M/s. Corwis Pharmaceuticals Ltd., Delhi V. ITO, New Delhi

ITA 5182/DEL/2013

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7395 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 1 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-10-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 30-07-2014
• Assessment Year: 2010-2011
• Appeal Filed On: 12-09-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PARWINDER KAUR
• Keywords: Diversion of income; Earning of tax free income; Fair market value; Avoidance of tax; Commercial expediency
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : B NEW DELHI BEFORE SHRI I.C. SUDHIR, JM AND SHRI J.SUDHAKAR REDDY, AM ITA NO. 5182 /DEL/201 3 AY : - 20 10 - 11 CORWIS PHARMACEUTICALS LTD. VS. ITO, WARD 3(4) 201, MOHAN PLACE NEW DELHI LSC, C BLOCK, SARASWATI VIHAR DELHI PAN: AA CCC 9522 E (APPELLANT) APPELLANT BY : SHRI ANIL JAIN, C.A. RESPONDENT BY : S MT. PARWINDER KAUR, SR. D.R. O R D E R PER J.SUDHAKAR REDDY, ACCOUNTANT MEMBER THIS APPEAL IS FILED BY THE ASSESSEE DIRECTED AGAINST THE ORDER OF LD.CIT(A) - VI, NEW DELHI DT. 24.7.2013 PERTAINING TO THE AY 2010 - 11. 2. FACTS OF THE CASE: - THE ASSESSEE IS A PUBLIC LIMITED COMPANY ENGAGED IN THE BUSINESS OF TRADING IN PHARMACEUTICAL PRODUCTS. IT IS A 100% SUBS IDIARY OF M/S AKUMS DRUGS AND PHARMACEUTICALS LTD. (HEREINAFTER REFERRED TO AS M/S AKUMS ). IT FILED ITS RETURN OF INCOME ON 28.9.2010 DECLARING INCOME OF RS.4,06,340/ - . THE AO DURING THE COURSE OF SCRUTINY PROCEEDINGS NOTICED THAT THE ASSESSEE HAS PAI D INTEREST OF RS.54,43,817/ - TO M/S AKUMS, PURSUANT TO AN AGREEMENT DT. 13.3.2007. AS PER THE TERMS OF THE AGREEMENT, THE ASSESSEE WAS REQUIRED TO MAKE PAYMENTS TO M/S AKUMS WITHIN 30 DAYS OF SUPPLY, OTHERWISE INTEREST @ 12% P.A. WAS PAYABLE FOR DELAYED P AYMENTS. 2.1. THE AO WAS OF THE VIEW THAT THE INTEREST PAYMENT WAS EXCESSIVE AND UNREASONABLE HAVING REGARD TO THE NATURE OF THE BUSINESS OF THE ASSESSEE. A SHOW CAUSE NOTICE WAS ISSUED TO THE ASSESSEE. THE ASSESSEE REPLIED AS FOLLOWS: - ITA 5182/DEL/2013 AY 2010 - 11 CORWIS PHARMACEUTICALS LTD., DELHI 2 1. AKUMS WAS A D EPENDABLE SOURCE BECAUSE MOST OF THE MULTINATIONALS AND BIG PHARMA COMPANIES DO GET THEIR GOODS MANUFACTURED FROM AKUMS. 2. COMPANY HAS PLACED ORDER FOR MANUFACTURING OF MEDICINES FOR SMALL QUANTITY. NO OTHER MANUFACTURER HAS GENERALLY AGREED TO MANUFACTU RE SUCH SMALL QUANTITY. 