M/s. VINAYAK CARE SOLUTION PVT. LTD., Bhopal V. THE ACIT CIRCLE 3(1), Bhopal

ITA 99/IND/2015

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 6158 (ITAT-INDORE)
• Duration Of Justice: 1 year(s) 3 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-05-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 05-04-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 16-02-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: R A VERMA
• Assessee Lawyers: P D NAGAR
• Section: 143(3)

Judgement Text

VINAYAK CARE SOLUTION ITA 99 OF 2015 1 IN THE INCOME TAX APPELLATE TRIBUNAL INDORE BENCH, INDORE BEFORE SHRI D.T. GARASIA, JUDICIAL MEMBER AND SHRI B.C. MEENA, ACCOUNTANT MEMBER ITA NO. 99/IND/2015 A.Y. 2009-10 M/S. VINAYAK CARE SOLUTION P. LTD., GOREGAON (E), MUMBAI PAN AABCV 8500 G :: APPELLANT VS ACIT-3(1), BHOPAL :: RESPONDENT ASSESSEE BY SHRI P.D. NAGAR RESPONDENT BY SHRI R.A. VERMA, DR DATE OF HEARING 05.04.2016 DATE OF PRONOUNCEMENT 18.05.2016 O R D E R PER SHRI D.T.GARASIA, JM THE ABOVE APPEAL IS FILED BY THE ASSESSEE CHALLENGI NG THE ORDER OF LD. CIT(A)-BHOPAL FOR THE ASSESSMENT YEAR 2009-10 ON TH E FOLLOWING GROUNDS OF APPEAL: 1. THAT LEARNED CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF DISCOUNT ON SALES PAID TO STOCKIEST/DISTRIBUTOR. VINAYAK CARE SOLUTION ITA 99 OF 2015 2 2. THAT LEARNED CIT(A) HAS ERRED IN CONFIRMING THE PRODUCT PROMOTIONAL CONSULTANCY CHARGES. 3. THAT LEARNED CIT(A) HAS ERRED IN DISALLOWING TRA VELLING EXPENSES. 2. FACTS OF THE CASE ARE THAT THE ASSESSEE IS A PRI VATE LIMITED COMPANY IN THE BUSINESS OF WHOLESALE OF MEDICINE. RETURN OF INCOME FOR THE ASSESSMENT YEAR 2009-10 WAS FILED ON 29.9.2009 SHOWING TOTAL INCOME AT RS.5,71,210/-. THE GROSS RECEIPTS OF THE YEAR IS RS.3,80,26,105/- AND THE GR OSS PROFIT AND NET PROFIT DISCLOSED ON GROSS RECEIPTS IS RS.1,44,32,852/- AND RS.13,765/- RESPECTIVELY, BESIDES INTEREST INCOME OF RS.21,04,506/-. THE ASSE SSING OFFICER NOTICED DISPROPORTIONATE INCREASE IN DISCOUNT PAID TO STOCK ISTS/DISTRIBUTORS AS COMPARED TO DISCOUNT PAID IN THE IMMEDIATELY PRECEDING PREVI OUS YEAR AND THEREFORE, HE CALLED FOR AN EXPLANATION TO JUSTIFY THE INCREASE. THE ASSESSEE ATTRIBUTED THE REASONS TO EXPANSION OF BUSINESS TO NEW AREAS WHERE IN, EXPENSE ON DISCOUNT WAS MORE TO CREATE THE DEMAND OF COMPANYS PRODUCT. IT WAS ALSO CONTENDED THAT NO SUCH ANALYSIS OF INCREASE IN EXPENSES PROPO RTIONATE TO SALES CAN BE VALIDLY MADE OR INFERENCE OF INCREASE IN SALE FOR I NCREASE IN DISCOUNT CANNOT BE DRAWN. THE ASSESSING OFFICER QUOTED THE RELEVANT PO RTION OF REPLY IN THE ORDER OF ASSESSMENT AND FOUND THAT THE EXPLANATION IS NOT AC CEPTABLE DUE TO HIS OBSERVATION THAT THOUGH THERE WAS LAUNCHING OF NEW BUSINESS IN DIFFERENT AREAS BUT THESE EXPENSES ARE DIRECTLY RELATED TO THE BUSI NESS OF THE ASSESSEE AND THAT INCREASE IN EXPENSES ARE AT HIGHER SIDE WHICH IS UN SUSTAINABLE LOOKING TO THE NATURE OF THE BUSINESS OF