Case Law Details

Case Name : Pfizer Ltd Vs ACIT (ITAT Mumbai)
Appeal Number : ITA No. 8739/MUM/2011 & 583/MUM/2013
Date of Judgement/Order : 20/11/2015
Related Assessment Year :
Courts : All ITAT (4439) ITAT Mumbai (1463)

Brief of the case: In these two appeal in the matter of Pfizer Ltd. Vs. ACIT, Mumbai Bench of the ITAT have decided various issues, like;

ITA No.8739/M/2011, for A.Y. 2007-08

  • Adjustment of Rs.1,88,83,489/- in relation to the assessee’s international transactions of provision of support services
  • Denial of (+/_) 5% range benefit available under proviso to section 92C(2)
  • Taxation of Rs.5,98,81,000/- being rental income from leased properties, as profit and gains of business or profession, instead of income from house property.
  • Disallowance u/s.40(a)(ia) of the Act, being the payments made to manufactures towards purchase of finished goods
  • Re-computation of capital gain in reference with the report of DVO.

ITA No.583/Mum/2013, for AY 2008-09

  • Adjustment to ALP on account of interest on outstanding receivable.
  • Taxation of Rs.6,21,49,000/- being rental income from leased properties as ‘Profits and Gains of Business or Profession’, instead of ‘Income from House Property’.
  • Disallowance u/s 40(a)(ia), on account of payments made to manufactures towards purchase of finished goods.
  • Disallowance u/s 40(a)(ia) on account of payments made towards clinical trial expenditure.
  • Treatment of profit on sale of right to use the trademark/license pertaining to consumer health brands treated as short term capital gains instead of long term capital gains.
  • Addition made on account of mismatch of individual transaction statement transactions with insurance companies.

Adjustment of Rs.1,88,83,489/- in relation to the assessee’s international transactions of provision of support services

  • Assessee provided support services to its AE in relation to coordination and managing the clinical trial performed by third party institutions/hospitals/ Trust in India.
  • Assessee company is earning assured return by adding 10% mark-up on the total cost and it has characterized itself as a low risk support service provider.
  • As per assessee it should be compared with support services providers rather than comparables engaged in providing high end clinical research and development activities.
  • The assessee has further explained that its role is to identify and recommend the investigators who have capabilities to undertake the clinical trial base on parameters laid down by the AE.
  • The assessee also contended that the TPO has not provided the benefit of 5% range as prescribed in the Proviso to Section 92C(2) of the Act.
  • The assessee has relied on the decision of Mumbai Bench of the Tribunal in the case of Zydus Altana Healthcare Pvt. Ltd, wherein activity in the nature of coordinating / facilitating clinical trials carried out by various hospitals rather than performing the R & D functions itself, for a return of 5% on cost, was accepted at arm’s length.
  • The DRP rejected the submissions of the assessee and upheld the adjustment made by the TPO.
  • After hearing the case ITAT have held that the real issues raised by the assessee in detailed submissions filed before the DRP have not been dealt with properly. It appears that the DRP could not properly appreciate the facts of the case and issues involved therein.
  • Therefore, in our considered opinion, this ground needs to go back to the file of the DRP to re-adjudicate the same, and to decide all the issues raised by the assessee in the submissions filed before it.
  • Action of denial the (+/_) 5% range benefit as per provision of 92 C (2) is consequential to above ground and the same is remitted back to the file of AO.

Taxation of Rs.5,98,81,000/- being rental income from leased properties, as profit and gains of business or profession, instead of income from house property.

