Written off of stock allowable if the same had no realizable value

Glaxosmithkline Asia Pvt. Ltd. Vs D.C.I.T. (ITAT Chandigarh)

Conclusion: Since the major write off claim evidently pertained to vaccines which assessee consistently claimed had been nearing expiry and thus had no realizable value and nothing had been pointed out regarding the insufficiency of evidences filed by assessee, therefore, the claim of assessee was fully justified for write off  of vaccines since undoubtedly such vaccines were not capable of being used beyond expiry period and had no realizable value thereafter.

Held:  Assessee company was in the business of manufacturing and trading of drugs and oral health care products. During the year it claimed deduction of Rs. 50,79,000/- on account of write off stocks on the ground that it had discontinued dealing in one of its products i.e. Aquafresh Tooth Brush and vaccine stocks nearing expiry were not capable of being sold in the market. AO disallowed the same stating that assessee was unable to substantiate its claim. CIT(A) upheld the disallowance. Assessee pointed out that write off of Rs.50.79 lacs pertained to stock of aquafresh tooth brush of Rs.12.46 lacs and the balance pertained to write off of stock of vaccine. Assessee contended that major portion of the write off related to vaccines and which had been duly submitted to the authorities below that they were nearing expiry and hence not capable of being sold in the market. It was held that the major write off claim evidently pertained to vaccines which assessee consistently claimed had been nearing expiry and thus had no realizable value. Copies of emails exchanged within the assessee company seeking approval for release, write off and destruction of stock of vaccines nearing expiry mentioning specifically the stock of such vaccines, mails granting approval granting for the same, as also sample copies of stock write off sheets of the vaccines were filed to CIT(A).Therefore it was not that the claim was entirely unsubstantiated. Further despite the repeated assertion of  assessee that the vaccines written off were nearing expiry, evidenced with emails so exchanged and the stock write off sheets so mentioning, the Revenue had not brought anything on record to controvert the said claim. Nothing had been pointed out regarding the insufficiency of evidences filed by assessee. Therefore, the claim of assessee was fully justified vis a vis write off of vaccines since undoubtedly such vaccines were not capable of being used beyond expiry period and had no realizable value thereafter. As for the write off of Aquafresh tooth brush assessee had explained to CIT(A) the reasons for discontinuation of the business and the consequent withdrawal of the toothbrushes, from the market, being commercially unviable and had as evidence filed copy of the Board resolution dated 25-11-2003 to this effect. Thus, assessee had been able to establish documentarily the fact of write off of the said product and the Revenue had not proved anything to the contrary. The claim of assessee to write off of toothbrush also was therefore allowed.

FULL TEXT OF THE ORDER OF ITAT CHANDIGARH

The above appeals relate to the same assessee and pertain to different assessment years. The appeal in ITA No.2453/Del/2016 relates to assessment year(A.Y) 2005-06 and is directed against the order passed by the Commissioner of Income Tax (Appeals)-2, Chandigarh (in short referred to as CIT(A) dated 29.02.2016 , u/s 250(6) of the Income Tax Act,1961, (hereinafter referred to as ‘Act’) . The appeal in ITA No.532/Chd/2014, relates to assessment year 2006-07 and is directed against the order of the Assessing Officer dated 31-03-2014, passed u/s 143(3) r.w.s. 144C(5) & 254/153(2A) of the Act, passed in accordance with the directions of the Dispute Resolution Panel(DRP in short), in second round, on the directions of the ITAT.

It was common ground that the issues involved in both the appeals were identical, they were therefore heard together and are being disposed off by a common consolidated order.

Ld. Counsel for the assessee contended that A.Y 2005-06 was the base year and the additions/adjustments made therein had been reiterated in the succeeding year ,i.e A.Y 2006-07.The appeal for A.Y 2005-06 was therefore first taken up for hearing.

ITA No.2453/Del/2016 A.Y 2005-06.

2. Ground No.1 raised by the assessee reads as under:

“1.      That the Commissioner of Income-tax (Appeals) erred on facts and in law in sustaining the disallowance of stock written-off of Rs. 50,79,000 allegedly holding that the appellant failed to produce evidence of (i) informing the excise authorities or other regulatory authorities for destruction of such goods and (ii) intimating the dealers/ stockiest for not selling Aquafresh toothpaste, to substantiate the claim.”

