The DCIT, Circle-8, Ahmedabad V. M/s. Zydus Pharmaceuticals Ltd., Ahmedabad

ITA 1344/AHD/2007

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 6915 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-04-2011
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 04-04-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 04-04-2007
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: MRS CHHAVI ANUPAM
• Assessee Lawyers: MUKESH M PATEL
• Keywords: Commercial expediency
• Section: 37(1); 37

Judgement Text

- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D AHMEDABAD BEFORE S/SHRI MUKUL KR. SHRAWAT, JM AND D.C.AGRAWAL , AM DY CIT, CIRCLE-8, AHMEDABAD. VS. ZYDUS PHARMACEUTICALS LTD. ZYDUS TOWER, OPP. ISCON TEMPLE, SATELLITE CROSS ROAD, AHMEDABAD. (APPELLANT) .. (RESPONDENT) APPELLANT BY :- MRS. CHHAVI ANUPAM, CIT, DR RESPONDENT BY:- SHRI MUKESH M. PATEL, AR O R D E R PER D.C. AGRAWAL, ACCOUNTANT MEMBER . THIS IS AN APPEAL FILED BY THE REVENUE RAISING FOL LOWING GROUND :- (1) THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DEL ETING THE ADDITION MADE OF RS.2,33,42,600/- BEING DISALLOWANC E OUT OF SERVICE CHARGES. 2. THE FACTS OF THE CASE ARE THAT ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF DISTRIBUTION AND CONSIGNMENT SALES OF T HE PHARMACEUTICAL PRODUCTS OF CADILA HEALTH CARE LTD. DURING THE COUR SE OF ASSESSMENT PROCEEDINGS THE AO FOUND THAT THE ASSESSEE COMPANY WAS NOT ONLY OPERATING AS A DISTRIBUTOR FOR M/S CADILA HEALTH CA RE LTD. (CHL) THROUGH A NET WORK OF C & F AGENTS BUT ALSO OPERATED FOR RE NDERING CONSIGNMENT SALE SERVICES FOR THE SAID PHARMACEUTICAL PRODUCTS OF CHL THROUGH THE NET WORK OF SAME HANDLING AGENTS. THE ASSESSEE COMPANY PAID SERVICES ITA NO.1344/AHD/2007 ASST. YEAR 2003-04 ITA NO.1344/AHD/2007 ASST. YEAR 2003-04 2 CHARGES @ 0.6% ON SALES UPTO RS.160 LACS AND THEN @ 0.4% ON BALANCE SALES TO THE C & F AGENTS IN ADDITION TO REIMBURSEM ENT OF CERTAIN ACTUAL EXPENSES. BOTH WERE REIMBURSED BY THE PRINCIPAL I.E . C.H.L. THUS THE REIMBURSEMENT OF ACTUAL EXPENSES TO THE C & F AGENT S WAS PAID MAXIMUM OF 1%OF NET SALE. THIS SCHEDULE WAS FOUND I N ACCORDANCE WITH THE WRITTEN AGREEMENT DATED 1 ST MARCH, 2000 WITH THE C & F AGENTS. IN PRACTICE ABOVE ARRANGEMENT CONTINUED FOR 8 MONTHS B UT IN THE REMAINING 4 MONTHS OF THE YEAR A NEW TRIPARTITE AGREEMENT SEE MS TO HAVE BEEN WORKED OUT BETWEEN THE CHL, THE ASSESSEE COMPANY AN D THE C& F AGENTS. ACCORDING TO NEW AGREEMENT, MADE EFFECTIVE FROM 1.12.2002, THE SERVICE CHARGES PAYABLE TO C & F AGENTS WAS INCREAS ED TO 1.18% ON NET SALES UPTO RS.130 LACS AND THEREAFTER 1% ON THE BAL ANCE ABOVE RS.130 LACS. THE NEW AGREEMENT DID NOT PROVIDE FOR REIMBUR SEMENT OF ACTUAL EXPENSES WHICH WERE EARLIER PROVIDED IN ADDITION TO