DCIT, New Delhi V. M/s. Ozone Pharmaceuticals Ltd., New Delhi

ITA 556/DEL/2016

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 3757 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-02-2020
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Assessment Year: 2011-2012
• Appeal Filed On: 03-02-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: DR RAKESH GUPTA
• Keywords: Business income; Transfer pricing; Earning of tax free income; Fair market value; Commercial expediency; Rule 8D
• Section: 14A; 80IC; 80IC

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH D, NEW DELHI BEFORE SH. AMIT SHUKLA, JUDICIAL MEMBER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER ITA NO. 556/DEL/2016 : ASSTT. YEAR : 2011-12 DCIT, CIRCLE-19(1), NEW DELHI VS M/S OZONE PHARMACEUTICALS LTD., BLOCK A-3, 1, LSC, JANAKPURI, NEW DELHI-110058 (APPELLANT) (RESPONDENT) PAN NO. AAACP0056H ASSESSEE BY : DR. RAKESH GUPTA, ADV. REVENUE BY : SH. ARUN KUMAR YADAV, SR. DR DATE OF HEARING: 16.01.2020 DATE OF PRONOUNCEMENT: 28.02.2020 ORDER PER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER: THE PRESENT APPEAL HAS BEEN FILED BY THE REVENUE A GAINST THE ORDER OF THE LD. CIT(A)-7, NEW DELHI DATED 23.1 1.2015. 2. FOLLOWING GROUNDS HAVE BEEN RAISED BY THE REVENU E: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LD. CIT(A) HAS ERRED IN LAW IN DELETING THE ADDITION OF RS.6,25,414/- SINCE THE ASSESSEE IS NOT ENTITLED TO CLAIM DEDUCTION U/S 80IC ON THE PRODUCT S WHICH ARE BEING MANUFACTURED BY OTHER COMPANY WITHOUT APPRECIATING THE FACTS THAT THE ASSESSEE HA S FAILED TO SUBMIT THE DETAILS MATERIAL WITH EVIDENCE . 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION O F RS.1,08,92,321/- MADE ON ACCOUNT OF 'SALE PROMOTION EXPENSES' WITHOUT APPRECIATING THE FACTS THAT THE ASSESSEE HAS FAILED TO SUBMIT THE DETAILS MATERIAL WITH EVIDENCE. ITA NO. 556/DEL/2016 OZONE PHARMACEUTICALS LTD. 2 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.35,23,254/- MADE ON ACCOUNT OF 'SALE PROMOTION EXPENSES' CLAIMED IN THE NAME OF SISTER CONCERNS' WITHOUT APPRECIATING THE FACTS THAT THE ASSESSEE HA S NOT ESTABLISHED THAT THE EXPENDITURE ON SALE PROMOTION WITH REFERENCE TO THE FAIR MARKET VALUE O F SERVICES FOR WHICH THE PAYMENT HAS BEEN MADE TO SISTER CONCERN OF THE ASSESSEE. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A)HAS ERRED IN LAW AND IN DELETING THE DISALLOWANCE OF RS.5,92,303/- OUT OF THE TOTAL DISALLOWANCE OF RS.6,16,593/- MADE BY AO U/S 14A R.W.R. 8D(2)(II) BY IGNORING THE MANDATORY PROVISIO NS OF SUB-RULE 2 OF RULE 8D R.W.S. 14A OF THE INCOME T AX ACT, 1961. DEDUCTION U/S 80IC: 3. THE ASSESSEE COMPANY HAS DISCLOSED SALES OF RS.51,39,96,470/- AT ITS GUWAHATI UNIT AND PROFIT T HEREFROM HAS BEEN CLAIMED AS EXEMPT U/S 80IC AT RS.1,25,68,495/- . THE ASSESSING OFFICER ON PERUSAL OF DETAILS OF PURCHASE S OF RS.2,55,76,711/- FROM M/S OZONE AYURVEDICS, A SISTE R CONCERN, ENQUIRED AS TO WHY DEDUCTION CLAIM ON TRADING ACTIV ITY FOR THE MEDICINES PURCHASED FROM M/S OZONE AYURVEDICS BE NO T DISALLOWED. THE ASSESSING OFFICER HELD THAT THE DED UCTION U/S 80IC CANNOT BE GRANTED FOR THE PROFIT DERIVED ON TH E PURCHASE AND SALE OF FINISHED PRODUCTS (TRADING GOODS). 4. BEFORE THE LD. CIT (A), IT WAS SUBMITTED THAT TH E TRADING GOODS WERE PURCHASED FOR THE BADDI UNIT AND NOT FOR THE GUWAHATI UNIT, ON WHICH THE CLAIM OF SECTION 80IC I S SOUGHT. THE LD. CIT (A) AFTER EXAMINATION OF THE P&L ACCOUN T OF THE ELIGIBLE UNIT HELD THAT THERE WAS NO TRADING ACTIVI TY UNDERTAKEN ITA NO. 556/DEL/2016 OZONE PHARMACEUTICALS LTD. 3 BY THE GUWAHATI UNIT. EVEN BEFORE US, DURING THE AR GUMENTS, THESE FACTS HAS NOT BEEN DISPUTED OR CONTROVERTED BY THE REVENUE. HENCE WE HEREBY HOLD THAT, SINCE THE TRADI NG GOODS HAVE BEEN PURCHASED BY THE NON-ELIGIBLE UNIT, THE D EDUCTION U/S 80IC FOR THE ELIGIBLE UNIT CANNOT BE ALTERED. APPEA L OF THE REVENUE ON THIS GROUND IS DISMISSED. SALES PROMOTION EXPENSES: 5. THE AO ADDED BACK AN AMOUNT RS.1,08,92,321/- REPRESENTING 7.5% OF EXPENSES CLAIMED ON THE TOTAL SALES PROMOTION AND INCENTIVES AMOUNTING TO RS.14,52,30,9 41/- CLAIMED IN THE P & L A/C. THE SAID DISALLOWANCE WA S MADE ON THE GROUND THAT BILLS/VOUCHERS RELATING TO THIS EXP ENSE WERE NOT FURNISHED FULLY AND THERE WAS FAILURE ON THE PART O F THE APPELLANT TO SUBSTANTIATE ITS CLAIM THAT THE SAID EXPENSE HAD YIELDED SUBSTANTIAL GROWTH IN THE BUSINESS OF THE APPELLANT COMPANY. THE AO HAS STATED THAT IN THE PAST SIMILAR DISALLOW ANCE HAS BEEN MADE ON THESE GROUNDS. THE LD. CIT (A) ON GOIN G THROUGH THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE HIM, NO TED THAT COMPLETE DETAILS IN RESPECT OF THESE EXPENSES WERE SUBMITTED BEFORE THE AO BY THE APPELLANT COMPANY. BEFORE US, THE LD. AR STATED THAT SINCE THE APPELLANT COMPANY IS IN THE B USINESS OF MANUFACTURING AND TRADING OF ALLOPATHIC MEDICINES I T REQUIRES VAST SALES PROMOTION ACTIVITY. IT WAS ARGUED THAT T HE AO HAS NOT POINTED OUT ANY SPECIFIC DEFECT IN BILLS/VOUCHERS P RODUCED BEFORE HIM. WE FIND THAT IT IS NOT THE CASE OF THE AO THAT THE EXPENSES CLAIMED IS NOT GENUINE OR INCURRED FOR NON BUSINESS PURPOSE. AS PER THE ASSESSMENT ORDER, THE APPELLANT WAS ASKED T O SHOW ITA NO. 556/DEL/2016 OZONE PHARMACEUTICALS LTD. 4 CAUSE AS TO WHY DISALLOWANCE SHOULD NOT BE MADE AT 10% OF THE EXPENSES CLAIMED. THE