THE ASSESSEE. IT WAS ALSO NOTICED BY THE ASSESSING VINAYAK CARE SOLUTION ITA 99 OF 2015 3 OFFICER THAT TURNOVER OF THE YEAR INCREASED BY 14.9 8% AS COMPARED TO THE TURNOVER OF THE PREVIOUS YEAR AND THEREFORE, CORRES PONDING INCREASE IN DISCOUNT AND CONSULTANCY CHARGES TO THE EXTENT OF 15% SEEMS TO BE REASONABLE AS AGAINST INCREASE IN DISCOUNT IS 88.82% AND 65.90%. ALSO THE SUBMISSION OF THE ASSESSEE COMPANY THAT NEW STAFFS WERE APPOINTED IN SOME NEW AREAS AND STAFFS WERE HIRED FROM THE LOCAL STATIONS IN SOME OTHER NE W AREAS LIKE, SINDHDURG, KONKABALI AND GOA WAS FOUND TO UNBELIEVABLE. SIMILA RLY, THE ASSESSING OFFICER NOTICED SIMILAR DISPROPORTIONATE INCREASE IN TRAVEL LING EXPENSES TO 47.02% WHEN THE FACTORS ATTRIBUTABLE TO INCREASE IN TRAVELLING COST LIKE PRICE OF PETROLEUM AND INFLATION IN THE RELATED ITEMS INCREASED BY 25% AS COMPARED TO THAT OF THE PREVIOUS YEAR. FOR THE REASONS NARRATED ABOVE, THE ASSESSING OFFICER DISALLOWED RS.34,26,922/-, RS.1,88,233/-, RS.13,84,639/- TOTALING TO RS.49,99,795/- AS EXCESS EXPENDITURE CLAIMED ON DISCOUNT/COMMISSION P AID TO STOCKISTS/DISTRIBUTORS, TRAVELLING EXPENSES AND CON SULTANCY CHARGES AND ADDED IT BACK TO THE RETURN INCOME. 3. MATTER CARRIED TO LEARNED CIT(A) AND LEARNED CIT (A) HAS CONFIRMED THE SAME. THE LD. AR HAS FILED THE WRITTEN SUBMISSION, WHICH READS AS UNDER: ISSUE INVOLVED DISALLOWANCE OF EXPENSE I) FACTS :- THE APPELLANT COMPANY IS ENGAGED IN TRADING IN PHAR MACEUTICALS, HAVING WIDE RANGE OF PRODUCTS LIKE ANTIBIOTIC, ANTI-INFLAM MATORY, INJECTIBLES, CALCIUM, PROTEINS, SYRUPS ETC. IT HAS MARKET PRESENCE IN MAD HYA PRADESH, VIDHARBA AND MARATHWADA REGIONS OF MAHARASHTRA, PARTS OF UTTAR P RADESH, CHATTISGARH AND VINAYAK CARE SOLUTION ITA 99 OF 2015 4 ORISSA. THE PRODUCTS ARE BEING GOT MANUFACTURED FRO M OTHERS BUT MARKETED IN THE NAME OF THE COMPANY, IN ITS OWN BRAND NAME. THE COMPANY WAS INCORPORATED IN THE STATE OF MP BUT LATERON ITS REGISTERED OFFICE WAS TRANSFERRED TO MUMBAI IN THE YEAR 2004 HENCE ACTIVITIES ARE ENTIRELY MANAGED AND CONTROL FROM MUMBAI OFFICE SIN CE A.Y. 2005-06. HOWEVER, THE ASSESSMENTS CONTINUED TO BE COMPLETED BY THE AS STT. COMMISSIONER OF INCOME TAX, BHOPAL BECAUSE PAN WAS NOT TRANSFERRED. RETURN OF INCOME WAS FILED DECLARING NET INCOME OF RS.5,71,211/- AND VIDE ORDER U/S 143(3) OF THE ACT IT WAS ASSESSED AT RS.59,34,260/-. CONSIDERING TOTAL TURNOVER AND EXPENDITURE INCURRED UNDER RELEV ANT HEADS DURING THE YEAR AS COMPARED TO EARLIER YEAR FOLLOWING EXPENSES WERE DI SALLOWED ON THE GROUND THAT INCREASE IN SUCH EXPENDITURE WAS DISPROPORTIONATE T O INCREASE IN TURNOVER. HONBLE CIT(A), ALSO CONFIRMED THE ADDITIONS :-. PARTICULARS CURRENT YEAR (A.Y.2009/10) PREVIOUS YEAR (A.Y.2008/09) PERCENT AGE OF INCREAS E OVER PREVIOU S YEAR EXPENSES ALLOWED EXPENSES DISALLOWED TURNOVER RS.38026105/ - RS.33072798/ - 14.97% = = DISCOUNT ON SALES TO DOCTORS, STOCKISTS & DISTRIBUTOR S RS.8765884/ - RS.4642575/ - 88.82% RS.5338961/ - (15% OVER PREVIOUS YEAR) RS.34,26,923/- PRODUCTS PROMOTION AL CONSULTANC RS.4513244/ - RS.2720526/ - 65.90% RS.3128605/ - (15% OVER PREVIOUS YEAR) RS.13,84,639/ - VINAYAK CARE SOLUTION ITA 99 OF 2015 5 Y CHARGES TRAVELLING EXP. RS.1256672/ - RS.854751/ - 47.02% RS.1068438/ - (25% OVER PREVIOUS YEAR RS.1,88,233/- EXPENSES DISALLOWED RS.49,99,795/- SUBMISSIONS : (A) RE : DISCOUNT ON SALES RS. 87,65,884/- PHARMACEUTICAL BUSINESS CAN BE EFFECTIVELY RUN ONLY BY INCURRING HUGE EXPENDITURE TOWARDS DISCOUNT, COMMISSION, ADVERTISE MENT, PRODUCT PROMOTION EXPENSES & BY INCURRING HUGE EXPENDITURE ON TRAVELL ING OF MEDICAL REPRESENTATIVES. AS EVIDENT FROM AUDITED ACCOUNTS, THE APPELLANT DID NOT INCUR EXPENDITURE ON ADVERTISEMENT AND CHOOSE TO PROMOTE THE SALE THROUGH HOSPITALS, DOCTORS AND DISTRIBUTORS BY GIVING HIGHE R DISCOUNT AND INCENTIVES THEM. THE NATURE OF BUSINESS OF THE APPELLANT DEMANDS TO INCUR SUCH EXPENDITURE OTHERWISE THE ASSESSEE WOULD NOT BE ABL E TO DISPOSE THE PRODUCTS MANUFACTURED BY IT. IT BEING A CONSUMER ORIENTED I NDUSTRY, HAVING LOT OF COMPETITION IN THE MARKET, WITHOUT THE SUPPORT OF T HE DOCTORS AND HOSPITALS, THE MEDICINES MANUFACTURED BY THE ASSESSEE CANNOT BE SO LD. THE COMPANY ALLOWED THE DISCOUNT IN THE SALE INVOICES ITSELF ON SALES TO DISTRIBUTORS, STOCKISTS, DOCTORS AND HOSPITALS. GRO SS SALE VALUE WAS CREDITED TO SALES ACCOUNT AND DISCOUNT ALLOWED IN THE INVOICES WAS SEPARATELY DEBITED IN THE BOOKS. CASH DISCOUNT AND ADDITIONAL INCENTIVES UNDER SCHEM ES WERE GIVEN BY ISSUE OF CREDIT NOTES TO DISTRIBUTORS AND STOCKISTS . SALES ARE EFFECTED THROUGH AREA MANAGERS & MEDICAL REPRESENTATIVES (MARKETING STAFF ) WHO USED TO VISIT DOCTORS, HOSPITALS AND DISTRIBUTORS. VINAYAK CARE SOLUTION ITA 99 OF 2015 6 SALE INVOICES WERE RAISED ON RETAILERS PRICE I.E. T RADE PRICE OF THE PRODUCTS AND DISCOUNTS WERE ALLOWED ON DIRECT SALES TO DOCTORS, HOSPITALS, STOCKISTS AND DISTRIBUTORS AS PER AGREED TERMS AS W ELL WAY OF INCENTIVES OR SCHEMES. THE APPELLANT COMPANY HAD GIVEN HIGHER DIS COUNT UP TO 70% IN SOME CASES FOR TWO REASONS :- (A) INVOICES WERE RAISED A T RETAILERS PRICE OF THE PRODUCTS; (B) COMPANY INTENDED TO BREAK THE MONOPOLY OF OTHER COMPANIES WHO WERE SUPPLYING GOODS TO PARTICULAR DOCTORS/HOSPITALS/RE TAILERS. PRODUCTS WERE SUPPLIED TO DOCTORS/HOSPITALS/NURSING HOME/RETAILERS BY PASSING ALL THE MARGINS DIRECTLY TO THEM BY GIVING HIGHER DISCOUNTS ON DIRECT SALES. IN THAT EVENT EXPENDITURE TOWARDS ADVERTISEM ENT, MARKETING OR ADDITIONAL INCENTIVES TO RETAILERS OR STOCKIEST WAS NOT REQUIR ED TO BE INCURRED. MRS ARE AUTHORIZED TO VISITS THE DOCTORS AND TO COLLECT PAY MENTS FROM SUCH DOCTORS & HOSPITALS. NO COMMISSIONS WAS PAID TO THE MRS. COMPLETE DETAILS OF DISCOUNT ALLOWED TO DOCTORS, HO SPITALS, DISTRIBUTORS & STOCKISTS AT RS. 87,65,884/- WERE FURNISHED WHICH A RE PROPERLY SUPPORTED BY DOCUMENTARY EVIDENCE YET A