JT. CIT (OSD)-6(2)(1), MUMBAI V. CHARAK PHARMA PVT. LTD., MUMBAI

ITA 2678/MUM/2016

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 0105 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 9 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-01-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2011-2012
• Appeal Filed On: 10-04-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Rule of consistency
• Section: 37; 80IB; 37(1); 80IC; 80IC

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “C” MUMBAI BEFORE SHRI G.S. PANNU (PRESIDENT) AND SHRI SAKTIJIT DEY (JUDICIAL MEMBER) ITA No. 2678/MUM/2016 Assessment Year: 2011-12 Jt. Commissioner of Income Tax (ODS)- 6(2)(1), R. No. 563, Aayakar Bhavan, M.K. Road, Churchgate, Mumai-20. Vs. M/s Charak Pharma Pvt. Ltd., 21, Evergreen Industrial Estate, Shakti Mill Lane, Opp. Dr. E. Moses Rd. Mahalaxmi, Mumbai-400011. PAN No. AABCC 4014 A AppellantRespondent Revenueby:Mr. HarendraNarayan Singh, DR Assessee by:Mr.Manish Shah, AR D a t e o f H e a r i n g:15/11/2021 D a t e o f o r d e r:17/01/2022 ORDER PER BENCH This is an appeal by the revenue against order dated 06.01.2016 of learned Commissioner of Income Tax (Appeals)-12, Mumbai [in short ‘CIT(A)’] for the assessment year 2011-12. Ground No. 1 & 2 1.On the facts and circumstances of the case and in law, the Id. CIT(A) has erred in deleting disallowance under section 80 |B(13) and 80 IC(T) R.W.S 80-1A(8)of the I. T. Act " 2.On the facts and circumstances of the case and in law, the Id. CIT(A) has erred in holding that the AO did not find defect in the submission of the assessee where as it is clear from the records that the submission of the assessee was not relevant to the issue-at hand and no quantitative reconciliation was furnished by the Assessee to prove the genuineness of cost of material debited to individual plants" M/s Charak Pharma Pvt. Ltd. ITA No. 2678/M/2016 2 2.In Ground nos. 1 and 2 the Revenue has challenged allowance of assessee’s claim of deduction under section 80IB and 80IC of the Income Tax Act, 1961. 3.Briefly the facts are, the assessee is a resident company engaged in the business of manufacturing and marketing of ayurvedic pharmaceutical products. For the assessment year under dispute, the assessee had filed its return of income on 18.09.2011 declaring income of ₹3,45,34,214/-. In course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee has claimed deduction of ₹ 1,75,30,180/- under section 80IB of the Act and ₹2,24,20,698/- under section 80IC of the Act. Noticing the above, the Assessing Officer called upon the assessee to furnish the necessary details relating to the deduction claimed and also justify that the conditions of the relevant provisions are fulfilled. In response to the query raised, the assessee filed its reply justifying the deduction claimed. After verifying the details furnished and submissions made by the assessee, the AO observed, though, the assessee furnished some details relating to the deductions claimed, however, he did not submit the profit and loss account in columnar format in respect of various units. Further, he observed, the assessee did not substantiate the basis of allocation of various expenses. In response to further query raised, the assessee furnished more details in respect of deduction claimed. However, the Assessing Officer remainedunconvinced. He observed that the assessee had three manufacturing units at Silvassa and Baddi. While the assessee has shown substantial profit in respect of units at Silvassa and Baddi which are eligible for deduction under section 80IB and 80IC of the Act respectively, however, in respect of the non-eligible unit at Silvassa, the assessee has shown loss. The Assessing Officer observed, compared to M/s Charak Pharma Pvt. Ltd. ITA No. 2678/M/2016 3 material consumption in eligible units, the assessee has shown higher material consumption in respect of non-eligible units. Further, he observed, manufacturing expenses shown for the eligible units are relatively low compared to such expenses in respect of non-eligible unit. Thus, based on the aforesaid analysis of facts, the Assessing Officer was of the view that the assessee has arranged its affairs in such a manner that some expenditure has been apportioned in selling ratio, which alone, does not prove the genuineness of assessee’s claim. He further alleged that the assessee could not furnish the reconciliation of the inventories. Referring to the provisions of section 80IB(13)/80IC(7) r.w.s. 80IA(8), the Assessing Officer observed that the assesse has not fulfilled the conditions for claiming deduction under the respective provisions. Accordingly, he reduced an amount of ₹85,23,005/- from the aggregate deduction claimed by the assessee u/s 80IB and 80IC of the Act. The assessee contested the aforesaid disallowance before learned CIT(A). In course of appellate proceedings, based on the submissions made by the assessee, learned CIT(A) called for a remand report from the Assessing Officer. 