AO HOWEVER, DISALLOWED 7.5% O F THE EXPENSES CLAIMED FINALLY. THERE APPEARS TO BE NO GR OUND FOR AD- HOC DISALLOWANCE. THE SIMILAR DISALLOWANCE WAS DELE TED BY THE ITAT IN A. Y. 2006-07, AND AGAIN BY THE CIT(APPEALS ) FOR A. Y. 2008-09, 2009-10 & 2010-11. SINCE NO COGENT REASON IS PUT FORTH BY THE AO FOR THE DISALLOWANCE AND THE FACT T HAT THE APPELLANT HAS BEEN CONSISTENTLY ALLOWED RELIEF OVER THE YEARS, WE DO NOT FIND ANY REASON TO UPHOLD THE DISALLOWANC E. THE ADDITION OF RS. 1,08,92,321/- IS HEREBY ORDERED TO BE DELETED. APPEAL OF THE REVENUE ON THIS GROUND IS DISMISSED. DISALLOWANCE U/S 40A(2)(B): 6. IN ORDER TO HAVE A COMPREHENSIVE VIEW OF THE DIS ALLOWANCE MADE, THE RELEVANT PORTION OF THE ASSESSMENT ORDER IS REPRODUCED IN TOTO AS BELOW: 6.1 THE ASSESSEE COMPANY HAS CLAIMED SALES PROMOTI ON EXPENSES IN THE NAME OF ITS SISTER CONCERN DETAILED BELOW: I. M/S OZONE AYURVEDICS 2,11,25,462 II. M/S FOURTH DIMENSION MEDIA PVT. LTD. 1,10,78,100 III. M/S FOURTH DIMENSION IMC PVT. LTD. 30,00,000 IV. M/S OZONE MISSION 28,978 RS.3,52,32,540 6.2 THE ASSESSEE COMPANY WAS REQUIRED TO PROVE GENU INENESS OF THE EXPENSES AND ALSO AS TO WHETHER THE EXPENSES AR E ON ARMS LENGTH PRICE. IN COMPLIANCE THERETO THE ASSESSEE CO MPANY STATED THAT WE HAVE PURCHASED MAGAZINES FROM M/S FO URTH DIMENSION MEDIA PVT. LTD. AT MARKET RATE AND THE PA YMENTS TO OTHER PARTIES ALSO ON COMPARABLE MARKET RATES, THER EFORE, THE PROVISIONS OF SECTION 40A(2)(B) ARE NOT APPLICABLE IN THIS CASE. 6.3. I HAVE CONSIDERED ALL THE FACTS OF THE CASE, P LEA OF THE ASSESSEE AND OF THE VIEW THAT THE ASSESSEE HAS NOT PROVED THAT ITA NO. 556/DEL/2016 OZONE PHARMACEUTICALS LTD. 5 THE EXPENSES INCURRED FOR SALES PROMOTION IN THE NA ME OF SISTER CONCERNS ARE AT ARMS LENGTH PRICE, THEREFORE, THE PROVISIONS OF SECTION 40A(2)(B) ARE CLEARLY APPLICABLE IN THIS CA SE. AFTER CONSIDERING ALL THE FACTS OF THE CASE, PLEA OF THE ASSESSEE, 10% OF THE TOTAL EXPENSES OF RS.3,52,32,540/- WHICH COM ES AT RS.35,23,254/- ARE HEREBY DISALLOWED AND ADDED IN T HE TOTAL INCOME OF THE ASSESSEE COMPANY U/S 40A(2)(B) OF THE ACT. 7. THE LD. CIT (A) DELETED THE ADDITION ON THE GROU NDS THAT THE ASSESSING OFFICER HAS MERELY STATED THAT THE AP PELLANT HAS NOT PROVED THAT THE EXPENSES INCURRED FOR SALES PRO MOTION BY WAY OF TRANSACTION ENTERED WITH THE SISTER CONCERN WERE NOT AT ARMS LENGTH PRICE. THIS CANNOT BE SUFFICIENT GROUN D FOR MAKING DISALLOWANCE U/S 40A(2)(B) OF THE ACT. THE GENUINEN ESS OF THE PAYMENT IS NOT DOUBTED. THE LD. CIT (A) HELD THAT, IN EFFECT THERE IS NO FINDING TO CONCLUSIVELY ESTABLISH THAT THE PAYMENT MADE TO RELATED PARTIES WAS EXCESSIVE ARE UNREASONA BLE WITH REFERENCE TO THE FAIR MARKET VALUE OF THE SERVICES RECEIVED. 