SERVICE CHARGES. HOWEVER, THE AO FOUND THAT AS AGAINST WHAT WAS AGRE ED TO BY THE ASSESSEE AND C& F AGENTS, THEY WERE GIVEN ON OVERAL L PERCENTAGE OF 1.38% INSTEAD OF RATE OF 0.6% AND 0.4% AS PER THE F IRST AGREEMENT AND EVEN AT A LOWER EFFECTIVE RATE IN THE SECOND TRIPAR TITE AGREEMENT. THE AO FOUND THAT AS PER EARLIER MECHANISM PAYMENT OF SERV ICE CHARGES AS PER PRESCRIBED 0.6% AND 0.4% THE OVER ALL AVERAGE RATE WOULD COME TO 0.51% OF NET SALE AS IN THE IMMEDIATELY PRECEDING YEAR, W HEREAS AS PER NEW TRIPARTITE AGREEMENT THE EFFECTIVE RATE WOULD STILL BE LOWER. BUT ACTUAL PAYMENT OF SERVICE CHARGES TO C & F AGENTS WAS MUCH HIGHER EVEN AS COMPARED TO ORIGINAL AGREEMENT OF 1.3.2000. THEREFO RE ACCORDING TO HIM THERE WAS A SUBSTANTIAL INCREASE IN THE PAYMENT OF SERVICE CHARGES TO C& F AGENTS CONTRARY TO WHAT IS AGREED UPON. IN RUPEE TERMS SERVICES CHARGES CLAIMED DURING THIS YEAR AMOUNTED TO RS.3,28,95,000 /-AS COMPARED TO LAST YEARS CLAIM OF RS.1,21,84,000/-. THUS AS COMPARED TO LAST YEAR THERE IS AN INCREASE OF ALMOST 170%. THE AO NOTED THAT LAST YEAR SALES WERE ITA NO.1344/AHD/2007 ASST. YEAR 2003-04 3 237.60 CRORES WHILE IN THE CURRENT YEAR THEY ARE 23 8.81 CRORES. ACCORDINGLY, IN HIS VIEW PAYMENT OF SERVICE CHARGES WAS HIGHER AS COMPARED TO LAST YEAR AND THAT TOO WITHOUT ANY JUST IFICATION. WHEN ASKED TO EXPLAIN ASSESSEE COMPANY SUBMITTED DETAILED REPL Y WHICH IS REPRODUCED BY THE AO ON PAGES 10 TO 17 OF HIS ORDER . THE GIST OF REPLY IS THAT - (1) THE A/C OF C & F AGENTS IS RECORDED IN THE BOOKS OF THE ASSESSEE CO.; (2) ASSESSEE COMPANY HAS BEEN DULY COMPENSATED BY CHL F OR SUCH SERVICE CHARGES; (3) C& F AGENTS ARE ALSO HANDLING SERVICES IN RESPECT O F DISTRIBUTION BUSINESS AT DEFINITE LOCATIONS; (4) ACTUAL EXPENDITURE INCURRED BY THE ASSESSEE COMPANY IS RS.505.15 LACS WHEREAS REIMBURSEMENT RECEIVED FROM CHL IS RS.176.02 LACS RESULTING INTO NET DEBIT IN P & L A/ C OF ASSESSEE AT RS.328.95 LACS. (5) IN EARLIER YEAR SERVICE CHARGES AND DISTRIBUTION EX PENSES WERE SEPARATELY DEBITED AND BOTH ALTOGETHER WILL AMOUNT TO RS.257.40 LACS WHILE IN THE CURRENT YEAR BOTH WOULD AMOUNT TO RS.390.34 LACS; (6) PAYMENT IS MADE FOR COMMERCIAL EXPEDIENCY AND IN TH E INTEREST OF BUSINESS. THE AO CONSIDERED THE ABOVE ARGUMENTS OF THE ASSESS EE AND HELD THAT - (1) THE PAYMENT OF EXTRA SERVICE CHARGES ARE BEYOND THE NORMAL PRUDENCY AND NON-EXPLAINED FOR COMMERCIAL EDPEDIENC Y; (2) ASSESSEE FAILED TO PROVIDE THE C&F AGENT OF SALES R ATE OF COMMISSION AND SERVICE CHARGES PAID TO THE INDIVIDU AL C & F AGENT. IT DID NOT ENABLE HIM TO FIND OUT WHETHER SE RVICE CHARGES TO ALL THE C & F AGENTS HAVE BEEN MADE ON EQUAL PER CENTAGE BASIS; (3) THE ASSESSEE HAS FAILED TO EXPLAIN WHY SERVICE CHAR GES PAID THIS YEAR ARE MORE THAN WHAT WAS