ASST CIT 9(2)(1), MUMBAI V. CHIRON BEHRING VACCINES P.LTD, MUMBAI

ITA 5579/MUM/2015

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 8791 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-11-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2006-2007
• Appeal Filed On: 10-12-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: ASHWINI BHOSALE
• Keywords: Bad and doubtful debts; Royalty expenses

Judgement Text

, , , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, C MUMBAI , , , BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER, AND SHRI RAJESH KUMAR, ACCOUNTANT MEMBER ITA NO.5579/MUM/2015 ASSESSMENT YEAR: 2006-07 ACIT-9(2)(1) R. NO.665A 6 TH FLOOR, AAYAKAR BHAVAN, M. K. ROAD, MUMBAI-400020 / VS. M/S CHIRON BEHRING VCACCINES PVT. LTD. 501, SHRI AMBA SHANTI CHAMBERS, ANDERI KURLA ROAD, ANDHERI EAST, MUMBAI-400059 ( / REVENUE) ( !' # /ASSESSEE) PAN. NO. AAACC6494P $ % # & / DATE OF HEARING : 01/11/2017 % # & / DATE OF ORDER: 01/11/2017 ! / REVENUE BY SHRI RAJAT MITTAL-DR !' # ! / ASSESSEE BY MS. ASHWINI BHOSALE ITA NO. 5579/MUM/2015 CHIRON BEHRING VACCINES P. LTD. 2 / O R D E R PER JOGINDER SINGH (JUDICIAL MEMBER) THE REVENUE IS IN APPEAL, CHALLENGING THE IMPUGNED ORDER DATED 23/09/2015 OF THE LD. FIRST APPELLATE AUTHORI TY, MUMBAI, ALLOWING THE TDS AMOUNTING TO RS.66,80,794/ - ON PAYMENT OF ROYALTY PURSUANCE TO CONTRACTUAL OBLIGAT ION WITH NOVARTIS GMBH, IGNORING THAT THE PAYMENT WAS NOT EX PENDITURE OF THE ASSESSEE AND WAS NOT INCURRED FOR THE BUSINE SS OF THE ASSESSEE, THUS, THE DEDUCTION IS NOT ALLOWABLE IN R ESPECT OF TDS AND FURTHER ERRED IN HOLDING THAT SINCE, THE ASSESS EE COMPANY HAS PAID TAX LIABILITY OF FOREIGN COLLABORATOR, THE REFORE, IT CANNOT BE DISALLOWED U/S 40(A)(IA) OF THE ACT. 2. DURING HEARING, THE LD. DR, SHRI RAJAT MITTAL, RELIED UPON THE ASSESSMENT ORDER BY ADVANCING ARGUMENTS, W HICH IS IDENTICAL TO THE GROUND RAISED. ON THE OTHER HAND, MS. ASHWINI BHOSALE, LD. COUNSEL FOR THE ASSESSEE, CONTENDED TH AT THE IMPUGNED ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS BOBCARDS LTD. (2013) 56 SOT 232 (MUM.). THI S FACTUAL MATRIX WAS NOT CONTROVERTED BY THE REVENUE. ITA NO. 5579/MUM/2015 CHIRON BEHRING VACCINES P. LTD. 3 2.1. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IN VIEW O F THE ABOVE, WE ARE REPRODUCING HEREUNDER THE RELEVANT PORTION F ROM THE AFORESAID ORDER OF THE TRIBUNAL DATED 20/06/2012 FO R READY REFERENCE AND ANALYSIS:- THE REVENUE HAS FILED THESE THREE APPEALS FOR ASSE SSMENT YEARS 2003-04 TO 2005-06 AGAINST THE ORDERS OF LD. CIT(A)-4, MUMB AI. IN ALL THESE APPEALS, REVENUE HAS TAKEN COMMON GROUNDS EXCEPT TH AT AMOUNT OF DISALLOWANCES OF EXPENSES VARIES EACH YEAR. THEREFO RE, WE HEARD THESE APPEALS TOGETHER AND DISPOSE OFF THE SAME BY THIS C OMMON ORDER FOR THE SAKE OF CONVENIENCE AND BREVITY. 