  • In its Profit & Loss Account, the assessee had credited a sum of Rs.5,98,81,000/- being rental income from sub-leasing of office premises situated at Express Towers, Nariman Point, Mumbai, which was owned by the Indian Express Group.
  • The assessee company reduced the said rental income of Rs.5,98,81,000/- from its income under the head “Income from Business & Profession” and shown the same under the head “Income from House Property” and taxed it accordingly.
  • Assessing Officer felt that assessee company was not the owner of the premises, so he treated the rental income under the head business and profession.
  • Assessee stated that the Indian Expression Group has granted irrevocable permission to the assessee to sub-lease the said leased premises, upon such terms and conditions as may be found fit by the assessee company, further, as the lease period exceeds 12 years, the assessee is the ‘deemed owner’ of the leased premises in terms of the provisions of section 27(1)(iii)(b) r.w.s. 269UA(f) of the Act.
  • Assessee contended that this issues are covered in favour of the assessee by the judgment of Hon’ble Bombay High Court in assessee’s own case reported as CIT vs. Pfizer Ltd 330 ITR 62 in which High Court has affirmed the order of Tribunal holding that the rental income received by the assessee from sub-lease of the commercial prices was to be considered as ‘income from house property’.
  • Surprisingly, the DRP refused to follow the order of Hon’ble Jurisdictional High Court, given in assessee’s own case and chose to follow the view taken by the AO, that too without pointing out any distinction in facts or law.
  • After considering the facts ITAT held that the judgment of jurisdictional High Court that too in assessee’s own case must have been followed, strictly and respectfully.
  • Respectfully following the judgment of jurisdictional High Court we decide this issue in favour of the assessee and direct the AO to assess the impugned rental income under the head, “income from house property”.

Disallowance u/s.40(a)(ia) of the Act, being the payments made to manufactures towards purchase of finished goods

  • During the year under consideration, the assessee made payments to the third party manufacturers for purchase of finished goods amounting to Rs.9166.75 lacs and for purchase of packaging material amounting to Rs.4370.60 lacs.
  • The assessee made the said payments without deduction of tax at source considering that the payments were made for contract of ‘sale of goods’ and hence, not liable for deduction of tax at source.
  • The AO contended that the these payment constitutes contractual payments and hence, liable for tax deduction at source under the provisions of section 194C.
  • The AO made a disallowance under section 40(a)(ia) of the Act on account of non-deduction of tax at source.
  • On reference to the DRP, assessment order was confirmed after considering the definition of ‘work’ as provided in the explanation to section 194C of the Act and hence held the same to be liable to deduction of tax at source.
  • Assessee contended that it has entered into agreements with various third party manufacturers/suppliers for the supply of finished goods. According to which, based on the specifications of the assessee, the manufacturers purchase the requisite raw materials, manufacture the products in their premises and deliver the final finished products.
  • The packaging material is supplied as per the instructions given in the purchase order. The invoice raised for the supplies is inclusive of the Excise duty and Sales tax as in the case for normal purchase of material.
  • The payments are made to these independent manufacturers/suppliers as per the terms of the agreements.
  • The Manufacturer pays Excise duty and VAT on the goods and the title in the goods is transferred to the appellant at the time of delivery. In view of these features, it was submitted that these transactions were in the nature of purchase/sale of goods and hence not covered under section 194C of the Act.
  • Amendment has been made u/s 194C by Finance Act 2009, whereby, in the definition of term “Work”, an exclusion has been made providing that, “work” does not include manufacturing or supplying a product according to the requirement or specification of the customers by using material purchased from a person, other than customer.
  • Reliance has been placed on the circular of CBDT, No. 681 dated 8th March 1984, wherein it has been provided that provisions of section 194C would not be applicable in case of contract for sale of goods.
  • After going through the facts of the case ITAT held that in Finance Act 2009, it has been provided that the expression ‘work’, as used in section 194C, shall not include payments made for manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer, but does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer.
  • It is further noted that in the Explanatory Memorandum to the Finance Bill, 2009, explanatory statement clarifies that intention of the legislature for bringing out this amendment was to avoid unintended consequences which the taxpayers were facing as a result of wrong application of pre-amended section 194C.
  • The Legislature wanted to remove the hardships faced by the assessee in such cases. There was no intention of the legislature for deduction of tax at source in the cases of transactions of pure sale and purchase. Therefore, to remove this anomaly, this amendment was brought out, for the benefit of the assessee.
  • Thus, in our view, the aforesaid amendment made in the definition of term “works”, in section 194C is clarificatory in nature, and therefore, assessee should get its benefit in assessment year 2007-08 also.
  • The CBDT had issued Circular No.681 dated 8th March 1984 providing that a contract undertaken to supply any article or goods according to the specifications given by any person and the property in such article or thing passes to such person only after such article or thing is delivered, then contract will be a contract for sale and as such outside of the proviso of section 194C.
  • Thus, in view this circular as well as amendment brought out by Finance Act, 2009, ITAT held that the impugned transactions were not liable for deduction of TDS u/s 194C.

