The ACIT, Circle-4, Ahmedabad V. Invida India Pvt.Ltd., Ahmedabad

ITA 1560/AHD/2012

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 1243 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 11 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-06-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 13-06-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 13-07-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JAGDISH
• Assessee Lawyers: N B SHAH
• Keywords: Royalty expenses; Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD B BENCH (BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER & SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER) ITA. NO: 537 & 1560/AHD/2012 (ASSESSMENT YEAR: 2008-09 & 2009-10) THE ACIT CIRCLE-4, AHMEDABAD V/S INVIDA INDIA PVT. LTD. B- 801, SAFAL PEGASUS, PRAHLADNAGAR, ANANDNAGAR, AHMEDABAD (APPELLANT) (RESPONDENT) PAN: AAACJ9822K APPELLANT BY : SHRI JAGDISH, CIT/DR RESPONDENT BY : SHRI N.B. SHAH, C.A. ( )/ ORDER DATE OF HEARING : 13 -06-20 16 DATE OF PRONOUNCEMENT : 20 -06-2016 PER N.K. BILLAIYA, ACCOUNTANT MEMBER: 1. ITA NOS. 537 & 1560/AHD/2012 ARE APPEALS BY THE REV ENUE PREFERRED AGAINST TWO SEPARATE ORDERS OF THE LD. CIT(A)-XI & VIII, AHMEDABAD DATED 21.12.2011 & 26.04.2012 PERTAINING TO A.Y. 20 08-09 & 2009-10 RESPECTIVELY. ITA NO. 537 & 1560/AHD/2012 . A.Y. 2008-0 9 & 2009-10 2 2. THE SUBSTANTIVE GRIEVANCE OF THE REVENUE IN ITA NO. 537/AHD/2012 FOR A.Y. 2008-08 WHICH READ AS UNDER:- 1THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN DEL ETING THE ADDITION MADE BY THE AO ON ACCOUNT OF PAYMENT OF ROYALTY OF RS.70,40,105/- WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE FAILED TO ESTABLISHED NEXUS BETWEEN THE SERVICES RENDERED AND SERVICES REQUIRED FOR THE BUSINESS AND ALSO TO FURNISH NECESSARY EVID ENCES. 2.THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN DE LETING THE ADDITION MADE BY THE AO ON ACCOUNT OF EXPENDITURE ON SEMINAR EXPENSES OF RS.35,29,028/- TREATING THE SAME AS CAPITAL EXPENDI TURE. 3. THE SUBSTANTIVE GRIEVANCE OF THE REVENUE IN ITA NO. 1560/AHD/2012 FOR A.Y. 2009-10 WHICH READ ASUNDER:- 1. THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELE TING THE ADDITION MADE BY AO ON ACCOUNT OF PAYMENT OF ROYALTY OF RS.71,75, 909/- WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE FAILED TO E STABLISHED NEXUS BETWEEN THE SERVICES RENDERED AND SERVICES REQUIRED FOR THE BUSINESS AND ALSO TO FURNISH NECESSARY EVIDENCES. 2. THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELE TING THE ADDITION MADE BY THE AO ON ACCOUNT OF EXPENDITURE ON TRAINING & S EMINAR EXPENSES OF RS.5,92,546/- TREATING THE SAME AS CAPITAL EXPENDIT URE, WITHOUT APPRECIATING FACTS THAT EXPENDITURE IN QUESTION IS AN ENDURING IN NATURE. 3. THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELE TING THE ADDITION MADE BY THE AO ON ACCOUNT OF NON-ACHIEVEMENT OF TARGETS OF RS. 93,45,801/- INCURRED DUE TO PENAL PROVISIONS IS NOT ALLOWABLE S INCE IT IS DUE TO BREACH OF CONTRACTS BETWEEN THE CUSTOMERS AND ASSESSEE. IT IS CREATED DUE TO CARELESSNESS OF THE ASSESSEE. ITA NO. 537 & 1560/AHD/2012 . A.Y. 2008-0 9 & 2009-10 3 4. SINCE IN BOTH THESE IMPUGNED APPEALS, FIRST TWO GRI EVANCES ARE COMMON THEY ARE DISPOSED OF BY THIS COMMON ORDER FO R THE SAKE OF CONVENIENCE. 