DCIT - 1(2), MUMBAI V. M/S MARTIN & HARRIS LABORATORIES LTD., MUMBAI

ITA 4494/MUM/2013

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 3483 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 11 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-05-2016
• Appeal Filed By: Department
• Bench Allotted: B
• Next Hearing Date: 30-03-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 04-06-2013
• Court: TRIBUNAL
• Department Lawyers: RAJESHWARI MOTWANI
• Assessee Lawyers: DR K SHIVARAM
• Keywords: Question of law; Tax effect

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, MUMBAI BEFORE S/SHRI B.R. BASKARAN (AM) & AMIT SHUKLA (JM) I.T.A. NO. 4493 /MUM/ 2013 (ASSESSMENT YEAR 2008 - 09 ) I.T.A. NO. 4494/MUM/2013 (ASSESSMENT YEAR 2009 - 10) DCIT 1(2) ROOM NO. 530 5 TH FLOOR AAYAKA R BHAVAN M.K. ROAD MUMBAI - 400 020. VS. M/S. MARTIN & HARRIS LABORATORIES LIMITED APEEJAY CHAMBERS WALLANCE STREET FORT, MUMBAI - 400001. ( APPELLANT ) ( RESPONDENT ) PAN NO . AABCM0832A ASSESSEE BY DR. K. SHIVARAM DEPARTMENT BY RAJESHWARI MOTWANI D ATE OF HEARING 4.5 . 201 6 DATE OF PRONOUNCEMENT 25 . 5 . 201 6 O R D E R PER B.R. BASKARAN, A M : - BOTH THE APPEALS FILED BY THE REVENUE ARE DIRECTED AGAINS T THE ORDERS PASSED BY LD CIT(A) - 2, MUMBAI AND THEY RELATE TO THE ASSESSMENT YEARS 2008 - 09 AND 2009 - 10. BOTH THE APPEALS WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER, FOR THE SAKE OF CONVENIENCE. 2. THE QUANTUM IN DISPUTE IN THE APPEAL FILED BY THE REVENUE FOR AY 2009 - 10 IS RS.22.95 LAKHS AND HENCE THE TAX EFFECT INVOLVED THEREIN IS LESS THAN RS.10.00 LAKHS. IN VIEW OF THE CIRCULAR NO. 21/2015 DATED 10 - 12 - 2015 ISSUED BY THE CBDT, THE REVENUE IS PRECLUDED FROM PURSUING THIS APPEAL IN VIEW OF THE LOW TAX EFFECT. ACCORDINGLY, THE APPEAL OF THE REVENUE FILED FOR AT 2009 - 10 IS DISMISSED IN LIMINE. M/S. MARTIN & HARRIS LABORATORIES LIMITED 2 3. WE SHALL NOW TAKE UP THE APPEAL FILED BY THE REVENUE FOR AY 2008 - 09. THE ISSUE CONTESTED BY THE REVENUE RELATES TO THE DISALLOWANCE OF SALES PROMOTION EXPENSES MADE BY THE AO U/S 40(A)(IA) OF THE ACT, WHICH HAS SINCE BEEN DELET ED BY LD CIT(A). 4. THE FACTS RELATING TO THE SAME ARE DISCUSSED IN BRIEF. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURE OF MEDICINES. THE ASSESSEE HAS SOLD ITS PRODUCTS TO ITS ASSOCIATE CONCERNS. ON THE SCRUTINY OF PROFIT AND LOSS ACCOUNT , THE AO NOTICED THAT THE ASSESSEE HAS INCURRED A SUM OF RS.8.73 CRORES TOWARDS SALES AND PROMOTION. ALL THESE EXPENSES HAVE BEEN GIVEN AS REIMBURSEMENT TO ITS GROUP COMPANIES. SINCE THE ASSESSEE DID NOT DEDUCT TAX AT