8. SECTION 40A(2)(B) READS AS UNDER: 40A. (1) THE PROVISIONS OF THIS SECTION SHALL HAVE EFFECT NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN ANY OTHER PROVISION OF THIS ACT RELATI NG TO THE COMPUTATION OF INCOME UNDER THE HEAD 'PROFITS A ND GAINS OF BUSINESS OR PROFESSION'. (2)(A) WHERE THE ASSESSEE INCURS ANY EXPENDITURE IN RESPECT OF WHICH PAYMENT HAS BEEN OR IS TO BE MADE TO ANY PERSON REFERRED TO IN CLAUSE (B) OF THIS SUB - SECTION, AND THE [ASSESSING] OFFICER IS OF OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVIN G REGARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVI CES OR FACILITIES FOR WHICH THE PAYMENT IS MADE OR THE LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF T HE ASSESSEE OR THE BENEFIT DERIVED BY OR ACCRUING TO H IM THEREFROM, SO MUCH OF THE EXPENDITURE AS IS SO CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION : ITA NO. 556/DEL/2016 OZONE PHARMACEUTICALS LTD. 6 [PROVIDED THAT [FOR AN ASSESSMENT YEAR COMMENCING ON OR BEFORE THE 1ST DAY OF APRIL, 2016] NO DISALLOWANCE, ON ACCOUNT OF ANY EXPENDITURE BEING EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE, SHALL BE MADE IN RESPECT OF A SPECIFI ED DOMESTIC TRANSACTION REFERRED TO IN SECTION 92BA, I F SUCH TRANSACTION IS AT ARM'S LENGTH PRICE AS DEFINE D IN CLAUSE (II) OF SECTION 92F.] (B) THE PERSONS REFERRED TO IN CLAUSE (A) ARE THE FOLLOWING, NAMELY : (I) WHERE THE ASSESSEE IS AN INDIVIDUAL ANY RELATI VE OF THE ASSESSEE; (II) WHERE THE ASSESSEE IS A COMPANY, FIRM, ASSOCIATION OF PERSONS OR HINDU UN- DIVIDED FAMILY ANY DIRECTOR OF THE COMPANY, PARTNER OF THE FIRM, OR MEMBER OF THE ASSOCIATION OR FAMILY, OR ANY RELATIV E OF SUCH DIRECTOR, PARTNER OR MEMBER; 9. WE HAVE GONE THROUGH THE FACTS OF THE CASE AND P ERUSED THE MATERIAL ON RECORD. 10. ELEMENTS OF COMMERCIAL EXPEDIENCY IN ACHIEVING THE LARGE TURNOVER AND EARNING A TAXABLE PROFIT CANNOT BE IGNORED WHIL E INVOKING THE PROVISIONS OF SECTION 40A (2)(B). IN THE INSTANT C ASE, THE PROVISIONS OF SEC. 40A (2)(B) OF THE ACT HAVE NOT BEEN COMPLIED B Y THE REVENUE TO THE EXTENT OF QUANTIFYING THE ELEMENT OF UNREASONABLE A ND EXCESSIVE NATURE OF EXPENSE IF ANY CLAIMED BY THE APPELLANT IN THE OPIN ION OF THE AO. THE 10% DISALLOWANCE ON THE ENTIRE EXPENSES HAS BEEN MADE O N THE SOLE CONSIDERATION THAT IT WAS ALLOWED TO ASSOCIATED CON CERNS, WHEREAS THE VALUE AND VOLUME OF EXPENSES MADE FROM THE ASSOCIAT ED CONCERNS WAS A VERY MINOR PART CONSIDERING THE TOTAL VOLUME OF EX PENSES. PAYMENT CANNOT BE DISALLOWED U/S 40A (2)(B) MERELY BECAUSE IT WAS MADE TO A RELATED PERSON, MERELY BECAUSE A PAYMENT IS