4.After considering the submissions of the assessee, the observations of the Assessing Officer in the remand report and facts and materials on record, learned CIT(A) observed that in course of assessment proceedings, the assessee had furnished every detail called for by the Assessing Officer to support its claim of deduction under section 80IB/80IC of the Act. She observed, the Assessing Officer did not point out any deficiency in the evidences nor clarified what further reconciliation is required. She observed, that the products are manufactured at different units. Therefore, the profit ratio cannot be same in respect of all the units. Thus, being of the view that the M/s Charak Pharma Pvt. Ltd. ITA No. 2678/M/2016 4 assessee has fulfilled the conditions of section 80IB/80IC of the Act, learned CIT(A) deleted the disallowance made by the Assessing Officer. 5.Learned Departmental Representative submitted, the assessee did not furnish the full details called for by the Assessing Officer. He submitted, after analyzing the facts, the Assessing Officer has given a factual finding that the material cost and manufacturing cost of eligible units are much less than similar cost in respect of non-eligible unit. He submitted, the AO has clearly demonstrated that the assessee has arranged his affairs in manner to show huge profit in eligible units and loss in non-eligible unit. Thus, he submitted, the disallowance made by the Assessing Officer should be sustained. 6.Per contra, learned counsel for the assessee strongly relied upon the observations of learned CIT(A). He submitted, the assessee has maintained separate books of accounts for all its units. Further, all direct expenses were attributed to the respective units on actual basis. Whereas, indirect expenses were apportioned in the ratio of turnover. Thus, he submitted, when unit-wise expenses are clearly identifiable, there is no question of apportionment of expenses. Further, he submitted, neither the Assessing Officer has pointed out any specific deficiency in the books of account nor has rejected it. Therefore, the Assessing Officer cannot disallow a part of deduction claimed. He submitted, both the eligible units were operating for past several years and the assessee has been consistently allowed deduction under section 80IB/80IC of the Act. That being the case, in absence of any material difference in factual position, rule of consistency will apply. Thus, he submitted, deduction claimed under section 80IB/80IC has to be allowed in M/s Charak Pharma Pvt. Ltd. ITA No. 2678/M/2016 5 full. In support of such contention, learned counsel relied upon the following decisions: i.CIT v. TTK Pharma Limited (Tax Appeal No. 413 of 2005 (Madras) (HC) ii.Controls and Swithchgears Company Ltd. (66 DTR 161) (Del HC) iii.CIT v. NIT Cris Ltd. (2 taxmann.com 12) (Delhi) iv.ACIT v. Narendra Polyplast (69 SOT 718) (Mumbai-Trib) v.Khinvasara Investment (P.) Limited v. JCIT (110 ITD 198) (Pune-Trib) vi.Godrej Household Products v. ACIT (41 taxmann.com 386) (Mum-Trib.) vii.CIT v. Translam Ltd. (231 Taxman 901) (Allahabad) viii.ACIT v. P.I. Industries (144 TTJ 353) (Jodhpur-Trib.) 7.We have considered rival submissions in the light of the decisions relied upon and perused the materials on record. The dispute in these grounds is regarding disallowance of assessee’s claim of deduction under section 80IB/80IC of the Act. Facts on record reveal that the eligible unit operating at Silvassa was set up in the year 2002-03 and assessee is claiming deduction under section 80IB of the Act from the very inception. Similarly, the unit at Baddi was set up in the year 2005-06 and from the very inspection assessee is claiming deduction under section 80IC of the