2. SINCE COMMON GROUNDS ARE INVOLVED IN ALL THESE APP EALS AND FACTS ARE IDENTICAL, WE SHALL TAKE UP ITA NO. 4882/M//2010 FO R A.Y. 2003-043 FOR OUR CONSIDERATION. 3. GROUND NO. 1 IS GENERAL IN NATURE AND DO NOT REQUI RE ANY SPECIFIC ADJUDICATION. 4. GROUND NO. 2 RELATES TO DISALLOWANCE OF BAD DEBTS AMOUNTING TO RS. 2,07,15,380/-. 5. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE A SSESSING OFFICER FOUND THAT IN THE PROFIT AND LOSS ACCOUNT, THE ASSE SSEE HAS DEBITED A SUM OF RS. 2,07,15,380/- ON ACCOUNT OF BAD DEBT. THE AO WAS OF THE OPINION THAT THE ASSESSEE COMPANY BEING A NON FINANCE COMPA NY, BAD DEBT COULD NOT BE ALLOWED FOLLOWING THE DECISIONS IN EARLIER A SSESSMENT YEARS AND THE AO DISALLOWED THE CLAIM OF RS. 2,07,15,380/-. 6. BEFORE THE LD. CIT(A) THE ASSESSEE RELIED UPON THE DECISION OF DIT (INTERNATIONAL TAXATION) V. OMAN INTERNATIONAL BANK [2009] 313 ITR 128/184 TAXMAN 314 (BOM) AND ALSO POINTED OUT THAT IN THE EARLIER YEARS IN ASSESSEE'S OWN CASE BAD DEBTS WERE ALLOWED. CONS IDERING THE FACTS AND SUBMISSIONS OF THE ASSESSEE, THE LD. CIT(A) DIRECTE D THE AO TO ALLOW THE CLAIM OF BAD DEBT HOLDING THAT UNDER THE AMENDED PR OVISIONS OF SEC. 36(1)(VII), THE ASSESSEE IS NOT REQUIRED TO DEMONST RATE THAT THE DEBIT IS BAD. ONLY REQUIREMENT IS THAT THE DEBT SHOULD BE WR ITTEN OFF IN THE BOOKS OF ACCOUNTS. 7. BEFORE US, THE LD. DEPARTMENTAL REPRESENTATIVE REL IED UPON THE FINDINGS OF AO AND SUBMITTED THAT THE FINDINGS OF T HE LD. CIT(A) ARE ERRONEOUS. LD AR REITERATED THE STAND TAKEN BEFORE THE CIT [A]. ITA NO. 5579/MUM/2015 CHIRON BEHRING VACCINES P. LTD. 4 8. WE HAVE HEARD THE RIVAL SUBMISSIONS. WE FIND THAT THE AO HAS NOT GIVEN ANY REASON FOR DISALLOWING THE CLAIM. WE ALSO FIND THAT THE AO HAS SIMPLY FOLLOWED THE FINDINGS OF EARLIER ASSESSMENT YEARS. AS SIMILAR ADDITIONS IN EARLIER ASSESSMENT YEAR HAS BEEN DELET ED BY LD. CIT(A) WHICH HAS BEEN ACCEPTED BY THE REVENUE AS COMMITTEE ON DISPUTE DECLINED TO GIVE PERMISSION TO THE DEPARTMENT TO PR OCEED WITH THE APPEAL , FINDINGS OF THE LD. CIT(A) BECOME FINAL. AS LD. C IT(A) HAS RIGHTLY POINTED OUT THAT AFTER THE AMENDMENT IN SECTION 36( 1)(VII), THE ASSESSEE IS NOT REQUIRED TO DEMONSTRATE THAT THE DEBT IS BAD . WE DO NOT FIND ANY INFIRMITY IN THE FINDING OF LD. CIT(A). WE ALSO DRA W SUPPORT FROM THE ORDER OF TRIBUNAL IN ITA NO. 500/M/06 FOR ASSESSMEN T YEAR 2002-03 IN THE CASE OF VERY SAME ASSESSEE IN WHICH THE TRIBUNA L HAS ALLOWED THE CLAIM OF BAD DEBT. RESPECTFULLY FOLLOWING THE DECIS ION OF THE TRIBUNAL, THE CLAIM IS ALLOWED FOR THIS YEAR ALSO. 9. GROUND NO. 3 RELATES TO DELETION OF SERVICE CHARGE S OF RS. 57,10,754/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AO