3. IT WAS NOT POSSIBLE FOR THE ASSESSEE TO GET THE GOODS MANUFACTURED WITHOUT A CREDIT PERIOD OF 30 DAYS AS NO WORKING CAPITAL FUNDS WERE AVAILABLE WITH THE COMPANY. OTHER MANUFACTURER WAS NOT PREPARED TO MANUFACTURE GOODS ON CREDI T. 4. AKUMS WAS FACILITATING LIQUIDITY OF FUND FOR THE ASSESSEE COMPANY. 2.2. AFTER CONSIDERING THE EXPLANATION , THE AO IN HIS ORDER PASSED U/S 143(3) DT. 31.1.2013 HELD AS FOLLOWS. (A) OUT OF 4 UNITS MANUFACTURING PHARMACEUTICALS OF M/S AKUMS, TWO UNITS, F ROM WHICH ASSESSEE MADE PURCHASES DURING THE YEAR WERE LOCATED IN SPECIAL CATEGORY STATES SUCH AS UTTARAKHAND AND WERE ELIGIBLE FOR DEDUCTION U/S 80IC AND HAD CLAIMED DEDUCTION OF RS.47.27 CRORES AND RS.49.55 CRORES RESPECTIVELY. THE OTHER TWO UNITS HAD INCURRED HUGE LOSS OF RS.5.15 CRORES. (B) THIS IS A CLEAR CASE OF DIVERSION OF INCOME TO AVOID PAYMENT OF TAXES AND BY THIS ARRANGEMENT THE ASSESSEE REDUCED ITS TAX LIABILITY BY DIVERTING PROFITS TO M/S AKUMS WHICH HAD EXEMPT INCOME. (C) ELEMENT OF COLLUSION CA NNOT BE RULED OUT AND COMMERCIAL EXPEDI ENCY IN THIS CASE IS CERTAINLY DOUBTFUL , SPECIFICALLY WHEN THE SURROUNDING CIRCUMSTANCES INDICATE THAT THE DEAL IS NOT MADE AT ARM S LENGTH. (D) HE CONCLUDED THAT THE PAYMENT OF INTEREST IS CLEARLY HIT BY THE PROVISION S OF S.40 A(2) . 3. ON APPEAL THE FIRST APPELLATE AUTHORITY UPHELD THE ORDER OF THE AO BY HOLDING THAT THE AO HAS EXERCISED HIS JUDGEMENT IN A REASONABLE AND FAIR MANNER AS THE PROVISIONS ARE MEANT TO ENCOUNTER EVASION AND AVOIDANCE OF TAXES THROUGH EXCESS IVE OR UNREASONABLE PAYMENTS TO RELATIVES OR ASSOCIATED CONCERNS. THE ASSESSEE ENJOYING CREDIT PERIOD OF 30 TO 90 DAYS DURING THE ORDINARY COURSE OF BUSINESS FROM ITS OTHER SUPPLIERS, AND HENCE THE AGREEMENT OF THE ASSESSEE WITH THE HOLDING COMPANY ITA 5182/DEL/2013 AY 2010 - 11 CORWIS PHARMACEUTICALS LTD., DELHI 3 ALL OWING CREDIT OF 30 DAYS IS NOT EXPLAINED. HE HELD THAT THIS FACT AUTOMATICALLY LIMITS THE CLAIM OF THE ASSESSEE. 4. AGGRIEVED THE ASSESSEE IS IN APPEAL BEFORE US ON THE FOLLOWING EFFECTIVE GROUND. THAT ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE AND THE PROVISIONS OF THE LAW, THE LD.CIT(A) HAS ERRED IN SUSTAINING THE DISALLOWANCE OF THE INTEREST OF RS.54,43,817/ - U/S 40A(2)(B) OF I.T.ACT PAID TO HOLDING COMPANY. 5. WE HAVE HEARD MR.ANIL JAIN, THE LD.COUNSEL FOR THE ASSESSEE AND SMT. PARWINDER KAUR , LD.SR.D.R. ON BEHALF OF THE REVENUE. 