PAID IN THE PRECEDING Y EAR; (4) ASSESSEE COMPANY IS NOT EXACTLY PAYING ENTIRE AMOU NT OF SERVICE CHARGES IN THE CURRENT YEAR TO THE C & F AG ENT BUT TRANSFERRING THEM TO THE SECURITY DEPOSIT ACCOUNT. IT IS PAYING OUT OF SECURITY DEPOSIT ACCOUNT AN AMOUNT PERTAININ G TO ITA NO.1344/AHD/2007 ASST. YEAR 2003-04 4 PRECEDING YEAR. THUS ALMOST AN AMOUNT OF 1.5 CRORES HAS BEEN CONVERTED INTO SECURITY DEPOSIT; (5) THE PAYMENT OF SERVICE CHARGES TO THE C & F AGENTS IS CONTRARY TO THE AGREEMENT. THUS THIS EXCESSIVE PAYMENT WAS T O REDUCE THE PROFITS OF THE BUSINESS. FINALLY FINDING THAT ADDITIONAL SERVICE CHARGES PAI D THIS YEAR WAS NOT SATISFACTORILY EXPLAINED THE AO DISALLOWED THE REST OF SERVICE CHARGES AFTER ALLOWING @ 0.4% ON THE NET SALES. 3. WHEN THE MATTER CAME UP BEFORE LD. CIT(A) HE OPI NED THAT NONE OF THE PARTIES TO WHOM SERVICE CHARGES ARE PAID ARE CO VERED U/S 40A(2)(B). THE GP & NP SHOWN BY THE ASSESSEE THIS YEAR IS QUIT E REASONABLE AS COMPARED TO THE EARLIER ACCOUNTING PERIOD. 4. AS PER REMAND REPORT OF THE PRESENT AO SERVICE C HARGES HAVE BEEN PAID IN ACCORDANCE WITH THE TERMS OF THE AGREEMENT BETWEEN THE ASSESSEE AND THE RESPECTIVE C & F AGENT. 5. BEFORE US, THE LD. DR SUBMITTED THAT ASSESSEE HA S FAILED TO SUBMIT BASIC INFORMATION ABOUT SALES DONE BY EACH C & F AG ENT, TOTAL COMMISSION PAID AND RATES AT WHICH IT WAS PAID, FRO M HOW MANY PERSONS SECURITY DEPOSIT WAS KEPT AND WHY NOT FROM ALL. THE ASSESSEE HAS FAILED TO SHOW THE ACCOUNTS OF RESPECTIVE PARTIES TO WHOM SUC H SERVICE CHARGES HAVE BEEN PAID IN THE BOOKS OF ACCOUNT, OR TO SHOW THAT AT LEAST THEY HAVE RAISED THE BILLS TO THIS EXTENT. IT HAS FAILED TO S HOW THE REASONS WHY SERVICE CHARGES WERE INCREASED OVER AND ABOVE WHAT IS PRESC RIBED IN THE AGREEMENT. THE LD. CIT(A) WAS INCORRECT TO SAY THAT PAYMENTS OF SERVICE CHARGES THIS YEAR IS ACCORDING TO THE AGREEMENT. 6. ON THE OTHER HAND, LD. AR SUBMITTED THAT THE AO CANNOT MAKE DISALLOWANCE OF SERVICE CHARGES IF THEY ARE CLAIMED U/S 37 OF THE ACT. NO ITA NO.1344/AHD/2007 ASST. YEAR 2003-04 5 CASE IS MADE OUT BY THE AO FOR DISALLOWANCE U/S 40A (2)(B) AS IT IS NOT ESTABLISHED THAT C & F AGENTS ARE SPECIFIED PERSONS COVERED UNDER THAT SECTION. FURTHER IT IS FOR THE ASSESSEE AND C &F AG ENTS TO DECIDE THE RATES AS PER COMMERCIAL EXPEDIENCY, AND HOW MUCH PAYMENT ASSESSEE HAS TO MAKE FOR THE SERVICE RENDERED. THE FACTUM OF RENDER ING SERVICES IS NOT DOUBTED. THE AO HAS NOT CALLED FOR ANY DETAILS AS T O HOW SERVICE CHARGES ARE CONVERTED INTO SECURITY DEPOSITS. FURTHER ONCE AGREEMENT PROVIDED THAT SERVICE CHARGES COULD BE PAID @ 0.6% ON SALES ABOVE RS.160 LACS THEN AO WAS NOT CORRECT TO ALLOW ONLY 0.4% OVER ALL . LD. AR ALSO ARGUED THAT THE AO HAD IGNORED THAT IN EARLIER YEAR ASSESSEE HAS PAID DISTRIBUTION EXPENSES AT RS.135.5 6 LACS MAKING EFFECTIVE PAYMENT TO C & F AGENTS AT RS.25.740 LACS WHEREAS IN THE CURRENT YEAR EXPENSES FOR DISTRIBUTION IS ONLY RS.6 1.319 LACS MAKING TOTAL EFFECTIVE PAYMENT TO C & F AGENTS 390.34 LACS THUS THERE IS NOT MUCH DIFFERENCE IN THE PAYMENT. 