3. Brief facts relating to the issue are that the assessee company is in the business of manufacturing and trading of drugs and oral health care products. During the year it claimed deduction of Rs. 50,79,000/- on account of write off stocks on the ground that it had discontinued dealing in one of its products i.e. Aquafresh Tooth Brush and vaccine stocks nearing expiry were not capable of being sold in the market. The Assessing officer disallowed the same stating that the assessee was unable to substantiate its claim. The Ld.CIT(A) upheld the disallowance at para 6.3 of his order as under:

“6.3 The submission of the appellant have been considered. The Assessing Officer asked the precise evidence related to destruction of stock, reconciliation of unsold goods lying at depot, how it was destroyed and evidence related to closer of business. However, no definite findings of the AO on the disallowance of write off stocks is available in the assessment order. It is seen, that similar disallowances were made by the AO in the case of the appellant company in assessment year 2004-05 on the ground that no evidence that these goods were destroyed were submitted by the assessee to substantiate its claim. I have carefully considered the submission of the assessee and various evidence on record. There is no evidence to substantiate the claim, that the appellant company informed the excise authorities and other regulatory authorities with regard to the destruction of stock of Rs. 59,79,000/-. There is also no evidence to suggest that the appellant intimated the dealers/ stockiest not to sale Aquafresh Toothpaste w.e.f. the date of discontinuation of business of Aqua Toothpaste. Therefore, in the absence of any evidence to support the claim of the assessee for write off stock, the disallowance is sustained. Ground of appeal No.2 is dismissed.”

4. Before us the Ld. Counsel for the assessee contended that identical disallowance made in assessment year 2003-04 in the case of the assessee had been deleted by the ITAT. Our attention was drawn to the relevant findings of the ITAT in its order passed in the said case in ITA No. 1323/Chd/2012 dated 28-09-18, at para 10-11, as under:

“10. We have gone through the entire history of the case and the facts on record. On the issue of whether the expenditure incurred on destruction of the goods be treated as capital expenditure as held by the Revenue, we are not in agreement with any of the points taken up by the Revenue mentioned above. While the issue before us is destruction of the stock and claiming consequently the expenditure as revenue expenditure, the Revenue’s submission that it is an item of disbursement and hence may be regarded as capital in nature cannot be accepted. Similarly this expenditure as pointed out in point no. 3 of the Revenue’s submission cannot be considered as relates to any frame work of business or as mentioned in the point no. 1 doesn’t bring out any new asset. The Revenue’s reliance that this write off be treated as capital expenditure based on the contention that the action of recalling of the product amounts to termination of agency and purely voluntary for obtaining substantial benefit cannot be accepted in the facts of the case. Based on the settled position of law as to what constitutes a capital expenditure, this write off of stock cannot be treated as capital expenditure. We are also not in agreement with the contention of the Ld. DR that these expenditures were not related with particular previous year but were related to many earlier years cannot be accepted as these products constitute a part of the closing stock for the instant year.

11. Now coming to the issue whether this expenditure has been incurred by the assessee indeed or not, the matter was referred back to the Assessing Officer to examine this specific issue in the first round of appeal by this Tribunal. The assessee could establish documentarily the fact of destruction of the off shelved products and the Assessing Officer has absolutely not discussed this issue to prove anything contra, we hereby allow the appeal of the assessee on the issue that the value of the goods destructed be treated as Revenue expenditure for the year in appeal. The Assessing Officer is hereby directed to determine the “actual cost” incurred in manufacturing of the product and allow the amount accordingly.”

5. The Ld. Counsel for the assessee further pointed out that write off of Rs.50.79 lacs pertained to stock of aquafresh tooth brush of Rs.12.46 lacs and the balance pertained to write off of stock of vaccine. The Ld. Counsel for the assessee contended that major portion of the write off related to vaccines and which had been duly submitted to the authorities below that they were nearing expiry and hence not capable of being sold in the market.