FOUND THAT THE ASSESSEE COMPANY HAS BEEN FOLLOWING MERCANTILE SYST EM OF ACCOUNTING IN RESPECT OF SERVICE CHARGES. HOWEVER FROM ASSESSMENT YEAR 1999-2000 ONWARDS THE COMPANY CHANGED ITS POLICY OF ACCOUNTIN G THE SERVICE CHARGES FROM MERCANTILE SYSTEM TO CASH SYSTEM. THE AO DID NOT ACCEPT THE CHANGE OF METHOD OF ACCOUNTING FOR THE SERVICE CHARGES AND ADDED TO THE TOTAL INCOME. THE AO FURTHER POINTED OUT THAT A S PER THE AUDIT REPORT U/S. 44AB OF THE ACT FOR THE YEAR UNDER CONSIDERATI ON THE AUDITORS HAD MARKED 'ASSESSEE FOLLOWS MERCANTILE SYSTEM OF ACCOU NTING EXCEPT OTHERWISE STATED ELSEWHERE IN ACCOUNTS INCLUDING IN THE ACCOUNTING POLICIES'. THUS AS PER AUDITORS REPORT, ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING BUT IN CASE OF NON PERFORMING ACCOUNTS, THE INCOME HAS BEEN RECOGNIZED ON ACTUAL RECEIPT ONLY. AS THIS CHANGE HAS NOT BEEN ACCEPTED BY THE DEPARTMENT SINCE ASSESSMENT YEAR 19 99-2000. THE AO FOLLOWED THE EARLIER YEAR ASSESSMENT, FOUND THAT FO R THE YEAR UNDER CONSIDERATION ASSESSEE HAS CATEGORIZED THE SUM OF R S. 1,66,98,110/- AS NON PERFORMING ASSETS (NPA). AS THE ASSESSEE HAS NO T WRITTEN OFF THE DEBTS, THE AO CHARGED INTEREST AT THE RATE OF 2.85% PER MONTH WHICH IS THE AVERAGE RATE OF INTEREST DURING THE YEAR UNDER CONSIDERATION AND TREATED THE SAME AS INCOME OF THE ASSESSEE AND ADDE D TO THE TOTAL INCOME AT RS. 57,10,754/-. 10. BEFORE THE LD. CIT(A) THE ASSESSEE CHALLENGED THIS ADDITION. THE MAIN CONTENTION OF THE ASSESSEE WAS THAT ASSESSEE B EING A NON BANKING FINANCE COMPANY IS BOUND TO FOLLOW THE GUIDELINES O F RESERVE BANK OF INDIA ACCORDING TO WHICH NON BANKING FINANCE COMPAN Y ARE NOT REQUIRED TO CREDIT INTEREST ON NPA ON ACCRUAL BASIS AS THE I NTEREST IS REQUIRED TO BE CREDITED ONLY ON RECEIPT BASIS. THE LD. CIT(A) WAS CONVINCED THAT NBFC ARE GOVERNED BY RESERVE BANK OF INDIA GUIDELINES AN D ACCORDING TO SUCH GUIDELINES INTEREST INCOME ON NPA IS REQUIRED TO BE CREDITED ON ACTUAL ITA NO. 5579/MUM/2015 CHIRON BEHRING VACCINES P. LTD. 5 RECEIPT BASIS AND NOT ON ACCRUAL. ACCORDINGLY THE L D. CIT(A) ALLOWED THE APPEAL BY DELETING THE ADDITION. 11. THE LD. DEPARTMENTAL REPRESENTATIVE RELIED UPON TH E ORDER OF AO. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUB MISSIONS MADE BEFORE LTD. CIT(A). 12. WE FIND THAT AS PER RBI GUIDELINES VIDE NON-BANKIN G FINANCIAL COMPANIES PRUDENTIAL NORMS (RESERVE BANK) DIRECTION S, 1998, NO INTEREST INCOME IS TO BE BOOKED ON ACCRUAL BASIS ON NPA AND THE SAME SHOULD BE RECOGNIZED ONLY ON CASH BASIS AND AS THE ASSESSEE IS A NON BANKING FINANCE COMPANY IT IS BOUND TO FOLLOW THE G UIDELINES ISSUED BY RESERVE BANK OF INDIA. WE THEREFORE DO NOT FIND ANY ERROR OR INFIRMITY IN THE ORDER OF LD. CIT(A) ACCORDINGLY WE CONFIRM THE SAME. 13. THE FOURTH GROUND RELATES TO DELETION OF THE DISAL LOWANCE OF RS. 36,37,533/- BEING AMOUNT DEDUCTED AS TDS ON PAYMENT S IN RESPECT OF CHARGES FOR SERVICES PROVIDED BY VISA/MASTERCARD IN TERNATIONAL. 14. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE A O FOUND THAT DURING THE YEAR UNDER CONSIDERATION ASSESSEE HAS MA DE PAYMENTS TO VISA/MASTER CARD INTERNATIONAL ON ACCOUNT OF THEIR CHARGES FOR THE SERVICES PROVIDED BY THEM TO THE ASSESSEE. THE TDS WAS DEDUCTED BY THE ASSESSEE ON SUCH PAYMENTS WAS TO THE TUNE OF RS. 36 ,37,533/- WHICH WAS CLAIMED BY THE ASSESSEE AS DEDUCTION IN THE PROFIT & LOSS ACCOUNT. THE AO SOUGHT EXPLANATION FROM THE ASSESSEE AND POINTED OUT WHY THIS SUM BEING TDS SHOULD NOT BE DISALLOWED AS THE SAME IS N OT A LIABILITY OF THE ASSESSEE. THE ASSESSEE POINTED OUT THAT AS PER AGRE EMENT WITH VISA & MASTER CARD INTERNATIONAL, THE ASSESSEE WAS REQUIRE D TO BEAR THE TAX LIABILITY OF THESE COMPANIES. HOWEVER, THIS CONTENT ION OF THE ASSESSEE DID NOT FIND FAVOUR WITH AO WHO WAS OF THE OPINION THAT THIS PAYMENT WAS NOT AN EXPENDITURE OF THE ASSESSEE AS THE SAME IS N OT INCURRED FOR THE ASSESSEE'S BUSINESS. 15. WHEN THE MATTER WAS AGITATED BEFORE THE LD. CIT(A) , CIT(A) AFTER CONSIDERING THE SUBMISSIONS AND AGREEMENT HELD THAT THIS AMOUNT IS ALLOWABLE IN VIEW OF THE DECISION IN THE CASE OF CIT V. STANDARD POLYGRAPH MACHINES (P.) LTD [2000] 243 ITR 788/[2002] 124 TAXMAN 669 (MAD.) AND ACCORDINGLY DELETED THE ADDITION AND ALLOWED THE APPEAL. 16. AGGRIEVED BY THE ORDER OF LD. CIT(A), REVENUE IS I N APPEAL BEFORE US. 17. BEFORE US, THE LD. DEPARTMENTAL REPRESENTATIVE REI TERATED THE SUBMISSIONS MADE BY AO. THE LD. COUNSEL FOR THE ASS ESSEE RELIED UPON THE DECISION OF STANDARD POLYGRAPH MACHINES (P.) LTD . ( SUPRA ) AND THE DECISION OF S. TAKENAKA V. CIT [1999] 237 ITR 412 /[1998] 101 TAXMAN 346 (KAR.) ITA NO. 5579/MUM/2015 CHIRON BEHRING VACCINES P. LTD. 6 18. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED TH E ORDERS OF LOWER AUTHORITIES AND ALSO THE ORDERS RELIED UPON BY THE LD. COUNSEL. WE FIND THAT ON IDENTICAL FACTS, HON'BLE MADRAS HIGH COURT IN THE CASE OF STANDARD POLYGRAPH MACHINES (P.) LTD ( SUPRA ) HAS ALLOWED THE CLAIM HOLDING THAT AMOUNT PAID WAS ONLY TO THE DISCHARGE OF THE LIABILITY WHICH LIABILITY THE ASSESSEE HAD TAKEN TO PAY AS PART OF THE AGREEMENT ENTERED INTO. THE AMOUNT SO PAID AS TAX HAS BEEN HELD TO BE THE AMOUNT PAYABLE BETWEEN THE COLLABORATOR AND THE ASSESSEE. THE TRIB UNAL DECIDED THAT THE AMOUNT SO PAID BY THE ASSESSEE WAS ONLY IN DISCHARG E OF A LIABILITY WHICH IT HAD UNDERTAKEN IN TERMS OF THE AGREEMENT. SIMILA R VIEW HAS BEEN TAKEN BY HON'BLE KARNATAKA HIGH COURT IN THE CASE OF S. TAKENAKA ( SUPRA ). WE FIND THAT THE FACTS AND ISSUES ARE IDENTICAL WITH T HOSE OF THE ABOVE CITED CASES THEREFORE RESPECTFULLY FOLLOWING THE DECISION S OF HON'BLE HIGH COURTS CITED HEREIN ABOVE, THIS GROUND RAISED BY TH E REVENUE IS DISMISSED. 