Re-computation of capital gain in reference with the report of DVO

  • During AY 2007-08 assessee had sold the property at Chandigarh for a total consideration of Rs. 2,74,73,00,000/-. In the agreement to sell an amount of Rs. 2,72,98,00,000/- was allocated towards the Chandigarh land out of the aforesaid total consideration.
  • In respect to the said land the assessee had obtained a Valuation report from a Government Registered Valuer which determined the fair market value of the land as on 1 April 1981 at Rs. 12,54,52,800/-.
  • In the ROI, the assessee had offered long term capital gains of Rs. 2,02,64,67,043/- on sale of land at Chandigarh.
  • AO referred the valuation DVO u/s 55A of the Act. Pursuant to the same, the DVO issued a valuation report determining the FMV of the Chandigarh Land at Rs. 36,974,000/-.
  • Assessee objected the said valuation by DVO but AO continued to complete assessment on the basis of valuation report.
  • The DRP upheld the action of the AO in rejecting the cost of acquisition as on 1st April 1981 and indexation thereof as per Registered Valuer’s Report and instead adopted the FMV of Rs. 3,69,74,000 as on 1st April 1981 as per DVO’s report.
  • Assessee contended that a reference to the DVO under section 55A(a) of the Act could be made only if the AO is of the opinion that the value claimed by the assessee was less than the FMV.
  • In the instant case, the value determined by the DVO was in fact, lower than that claimed by the assessee, i.e. the value as per the Registered Valuer.
  • It was further submitted that a reference to the Valuation Officer under section 55A(b) can be made only in a case where the assessee has not furnished a valuation report.
  • Reliance was placed on the decision of the jurisdictional High Court in the case of CIT vs Puja Prints, 360 ITR 697 (Bombay) where it was held that if a report of a registered valuer has been taken by the assessee, then the provisions of section 55A(a) only are applicable and section 55A(b) has no application, and further if the value determined by the DVO is lower that than claimed by the assessee, then the reference to the DVO is not valid.
  • It has been argued by revenue that reference has been made by Ld. DVO u/s 55A(b)(ii) and not in section 55(A(a), he placed reliance upon Board’s circular No.96 dated 25.11.1972.
  • Tribunal after considering the facts and case of CIT vs Puja prints (Supra) have held that Hon’ble Jurisdictional High Court has also considered the amendment made under the law and held that the same is prospective and 26 Pfizer Limited not retrospective in nature, and therefore, Revenue cannot be given the benefit of amendment.
  • It has been further held by the Jurisdictional High Court that in all those cases which are covered by section 55A(a), resort cannot be made to the residuary clause provided in section 55A(b)(ii).
  • In other words, reference u/s 55A(b)(ii) can be made only in those cases which are not covered by this section 55A(a).
  • It is noted by the court that clause (a) covers those cases where the value of asset is adopted by the assessee on the basis of report of registered valuer.
  • The present case is clearly covered under clause (a), since the assessee had adopted the value of the impugned land as on 01.04.1981 on the basis of report of registered valuer.
  • Thus, under such circumstances invocation of clause (b)(ii) of section 55A was ousted, and therefore, reference could have been made by the AO u/s 55A (a), only.
  • The facts of the assessee has been clearly covered by Hon’ble Jurisdictional High Court in the case of Puja Prints (supra), as per which the AO was empowered under the law to make a reference to DVO, if in his opinion the fair market value of the impugned property was more than the value as adopted by the assessee in the return of income on the basis of report of its registered valuer.
  • Therefore, respectfully following the same we hold that reference made by the DVO was bad in law and is held to be invalid.
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Category : Income Tax (25515)
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Tags : ITAT Judgments (4619) Jagjeet Singh (141) Section 194C (126)

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