SOURCE FROM THESE REIMBURSEMENTS, TH E AO DISALLOWED THE SAME U/S 40(A)(IA) OF THE ACT. 5. THE LD CIT(A), HOWEVER, HELD THAT THE REIMBURSEMENT OF EXPENSES DOES NOT CONTAIN ANY INCOME ELEMENT AND HENCE THERE IS NO LIABILITY ON THE PART OF THE ASSESSEE TO DEDUCT TDS FROM THOSE PAYMENTS. ACCORDINGLY HE DELETED THE DISALLOWANCE MADE U/S 40(A)(IA) OF THE ACT. 6. WE HEARD THE PARTIES AND PERUSED THE RECORD. THE BUSINESS MODEL FOLLOWED BY THE ASSESSEE IS THAT IT SHALL MANUFACTURE THE PRODUCTS AND THE MARKETING ACTIVITY OF THE PRODUCTS S HALL BE CARRIED ON BY ITS ASSOCIATE COMPANIES (HEREIN AFTER REFERRED TO AS MARKETING COMPANIES). THE LD CIT(A) HAS EXTRACTED A MODEL AGREEMENT ENTERED BY THE ASSESSEE WITH ANOTHER COMPANY M/S WALTER BUSHNELL BIOHEALTH PVT. LTD. IN PAGE 42 OF HIS ORDER AN D A PERUSAL OF THE SAME SHOWS THAT THE PARTIES HAVE ENTERED INTO A PURE COMMERCIAL ARRANGEMENT FOR MARKETING THE PRODUCTS. THE ASSESSEE APPEARS TO HAVE ENTERED INTO SIMILAR AGREEMENT WITH ALL THE MARKETING COMPANIES. THE AGREEMENT CLEARLY SPECIFIES THAT THE MARKETING COMPANY SHALL EMPLOY PERSONS FOR MARKETING THE M/S. MARTIN & HARRIS LABORATORIES LIMITED 3 PRODUCTS AND THE SALARY, BENEFITS ETC., GIVEN TO THEM SHALL BE REIMBURSED BY THE ASSESSEE. ALL THE TRAVELLING EXPENSES, INCENTIVE AND OTHER EXPENSES SHALL ALSO BE REIMBURSED. THE MARKETING COMPA NY SHALL BE PAID COMMISSION ON THE SALES GENERATED BY IT. 7. THE AO HAS TAKEN THE VIEW THAT THE ASSESSEE SHOULD HAVE DEDUCTED TAX AT SOURCE FROM THE REIMBURSEMENTS SO GIVEN BY THE ASSESSEE TO THE MARKETING COMPANIES. MAJOR PART OF REIMBURSEMENTS CONS ISTED OF SALARY EXPENSES ONLY. THE LD CIT(A) NOTICED THAT THE MARKETING COMPANIES HAVE DEDUCTED TAX SOURCE FROM THE SALARY PAID TO THE REPRESENTATIVES AND REMITTED THE SAME TO THE CREDIT OF THE GOVERNMENT. THE LD CIT(A) HAS CONFIRMED THIS SUBMISSION BY E XAMINING THE TDS STATEMENTS FURNISHED BY M/S WALTER BUSHNELL BIO HEALTH P LTD, ONE OF THE MARKETING COMPANIES. FURTHER THE LD CIT(A) HAS EXAMINED THE BILL DATED 29 - 02 - 2008 SUBMITTED BY THE ABOVE SAID MARKETING COMPANY AND NOTICED THAT THE BILLS HAVE BEEN RAISED TOWARDS SALARY AND TRAVELLING EXPENSES AND CONVEYANCE EXPENSES. HE HAD ALREADY NOTICED THAT THE MARKETING COMPANY HAS DEDUCTED TAX AT SOURCE FROM THE SALARY PAYMENTS. ACCORDINGLY, THE LD CIT(A) HAS GIVEN A FINDING THAT THE ASSESSEE HAS ONLY REIMBU RSED ACTUAL EXPENSES OVER AND OVER THE COMMISSION PAID TO THE MARKETING COMPANIES. FURTHER THE REIMBURSEMENTS DID NOT HAVE ANY INCOME ELEMENT. ACCORDINGLY THE LD CIT(A) HELD THAT SUCH KIND OF REIMBURSEMENTS DOES NOT REQUIRE DEDUCTION OF TAX AT SOURCE AND ACCORDINGLY DELETED THE ADDITION MADE U/S 40(A)(IA) OF THE ACT. THE LD CIT(A) PLACED RELIANCE ON THE DECISION RENDERED IN THE CASE OF MAHINDRA & MAHINDRA LTD VS. DCIT (122 TTJ (MUM) 577)(SB) AND HOST OF OTHER DECISIONS. 