6. MR.ANIL JAIN, THE LD.COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE DISALLOWANCE U/S 40 A(2)(B) HAS TO BE MADE WITH REGARD TO FAIR MARKET VALUE KEEPING IN MIND THE LEGITIMATE NEEDS OF BUSINESS. HE RELIED ON THE WORD ING OF S.40A(2)(B) AND SUBMITTED THAT THE AO HAS NOT DETERMINED THAT PORTION OF THE EXPENDITURE, WHICH IS CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE. HE CONTENDED THAT THE AO HAS NOT BROUGHT OUT ANY COMPARABLE CASE. HE CONTENDED THAT THE AGREEME NT BETWEEN THE ASSESSEE AND M/S AKUMS IS A GENUINE BUSINESS AGREEMENT AND THE ASSESSEE WAS PROVIDED WITH WORKING CAPITAL NEEDS BY M/S AKUMS FOR WHICH THE ASSESSEE INCURRED COST FOR WORKING CAPITAL. HE SUBMITTED THAT THE ASSESSEE HAS NOT OBTAINED ANY LOANS OR FACILITIES FROM BANKS OR OTHER ASSOCIATES. 6.1. HE SUBMITTED THAT PAYMENT OF INTEREST TO M/S AKUMS WAS MADE @ 12% P.A. I.E. THE BANK RATE AVAILABLE AT THAT TIME FOR THE REASON THAT IF THE ASSESSEE HAD RECEIVED FINANCE FROM OUTSIDE PARTIES, IT WOULD B E LIABLE TO MAKE PAYMENT OF INTEREST AT A HIGHER RATE IN ADDITION TO GIVING SECURITIES. HE FURNISHED A CHART TO DEMONSTRATE THAT THE OTHER SUPPLIERS OF THE ASSESSEE COMPANY WERE PAID PROMPTLY AND WHEREAS PAYMENTS DUE TO M/S AKUMS WERE DELAYED. HE POINTE D OUT THAT PAYMENTS TO OTHER ITA 5182/DEL/2013 AY 2010 - 11 CORWIS PHARMACEUTICALS LTD., DELHI 4 SUPPLIERS WAS MADE WITHIN 20 TO 30 DAYS FROM DUE DATE OF BILLS AND WHERE AS THE IN CASE OF AKUMS, PAYMENTS WERE MADE AFTER A LAPSE OF SIX MONTHS FROM THE DUE DATE. HE SUBMITTED THAT THE RATE IS REASONABLE AND THAT THERE WAS NO ENQUIRY BY THE AO THAT THERE WAS EXCESSIVE AND UNREASONABLE PAYMENT. HE SUBMITTED THAT THE TRANSACTION IS AT ARM S LENGTH AND JUST BECAUSE THE ASSESSEE ENJOYED DIFFERENT CREDIT TERMS FROM DIFFERENT SUPPLIERS, IT DOES NOT MEAN THAT THE PAYMENT WAS NOT AT ARM S LENGTH. 7. SMT.PARWINDER KAUR, LD.SR.D.R. ON THE OTHER HAND OPPOSED THE CONTENTIONS AND SUBMITTED THAT THE PAYMENTS WERE COLLUSIVE IN NATURE. SHE POINTED OUT THAT THAT THE HOLDING COMPANY I.E. M/S AKUMS WAS A TAX EXEMPT COMPANY AND THE ASSESSEE DRAINED ITS PROFITS TO ITS PARENT COMPANY AND THUS AVOIDED PAYMENT OF TAXES. SHE RELIED ON THE ORDER OF THE AO AS WELL AS T HE LD.CIT(A) AND SUBMITTED THAT THE TERMS OF CREDIT OF THE PARENT COMPANY AS AN INDEPENDENT SUPPLIER WERE AT VARIANCE AND THIS DEMONSTRATE THAT THE PAYMENTS WERE NOT AT ARM S LENGTH. SHE ARGUED THAT THE PARENT COMPANY WAS PAID INTEREST @ 18% WHERE AS IT H AD TAKEN LOAN @ 12%. SHE POINTED OUT THAT THE LD.CIT(A) AT PARA 5.7 HAD STATED AS TO HOW THE PAYMENTS WERE EXCESSIVE AND UNREASONABLE AS COMPARED TO COMPETING SUPPLIERS. 