SUM OF RS. 34,26,923/- W AS DISALLOWED BY THE A.O. IT IS EVIDENT FROM THE BREAK UP OF DISCOUNTS SUBMITTE D BEFORE LOWER AUTHORITIES THAT SUCH DISCOUNTS WERE GIVEN IN THE SALE INVOICES OR BY ISSUE OF CREDIT NOTES AS UNDER :- S.NO PARTICULARS TO DISTRIBUTORS & STOCKISTS TO DOCTORS & HOSPITALS PAGE NOS. OF PAPER BOOK I) DISCOUNT ALLOWED IN SALE INVOICES RS.67,26,321/- RS.6,91,774/- 1 TO 45 II) CASH DISCOUNT BY CREDIT NOTES RS. 3,44,233/- NIL 46 TO 51 III) ADDITIONAL INCENTIVES UNDER SCHEMES BY CREDIT NOTES RS.10,03,556/- NIL 52 TO 53 VINAYAK CARE SOLUTION ITA 99 OF 2015 7 TOTAL RS.80,74,110/- RS.6,91,774/- IT WAS CLAIMED BEFORE THE LOWER AUTHORITIES THAT TH E COMPANY HAD INTRODUCED SOME NEW PRODUCTS AS WELL EXISTING PRODU CTS WERE LAUNCHED IN NEW AREAS BECAUSE OF WHICH EXPENDITURE UNDER AFORESAID HEADS WERE INCREASED. SUCH EXPLANATION WAS NOT ACCEPTED BY THE LOWER AUTHORITI ES. IT IS HUMBLY SUBMITTED THAT NORMALLY AS PER ACCOUNT ING PRINCIPAL SALES ARE ACCOUNTED FOR AS PER SALE INVOICE ISSUED TO THE PAR TY I.E. NET SALES AFTER DEDUCTING THE AMOUNT OF DISCOUNT ALLOWED IN THE INVOICE ITSEL F. THE APPELLANT ADOPTED A METHOD BY WHICH GROSS SALES WERE SHOWN SEPARATELY I N THE PROFIT & LOSS ACCOUNT (PAGE 92 OF P.B.) AND DISCOUNT ALLOWED WAS SHOWN AS EXPENDITURE UNDER THE HEAD PURCHASES. (PAGE 102 OF P.B.). IT IS WELL SETTLED LAW THAT THE PARTICULAR MANNER IN WHICH THE ACCOUNTS ARE MAINTAINED IS NO C RITERIA OR EVIDENCE FOR DETERMINING WHEN THE LIABILITY TO A TAX ARISES. THE ACCOUNTING ENTRIES ARE NOT DECISIVE OR CONCLUSIVE AS HELD IN FOLLOWING JUDGMEN TS :- A) KEDARNATH JUTE MANUFACTURING CO. LTD. VS. CIT (1971 ) 82 ITR 363 AT 367 (SC) B) JONNALLA NARSHIMHARAO AND CO. VS. CIT (1993) 200 IT R 588 (SC) THEREFORE AT LEAST DISCOUNT ALLOWED IN THE INVOICES ITSELF AT RS. 74.18 LACS CAN NOT BE TAKEN CONSIDER INTO FOR DISALLOWANC E, BEING DIRECT DEDUCTION FROM SALE PRICE ON WHICH VAT WAS COLLECTED & DEPOSI TED BY THE APPELLANT (PAGE 14 TO 39 OF PAPER BOOK). (B) RE : PRODUCT PROMOTIONAL CONSULTANCY CHARGES TO DOCTORS RS. 45,13,244/- THE COMPANY ALSO INCURRED EXPENDITURE TOWARDS PRODU CT PROMOTIONAL CONSULTANCY CHARGES AT RS.45,13,244/- OUT OF WHICH THE A.O. DISALLOWED A SUM OF RS. 13,84,639/-. NONE OF THE DOCTORS WERE RELATED T O ANY OF THE DIRECTORS OF THE VINAYAK CARE SOLUTION ITA 99 OF 2015 8 COMPANY. SUCH CONSULTANCY CHARGES WERE PAID TO DOCTORS AFTER DEDUCTION OF TAX AT SOURCE, WHEREVER APPLICABLE AS PER ANNEXED DETAILS. (PAGE NO.54 TO 67). THOUGH IDENTITY OF THE STOCKISTS AND DISTRIBUTORS O R DOCTORS WAS PROVED FROM THE SALE INVOICES RAISED TO THEM AND PAYMENTS WERE RECEIVED AFTER DEDUCTING THE DISCOUNT, YET THE DISALLOWANCE WAS MA DE MERELY ON THE GROUND THAT SUCH EXPENSES WERE ON HIGHER SIDE AND ATTRIBUT E TO MORE THAN 37% OF THE TURNOVER. THE AO DID NOT RAISE ANY DOUBT WITH REGARD TO GENUINENESS OF DISCOUNTS ALLOWED BUT OBSERVED THAT THOUGH THERE IS LAUNCHING OF NEW