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL ON RECORD. IN OUR CONSIDERED VIEW THERE IS A CLEAR CASE WHERE ASSESSEE HAS WITHHELD THE MATERIAL FACTS FROM THE PURVIEW OF THE AO. THE AO CALLED FOR THE DETAILS AS TO HOW MUCH PAYMENT TO EACH C & F AGENT HAS BEEN MADE, WHAT ARE THE SALES EFFECTED BY THEM AND AT WH AT RATE PAYMENT HAS BEEN MADE TO EACH OF THEM IS NOT SUBMITTED TO HIM. FURTHER, WHETHER PAYMENT TO EACH C & F AGENT IS IN ACCORDANCE WITH T HE AGREEMENT, WHETHER SECURITY DEPOSIT SYSTEM OUT OF SERVICE CHAR GES WAS INTRODUCED THIS YEAR AND AT WHAT RATES AS COMPARED TO EARLIER YEARS OR WHETHER THERE WAS ANY RENEWED AGREEMENT WITH THE C & F AGENTS TO ALLOW HIGHER PAYMENT OF SERVICE CHARGES AS COMPARED TO EARLIER Y EARS. ALL THESE ISSUES REMAINED UNANSWERED. IT IS BECAUSE EVEN FROM ASSESS EES OWN ADMISSION ITA NO.1344/AHD/2007 ASST. YEAR 2003-04 6 TOTAL EFFECTIVE PAYMENT TO THE C & F AGENT IN THE I MMEDIATELY PRECEDING YEAR WAS RS.257.40 LACS WHEREAS IN THE CURRENT YEAR IT IS RS.390.34 LACSK. THUS STILL THERE IS A GAP OF RS.132.94 LACS. WHEN T URNOVER THROUGH C & F AGENTS IS ALMOST THE SAME IN IMMEDIATELY PRECEDING YEAR I.E. AT RS.237.60 CRORES WHEREAS IN THE CURRENT YEAR IT IS 238.81 CRO RES. 8. CLAUSE 4.42 OF THE AGREEMENT DATED 1.3.2000 WITH C & F AGENTS PROVIDE RATES AT WHICH PAYMENT IS TO BE DONE TO C & F AGENTS. IT SEEMS THAT SIMILAR AGREEMENT HAS BEEN EXECUTED WITH ALL T HE C & F AGENTS. AT LEAST NO VARIATION OR DIFFERENCE IN THE AGREEMENT W ITH DIFFERENT C & F AGENT HAS BEEN BROUGHT INTO OUR KNOWLEDGE SO AS TO JUSTIFY THE PAYMENT AT DIFFERENT RATE TO DIFFERENT C & F AGENTS. 9. ONCE RATES OF SERVICE CHARGES ARE FIXED FOR ALL THE C & F AGENTS THEN ONUS HEAVILY LIES ON THE ASSESSEE TO SHOW HOW PAYMENT OF SERVICE CHARGES HAVE INCREASED WHEN THE SALE IS ALMOST THE SAME. WE THEREFORE, ARE NOT SATISFIED WITH THE EXPLANATION FURNISHED BY THE ASSESSEE BUT WE WOULD LIKE THE MATTER TO BE INVESTIGATED FURTHER SO AS TO JUSTIFY WHETHER PAYMENT OF SERVICE CHARGES WAS IN ACCORDANCE WITH A GREEMENT OR NOT. WE ACCORDINGLY RESTORE THE MATTER BACK TO THE FILE OF AO FOR DECIDING THE ISSUE AFRESH AFTER GIVING AN OPPORTUNITY OF BEING H EARD TO THE ASSESSEE OF CALLING IT TO PRODUCE C & F AGENTS FOR EXAMINATION FOR GIVING EVIDENCE OF SERVICE RENDERED FOR ENHANCED SERVICE CHARGES AND T O JUSTIFY THEM THROUGH AGREEMENT LIKE THE ONE DATED 1.3.2000 OR OTHERWISE. 