8. THE LD.COUNSEL FOR THE ASSESSEE IN HIS REJOINDER SUBMITTED THAT THOUGH THE AGREE MENT WAS TO PAY INTEREST @ 18% THE PARENT COMPANY HAS CHARGED ONLY 12%. HE DREW THE ATTENTION OF THE BENCH TO THE ANNUAL ACCOUNTS OF THE PARENT COMPANY WHICH WERE PART OF THE PAPER BOOK AND SUBMITTED THAT THE PARENT COMPANY HAD TAKEN LOANS FROM BANKS AND WAS SERVICING THE LOANS @ 12%. HE POINTED OUT THAT THE BANK BORROWINGS FOR WORKING CAPITAL LIMITS OF M/S AKUMS WAS RS.67.09 CRORES AND THE INTEREST OUT FLOW WAS RS.6.53 CRORES. HE FURTHER POINTED OUT THAT THE SECURED LOANS FROM M/S AKUMS WAS RS.91.24 CR ORES. THUS HE SUBMITTED THAT THE ASSESSEE WAS RIGHTLY CHARGED INTEREST @ 12% P.A. ITA 5182/DEL/2013 AY 2010 - 11 CORWIS PHARMACEUTICALS LTD., DELHI 5 9. RIVAL CONTENTIONS HEARD. ON A CAREFUL CONSIDERATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND PERUSAL OF PAPERS ON RECORD AND ORDERS OF THE LOWER AUTHORITIES AND CASE LAWS CITED, WE HOLD AS FOLLOWS. 10. THE DISALLOWANCE IS MADE U/S 40 A(2)(B) FOR THE FOLLOWING REASONS. (I) THIS IS A CLEAR CASE OF DIVERSION OF INCOME TO AVOID PAYMENT OF TAX; (II) IT IS AN ARRANGEMENT BETWEEN TWO CLOSE ASSOCIATES WITH A VIEW TO DIVERT TAXAB LE INCOME FROM ONE CONCERN TO ANOTHER WITH AN OBJECTIVE OF REDUCING TAX LIABILITY; (III) COMMERCIAL EXPEDIENCY IS NOT PROVED AND THE SURROUNDING CIRCUMSTANCES INDICATE THAT THE PAYMENT IS NOT AT ARM S LENGTH. 10.1. IT IS NOT DISPUTED THAT THE PARENT COMPANY M/S AKUMS HAS SECURED LOANS OF RS.91.24 CRORES, OUT OF WHICH BANK BORROWINGS FOR WORKING CAPITAL IS RS.67.09 CRORES. IT IS ALSO NOT IN DISPUTE THAT THE PARENT COMPANY IS PAYING RS.3,60,54,559/ - AS INTEREST ON WORKING CAPITAL FROM BANK. THE TOTAL INTERES T OUTFLOW IS RS.6,53,28,884/ - . 10.2. ON THE OTHER HAND THE INTEREST INCOME OF M/S AKUMS IS RS.2,65,47,691/ - OUT OF WHICH THE INCOME FROM THE ASSESSEE IS RS.54,43,817/ - . IT IS ALSO A FACT THAT THE ASSESSEE DOES NOT HAVE ANY BORROWINGS FROM ANY OTHER SOURCE EXCEPT FOR THE CREDIT LINE EXTENDED BY THE SUPPLIER. 10.3. ON THESE FACTS AND CIRCUMSTANCES, WE ARE OF THE CONSIDERED OPINION THAT THE CONCLUSION DRAWN BY THE REVENUE AUTHORITIES THAT NO INTEREST WHATSOEVER IS PAYABLE BY THE SUBSIDIARY TO THE PA RENT COMPANY FOR THE CREDIT LINE EXTENDED BY IT FOR SUPPLIES MADE IS DEVOID OF MERIT. WHEN THE PARENT COMPANY HAS BORROWED FUNDS FOR WORKING CAPITAL AND HAS BEEN PAYING INTEREST, IT IS ENTITLED TO CHARGE REASONABLE INTEREST FOR THE CREDIT EXTENDED OR OF FERED BY IT. THUS, THE DISALLOWANCE ON THE GROUND OF COMMERCIAL EXPEDIENCY CANNOT BE UPHELD BY US. ITA 5182/DEL/2013 AY 2010 - 11 CORWIS PHARMACEUTICALS LTD., DELHI 6 11. COMING TO THE OTHER ISSUE OF REASONABLE OF THE PAYMENT, THE ASSESSEE SUBMITTED THAT THE INTEREST CHARGED IS @ 12% THOUGH THE AGREEMENT PROVIDES FOR C HARGING OF INTEREST @ 18%. IN OUR VIEW THE RATE IS INTEREST @ 12% IS REASONABLE. 