5. ASSESSEE IS A PRIVATE LIMITED COMPANY ENGAGED IN BU SINESS OF PROVIDING CONTRACT SALES SERVICES AND ALSO TRADING OF BRANDED MEDICINES. 6. ASSESSEE ENTERED INTO CONTRACT WITH PHARMA COMPANIE S FOR MARKETING THEIR PRODUCTS. TO CARRY ON ITS BUSINESS SMOOTHLY, THE ASSESSEE EMPLOYS MEDICAL REPRESENTATIVES WHO VISIT DOCTORS A ND MARKET THE PRODUCTS OF CUSTOMER FOR WHICH ASSESSEE COMPANY REC EIVES FEES FOR SERVICES EITHER ON THE BASIS OF TIME SPENT OR PERSO NS DEPLOYED. 7. DURING THE COURSE OF THE SCRUTINY ASSESSMENT PROCEE DINGS, THE A.O. NOTICED THAT THE ASSESSEE HAS DEBITED AN AMOUNT OF RS. 70,48,105/- TO THE PROFIT AND LOSS ACCOUNT ON ACCOUNT OF PAYMENT O F ROYALTY. THE ASSESSEE WAS ASKED TO EXPLAIN AND JUSTIFY THE CLAIM OF THIS EXPENDITURE. 8. VIDE LETTER DATED 02.11.2010, THE ASSESSEE EXPLAINE D THAT THE ROYALTY EXPENDITURE IS ABOUT 5% OF THE TURNOVER OF TRADING ITEMS WHICH HAS BEEN GIVEN AS PER THE AGREEMENT. IT WAS FURTHER EXP LAINED THAT A SIMILAR PAYMENT WAS ALSO MADE IN THE IMMEDIATELY PR ECEDING YEAR. THE ASSESSEE SUPPLIED THE COPY OF THE AGREEMENT. IT WAS EXPLAINED THAT THE ASSESSEE IS DOING TRADING BUSINESS OF PYRI DIUM BRAND WHICH IS OWNED BY ASIA PACIFIC PHARMACEUTICAL INVESTMENT PVT . LTD. WHO HAD PURCHASED TRADE MARK RIGHT FROM PFIZER. THE ASSESSE E ENTERED INTO A BRAND LICENSING AGREEMENT WITH ASIA PACIFIC PHARMAC EUTICAL ITA NO. 537 & 1560/AHD/2012 . A.Y. 2008-0 9 & 2009-10 4 INVESTMENT PVT. LTD. ON 01.07.2006. AS PER THIS AGR EEMENT, THE ASSESSEE HAS TO PAY 5% ROYALTY. 9. THE A.O. WAS OF THE OPINION THAT THE ROYALTY EXPENSES IS OF ENDURING NATURE. FURTHER, THE ASSESSEE COULD NOT ES TABLISH THE NEXUS PROPERLY BETWEEN THE SERVICES RENDERED AND SERVICES REQUIRED FOR THE BUSINESS AND COULD NOT FURNISH ANY EVIDENCE REGARDI NG ENTITLED ELIGIBILITY OF THE RECIPIENT FOR THE ROYALTY OR THE SERVICES RENDERED BY IT. THE A.O. ACCORDINGLY DISALLOWED RS. 70,48,105/-. 10. ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT(A) A ND REITERATED ITS CLAIM OF EXPENDITURE. 11. AFTER CONSIDERING THE FACTS AND THE SUBMISSIONS, TH E LD. CIT(A) FOUND THAT A SIMILAR ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE IN APPEAL NO. CIT(A)-XI/1011/10-11 DATED 22.11.2011 FO R A.Y. 2007-08. THE LD. CIT(A) FURTHER FOUND THAT THE IMPUGNED EXPE NDITURE HAS BEEN ALLOWED AS REVENUE EXPENDITURE IN ALL THE SCRUTINY ASSESSMENTS MADE IN EARLIER YEARS. THE LD. CIT(A) CONCLUDED BY HOLDI NG THAT THE FACTS AS EXISTED IN A.Y. 2007-08 ARE IDENTICAL TO THE FACTS FOR THE YEAR UNDER CONSIDERATION AND ACCORDINGLY ORDERED THE A.O. TO D ELETE THE ADDITION OF RS. 70,48,105/-. 12. AGGRIEVED BY THIS, THE REVENUE IS BEFORE US. 13. THE LD. D.R. STRONGLY RELIED UPON THE FINDINGS OF T HE A.O. PER CONTRA, THE LD. COUNSEL FOR THE ASSESSEE SUPPORTED THE FINDINGS OF THE LD. CIT(A). ITA NO. 537 & 1560/AHD/2012 . A.Y. 2008-0 9 & 2009-10 5 14. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE AUTHORI TIES BELOW. WE FIND THAT THIS ISSUE HAS NOT COME UP FOR THE FIR ST TIME. IT WAS ALSO THERE IN THE EARLIER ASSESSMENT YEARS. A PERUSAL O F THE ORDER OF THE FIRST APPELLATE AUTHORITY SHOWS THAT IN EARLIER YEA RS, A SIMILAR DISALLOWANCE WAS DELETED BY THE APPELLATE AUTHORITI ES. WE ALSO FIND THAT THE ROYALTY PAYMENT IS PURSUANT TO AN AGREEMEN T WHICH WAS BEFORE THE ASSESSING AUTHORITY, WE DO NOT FIND ANY LOGIC/REASON IN MAKING THE DISALLOWANCE. SINCE THE FIRST APPELLATE AUTHORITY HAS FOLLOWED THE FINDINGS GIVEN IN EARLIER ASSESSMENT Y EARS, NO INTERFERENCE IS CALLED FOR. GROUND NO. 1 IS ACCORDINGLY DISMISSE D. 15. ON FURTHER PROBE, THE A.O. FOUND THAT THE ASSESSEE HAS CLAIMED EXPENSES OF RS. 35,29,098/- ON ACCOUNT OF TRAINING AND SEMINAR AS AGAINST EXPENSE OF RS. 3,41,154/- CLAIMED IN THE IM MEDIATE PRECEDING YEAR. THE A.O. FURTHER NOTICED THAT THE ASSESSEE HA S CLAIMED TRAINING AND RECRUITMENT EXPENSES OF RS. 60,44,969/- AS AGAI NST RS. 18,82,414/- CLAIMED IN THE IMMEDIATE PRECEDING YEAR . ASSESSEE WAS ASKED TO FURNISH COMPLETE DETAILS WITH RESPECT TO T HIS EXPENDITURE AND TO JUSTIFY THE CLAIM AND ITS ADMISSIBILITY AND ALSO THE BENEFIT DERIVED TO THE BUSINESS. ASSESSEE FILED A DETAILED REPLY WHICH DID NOT FIND ANY FAVOUR WITH THE A.O. WHO WAS OF THE FIRM BELIEF THA T TRAINING AND SEMINAR EXPENDITURE AMOUNTING TO RS. 35,29,098/- IS NOTHING BUT CAPITAL EXPENDITURE AND DISALLOWED THE SAME. 16. BEFORE THE FIRST APPELLATE AUTHORITY, IT WAS STRONG LY CONTENDED THAT AN IDENTICAL ISSUE AROSE IN A.Y. 2004-05 AND T HE MATTER TRAVELLED UP TO THE TRIBUNAL AND THE TRIBUNAL HAS DELETED THE ADDITION. FOLLOWING THE ORDER OF THE TRIBUNAL, THE LD. CIT(A) DIRECTED THE A.O. TO DELETE THE IMPUGNED ADDITION. ITA NO. 537 & 1560/AHD/2012 . A.Y. 2008-0 9 & 2009-10 6 17. AGGRIEVED BY THIS, THE REVENUE IS BEFORE US. 18. THE LD. D.R. COULD NOT BRING ANY DISTINGUISHING DEC ISION IN FAVOUR OF THE REVENUE. WE FIND THAT THE TRIBUNAL IN ASSESS EES OWN CASE IN A.Y. 04-05 HAS DECIDED THIS ISSUE IN FAVOUR OF THE ASSESSEE. THE RELEVANT OBSERVATIONS OF THE TRIBUNAL READ AS UNDER :- 'AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US. WE HAVE HEARD THE PARTIES AND CONSIDERED THE RIVAL SUBMISSION. THE EX PENDITURE WAS INCURRED FOR SPECIALIZED TRAINING, WHICH IS FOR THE PURPOSE OF CARRYING ON BUSINESS OF THE ASSESSEE. THE EXPENSES WAS INCURRED IN THE YEAR UNDER CONSIDERATION. THOUGH THE SPECIALIZED TRAINING BENEFIT MAY OCCUR T O THE ASSESSEE IN FUTURE AS WELL AS BUT THAT ITSELF MAY NOT BE A GROU ND FOR TREATING THE EXPENDITURE AS CAPITAL EXPENDITURE. IT IS FOR THE S MOOTH CARRYING ON THE BUSINESS OF THE ASSESSEE. NEITHER ANY SPECIFIC ASSE T HAS BEEN CREATED BY THE ASSESSEE NOR ANY ENDURING BENEFIT HAS BEEN GAIN ED. THE CIT(A) WAS JUSTIFIED IN DELETING THE DISALLOWANCE AS CAPITAL E XPENDITURE. ' 19. AS NO DISTINGUISHING DECISION HAS BEEN BROUGHT ON R ECORD IN FAVOUR OF THE REVENUE. RESPECTFULLY FOLLOWING THE P RECEDENCE, WE HOLD THAT THE LD. CIT(A) WAS JUSTIFIED IN DELETING THE D ISALLOWANCE AS CAPITAL EXPENDITURE. GROUND NO. 2 IS ACCORDINGLY DISMISSED. 