Act. The uncontroverted factual position on record demonstrates that assessee’s claim of deduction under section 80IB/80IC in past years have been allowed. On perusal of the assessment order, it is very much clear that in course of assessment proceedings, in response to the query raised by the AO, the assessee had furnished various details from time to time, such as, copies of auditor’s certificate in Form 10CCB, unit-wise profit and loss account etc. Further, when the Assessing Officer complained that the profit and loss accounts are not in columnar format, the assessee furnished more evidences including profit and loss account in columnar format and many more evidences were submitted in a compact disc(CD). These facts have been accepted by the Assessing Officer in M/s Charak Pharma Pvt. Ltd. ITA No. 2678/M/2016 6 the assessment order. However, the Assessing Officer has not pointed out any defect or deficiency either in the maintenance of unit-wise books of accounts or evidences furnished. By simply entertaining certain doubts and suspicion as to why the material and manufacturing cost in the eligible units is lesser than the non-eligible unit, the Assessing Officer has partly disallowed the deduction claimed u/s 80IB/80IC of the Act. The difference in material and manufacturing cost could be for various factors including modernization in plant and machinery. 8.Though, the Assessing Officer has observed that assessee has not fully complied with the conditions enshrined in the deduction provisions, however, he has not illustrated a single instance of such violation. As rightly observed by the learned CIT(A), the Assessing Officer, without appropriately verifying the evidences furnished by the assessee and pointing out specific defect which required reconciliation, has simply made general observation that the assessee could not reconcile certain issues. It is a fact on record that the eligible units at Silvassa and Baddi are operating for past many years and assessee’s claim of deduction under section 80IB/80IC of the Act has all along been accepted by the Revenue. Therefore, when there is no material change in the factual position in the impugned assessment year to demonstrate that certain conditions of the relevant statutory provisions have been violated, rule of consistency would apply. Thus keeping in view, the factual position as well as provisions of section 80IB/80IC and applying the ratio laid down in the decision cited before us, we held that the decision of learned CIT(A) on the issue deserves to be upheld. Accordingly, we do so. The grounds are dismissed. M/s Charak Pharma Pvt. Ltd. ITA No. 2678/M/2016 7 Ground No. 3 & 4 3.On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting disallowance of commission and incentive paid". 4."On the facts and circumstances of the case and in law, the Id. CIT(A), has erred in giving full relief to the assessee without appreciating that in the given facts of the case, the commission paid to M/s Ayurveda Agencies was excessive". 9.In these grounds, the revenue has challenged deletion of disallowance of commission and incentive paid to M/s Ayurveda Agencies. Briefly the facts are, in course of assessment proceedings, the Assessing Officer noticed that the assessee had debited an amount of ₹9.22 crores towards commission and ₹1.74 crores as incentive paid to M/s Ayurveda Agencies. On further verification, he found that M/s Ayurveda Agency is a partnership firm, wherein,the spouses of the directors of assessee-company are partners. Thus, according to the Assessing Officer, the payments made are to related party. Therefore, he called the assessee to justify the payments made. In response to the query raised, the assessee furnished detailed submission stating that the payment made was reasonable and required for the purpose of business. It was submitted, M/s Ayurveda Agencies is carrying out the sales promotion activity on behalf of the assessee. Without prejudice, the assessee submitted, since both the assessee and M/s Ayurveda Agencies are taxed at the same rate, there can be no gain to either of the paries. The Assessing Officer, however, was not convinced with the submissions of the assessee. He observed, the expenditure incurred by the assessee on commission and incentive is very high and by any standard cannot be compared to the sales. He observed, assessee’s