12. THIS LEAVES US WITH ONLY ONE MORE ASPECT RELATING TO CREDIT PERIOD. NO DOUBT THERE IS A VARIATION IN THE CREDIT PERIOD ALLOWED BY SUPPLIERS WHO ARE UNRELATED PARTIES TO THE ASSESSEE AND THE PARENT COMPANY OF THE ASSESSEE WHILE M/S AKUMS GRANTED CREDIT PERIOD OF 30 DAYS, CERTAIN OTHER COMPANIES LIKE CURE TEC H SKIN CARE, ULTRATEC H PHARMA GRANTED 75 DAYS OF CREDIT PERIOD ; AND MEDICAMEN ORGANIS LTD. GRANTED 90 DAYS CREDIT PERIOD. 12.1. AT THE SAME TIME WE OBSERVE THAT FIVE OTHER SUPPLIERS I.E. ENDOLABS HEALTHCARE PVT.LTD., GLIDE CHEM PVT.LTD., LIVE WELL FOO D PRODUCTS, RPG HEALTHCARE PVT.LTD. AND ZURICH HEALTH CARE HAVE A LSO ALLOWED CREDIT PERIOD OF 30 DAYS TO THE ASSESSEE. THUS ON AN ANALYSIS OF THE VARIOUS CREDIT PERIOD S ALLOWED BY DIFFERENT SUPPLIERS, WE CAN COME TO A CONCLUSION THAT 30 DAYS CREDIT PER IOD ALLOWED BY M/S AKUMS TO THE ASSESSEE CANNOT BE REJECTED AS UNREASONABLE OR EXCESSIVE. THUS WE ARE UNABLE TO UPHOLD THE FINDINGS OF THE AO AS CONFIRMED BY THE FIRST APPELLATE AUTHORITY. 13. COMING TO THE ALLEGATION ON DIVERSION OF TAXABLE INCOME, IT HAS TO BE UNDERSTOOD THAT THE PARENT COMPANY COULD HAVE SOLD ITS GOODS DIRECTLY TO CUSTOMERS, INSTEAD OF FLOATING A S UBSIDIARY WHOSE INCOME IS NOT EXEMPT FROM TAX IF AT ALL THE OBJECTIVE WAS TO SAVE TAXES. JUST BECAUSE THE HOLDING COMPANY HAS CERTAIN TAX BENEFITS, IT CANNOT BE CONCLUDED THAT THE INTEREST LEVIED ON CREDIT PERIODS ALLOWED FOR SUPPLIERS, IS DONE WITH AN OBJECTIVE OF DIVERTING TAXABLE INCOME FROM ONE ENTITY TO ANOTHER ENTITY. WE ALSO OBSERVE THAT THE AO OR THE LD.CIT(A) HAVE NOT COME OUT WIT H ANY COMPARABLE CASES SO AS TO ENABLE US TO COME TO A CONCLUSION THAT SUCH PAYMENT OF INTEREST FOR DELAYED REMITTANCES OF SALE PROCEEDS IS CONTRARY TO TRADE PRACTICES OR IS ITA 5182/DEL/2013 AY 2010 - 11 CORWIS PHARMACEUTICALS LTD., DELHI 7 UNREASONABLE AND EXCESSIVE. IN FACT M/S AKUMS HAS RECEIVED INTEREST FROM OTHER ENTITIES ALSO. 13.1. IN VIEW OF THE ABOVE DISCUSSION, WE ARE OF THE CONSIDERED OPINION THAT THE DISALLOWANCE IN QUESTION IS BAD IN LAW. 14. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH OCTOBER ,2014. SD/ - SD/ - ( I.C. SUDHIR ) (J.SUDHAKAR REDDY) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: THE 29 TH OCTOBER , 2014 *MANGA COPY OF THE ORDER FORWARDED TO: 1. APPELLANT; 2.RESPONDENT; 3.CIT; 4.CIT(A); 5.DR; 6.GUARD FILE BY ORDER ASST. REGISTRAR