BUSINESS IN DIFFER ENT AREAS BUT SUCH EXPENSES ARE INDIRECTLY RELATED TO T HE BUSINESS OF THE ASSESSEE AND NOT ON THE CIRCUMSTANCES OF ITS LAUNCHING BUSIN ESS IN NEW AREAS FURTHER THE INCREASE IN THESE EXPENSES ARE ON VERY HIGHER SIDE . DISALLOWANCE WAS MADE ON THE GROUND THAT SUCH EXPENDITURE WAS INCREASED DISP ROPORTIONATE TO THE SALES (PAGE 2 OF ASSTT. ORDER ). THE LEARNED CIT(A) CONFIRMED THE DISALLOWANCE BY OB SERVING THAT (A) EXPENSES INCREASED DISPROPORTIONATELY; (B) PAYMENTS MADE TO MIDDLEMEN WAS 35% OF THE TURNOVER; (C) THE DIFFERENCE BETWEEN GRO SS SALES AS PER BILL-WISE SALES STATEMENT AND GROSS SALES AS PER P&L A/C WAS NOT RE CONCILED; (D) HIGHER RATE OF DISCOUNT WAS GIVEN IN SALE BILLS IN OLD AREA OPERAT ION AND NOT EXCLUSIVELY FOR NEW AREAS OR NEW PRODUCT AND (E) PAYMENTS TO DOCTORS A ND HOSPITALS ARE NOT JUSTIFIED BECAUSE SERVICES RENDERED BY THEM IN PROCURING THE ORDERS FOR COMPANY WAS NOT DEMONSTRATED AND ESTABLISHED INDEPENDENTLY (PAG E 5 & 6 OF APPELLATE ORDER) . SUCH OBSERVATIONS OF CIT(A) ARE MIS-CONSTRUED BECAU SE DIFFERENCE IN TURNOVER WAS DUE TO VAT COLLECTED SEPARATELY ON SAL ES AND NO COMMISSION WAS PAID TO ANY MIDDLEMEN. DISCOUNT WAS GIVEN AGAINST S ALES MADE TO DOCTORS, VINAYAK CARE SOLUTION ITA 99 OF 2015 9 HOSPITALS AND DISTRIBUTORS ONLY WHEREAS PRODUCT PRO MOTIONAL CONSULTANCY CHARGES WERE PAID TO THE DOCTORS ONLY FOR PRESCRIBI NG DRUGS AND MEDICINES MARKETED BY THE APPELLANT COMPANY. SUCH SERVICES RENDERED BY THEM WERE INDIRECT IN NATURE AND CANNOT BE DEMONSTRATED. THE LEARNED CIT(A) APPLIED THE RATIO OF JUDGMENT OF DELHI HIGH COURT IN THE CASE OF M/S. SAGA DEPARTMENTAL STORES (2010) 32 5 ITR 324 WHICH IS DISTINGUISHABLE ON FACTS BECAUSE IN THAT CASE NONE OF THE RECIPIENT OF THE COMMISSION WAS PRODUCED AND VARIOUS TRANSACTIONS WE RE QUESTIONABLE AND SIMILAR DISALLOWANCE WERE MADE IN EARLIER YEARS ALS O. JUST TO CONFIRM THE DISALLOWANCE, CIT(A) REFERRED VARIOUS JUDGMENTS WHI CH ARE DISTINGUISHABLE ON FACTS AND NOT RELEVANT OR EVEN IDENTICAL TO THE FAC TS OF THE CASE OF THE APPELLANT. (GIST OF CASES ANNEXED). RE : DISALLOWANCE OUT OF TRAVELLING EXPENSES : THE COMPANY INCURRED EXPENDITURE TOWARDS TRAVELLING AND LODGING AND BOARDING OF DIRECTORS & OTHER STAFF AT RS.12,56,672 /- BREAK UP OF SUCH EXPENDITURE IS AS UNDER:- S.NO PARTICULARS AMOUNT PAGE NOS. OF PAPER BOOK A) AIR TICKETS DIRECTORS RS. 3,16,146/- 68 69 B) AIR TICKETS OTHERS RS. 3,70,935/- 70 71 C) LODGING/BOARDING DIRECTORS RS. 1,80,185/- 72 D) LODGING/BOARDING OTHERS RS. 3,88,906/- 73 7 4 TOTAL RS.12,56,672/- THE AO DISALLOWED A SUM OF RS.1,88,233/- OUT OF TR AVELLING EXPENSES WITHOUT APPRECIATING THE FACT THAT COMPLETE DETAILS OF SUCH EXPENSES WERE SUBMITTED. HE DID NOT APPRECIATE THAT TRAVELLING EX PENSES WERE INCURRED BY MR AND STAFF AND THE DIRECTORS OF THE COMPANY WHICH AR E SUPPORTED BY VOUCHERS. VINAYAK CARE SOLUTION ITA 99 OF 2015 10 CONFIRMATION OF DISALLOWANCE OUT OF TRAVELLING EXPE NSES INCURRED IN EXCESS OF 25% OF EXPENDITURE INCURRED IN A.Y. 2008-09 WITHOUT CONSIDERING THE FACT OF LAUNCHING OF NEW PRODUCTS IS UNJUSTIFIED AND IMPRO PER. IN SUBSTANCE, CONSIDERING THE NATURE OF BUSINESS AN D THE FACT THAT WHEN ANY NEW PRODUCT IS LAUNCHED BY ANY MANUFACTURER OF MEDICINES, IT IS REQUIRED TO PUBLISH THE MATERIAL AND INCUR THE EXPENDITURE TOWA RDS TRAVELLING, SALES CONFERENCE, SELLING AND DISTRIBUTION EXPENSES, CONF ERENCE EXPENSES WITH DOCTORS FOR PROMOTING THE SALES SO THAT THE DOCTORS ARE AWA RE ABOUT THE MEDICINE MANUFACTURED BY THE APPELLANT. WHEN ANY PRODUCT IS LAUNCHED, LOT OF CONFERENCES ARE TO BE ORIENTED AND THE COMPANY HAS TO INCUR THE EXPENSES TOWARDS TRAVELLING AND OTHER EXPENSES WHICH ARE WHO LLY AND EXCLUSIVELY INCURRED FOR THE BUSINESS PURPOSES HENCE ADMISSIBLE UNDER IN COME TAX ACT. RELIANCE IS PLACED ON THE JUDGMENT IN THE CASE OF M/S. GENO PHARMACEUTICALS LTD VS. DEPARTMENT OF INCOME TAX ITA NO.12/PNJ/2014 ORDER D ATED 30.05.2014 (ITAT PANJI BENCH) (COPY ANNEXED). IT IS, THEREFORE, PRAYED THAT DISALLOWANCES WERE BA SED ON PRESUMPTION, SURMISES AND CONJECTURES WITHOUT CONSIDERING THE FA CT THAT BOOKS OF ACCOUNTS ARE AUDITED AND DISCOUNTS WERE ALLOWED IN THE SALE INVO ICES. SIMILARLY OTHER CLAIMS ARE ALSO SUPPORTED BY VOUCHERS, HENCE ENTIRE ADDITI ONS MADE BY AO AND CONFIRMED BY CIT(A) DESERVES TO BE QUASHED. 4. LD. DR RELIED ON THE ORDERS OF THE REVENUE AUTH ORITIES. LD. DR SUBMITTED THAT IN THE CASE OF LAXMINARAY MADANLAL VS. CIT, 86 ITR 439 (SC), WHEREIN, IT IS HELD THAT WHEN ASSESSEE AND SELLING AGENCY FOR MAKE BELIEVABLE ARRANGEMENT, THE ARRANGEMENT WAS MINIMIZED TO TAX LIABILITY OF T HE ASSESSEE FIRM AND IT WAS NOT VINAYAK CARE SOLUTION ITA 99 OF 2015 11 GENUINE BUSINESS ARRANGEMENT AND THIS FACT CONCLUSI ON WAS DRAWN ON THE BASIS OF FACTS DISCOVERED BY THE AUTHORITIES, THEREFORE, IN THE INSTANT CASE, THIS IS ONLY THE ARRANGEMENT TO MINIMIZE THE LIABILITY. LD. DR A LSO RELIED ON THE DECISION IN THE CASE OF SWADESH COTTON MILLS V. CIT, 73 ITR 634 (SC ). LD. DR ALSO RELIED ON THE DECISION OF DELHI HIGH COURT IN THE CASE OF SAGA DE PARTMENTAL STORES VS. CIT, 325 ITR 324 AND SUBMITTED THAT WHEN THE ASSESSEE HA S NOT PRODUCED ANY RECEIPT AND VARIOUS TRANSACTIONS WERE QUESTIONABLE, THE FIGURE OF N.P. WAS EXTREMELY LOW AS COMPARED TO G.P., THE DISALLOWANCE WAS ALSO IN EARLIER YEARS, THE TRIBUNAL HAS ALLOWED ONLY 16% OF THE COMMISSION OF THE TOTAL TURNOVER. 5. WE HAVE HEARD RIVAL CONTENTIONS OF BOTH THE PART IES AND HAVE PERUSED THE MATERIAL AVAILABLE ON RECORD. LOOKING TO THE FACTS AND CIRCUMSTANCES, WE FIND THAT IN THIS CASE, IF WE GO THROUGH THE ORDER OF THE LEA RNED CIT(A), THE LEARNED CIT(A) WAS OF THE VIEW THAT G.P. IS RS.1,44,32,852/- ON TH E TURNOVER OF RS.3,80,26,105/- OF THE YEAR I.E. 37.96% OF THE TOTAL TURNOVER. THE N.P. IS ONLY RS.13,756/-. THE LEARNED CIT(A) HAS PRODUCED THE FOLLOWING CHART WHI CH READS AS UNDER: PARTICULARS CURRENT YEAR PREVIOUS YEAR PERCENTAGE OF INCREASE EXPENSES ALLOWED EXPENSES DISALLOWED DISCOUNT COMM TO STOCKISTS/ DISTRIBUTORS RS.8765884/ - RS.4642575/ - 88.82% RS.5338961 .25 RS.34,26,922.75 TRAVELLING EXP. RS.1256672/ - RS.854751/ - 47.02% RS.1068438 .75 RS.1,88,233 .25 PRODUCTS PROMOTIONAL CONSULTANCY RS.4513244/ - RS.2720526/ - 65.90% RS.312860 4.90 RS.13,84,639.10 VINAYAK CARE SOLUTION ITA 99 OF 2015 12 CHARGES EXPENSES DISALLOWED RS.49,99,795.10 FROM THE ABOVE CHART, THE LEARNED CIT(A) WAS OF THE VIEW THAT EXPENSES INCREASE DISPROPORTIONATELY TO THE INCREASE IN THE TURNOVER REGISTERED AT 14.98%. THE PAYMENT MADE TO MIDDLEMEN WAS 35% OF THE TOTAL TURN OVER. THUS, THE TOTAL PAYMENT MADE IS RS.37.37% TO STOCKISTS/DISTRIBUTORS . THE LD. AR DURING THE COURSE OF HEARING, HAS SUBMITTED THAT THE G.P. ON S ALES BEFORE DISCOUNT ALLOWED ON INVOICES AND G.P. AND NET SALES AFTER DISCOUNT A LLOWED IN INVOICES WHICH READS AS UNDER: A) GROSS PROFIT ON GROSS SALES I.E. BEFORE DISCOUNT AL LOWED IN INVOICES A.Y. TURNOVER (IN RS.) GROSS PROFIT (IN RS.) PERCENTAGE OF G.P. 2008 - 09 3,30,72,798/ - 1,34,32,508/ - 40.61% 2009 - 10 3,80,26,105/ - 1,44,32,852/ - 37.96% B) GROSS PROFIT ON NET SALES I.E. AFTER DISCOUNT ALLOW ED IN INVOICES A.Y. TURNOVER (IN RS.) GROSS PROFIT (IN RS.) PERCENTAGE OF G.P. 2008 - 09 2,84,30,223 / - 1,34,32,508/ - 47.25% 2009 - 10 2,92,60,221 / - 1,44,32,852/ - 49.33% VINAYAK CARE SOLUTION ITA 99 OF 2015 13 THE LD. AR SUBMITTED THAT THE G.P. ON YEAR UNDER TH IS APPEAL IS 37.96% AS AGAINST LAST YEAR G.P. WAS 40.6% LOWER BY 2.5% ONLY . IN CASE THE SALES ARE CONSIDERED NET OF DISCOUNT ALLOWED IN INVOICES ITSE LF, THE G.P. ON DURING THE YEAR WILL BE HIGHER BY 2.08%. THE LD. AR HAS CLAIMED BEF ORE US THAT ASSESSEE CO. HAS INTRODUCED SOME NEW PRODUCES AS WELL AS EXISTING PR ODUCTS WERE LAUNCHED IN NEW AREAS, BECAUSE OF WHICH EXPENDITURE OF THE AFOR ESAID HEADS INCREASED. THE ASSESSEE SUBMITTED THAT RS.74.18 LACS WERE DISALLOW ED BEING DIRECT DEDUCTION FROM THE SALE PRICE WHICH WAS VAT COLLECTED AND DEP OSITED BY THE ASSESSEE IN THE GOVT. DEPARTMENT. THEREFORE, THESE EXPENSES SHO ULD BE ALLOWED. THE LD. AR SUBMITTED THAT ASSESSEE HAS SHOWN THE SALES SEPARAT ELY AND DISCOUNT GIVEN TO THE DOCTORS/STOCKISTS WERE SHOWN SEPARATELY AS PURC HASE EXPENSES. THEREFORE, ONE HAS TO LOOK THE NATURE OF EXPENDITURE AND WHETH ER IT IS NECESSARY FOR THE BUSINESS OR NOT. FOR EXAMPLE, IN SOME OF CASES, ASS ESSEE HAS ALLOWED THE DISCOUNT AT 72.13% AND IN SOME OF THE CASES, THE AS SESSEE HAS ALLOWED DISCOUNT AT 49.16% AND IN SOME OF THE CASES, THE DISCOUNT ON THE SALES WERE 60% WHICH IS ON PAGE 24 OF THE PAPER BOOK. WE HAVE ALSO GONE THROUGH THE COPY OF SALES INVOICES. WE FOUND FROM THIS THAT ASSESSEE HAS TO G IVE THE DISCOUNT ON MRP TO STOCKISTS AND DISTRIBUTORS. THEREFORE, ONE HAS TO L OOK THE NATURE OF COMMISSION AND DISCOUNT. WE FIND THAT IN