claim that major part of the sales is generated by M/s Ayurveda Agency was not proved on record as the assessee failed to prove the medical qualification and expertise of the partners of M/s Ayurveda Agency. M/s Charak Pharma Pvt. Ltd. ITA No. 2678/M/2016 8 Referring to the service agreement with M/s Ayurveda Agency, the Assessing Officer observed, the assessee does not reveal who is providing services for whom.Thus,ultimatelytheAssessingOfficerdisallowedthe commission/incentive paid of ₹10,97,38,454/- by invoking the provisions of section 40A(2) of the Act. The assessee contested the aforesaid disallowance before learned CIT(A). After considering the submissions of the assessee in the context of facts and material on record, learned CIT(A) deleted the addition with the following observation : “Ground of Appeal No 3 relates to the disallowance of Rs 10,97,38,454/- on account of commission paid to related entity. On perusal of the assessment order, itis seen that the assessing officer has doubted the genuineness of the commission and incentive paid to the related entity. The AO has discussed the disallowance in para6.1 to 6.5.3 of the assessment order. Appellant has submitted that the commission &incentive paid to M/s Ayurveda Agencies were genuine business expenses. The appellant submitted the assessment order made in the case of M/s.Ayurveda Agencies for A.Y. 2012-13. On perusal of the assessment order, it is seen that the assessing officer of M/s Äyurveda Agencies after examining the books of accounts, has not found any expenses to be bogus and has accepted the returned income. Hence the doubt raised by the assessing officer that there was no need for such expenses as the appellant has various ASM's, R$M' & NSM's appears farfetched. Each ASM controls a minimum of 4-6 medical representatives, Each RM supervises a minimum of 4- 6 ASM's, this is how the pyramid of marketing personnel is established. There is no merit in the observation of the A.O: held by him as to how this pyramid is related to business. The AO has to investigate and find out the actual truth. The AO has made the addition on mere suspicious and assumptions and presumptions. No investigation was carried out to substantiate that the money spend by the appellant on commission and incentive has either not been incurred nor it is beneficial to the wives of the directors of the Appellant Company. The appellant, on the other hand, has given vast documentary records that the commission and incentive expenses incurred through the M/s. Ayurveda Agencies have been actually incurred. It is also seen that in the AY. 2012-13, the assessing officer has accepted the expenditure incurred u/s 37 of the Act and disallowed the part of the commission & incentive expenses u/s 40 A (2)(b) which also shows that the commission paid to M/s Ayurveda Agencies is a genuine business expense. Now, going into the second issue in hand, i.e whether the expenses incurred on account of payment made to related entity is excessive or not the appellant has submitted the details of rate of M/s Charak Pharma Pvt. Ltd. ITA No. 2678/M/2016 9 commission given to non related parties. On perusal of the rate of commission given to the non related party it is seen that it is at 14.01% to 20%. The rate of commission give to M/s Ayurveda Agencies is at14.10%. Hence, as per records, the rate of commission given to M/s Ayurveda is reasonable. Hence this Ground of Appeal No.3 is allowed.” 10.The learned Departmental Representative strongly relied upon the observations of the assessing officer. 11.Whereas, learned counsel for the assessee submitted, where the existence of the payee is established, the payment made has to be held as genuine and the payment made for legitimate business purpose has to be allowed under section 37(1) of the Act. As regards applicability of section 40A(2), he submitted, unless the Assessing Officer demonstrates that the payment made is excessive or unreasonable having regard to the market value, no disallowance could be made. He submitted, when the assessee and the payee are in same taxed at the same rate, therefore, no benefit could have been derived by any of the parties. Finally, he submitted, similar payment made in earlier years has been allowed. Therefore, rule of consistency would apply. In respect of such contention, learned counsel relied upon the