19. IN THE RESULT, ALL THE APPEALS FILED BY THE REVENU E ARE STAND DISMISSED AS POINTED ABOVE THAT COMMON GROUNDS AND ISSUES ARE INVOLVED IN ALL THREE APPEALS FOR THREE ASSESSMENT YEARS VIZ, ITA N OS. 4882/2475/6527/ MUM/2010 FOR ASSESSMENT YEARS-2003-04, 2004-05 AND 2005-06. 2.2. WE HAVE CONSIDERED THE FACTS AND FOUND THAT THERE I S NO DISPUTE THAT THE ROYALTY TO THE FOREIGN COLLABOR ATORS WAS PAID AS PER THE TERMS AND CONDITIONS OF THE AGREEMENT. THIS IS ALSO AN ADMITTED FACT THAT THE ASSESSEE COMPANY PAID THE TAX LIABILITY OF THE FOREIGN COLLABORATOR, THEREFORE, I T CANNOT BE DISALLOWED U/S 40(A)(II) OF THE ACT. IT IS ALSO NOT ED THAT IN SUBSEQUENT YEAR, THE DEPARTMENT ITSELF ALLOWED THE EXPENDITURE. THE LD. COMMISSIONER OF INCOME TAX (AP PEAL) HAS ALSO SIMILARLY CONSIDERED THE CASE IN ITALIAN THAI DEVELOPMENT PUBLIC CO. LTD. 17 TAXMAN 172, KARAN JOHAR VS ASSES SING OFFICER 46 SOT 21 AND STANDARD POLYGRAPH MACHINES P VT. LTD. 124 TAXMAN 669. THUS, THE ADDITION OF RS.66,80,792/ - WAS ITA NO. 5579/MUM/2015 CHIRON BEHRING VACCINES P. LTD. 7 RIGHTLY DELETED. LIKEWISE, THE DISALLOWANCE OF RS.2 4,12,243/- WAS MADE BY THE ASSESSING OFFICER AS OBSERVED IN PA RA 4.1 OF THE ORDER BY OBSERVING THAT THE ASSESSEE COMPANY HA S PAID TO ROYALTY EXPENSES OF RS.3,95,78,673/- TO NOVARTIS GM BH INCLUDING INCOME TAX AND EDUCATION CESS. THE ASSESS EE PAID THE SAID TAXES UNDER CONTRACTUAL OBLIGATION. HOWEVER, THE LD. ASSESSING OFFICER DISALLOWED RS.60,80,794/- AND ADD ED BACK TO THE TOTAL INCOME. EVEN OTHERWISE, THE ASSESSEE IS S UPPORTED BY THE AFORESAID ORDER OF THE TRIBUNAL AND THE RATIO L AID DOWN THEREIN IN THE CASE OF BOBCARDS LTD., CONSIDERING T HE TOTALITY OF FACTS, WE FIND NO INFIRMITY IN THE CONCLUSION OF TH E LD. COMMISSIONER OF INCOME TAX (APPEAL). THE APPEAL OF THE REVENUE IS DISMISSED. FINALLY, THE APPEAL OF THE REVENUE IS DISMISSED. THIS ORDER WAS PRONOUNCED IN THE OPEN COURT IN TH E PRESENCE OF THE LD. REPRESENTATIVE FROM BOTH SIDES AT THE CONCLUSION OF THE HEARING ON 01/11/2017. SD/- SD/- ( RAJESH KUMAR ) (JOGINDER SINGH) '!# / ACCOUNTANT MEMBER $!# /JUDICIAL MEMBER $ MUMBAI; ( DATED : 01/11/2017 F{X~{T? P.S / /. .. ITA NO. 5579/MUM/2015 CHIRON BEHRING VACCINES P. LTD. 8 %$&'()(*& / COPY OF THE ORDER FORWARDED TO : 1. *+,- / THE APPELLANT (RESPECTIVE ASSESSEE) 2. ./ ,- / THE ASSESSEE. 3. 0 0 1# ( *+ ) / THE CIT, MUMBAI. 4. 0 0 1# / CIT(A)- , MUMBAI, 5. 34 .# , 0 *+& * 5 , $ / DR, ITAT, MUMBAI 6. 6! 7$ / GUARD FILE. ! / BY ORDER, /3+# .# //TRUE COPY// /! (DY./ASSTT. REGISTRAR) , $ / ITAT, MUMBAI