MADE TO A RELATED PERSON IT CANNOT BE UNDERSTOOD AS BEING NON GENUINE OR THAT I S EXCESSIVE OR ITA NO. 556/DEL/2016 OZONE PHARMACEUTICALS LTD. 7 UNREASONABLE. IN THE ABSENCE OF SUCH FINDING IN THI S REGARD, THE PAYMENT COULD NOT BE DISALLOWED. [SHREE CONSTRUCTION & INVE STMENT CO. VS. ASST. CIT (2003) 262 ITR 73(GUJ)] THERE IS NO DOUBT AS TO THE JUDICIAL PROPOSITION AS TO WHETHER THE PAYMENT IS EXCESSIVE OR REASONABLE IS A QUESTION OF FACT. HOWEVER, THE FACT OF EXCESSIVE OR REASONABLE IS REQUIRED TO BE ESTABLISHED ONLY BY FINDING OUT AS TO WHAT WO ULD BE REASONABLE AMOUNT FOR THE SERVICES OBTAINED. IT WAS FOR THE AO TO DISPUTE THE CLAIM ON SOME COGENT EVIDENCE AND MATERIAL WHICH HAS NOT BEEN DONE BY HIM. 11. AS PER THE PROVISIONS OF SECTION 40A(2)(A), SOM E JUSTIFICATION ON THE BASIS OF COMPARABLES AND BENCH MARKING IS REQUIRED TO PROVE THE EXISTENCE AND QUANTIFY THE UNREASONABLENESS OF THE EXPENSES T O BE CONSIDERED FOR DISALLOWANCES. THE AO DID NOT ASCERTAIN FAIR MARKET VALUE (F.M.V.) OF THE SERVICES AND OTHER CONNOTATIONS TO ESTABLISH THAT A PPELLANT HAS PAID UNREASONABLE AMOUNT AND QUANTUM OF PAYMENT DOES NOT COMMENSURATE WITH THE SERVICES RENDERED. THE INTENTION BEHIND TH E PROVISION OF SECTION 40A(2)(A) IS TO PREVENT THE INTENTIONAL REDUCTION I N TAX LIABILITY BY CERTAIN ASSESSEES BY DIVERTING BUSINESS PROFITS TO CLOSE R ELATIVES AND CONCERNS IN THE FORM OF EXCESSIVE PAYMENTS FOR GOODS AND SERVIC ES RECEIVED. THE FACTS AND CIRCUMSTANCES OF THE CASE DOES NOT INDICATE ANY SUCH TAX EVASION PLAN. 12. HENCE RELYING ON THE JUDICIAL PRONOUNCEMENTS DI SCUSSED ABOVE AND ALSO BECAUSE THE NATURE OF TRANSACTION IS GENUINE A ND IN THE ABSENCE OF ANY REVENUE LOSS AND IN THE ABSENCE OF DETERMINATIO N OF FMV BY THE ASSESSING OFFICER, THE DISALLOWANCES MADE IS DIRECT ED TO BE DELETED. APPEAL OF THE REVENUE ON THIS GROUND IS DISMISSED. ITA NO. 556/DEL/2016 OZONE PHARMACEUTICALS LTD. 8 DISALLOWANCE U/S 14A: 13. THE ASSESSEE MADE INVESTMENTS TO THE TUNE OF RS.85,15,314/- AGAINST WHICH DISALLOWANCE OF RS.6,1 6,593/- HAS BEEN MADE BY THE ASSESSING OFFICER. THE RECORDS REV EAL THAT THE ASSESSEE HAS EARNED EXEMPT INCOME OF RS.21,290/- ON LY. HENCE, KEEPING IN VIEW THE JUDGMENT OF HONBLE JURISDICTIO NAL HIGH COURT IN THE CASE OF CHEMINVEST LTD. V. CIT (2015) 378 ITR 33 (DELHI), WE HEREBY RESTRICT THE DISALLOWANCE TO THE AMOUNT OF EXEMPT INCOME EARNED. APPEAL OF THE REVENUE ON THIS GROUND IS DISMISSED. 14. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 28/02/2020. SD/- SD/- (AMIT SHUKLA) (DR. B. R. R. KUMAR) JUDICIAL MEMBER ACCOUNT ANT MEMBER DATED: 28/02/2020 *SUBODH* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR