Torrent Pharmaceuticals Ltd Vs DCIT (ITAT Ahmedabad)
Revisional Commissioner is expected show that the view taken by the AO is wholly unsustainable in law before embarking upon exercise of revisionary powers. The revisional powers cannot be exercised for directing a fuller inquiry to merely find out if the earlier view taken is erroneous particularly when a view was already taken after inquiry.
If such course of action as interpreted by the Revisional Commissioner in the light of the Explanation 2 is permitted, Revisional Commissioner can possibly find fault with each and every assessment order without himself making any inquiry or verification and without establishing that assessment order is not sustainable in law.
This would inevitably mean that every order of the lower authority would thus become susceptible to Section 263 of the Act and, in turn, will cause serious unintended hardship to the tax payer concerned for no fault on his part. Apparently, this is not intended by the Explanation.
Howsoever wide the scope of Explanation 2(a) may be, its limits are implicit in it. It is only in a very gross case of inadequacy in inquiry or where inquiry is per se mandated on the basis of record available before the AO and such inquiry was not conducted, the revisional power so conferred can be exercised to invalidate the action of AO. The AO in the present case has not accepted the submissions of the assessee on various issues summarily but has shown appetite for inquiry and verifications.
The AO has passed the order in great detail after making several allowances and disallowances on the issues involved impliedly after due application of mind. Therefore, the Explanation 2 to Section 263 of the Act do not, in our view, thwart the assessment process in the facts and the context of the case. Consequently, we find that the foundation for exercise of revisional jurisdiction is sorely missing in the present case.
Resultantly, the order of the Pr.CIT passed under s.263 of the Act is set aside and cancelled and the order of the AO under 143(3) is restored.
FULL TEXT OF THE ITAT JUDGMENT
The captioned appeal has been filed at the instance of the Assessee against the order of the Principal Commissioner of Income-Tax-4, Ahmedabad (‘Pr.CIT’ in short), dated 15.11.2017 wherein order passed by the Assessing Officer (AO) under s. 143(3) of the Income Tax Act, 1961 (the Act) dated 26.12.2016 concerning assessment year 2014-15 was held to be erroneous in so far as the prejudicial to the interest of the Revenue within the meaning of Section 263 of the Act and thus set aside.
2. The grounds of appeal raised by the Assessee reads as under:-
“1. On the facts and in the circumstances of the case, the order passed by the learned Pr.C.I.T. u/s. 263 of the I.T. Act is ab initio void being bad in law.
2. On the facts and in the circumstances of the case, the learned Pr.C.I.T. erred in setting aside the assessment order dated 26th December, 2016 and directing the Assessing Officer to pass a fresh assessment order.”
3. The assessee, as per grounds of appeal, essentially challenges the foundation of jurisdiction assumed by the Pr.CIT under s.263 of the Act and contends that the subject assessment order framed under s. 143(3) of the Act passed by the AO cannot be termed as erroneous and prejudicial to the interest of the Revenue which is a condition precedent for usurption of revisional jurisdiction.
4. The relevant facts in brief are that the return of the assessee was subjected to scrutiny assessment for AY 2014-15 and the assessment was completed by the AO under s. 143(3) of the Act vide order dated 26.12.2016 whereby the total income of the assessee was assessed at Rs.7 15.01 Crores as against the returned income of Rs.584.13 Crores. Thereafter, the Pr.CIT in exercise of his revisionary power, issued show cause notice dated 18.08.2017 under s.263 of the Act requiring the assessee to show cause as to why assessment so framed u/s.143(3) is not liable to be set aside or modified. It was alleged by the Pr.CIT that the examination of records revealed that the assessment order so passed is erroneous in so far as it is prejudicial to the interest of the Revenue for the reasons that the AO has failed to make adequate inquiries in respect of various issues discussed in the show cause notice and the assessment order was allegedly passed without due application of mind. The show cause notice issued by the Pr.CIT under s.263(supra) is reproduced hereunder for the sake of ready reference:
“You have debited a total amount of Rs.55.14 cr. On account of business advancement expenses, which have been allegedly incurred on gifts items distributed to various persons. Out of this Rs.55.14 cr., you have incurred an expenditure of Rs.24.32 cr. On gift items exceeding Rs.1000/- each. On perusal of the records, it is seen that the A.O. has not made any enquiry as regards to whom such gift items were distributed and what was the record maintained. The A.O. has also not enquired as to the proof/evidence of such distribution made to various stake holders. Non enquiry in the matter has rendered the impugned order erroneous and prejudicial to the interest of revenue.
ii) You have shown a turnover of Rs.52,126.83 lakh from your Baddi unit and shown a profit of Rs.12,296.55 lakh. The A.O. has failed to apply his mind to the issue and has also failed to make any meaningful enquiry as to what kind of medicines were being manufactured there; whether It was API or whether it was formulation; from where did this plant get the chemistry of molecules if API has been manufactured? If the said unit was FDA/other regulatory authorities approved? And, if yes, who incurred expenses for such approvals? Whether Baddi unit was manufacturing generic medicines or branded generics? If branded, whether these were old brands belonging to the company? What kind of expenses had been incurred on account of business advancement (in India & abroad) and other related expenses. What amount of expenditure was debited to Baddi unit on account of salary/remuneration paid to the higher management and other administrative expenses? If the medicines were exported, what kind and how much of expenditure was incurred and debited to the books of Baddi unit on account of export of such formulations. Similar is the case with your Sikkim unit. Non application of mind in this matter by the A.O. has rendered the impugned order as erroneous and prejudicial to the interest of revenue
iii) You have debited a total expenses of Rs. 137,41 crores on account of R & D expenses on which a weighted deduction has been The A.O. has not enquired as to whether separate expenses have been incurred by you on account of quality control & regulatory approvals or whether they have been grouped Into R & D expenses. Non application of mind in this matter by the A.O. has rendered the impugned order as erroneous and prejudicial to the interest of revenue.
You have claimed an expenditure of Rs 475,32 lakhs on account of patent expenses/patent related expenses outside India as eligible for weighted tax u/s.35 (2AB) of the I.T. Act, The explanation inserted under clause 1D to Sec.35(2AB) stated that;
Explanation – for the purposed of this clause, “Expenditure on scientific research”, in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the Patents Act, 1970 (39 of 1970).
Thus, the expenditure incurred in relation to patents not relating to the Patent Act, 1970 would not be eligible for such deduction, A/on application of mind in this matter by the A.O. has rendered the Impugned order as erroneous and prejudicial to the interest of Revenue.
iv) You have claimed an expenditure of Rs. 1214.01 lakhs on Clinical Research. The A.O. has failed to apply his mind and not made any enquiries in this regard as to the nature and details of the expenses incurred – as to whom paid and for what purposes? He has also not enquired if such clinical trials were made for the purpose of regulatory approvals or for R & D work, which would have affected the deduction available u/s.35 (2AB) of the I.T. Act. A/on application of mind and non enquiry in this regard has rendered the impugned assessment order erroneous and prejudicial to the interest of revenue.
v) You have also claimed various expenses on account of labour and job work charges, professional fees, legal expenses and other salary expenses as part of R&D expenses. The A.O. has not made any meaningful enquiry with respect to these expenses as to determine whether all such expenses were related to R&D because of which the impugned order has been rendered erroneous and prejudicial to the interest of revenue.
vi) You have claimed expenses on academic/scientific get together of 9.44 cr., sales promotion expenses of Rs.19,57 crores, business advancement expenses of Rs.1.48 Cr. (other than on domestic). The A.O. has not made any enquiry as regards the incurring of such expenses nor has he applied his mind as to whether such or part of such expenses fell foul of local regulations prevailing in those countries regarding gifting/other payments/expenses incurred on doctors and medical practitioners. Further, the A.O, has also not examined if such expenses incurred were rightfully belonging to the assessee company and not its foreign subsidiaries which were also engaged in marketing of formulations in other countries. Non application of mind and non enquiry in this regard has rendered the impugned assessment order erroneous and prejudicial to the interest of the revenue.”
4.1 The controversy emerging from the show cause notice is broadly summarized as under:
“(i) The assessee debited a sum of Rs.55.14 crores on account of “business advancement expenses” allegedly incurred on gift articles distributed to various persons. The assessee was intimated that the aforesaid amount included Rs.24.32 crores on gift items exceeding Rs.1000 each. The learned Pr. CIT alleged that the Assessing Officer did not make inquiry regarding the persons to whom gifts were given and the record maintained for the same.
(ii) The assessee has shown turnover of Rs.52126.83 lacs from Baddi unit yielding profit of Rs.12296.55 lacs and the Assessing Officer failed to apply his mind to this issue and to make meaningful inquiry regarding the manufacturing process, and goods being manufactured. The learned Pr. CIT has alleged that similar is the position with regard to Sikkim unit.
(iii) The assessee has debited expenditure of Rs. 137.41 crores for R & D expenses on which weighted deduction has been claimed. He has observed that the Assessing Officer has not inquired as to whether separate expenses have been incurred on account of quality control and regulatory approvals or whether these expenses are grouped under R & D expenses. The learned Pr. CIT assumed that there was non-application of mind on the part of the Assessing Officer on this issue.
(iv) The assessee has claimed Clinical Research expenditure of Rs. 01 lacs and the Assessing Officer did not apply his mind and did not make inquiry regarding the nature and details of the expenses and the purpose of the expenditure vis-a-vis deduction available u/s.35(2AB) of the Act.
(v) The assessee has claimed various expenses for labour, job-work, professional fees, legal expenses and salary expenses as part of R & D expenses and the Assessing Officer did not make any meaningful inquiry with regard to these expenses.
(vi) The assessee claimed expenses of Rs.9.44 crores on academic / scientific get-together, sales promotion expenses of Rs. 19.57 crores and business advancement expenses of Rs.1.48 crores (other than domestic expenses). The learned Pr. CIT assumed that the Assessing Officer did not make inquiry regarding incurring of such expenses and there was no application of mind as to whether any part of such expenditure violated the regulations prevailing in those countries where expenses were incurred.”
4.2 In response to show cause notice, the assessee filed a detailed reply dated 21.09.2017 to demonstrate that the allegations made in the show cause notice has, in fact, been dealt with after making proper inquiries during the course of assessment proceedings and a very lengthy assessment order running into 102 pages was passed by the AO in this regard. It was also pointed out that the returned income was accompanied by the audited financial statements together with all statutory annexures and notes. The books of accounts were also produced before the AO in the course of the assessment proceedings. It was further pointed out that the AO made various additions/disallowances of substantial nature while accepting the remaining part after thorough scrutiny and application of mind.
4.3 For better appreciation of the version of the assessee before the Revisional Commissioner, the relevant part of the written reply dealing with show cause notice is reproduced hereunder:
“5.1 Regarding Business Advancement Expenses:
I. Vide para no. (i) of the above referred notice, your honor has stated that non inquiry by the Assessing Officer in the matter of Business Advancement expenses has rendered the impugned order erroneous and prejudicial to the interests of the Revenue. Relevant para of the said notice is reproduced as under:
“i). You have debited a total amount of Rs, 55,14 Cr. on account of business advancement expenses, which have been allegedly incurred on gifts items distributed to various persons. Out of this Rs. 55.14 Cr., you have incurred on expenditure of Rs. 24.32 Cr. on gift items exceeding Rs. 1,000/- each. On perusal of the records, it is seen that the A.O. has not made any inquiry as regards to whom such gift items were distributed and what was the record maintained. The A.O. has also not enquired as to the proof/evidence of such distribution made to various stake-holders. Non inquiry in the matter has rendered the impugned order erroneous and prejudicial to the interest of Revenue.”
II. In this connection, the assessee company submits following details in respect of records available with the Assessing Officer, inquiries made by him and replies /details submitted by the assessee company.
(a) Vide submission dated 17.06.2016 the assessee company submitted copy of Audit Report. Based on the verification of the financial statements, the Assessing Officer asked to provide break-up of Selling, publicity and medical literature expenses amounting to Rs. 279.20 crores as appearing in Note No. 21 “OTHER EXPENSES’ of Profit & Loss account along with explanation for nature of expenses.
In response to that the assessee company submitted the detailed breakup of selling and Publicity expenses incurred for Domestic Market and other than Domestic Market, detailed explanation for nature of such expenditure along with break-up of Business Advancement expenses into items costing more than Rs. 1000/- and those less than Rs. 1,000/- vide submission dated 10.12.2016. Copy of the said reply is annexed herewith vide Ann exu re-1 (A).
(b) On the basis of verification and examination of details submitted vide above mentioned submitted dated 10.12.2016. the assessee company was asked to show cause as to why expenses accounted under the head of Business Advancement Expenses and Doctors’ Sponsorship, which are grouped under Selling and Distribution Expenses, should not be disallowed in view of the CBDT Circular No. 5/2012 dated 01-08-2012 which provides for disallowance of deduction pertaining to freebies given to medical practitioners.
In response to that the assessee company submitted following details vide submission dated / 15.12.2016, copy of which is annexed herewith vide Annexure-1(b).
(i) Note on the nature of such expenses – Para 1.1 on page 1 and 1.2 on page 4
(ii) Types of gift items given – Para 1.1 (b) on page 2
(iii) Category of various persons to whom such gift items are distributed – Para 1.1(c) on page 2
(iv) How such gift items are distributed to various stakeholders by the assessee company –Para 1.1 (d) on page 3
(v) Explanation regarding maintaining records in respect of such expenses – Para 1.1(d) on page 3; and
(vi) Justification for allowability of the said expenses viz-a-viz Circular No. 5/2012 – Para 2 on page 4.
III. The hearings on the above matter were taken up by the Assessing Officer on a number of occasions. Over and above the verification ledger accounts, the Assessing Officer has also viewed certain invoices and/bills, which were made available during the course of the proceedings.
Based on such scrutiny of the aforesaid bills and records of the assesse company and after detailed verification of the bills and invoices on random check basis, the Assessing Officer has made disallowance of 10% of the the entire expenses of Rs. 55.14 crores, after satisfying himself of the fact that the expenses are incurred also for the persons other than Doctors and medical professionals such as associates, business associates, suppliers and such other professionals, etc. as already discussed in the submissions made before the Assessing Officer.
IV. In this connection, it is also important to note that small items costing below Rs.1000/- in each case are also of substantial amount and the balance of the total expenditure comes to 24.32 crores. Further, it is submitted that the small items costing below Rs. 1000/- in each case, given as a memento, would not be hit by the CBDT circular no. 5/2012. even if they are given to medical practitioners (as per MCI Regulation amended by Notification dated 01-02-2016). Therefore, it can be said that the Assessing officer has made disallowance of Rs. 5,51,37,427 out of expenditure of Rs. 24.32 crores, being expenditure on items exceeding Rs. 1000/- in each case.
Apart from above, the Assessing Officer has also made disallowance of entire expenditure of Rs. 25,99,87,036, being expenses on Academic/ Scientific Grants to Doctors etc.
V. Therefore, the observation of your honor that the Assessing Officer has not made any enquiry as regards to whom such gifts items were distributed and what was the record maintained, or as to the proof / evidence of such distribution made to various stakeholders, is, apparently, on incorrect understanding of the facts.
The assessee company also submitted list of the items distributed along with the break-up of items costing more than Rs. 1000 and less than that. This indicates that adequate records have been maintained by the assessee company, as to the expenditure incurred by it for the said expense and on products distributed by it.