8. BEFORE US, THE LD A.R PLAC ED RELIANCE ON THE DECISION RENDERED BY THE HONBLE HIGH COURT OF BOMBAY IN THE CASE OF CIT - II VS. OCB ENGINEERS (2013)(32 TAXMANN.COM 271), WHEREIN THE HONBLE BOMBAY HIGH COURT HAS HELD THAT THE REIMBURSEMENT OF SALARY EXPENSES OF EMPLOYEES TO THE SISTER CONCERN, M/S. MARTIN & HARRIS LABORATORIES LIMITED 4 WHO WERE DEPUTED BY THE SISTER CONCERN TO THE ASSESSEE DOES NOT REQUIRE DEDUCTION OF TAX AT SOURCE AND HENCE THERE IS NO OCCASION TO INVOKE THE PROVISIONS OF SEC. 40(A)(IA) OF THE ACT. HE ALSO PLACED RELIANCE ON THE DECISION RENDERED BY THE CO - O RDINATE BENCH OF TRIBUNAL IN THE CASE OF ACIT VS. KARMA ENERGY LTD (2012)(19 ITR (TRIB) 552)(33 CCH 0391), WHEREIN ALSO IT HAS BEEN HELD THAT THE REIMBURSEMENT OF EXPENSES SHALL NOT ATTRACT LIABILITY TO DEDUCT TAX AT SOURCE AND HENCE NO DISALLOWANCE U/S 40 (A)(IA) FOR NON - DEDUCTION OF TAX AT SOURCE IS REQUIRED. THE LD A.R SUBMITTED THAT THE ABOVE SAID DECISION OF THE TRIBUNAL HAS SINCE BEEN UPHELD BY THE HONBLE BOMBAY HIGH COURT REPORTED IN 375 ITR 264, WHEREIN THE HONBLE HIGH COURT HAS HELD THAT THE DOES NOT GIVE RISE TO ANY SUBSTANTIAL QUESTION OF LAW. 9. ON THE CONTRARY, THE LD D.R PLACED HEAVY RELIANCE ON THE ORDER PASSED BY THE AO. 10. HAVING HEARD THE RIVAL CONTENTIONS, WE ARE OF THE VIEW THAT THE ORDER PASSED BY LD CIT(A) DOES NOT CALL FOR INTERFERENCE. WE NOTICE THAT MAJOR PART OF REIMBURSEMENTS CONSISTED OF SALARIES PAID TO THE SALES REPRESENTATIVES AND REIMBURSEMENT OF TRAVELLING EXPENSES. THE LD CIT(A) HAS GIVEN A FINDING THAT THE MARKETING COMPANIES HAVE DEDUCTED TAX AT SOURCE FROM TH E SALARY PAYMENTS AND THE TRAVELLING AND CONVEYANCE EXPENSES DO NOT REQUIRE TAX DEDUCTION AT SOURCE. FURTHER, WE MAY GAINFULLY REFER TO THE DECISION RENDERED BY HONBLE ALLAHABAD HIGH COURT IN THE CASE OF VECTOR SHIPPING SERVICES (P) LTD (ITA NO.122 OF 2 013 DATED 09 - 07 - 13). IN THE CASE BEFORE THE HONBLE ALLAHABAD HIGH COURT, THE ASSESSEE THEREIN ENGAGED SERVICES OF ANOTHER COMPANY. THE OTHER COMPANY PAID SALARIES TO THE EMPLOYEES AND CLAIMED THE SAME AS REIMBURSEMENT FROM THE ASSESSEE COMPANY. THE OTH ER COMPANY ALSO DEDUCTED TAX AT SOURCE FROM THE SALARIES SO PAID. THE REVENUE TOOK THE VIEW THAT THE ASSESSEE SHOULD DEDUCT TAX AT SOURCE FROM THE REIMBURSEMENT OF SALARIES SO MADE AND ACCORDINGLY M/S. MARTIN & HARRIS LABORATORIES