20. NOW THE ONLY SURVIVING GROUND REMAINS IN ITA NO. 1560/AHD/2012 QUA GROUND NO. 3 WHICH RELATES TO THE DELETION OF THE ADDITION MADE BY THE A.O. ON ACCOUNT OF NON-ACHIEVE MENT OF TARGETS AMOUNTING TO RS. 93,45,801/-. 21. WHILE SCRUTINIZING THE RETURN OF INCOME, THE A.O. N OTICED THAT THE ASSESSEE HAS CLAIMED EXPENSES OF RS. 93,94,801/- ON ACCOUNT OF ITA NO. 537 & 1560/AHD/2012 . A.Y. 2008-0 9 & 2009-10 7 CLAIMS FOR NON-ACHIEVEMENT OF TARGETS. THE ASSESSEE WAS ASKED TO JUSTIFY ITS CLAIM. ASSESSEE FILED A DETAILED REPLY WHICH READS AS UNDER:- 'AS REGARDS NON-ACHIEVEMENT OF TARGETS, IT IS TO BE SUBMITTED THAT THE COMPANY IS PROVIDING MARKET SUPPORT AND PROMOTION S ERVICES TO VARIOUS PHARMA-COMPANIES AND IN THE SAID AGREEMENT, ONE OF THE RESPONSIBILITIES IS TO GENERATE SALES. THE TARGETS FOR THE COMPANY A RE GIVEN AND WHEN THE SAME ARE NOT ACHIEVED, THE COMPANY IS REQUIRED TO P AY FOR NON- ACHIEVEMENT OF TARGETS. IF THE COMPANY ACHIEVES THE TARGET BEYOND CERTAIN LEVELS, IT ALSO GETS BONUS. THUS, THIS PAYMENT TOWA RDS NON-ACHIEVEMENT OF TARGETS IS NOTHING BUT A CONTRACTUAL PAYMENT AND IS ALLOWABLE EXPENSE. IT IS THEREFORE SUBMITTED THAT THE SAME BE ALLOWED. WITHOUT PREJUDICE TO THE ABOVE, IT IS SUBMITTED THA T THE ROYALTY AND PAYMENT FOR NON-ACHIEVEMENT OF TARGETS ARE REVENUE EXPENDITURE AND VERY RECENTLY, THE HON'BLE CIT (APPEALS) IN THE CASE OF THE COMPANY ITSELF HAS GRANTED THE SAME IN A.Y. 2007-08.' 22. THE AFOREMENTIONED SUBMISSION OF THE ASSESSEE WAS N OT FOUND ACCEPTABLE BY THE A.O. WHO WAS OF THE OPINION THAT A SIMILAR DISALLOWANCE WAS MADE IN A.Y. 2008-09 AND DRAWING S UPPORT FROM THE PRECEDING YEAR, THE A.O. DISALLOWED RS. 93,45,801/- . 23. ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT(A). IT WAS POINTED OUT THAT IN A.Y. 2008-09, THE ADDITION WAS DELETED BY THE FIRST APPELLATE AUTHORITY. RELIANCE WAS PLACED ON THE DEC ISION OF THE TRIBUNAL IN THE CASE OF NEO STRUCTO CONSTRUCTION LT D. IN ITA NO. 3026/AHD/2012. THE LD. CIT(A) WAS CONVINCED AND DEL ETED THE ADDITION OF RS. 93,45,901/-. 24. AGGRIEVED BY THIS, THE REVENUE IS BEFORE US. ITA NO. 537 & 1560/AHD/2012 . A.Y. 2008-0 9 & 2009-10 8 25. THE LD. D.R. COULD NOT BRING ANY DISTINGUISHING DEC ISION IN FAVOUR OF THE REVENUE. THE LD. COUNSEL FOR THE ASSESSEE RE LIED UPON THE DECISION OF THE FIRST APPELLATE AUTHORITY. 26. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE AUTHORI TIES BELOW. WE FIND THAT THE DAMAGES PAID BY THE ASSESSEE ARE N OT FOR ANY INFRINGEMENT OF ANY LEGISLATED LAW. ON THE CONTRARY , WE FIND THAT IT WAS A CONTRACTUAL LIABILITY DISCHARGED BY THE ASSESSEE AND IS NOT OF PENAL IN NATURE. CONSIDERING THE FACTS IN TOTALITY, WE DECLI NE TO INTERFERE WITH THE FINDINGS OF THE LD. CIT(A). THIS GROUND IS ACCO RDINGLY DISMISSED. 27. IN THE RESULT, BOTH THESE APPEALS OF THE REVENUE AR E DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 20 - 06 - 20 16. SD/- SD/- (RAJPAL YADAV) (N. K. BILLAIYA) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD: TRUE COPY RAJESH COPY OF THE ORDER FORWARDED TO: - 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (APPEALS) 4. THE CIT CONCERNED. 5. THE DR., ITAT, AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT,AHME DABAD