It was also explained that these items are not distributed on one to one basis by the assessee company itself, rather these items are generally handed over to the marketing staff and other employees of the company, who in-tura distribute them to the respective persons whom they have been directly interacting / dealing with. These items are distributed to the following persons:
* Distributors,
* Wholesalers,
* Retailers,
* Commission Agents,
* Stockiest,
* Pharmacies,
* Employees,
* Professional consultants,
* Bankers,
* Other Financers,
* Lawyers
* Permanent Suppliers,
* Hospitals, Doctors, others people connected with medical field,
* Independent Scientists and
* Scientific and Research Associations etc.
It is submitted that the assessee company maintains the records pertaining to such expenses, however, it is not possible to maintain the list of the persons to whom these items have been distributed by the marketing staff and other employees of the company, especially considering the nature, value and volume of such products.
VI. On the basis of above, it can be said that it is not a case that there is non-enquiry on the part of the assessing officer in this matter as observed by your honor, but the Assessing Officer has made in-depth inquiries regarding the Business Advancement expenses, which was duly replied by the assessee company during the course of assessment proceedings. The Assessing Officer has also made certain disallowance as mentioned in para 5.1 (III) (supra) for this matter in his assessment order at para 6 on page no. 20-21.
Further, as stated above, the Assessing Officer has also made disallowance of entire expenditure of Rs. 25.99.87.036/-. being expenses on Academic / Scientific Grants to Doctors etc.
5.2 Regarding Business of Baddi and Sikkim Units:
I. Vide para no. (ii) of the above referred notice, your honor has observed that the assessment order passed by the AO is erroneous and prejudicial to the interest of Revenue by stating that AO has failed to make meaningful inquiry as to:
– What kind of medicines being manufactured there (whether API or formulations)
-Source of getting chemistry of molecules, if API is manufactured
-Source of formula / composition, if formulation is manufactured
-Whether the said units required approval from PDA / other regulatory authorities and if yes, who incurred expenses for such approvals?
-Whether unit is manufacturing generic or branded medicines? If branded, whether these old brands belong to company?
-Expenses incurred for business advancement (in India and abroad)
-Expenditure debited to Baddi and Sikkim unit for salary / remuneration to higher management and administrative expenses
-If medicines were exported, expenditure incurred and debited to the books of Baddi and Sikkim unit for export of such formulations.
II. In this connection, the assessee company submits the following details about the records available with Assessing Officer, inquiries made by him and replies and details submitted by the assessee company:
(a) As per the provisions of section 80IC (7) and 80IE(6) read with section 80IA (7), every undertaking claiming deduction under the said provisions is required to get its accounts audited by a Chartered Accountant and furnish the report of such audit in Form no. 10CCB along with the return of income.
The assessee company had maintained separate books of accounts of its Baddi Unit and Sikkim Unit and the said books of account are audited by a Chartered Accountant as required under the above provisions. The copy of such reports along with the Profit and Loss Account and Balance sheet of Baddi Unit and Sikkim Unit were also available with the Assessing officer.
(b) Further, vide submission dated 17.06.2016, the assessee company submitted copy of Acknowledgement of Return of income along with the Statement of Total Income, wherein the claim made by the assessee company u/s. 80IC and 80IE was verifiable.
(c) Basis of Allocation of expenses:
i. On the basis of verification of above documents / details as mentioned in para 5.2 (II) (a) & (b) and explanations provided during the course of hearing, the Assessing Officer asked the assessee company to provide the details regarding expenditure debited to P&L account and the basis of allocation of expenses to Baddi and Sikkim unit.
