promotion expenditure incurred by an assessee in the business of manufacture and selling of pharmaceutical products cannot be disallowed by enlarging the scope of circular issued under different regulation. The relevant findings of the Tribunal are as under:- 2.2. We have heard the rival submissions and perused the materials available on record. We find that the assessee is a manufacturer of pharmaceutical products. The various arguments of the ld AR could be summarized as under:- a) The assessee, who is a manufacturer of pharmaceutical products had marketed its products through Tablets (India) Ltd. Based on an agreement with Tablets (India) Ltd, the assessee had accepted to share a part of the sales promotion, advertisement and publicity expenses. It is a commercial decision taken by the assessee and the same cannot be questioned by the revenue. The ld AR relied on the decisions of the Hon ble Supreme Court in the case of S.A.Builders Ltd V. CIT reported in 288 ITR 1 (SC) and in the case of Hero Cycles (P) Ltd V. CIT reported in 379 ITR 347 (SC) and also the decision of Hon ble Delhi High Court in the case of CIT V. Dalmia Cement (Bharat) Ltd reported in 254 ITR 377 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has accepted the settled position that the disallowances made under sections 32, 40(a)(ia), 40A(3), 43B, etc. of the Act and other specific disallowances, related to the business activity against which the Chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business, and that deduction under Chapter VI-A is admissible on the profits so enhanced by the disallowance. 2.3. Per Contra, the ld DR vehemently argued that the expenditure incurred by the assessee is in violation of the provisions of section 37(1) and that they are hit directly by the CBDT Circular No.5 of 2012 and accordingly the said expenditure is not eligible for deduction u/s 37(1) of the Act. He also argued that the CBDT Circular needs to be extended to Pharma companies also as it is the paying hands (i.e the persons distributing the various gifts etc) and the medical practitioners are the receiving hands ( i.e the persons receiving the various gifts etc). Hence there is no need to segregated between two parties and that the Circular should be read in totality. 2.4. We find that the expenditure incurred by the assessee towards sales promotion, advertisement and pub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which prohibits the pharmaceutical company not to incur any development or sales promotion expenses. A law which is applicable to different class of persons or particular category of assessee, same cannot be made applicable to all. The regulation of 2002 issued by the Medical Council of India (supra), provides limitation/curb/prohibition for medical practitioners only and not for pharmaceutical companies. Here the maxim of 'ExpressioUniusEstExclusioAlterius' is clearly applicable, that is, if a particular expression in the statute is expressly stated for particular class of assessee then by implication what has not been stated or expressed in the statute has to be excluded for other class of assessee. If the Medical Council regulation is applicable to medical practitioners then it cannot be made applicable to Pharma or allied health care companies. If section 37(1) is applicable to an assessee claiming the expense then by implication, any impairment caused by Explanation 1 will apply to that assessee only. Any impairment or prohibition by any law/regulation on a different class of person/assessee will not impinge upon the assessee claiming the expenditure under this section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmaceuticals Ltd referred to supra. Hence the same would not be applicable to the impugned assessment year i.e AY 2012-13 and hence disallowance cannot be made based on the said Circular. We therefore, direct the ld AO to allow the claim of sales promotion, advertisement and publicity expenses u/s.37 of the Act. 8.1 As regards, re-computation of deduction claim u/s.80IC of the Act, by excluding disallowance made towards sales promotion and publicity expenses including free samples given to medical practitioners, the Tribunal by following the decision of Hon ble Bombay High Court in the case of CIT vs. Gem Plus Jewellery India Ltd., supra, held that enhanced profit on account of disallowance of expenses is eligible for deduction u/s.80IC of the Act. The relevant findings of the Tribunal are as under:- 2.8. Now let us come to the Additional Ground raised by the assessee on the aspect of whether the disallowance of aforesaid expenditure would correspondingly go to increase the claim of deduction u/s 80IC of the Act. We find that this is a legal claim made by the assessee which could be raised for the first time before this tribunal and accordingly deem it fit to admit the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isallowance of interest expenditure under Rule 8D(2)(ii) to verify the claim of the assessee with regard to availability of own funds. 10. The ld.AR for the assessee submitted that the ld.CIT(A) has erred in upholding disallowance u/s.14A r.w.rule 8D of IT Rules without appreciating the fact that the AO has not recorded satisfaction as required u/s.14A(2) of the Act having regard to books of accounts of the assessee that claim of the assessee that no expenditure has been incurred to earn exempt income is incorrect. The ld.AR further submitted that the ld.CIT(A) has erred in sustaining addition made by the AO towards direct expenses under Rule 8D(2)(i) and other expenses under Rule 8D(2)(iii) ignoring the fact that no expenditure was incurred by the assessee for earning exempt income. He further submitted that as regards interest expenditure, the assessee has sufficient own funds which is in excess of investments made in shares and securities which yielded exempt income and thus, interest expenses cannot be disallowed. 11. The ld.DR on the other hand submitted that the ld.CIT(A) has erred in directing the AO to delete disallowance made u/s.14A r.w.rule 8D(2)(ii) without ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded by the ld.CIT(A) to restore the issue to the file of the AO and to determine disallowance of interest expenses under Rule 8D(2)(ii), on the basis of availability of interest free funds. 12.2 As regards disallowance of other expenses under Rule 8D(2)(iii) at the rate of 0.5% of average value of investments, when the assessee has not made any suo-motto disallowance towards expenses relatable to exempt income, then the AO left with no option but to apply prescribed procedure provided under Rule 8D(2)(iii) of the IT Rules. Hence, there is no error in disallowance made by the AO towards other expenses. Accordingly, we reject the ground taken by the assessee. 12.3 As regards excluding investments which does not yield exempt income, we find that it is a well settled principle of law by the decision of ITAT, Special Bench in the case of ACIT vs. Vireet Investment Pvt. Ltd., 165 ITD 27, where it was clearly held that only those investments which yielded exempt income for the relevant assessment year needs to be considered for the purpose of disallowance of other expenses under Rule 8D(2)(iii) of IT Rules. Therefore, we direct the AO to consider only those investments which yie ..... X X X X Extracts X X X X X X X X Extracts X X X X
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