LIMITED 5 DISALLOWED THE CLAIM U/S 40(A)(IA) OF THE ACT. HOWEVER, T HE HONBLE ALLAHABAD HIGH COURT HELD THAT THE SALARIES, HAVING SUFFERED TAX AND THE CIRCUMSTANCES FOR REIMBURSEMENTS HAVING BEEN EXPLAINED, THERE IS NO REQUIREMENT OF INVOKING THE PROVISIONS OF SEC. 40(A)(IA) OF THE ACT. 11. THE FACTS PREVAILING IN T HE INSTANT CASE, IN OUR VIEW, IS IDENTICAL IN NATURE. THERE IS AN AGREEMENT BETWEEN THE ASSESSEE AND THE MARKETING COMPANIES. THE MARKETING COMPANIES ARE ENTITLED TO COMMISSION FOR THE SALES GENERATED BY THEM. AS PER THE AGREEMENT, THE MARKETING COMPANI ES ARE REQUIRED SUFFICIENT NUMBER OF EMPLOYEES FOR EFFECTIVELY MARKETING THE PRODUCTS. AS PER THE AGREEMENT, THE SALARY EXPENSES, TRAVELLING AND CONVEYANCE EXPENSES ETC. INCURRED BY THE MARKETING COMPANIES ARE REQUIRED TO BE REIMBURSED BY THE ASSESSEE COM PANY. THUS, THE REASON AS TO WHY THE EXPENSES WERE REIMBURSED BY THE ASSESSEE COMPANY TO THE MARKETING COMPANIES ARE SUFFICIENTLY EXPLAINED. THE LD CIT(A) HAS GIVEN A FINDING THAT THE MARKETING COMPANIES HAVE DEDUCTED TAX AT SOURCE FROM THE SALARY PAYMENT S. THUS THE EXPENSES WHICH HAVE BEE N REIMBURSED BY THE ASSESSEE HAVE ALREADY SUFFERED TAX DEDUCTION AT SOURCE AT THE END OF THE MARKETING COMPANIES. HENCE, WE ARE OF THE VIEW THAT THOUGH THE CHARACTER OF MARKETING EXPENSES ARE IN THE NATURE OF REIMBURSEM ENT OF EXPENSES, YET THE SAME HAS ALREADY SUFFERED TAX AT SOURCE, I.E., THE MARKETING COMPANIES HAVE DEDUCTED TAX AT SOURCE FROM THE SAID PAYMENTS. ACCORDINGLY, WE ARE OF THE VIEW THAT THERE IS NO REQUIREMENT OF INVOKING THE PROVISIONS OF SEC. 40(A)(IA) O F THE ACT IN THE HANDS OF THE ASSESSEE AS PER THE DECISION OF HONBLE ALLAHABAD HIGH COURT RENDERED IN THE CASE OF VECTOR SHIPPING SERVICES (P) LTD (SUPRA). IT IS NOT THE CASE OF THE ASSESSING OFFICER THAT OTHER EXPENSES INCURRED BY THE MARKETING COMPANI ES REQUIRE TAX DEDUCTION. V ARIOUS CASE LAWS RELIED UPON BY THE ASSESSEE HAS TAKEN THE VIEW THAT THE REIMBURSEMENT OF EXPENSES DOES NOT REQUIRE TAX DEDUCTION AT SOURCE. M/S. MARTIN & HARRIS LABORATORIES LIMITED 6 12. IN VIEW OF THE FOREGOING DISCUSSIONS, WE ARE OF THE VIEW THAT THE DECISION REN DERED BY LD CIT(A) ON THIS ISSUE DOES NOT CALL FOR ANY INTERFERENCE. ACCORDINGLY WE UPHOLD THE SAME. 13. IN THE RESULT, BOTH THE APPEALS FILED BY THE REVENUE ARE DISMISSED. ORDER HAS BEEN PRONOU NCED IN THE OPEN COURT ON 25. 5 .2016 . SD/ - SD/ - (AMIT SHUKLA ) (B.R.BASKARAN ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED : 25 / 5 /20 1 6 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./ASSTT. REGISTRAR) ITAT, MUMBAI PS