PHARMACEUTICAL BUSINE SS, SUCH DISCOUNTS ARE ALLOWED BY FIXING THE MRP OF THE PRODUCT AT ENHANCE D PRICE SO AS TO PROMOTE THE SALES. THE DISCOUNTS ARE ALLOWED TO THE STOCKISTS A ND DISTRIBUTORS AS PER AGREED TERMS AND IF THE HIGHER DISCOUNT IS ALLOWED ONLY TO DIRECT SALES TO DOCTORS AND VINAYAK CARE SOLUTION ITA 99 OF 2015 14 HOSPITALS. IN THIS CASE, IDENTITY OF THE STOCKISTS AND DISTRIBUTORS WAS PROVED FROM THE SALES INVOICES AND PAYMENTS WERE RECEIVED AFTER DEDUCTING THE DISCOUNTS. WE FIND THAT IN THE CASE OF SAGA DEPARTMENTAL STORE S (SUPRA) WHEREIN THE HIGH COURT HAS DISMISSED THE APPEAL ON THE GROUND THAT 1 6% OF THE COMMISSION TO THE MIDDLEMEN IS JUSTIFIED. CONSIDERING OVERALL FACTS O F THE CASE, WE ARE OF THE VIEW THAT DISCOUNT GIVEN ON BILLS AND DISCOUNT TO STOCKI STS IS JUSTIFIED BUT DISCOUNT GIVEN AGAINST PROMPT PAYMENTS IS NOT JUSTIFIED. THEREFORE , WHEN THE BOOKS OF ACCOUNTS AND ALL VOUCHERS WERE PRODUCED DURING ASSESSMENT PR OCEEDINGS, THE ASSESSING OFFICER IS NOT JUSTIFIED IN DISALLOWING THE EXPENSE S MADE ON ACCOUNT OF DISCOUNT/COMMISSION TO STOCKISTS/DISTRIBUTORS OF RS .34,26,922.75/-. IN THE CASE OF TRAVELING EXPENSES, WE ARE OF THE VI EW THAT LEARNED CIT(A) IS JUSTIFIED ON DISALLOWING THE TRAVELLING EXPENSES. IN RESPECT OF PRODUCT PROMOTIONAL CONSULTANCY CHARG ES, THE ASSESSING OFFICER/LEARNED CIT(A) HAS DISALLOWED RS.13,84,693/ -, FOR WHICH, THERE IS NO DIRECT EVIDENCE, THEREFORE, ONE HAS TO ESTIMATE THE EXPENS ES AND THE ASSESSING OFFICER HAS NOT POINTED OUT ANY DEFECT AGAINST THE PRODUCT PROMOTIONAL CONSULTANCY CHARGES BUT HE HAS DISALLOWED THE PROMOTIONAL EXPEN SES ON THE BASIS OF THE TRIBUNAL DECISION IN THE CASE OF SAGA DEPARTMENTAL STORES, 325 ITR 324 WHEREIN HIGH COURT HAS CONFIRMED THE DISALLOWANCE AT 16% OF THE TURNOVER. WE FIND THAT THE ASSESSEE HAS SUBMITTED BEFORE US THAT WHATEVER THE AMOUNT WAS GIVEN TOWARDS THE PRODUCT PROMOTIONAL CONSULTANCY CHARGES , THE ASSESSING OFFICER HAS DISALLOWED 16% BUT THE ASSESSEE HAS PROVED THE IDEN TITY OF STOCKISTS, DISTRIBUTORS VINAYAK CARE SOLUTION ITA 99 OF 2015 15 AND DOCTORS FROM THE SALE INVOICES RAISED TO THEM A ND PAYMENTS WERE RECEIVED AFTER DEDUCTING THE DISCOUNT. WE FIND THAT ONE HAS TO SEE THE MODUS-OPERANDI OF THE BUSINESS AND FOR DISALLOWING 16%, THERE IS NO C RITERIA BUT ASSESSING OFFICER HAS MADE A GUESSWORK, THEREFORE, IN THE INTEREST OF JUSTICE AND FAIR, WE ARE OF THE VIEW THAT RS. 13,84,693/- IS ON HIGHER SIDE, THEREF ORE, WE DISALLOW EXPENSES ON ESTIMATED BASIS TO THE EXTENT OF RS.5 LACS. ACCORDI NGLY, THIS GROUND OF APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. IN THE RESULT, GROUND NO.1 IS ALLOWED, GROUND NO.2 IS PARTLY ALLOWED AND GROUND NO.3 IS DISMISSED. ORDER WAS PRONOUNCED IN THE OPEN COURT ON 18.5.2016 . SD/- SD/- (B.C. MEENA) (D.T. GARASIA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 18.5.2016 !VYS! COPY TO: APPELLANT/RESPONDENT/CIT(A)/CIT/DR, INDORE