The Ld. Counsel for the assessee contended that this fact has not been controverted by the Revenue and, therefore, when the vaccines itself were not capable of being used, they had no realizable value and the write off therefore of the same was justified. With regard to the claim of write off of toothbrush the Ld. Counsel for the assessee pointed out that it had been explained that the assessee company had decided to discontinue this line of business finding it commercially unviable and hence the stock was withdrawn from the market. He pointed out that evidence in the form of write off sheets approving the write off of the products, and copy of Board Resolution dated 11-03-2004 approving the write off had been filed. That therefore, it was incorrect on the part of the Revenue Authorities to hold that the write off was unsubstantiated. The Ld. Counsel for the assessee further pointed out that the D.R.P. in assessee’s own case had held the claim of the assessee on impairment of the stock as allowable revenue expenditure. A brief submission of its arguments in this regard was filed before us and are being reproduced hereunder:

“The appellant is engaged in the business of manufacture and sale of OTC products, viz., Eno. Crocin and oral healthcare products, etc. The appellant is also engaged in resale / distribution of vaccine. The appellant has in the relevant previous year written off in the profit and loss account stock amounting to Rs. 50.79.000 comprising of the following:

(a) During the relevant previous year, the appellant has written off the stock of following vaccine aggregating to Rs.38.33 lacs, which were nearing expiry:

(Rs. in lacs)

Brand	Quantity	Value
Fluarix	13.820	17.28
Mencevax	5.884	20.07
Priorix.	246	0.34
Tvpherix	653	0.64
		38.33

(b) The appellant had discontinued its business of manufacture of Aquafresh Tooth Brush and the said product was withdrawn from the market. Therefore, the entire inventory of Aquafresh Tooth Brush, related raw material and packing material were withdrawn and destroyed. Accordingly, the appellant has written off stock of Aquafresh toothbrush amounting to Rs. 12.46 lacs. The write off of such stock is supported by (i) stock write off sheet approving the write off of such products, (n) Copy of resolution of the meeting of the Board of Directors held on 11-03-2004 for discontinuation of Aquafresh toothbrush business [Pg. 269­308 of PB – Merits (Reply dated 14.06.2013)1- The loss aggregating to Rs. 50,79,000 on account of write off of such stock of vaccine and Aquafresh toothbrush was claimed as revenue deduction in the relevant previous year [Pg. 1 of PB – Merits (Audited Accounts)].

The assessing officer, while completing the assessment, made disallowance of such stock written off. The assessing officer did not record any finding I reason for making the said disallowance.

The action of the assessing officer in making disallowance of write off of stock amounting to Rs.59,79,000 as aforesaid is unlawful and is not sustainable for the reasons submitted as follows:

In our respectful submission, the appellant as per the consistent method of valuation of stock values the closing stock at cost or net realisable value, whichever is lower as mandated by Accounting Standard — 2 on ‘Valuation of inventories’ prescribed by the Institute of Chartered Accountants of India. Since such stocks could not be sold in the market, the net realizable value of such stock was taken as ‘Nil’. The market price in the instant case being Nil, In accordance with the consistent method of valuation of inventory followed by the appellant, the value of these items was written down to Nil and was reduced from the value of the inventories.

The method of valuation of stock, it is respectfully submitted, is in accordance with the accepted principles of accounting propounded by the institute of Chartered Accountants of India. The Courts in India, too, have accepted the method of valuation of obsolete/defective stock at net realisable value being lower than cost.

Reliance in this regard is also placed on the following decision:

– Chainrup Sampatram vs. CIT : 24 1TR 48 (SC)

–  K. Mohammad Adam Sahib v. CIT : 56 1TR 360 (Madras HC)

–   India Motor Parts and Accessories (P) Ltd. v. CIT : 60 ITR 531 (Madras HC)

–  CIT v. Dalmia Cement (Bharat) Ltd.: 215 ITR 4411 (Delhi HC)

–   CIT vs. Bharat Commerce & industries Limited : 240 ITR 256 (Delhi HC)

–   Hotline Tele Tube and Components Limited: 175 Taxman 286 (Delhi HC)[Pg. 35-36 of PB-CL for AY 2004-05 & 2005-06]

–   C1T v. Hughes Communication India Ltd.: 215 Taxman 136 (Delhi HC) [Pg. 37-39 of PB-CL for AY 2004-05 & 2005-06]

–  CIT v Becton Dickinson India (P.) Ltd.: 214 Taxman 636 (Delhi HC) [Pg. 40-42 of PB-CL for AY 2004-05 -& 2005-06]

–   CIT v Bharat Commerce & Industries Ltd.: 107 Taxman 135 (Delhi HC) [Pg. 43-45 of PB-CL for AY 2004-05 & 2005-06]

–  IAC v. Consolidated Pneumatic Tool Co. (India) Ltd.: 14 1TD 564 (Bom. Tribunal)

–  Wipro Limited vs. DCIT : 96 TTJ 211 (Bangalore Tribunal).

–  Samsung India Electronics Limited (ITA No. 3734/Del/2002) (Delhi Tribunal)

–  Jet Airways India (P) Ltd. vs CIT (in 4228/M/2000 for assessment year 1997-98;

3349/M/2002 for assessment year!998-99; 2682/M/2003 for assessment year 1999-2000;

5945/M/2003 for assessment year 2000-01; 7389/M/2004 for assessment year 2001-02;

4087/M/05 for assessment year 1997-98; 3691/M/02 for assessment year 1998-99; 3201/M/03 for assessment year 1999-2000; 6084/M/03 for assessment year 2000-01; 7390/M/04 for assessment year 2001-02) (Mumbai Tribunal)

–   Emersons Process Management India (P) Ltd. vs Addl. CIT: IT Appeal No. 8118 (Mum.) of 2010 [Pg. 46-66 of PB-CL for AY 2004-05 & 2005-06)

–  Digital Equipment India Ltd. vs CIT: ITA No. 6623 and 6624(Bom.)/2008 Assessment Years 1990-91 and 1991-92 ITA Nos. 7466, 6707 and 6708(Bom.)/1995 Assessment Years 1989­90, 1990-91 and 1991-92 [Pg. 67-80 of PB-CL for AY2004-05 & 2005-06]

–   CIT v Nuware India Ltd,: 118 ITD 70 (Del) [Pg. 81-93 of PB-CL for AY 2004-05 & 2005-06]

The ld. CIT(A), however, sustained the disallowance holding that:

3. The submission of the appellant have been considered. The assessing officer asked the precise evidence related to destruction of stock, reconciliation of unsold goods lying at depot, how it was destroyed and evidence related to closer of business. However, no definite findings of the AO on the disallowance of write off stocks is available in the assessment order It is seen, that similar disallowances were made by the AO in the case of the appellant company in assessment year 2004-05 on the ground that no evidence that these goods were destroyed were submitted by the assessee to substantiate Us claim. I have carefully considered the submission of the assessee and various evidence on record. There is no evidence to substantiate the claim, that the appellant company informed the excise authorities and other regulatory authorities with regard to the destruction of stock of Rs. 59, 79,000/-. There is also no evidence to suggest that the appellant intimated the dealers/stockiest not to sale Aquafresh Toothpaste w.e.f the date of discontinuation of business of Aqua Toothpaste. Therefore, in the absence of any evidence to support the claim of the assessee for write off stock, the disallowance is sustained. Ground o appeal No. 2 is dismissed.

It is submitted that the appellant, vide letter dated 14.06.2013 filed before the Id. CIT(A) additionally submitted the sample copies of stock write off sheets and email approvals, etc. related to write off of vaccines along with copy of hoard resolution dated 25.1S.2013, in order to support its claim of provision made for write off of stock [Pg. 269-308 of PB – Merits (Reply dated 14.06.2013)]. The C1T(A), merely on the ground that there is no evidence to show that, the assessee has informed the excise authorities and other regulatory authorities with regard to the destruction of stock, sustained the aforesaid disallowance, when, in fact, there is no requirement to inform the excise authorities and other regulatory authorities for creating provision of obsolete stock.

 Further, the DRP, in appellant’s own case for assessment year 2006­07 held the claim of the appellant for deduction of expenses on impairment of stock as allowable revenue expenditure [Page 26 of PB -CL for AY 2004-05 and 2005-06].

In view of the aforesaid, it is respectful submission of the appellant that any disallowance of the expenses in respect of the impairment of stock amounting to Rs. 50.79 lacs is not sustainable and is liable to be deleted.”

The Ld. DR on the other hand relied on the order of the Ld. CIT(A).