following decisions : i.CIT v. Delhi Press Patra Prakashan Ltd. (355 ITR 1)(Delhi HC) ii.CIT v. Shandong Tiejun Electric Power Engineering Co. (440 ITR 371) (Gujarat) iii.M/s Praveen Industries Ltd. v. DCIT (ITA No. 1790/Del/2013) (Del-T) iv.FIL Industries Ltd. v. ACIT (56 SOT 52) (Amritsar) v.Radhasaomi Satsang v. CIT (193 ITR 321) (SC) vi.UOI v. Kaumudini Dalal (249 ITR 219) (SC) vii.Abbot India Ltd. v. ACIT (50 ITR (T) 369) (Mumbai-Trib.) 12.We have considered rival submissions in the light of the decisions relied upon and perused materials on record. As far as facts are concerned, there is no dispute that the assessee has paid the amount in dispute to M/s Ayurveda M/s Charak Pharma Pvt. Ltd. ITA No. 2678/M/2016 10 Agencies which has undertaken the task of business promotion and marketing on behalf of the assessee. The Assessing Officer has held that M/s Ayurveda Agencies is a related party as the partners therein are wives of the directors of the assessee-company. Therefore, he has disallowed the expenditure, both, under section 37(1) and 40A(2) of the Act. In so far as disallowance under section 37(1) is concerned, there is no dispute that the assessee has entered in an agreement with M/s Ayurveda Agencies on 01.04.2008 for sales promotion and marketing of assessee’s products. It is also a fact that the payment of commission and incentive to M/s Ayurveda Agencies is in terms with the service agreement. From the materials on record it is evident that the assessee had been paying commission and incentive to M/s Ayurveda Agencies since assessment year 2005-06 and these payments have also been allowed in the past years. That being the factual position, there cannot be any doubt regarding either the genuineness or commercial expediency of the expenditure. More so, when the assesse has demonstrated that by incurring such expenditure business has grown. It is observed, though, the assessee has placed material before the Assessing Officer to demonstrate that substantial part of assessee’s turnover was generated by the efforts of M/s Ayurveda Agencies, the Assessing Officer has simply brushed it aside by observing that assessee failed to prove the medical qualification and expertise of the partners of M/s Ayurveda Agencies. This, in our view, is totally unjustified. Thus, when the assessee has proved the genuineness of expenditure and the business expediency, no disallowance under section 37(1) should have been made. 13.In so far as disallowance under section 40A(2) of the Act is concerned, on a reading of the said provision it becomes clear that where the Assessing Officer is of the view that the payment made by the assessee to related party is M/s Charak Pharma Pvt. Ltd. ITA No. 2678/M/2016 11 unreasonable and excessive having regard to the market value of the goods and services availed, then such expenditure can be disallowed. Therefore, the burden is entirely on the Assessing Officer to establish on record that the expenditure is unreasonable and excessive having regard to the market value. In the facts of the present case, the Assessing Officer has not undertaken any comparative analysis or has not even brought a single instance of similar expenditure undertaken by any other party to demonstrate that the payment made by the assessee to M/s Ayurveda Agencies is unreasonable and excessive having regard to the market value. The Assessing Officer has not even brought on record any material to demonstrate market value of the services availed. On the contrary, learned CIT(A) has given a factual finding that the commission paid to non-related parties at 14.10% to 20% is more than the rate of commission given to M/s Ayurveda Agencies at 14.10%. The aforesaid factual finding of learned CIT(A) has not been controverted. In view of aforesaid, we fully agree with the decision of learned CIT(A) that no disallowance can be made under section 40A(2) of the Act as well. Accordingly, we uphold the decision of learned CIT(A). 14.In the result, the appeal filed by the Revenue is dismissed. Sd/-Sd/- (G.S. PANNU)(SAKTIJIT DEY) PRESIDENTJUDICIAL MEMBER Mumbai; Dated: 17/01/2022 Rahul Sharma, Sr. P.S. M/s Charak Pharma Pvt. Ltd. ITA No. 2678/M/2016 12 Copy of the Order forwarded to : 1.The Appellant 2.The Respondent. 3.The CIT(A)- 4.CIT 5.DR, ITAT, Mumbai 6.Guard file. BY ORDER, //True Copy// (Dy./Assistant Registrar) ITAT, Mumbai