In this connection, the assessee company explained that all Manufacturing & other direct expenses incurred for the Baddi and Sikkim units have been accounted directly in Baddi and Sikkim unit’s books of account respectively and expenses which are incurred in common for Baddi, Sikkim & other units of company are allocated on the systematic basis as explained in the said submission dated 10.12.2016, copy of which is annexed herewith vide Annexure -2(a)
ii. On the basis of verification of the above submissions, Assessing Officer further asked the assessee company to explain that:
> why the administrative expenses should not be allocated on the basis of turnover ratio of Baddi & Sikkim Unit, instead of allocation of such expenses made by the assessee company on the basis of number of employees;
> why the donation should not be allocated to Baddi & Sikkim unit;
> to justify the basis of allocation of R & D expenses (Development cost) to Baddi & Sikkim unit; and
> explain as to why the Discovery cost of R & D and Capital expenditure on R & D are not allocated to Baddi and Sikkim units
In response to this, the assessee company submitted its detailed explanation vide three replies filed on 13.12.2016 on each of the question raised by the assessing officer. Copies of those replies are annexed herewith vide Annexure-2(B)(i), 2(B)(ii) and 2(B)(iii).
(d) Claim for deduction u/s. 80IC and 80IE of the Act:
From the copy of Form 10CCB submitted by the assessee company, the Assessing Officer verified the basic details, regarding eligibility of claim u/s. 80IC and 80IE of the Act viz.
a. location of the undertaking,
b. commencement of commercial production,
c. articles manufactured or produced i.e. pharmaceutical products (schedule XIV, part C, sr. no. 12) etc.
Thereafter, the AO asked the assessee company to provide the details of other operating income of Baddi & Sikkim Unit and to explain its eligibility for claim u/s. 80IC and 80IE of the Act respectively.
In response to the same the assessee company submitted explanation for eligibility of claim on account of other operating income u/s. 80IC and 80IE of the Act. Copy of the said submissions dated 14.12.2016 and 15.12.2016 is attached herewith vide Annexure-2(C) & 2(D) respectively.
III. After considering the various submissions made by the assessee company and on the basis of various points discussed during the course of assessment proceedings, the assessing officer has in his assessment order made following adjustments:
– Reallocated the expenditure in the nature of Administrative expenses and there by reduced the amount eligible for the claim of deduction u/s. 80IE of the Act by an amount of Rs. 27,74,99,662/-, (Since, the allocation made by the assessee company to Baddi unit was higher than the amount worked out by Assessing Officer, no adjustment was made to increase the amount eligible for claim of deduction u/s. 80IC of the Act) – para no. 19 at page no. 77-79 of the assessment order;
-Rejected the allocation made by the assessee company in respect of development cost related to R&D Center and reallocated the same on the basis of total turnover ratio, thereby reduced the amount eligible for claim of deduction u/s. 80IC and u/s. 80IE of the Act by an amount of Rs. 1,01,69,860/- and Rs. 18,95,26,218/- for Baddi & Sikkim unit respectively – para no. 15&16 at page no. 54-59 of the assessment order:
-Allocated the Capital expenditure and discovery cost of R&D Centre to Baddi & Sikkim unit, rejecting the contention of the assessee company that no such allocation should be made, thereby reduced the amount eligible for claim of deduction u/s. 80IC and u/s. 80IE of the Act by an amount of Rs. 17,83,57,712/- and Rs. 21,86,59,796/- for Baddi & Sikkim unit respectively – para no. 15&16 at page no. 54-59 of the assessment order:
-Reduced the amount eligible for deduction on account of other operating income claimed by the assessee company u/s. 80IC and 80IE of the Act by amount of Rs.6,97,68,075/- and Rs. 30,81,029/- respectively – para no. 9&22-23 at page no. 28-38 & 85-99 of the assessment order:
-Reduced the claim of deduction u/s. 80G of the Act by Rs. 1,73,65,884/- and 80GGB of the Act by Rs. 1,90,25,206/- by allocating the said donations to Baddi & Sikkim Unit – para no. 18 at page no. 73-77 of the assessment order.
The amount of expenses / donation allocated by the assessee company and adjustment made by the assessing officer to expense and the other income claimed by the assessee company u/s 80IC / 80IE and the amount allowed by the assessing officer are summarized as under.