10. WE MAY MAKE IT CLEAR THAT SECTION 37(1) DOES NO T ENVISAGE THAT AN EXPENDITURE CLAIMED WOULD BE FULLY ALLOWABLE EVEN I F PART OF IT IS FOUND FOR BUSINESS PURPOSES OR ENTIRE WOULD BE DISALLOWED IF PART OF IT IS NOT FOUND FOR BUSINESS PURPOSES. ONCE CONDITION FOR ALL OWABILITY OF EXPENSES U/S 37(1) IS THAT IT SHOULD BE INCURRED WHOLLY AND EXCLUSIVELY FOR BUSINESS ITA NO.1344/AHD/2007 ASST. YEAR 2003-04 7 PURPOSES, IT WOULD MEAN THAT ENTIRE EXPENDITURE SHO ULD BE INCURRED FOR BUSINESS PURPOSES. THE WORD WHOLLY IN THIS REGARD IS OF UTMOST IMPORTANCE, IT SIGNIFIES THAT ENTIRE EXPENDITURE SH OULD BE INCURRED FOR BUSINESS PURPOSE AND THE WORD EXCLUSIVELY SIGNIFI ES ANY PART OF THE EXPENDITURE SHOULD NOT BE INCURRED FOR ANY OTHER PU RPOSE OTHER THAN BUSINESS PURPOSES. THUS THE WORD WHOLLY IS A POSI TIVE CONDITION AND EXCLUSIVELY IS COMPLEMENTARY TO IT ENABLING THE A O TO DISALLOW A PART OF THE EXPENDITURE IF IT IS FOUND THAT IT IS INCURR ED OR PART OF IT IS NOT INCURRED FOR NON-BUSINESS PURPOSES. THE WORD WHOLL Y RELATES TO THE AMOUNT OF EXPENDITURE CLAIMED AND THE WORD EXCLUSI VELY RELATES TO THE PURPOSE FOR WHICH IT IS CLAIMED. THUS THE AO IS FUL LY EMPOWERED TO LOOK INTO THE QUANTUM OF EXPENDITURE CLAIMED AS TO WHETH ER IT IS INCURRED FOR BUSINESS AND ALSO TO THE PURPOSE FOR WHICH SUCH EXP ENDITURE IS CLAIMED. IF PURPOSE IS NOT BUSINESS THEN HE CAN DISALLOW A PART OF IT WHICH IS ATTRIBUTABLE TO NON-BUSINESS PURPOSES. THEREFORE, I N OUR CONSIDERED VIEW EVEN WHERE PROVISIONS OF SECTION 40A(2)(B) CANNOT B E INVOKED, THE AO IS FULLY EMPOWERED TO DISALLOW A PART OF THE EXPENDITU RE CLAIMED EVEN U/S 37(1) IF IT IS FOUND THAT IS NOT WHOLLY AND EXCLUSI VELY INCURRED FOR BUSINESS PURPOSE.. 13. WITH THE ABOVE OBSERVATIONS, WE RESTORE THE MAT TER BACK TO THE FILE OF AO. ACCORDINGLY, THE APPEAL FILED BY THE REVENUE IS ALLOWED BUT FOR STATISTICAL PURPOSES. ITA NO.1344/AHD/2007 ASST. YEAR 2003-04 8 14. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS ALLOWED BUT FOR STATISTICAL PURPOSES. ORDER WAS PRONOUNCED IN OPEN COURT ON 8/4/11. SD/- SD/- (MUKUL KR. SHRAWAT) (D.C. AGRAWAL) JUDICIAL MEMBER ACCOUNTANT ME MBER AHMEDABAD, DATED : 8/4/11. MAHATA/- COPY OF THE ORDER FORWARDED TO :- 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD 1.DATE OF DICTATION 5/4/2011 2.DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE TH E DICTATING 7/4/ 2011 MEMBER.OTHER MEMBER. 3.DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P.S./P.S . 4.DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT.. 5.DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR .P.S./P.S 6.DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 7.DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8.THE DATE ON WHICH THE FILE GOES TO THE ASSTT. REG ISTRAR FOR SIGNATURE ON THE ORDER 9.DATE OF DESPATCH OF THE ORDER..