6. We have heard both the parties and have also gone through the documents and decisions relied /referred to before us. The claim of write off of stock amounting to Rs. 59,79,000/- has been denied for want of evidence. The write-offs claimed by the assessee relate to the following:

Vaccines	37.33lacs
Aquafresh toothbrush	12.46 lacs.
Total	57.79 lacs

The major write off claim evidently pertains to vaccines which, we find, the assessee consistently claimed had been nearing expiry and thus had no realizable value. Copies of emails exchanged within the assessee company seeking approval for release, write off and destruction of stock of vaccines nearing expiry mentioning specifically the stock of such vaccines, mails granting approval granting for the same, as also sample copies of stock write off sheets of the vaccines were filed to the CIT(A).Therefore it is not that the claim was entirely unsubstantiated. Further despite the repeated assertion of the assessee that the vaccines written off were nearing expiry, evidenced with emails so exchanged and the stock write off sheets so mentioning, the Revenue has not brought anything on record to controvert the said claim. Without pointing out any infirmity in the explanation of the assessee duly evidenced with documents, we hold, the claim could not be denied for want of further evidence. Nothing has been pointed out regarding the insufficiency of evidences filed by the assessee. Then why further evidences were needed to substantiate the claim we are unable to understand. In the light of the same, we hold, the claim of the assessee as fully justified vis a vis write off of vaccines since undoubtedly such vaccines were not capable of being used beyond expiry period and had no realizable value thereafter.

As for the write off of Aquafresh tooth brush the assessee we find had explained to the CIT(A) the reasons for discontinuation of the business and the consequent withdrawal of the toothbrushes, from the market, being commercially unviable and had as evidence filed copy of the Board resolution dated 25-11-2003 to this effect. Thus, we find that the assessee has been able to establish documentarily the fact of write off of the said product and the Revenue has not proved anything to the contrary. For the reasons stated above in the context of write off of vaccines we see no reason to disallow the claim of the assessee. Moreover identical claim of the assessee, we have noted, was allowed by the ITAT in identical facts and circumstances in A.Y 2003-04. The claim of the assessee to write off of toothbrush also is therefore allowed

In effect the entire claim to write off amounting to Rs. 59,79,000/- is allowed.

Ground No.1 raised by the assessee is allowed.

7. Ground No.2 raised by the assessee reads as under:

“2. That the Commissioner of Income-tax (Appeals) erred on facts and in law in sustaining the disallowance of Rs. 8,94,33,333, being 1/3^rd of the expenditure on advertisement and promotion of Rs.26, 83,00,000 allegedly on the ground that the said expenditure resulted in promotion of brand name owned by the foreign company.

8. Brief facts relating to the issue, as find mention in the order of the Ld.CIT(A) at para 7.1, are that the assessee company during the relevant year incurred expenditure of Rs. 26,83,00,000/- on advertisement and sale promotion. The Assessing officer noted that assessee company was spending on advertising and marketing and therefore, it had built a formidable marketing network in India. That by incurring these expenses it was generating benefits to the parent company i.e. GSK Pic, UK who owned the brand. The AO further noted that the said expenses were incurred in promoting the brand in India, the benefit of which was ultimately to be derived by the parent company. The AO further observed that there was a strong nexus between the expenses on advertisement and the revenues of the Associated Enterprises and therefore, the AE should contribute towards advertisement expenditure incurred by the assessee in India. That this arrangement was concocted to lower the profit of the assessee company and to save on the expenditure of the parent company and therefore, 1/3 of the advertising expenses were held to be towards brand building for the entities owning the brand and were disallowed by AO as not being business expenses of the assessee company.  An addition of Rs.8,94,33,333/- (being 1/3 of Rs .26,83,00,000/-) was accordingly made.

9. Before the Ld. CIT(A) the assessee made detailed submissions, reproduced at para 7.2 of the CIT(A)’s order, to the effect that the impugned expenses were incurred at the local level and were routine expenses incurred to beat the competition in the trade, that immediate beneficiary of the expenses was the assessee which got reflected in the increased turnover and profitability. That the expenses had not been incurred for brand building and the benefit, if any, to the affiliated company was only incidental. The Ld.CIT(A) was not convinced with the submissions of the assessee and accordingly upheld the order of the AO stating that since there is no denying the fact that incurrence of advertisement expenses resulted in promotion of the brand name owned by the parent company, the said expenses it cannot be said to have been incurred wholly and exclusively for the purpose of assessee. Relevant findings of the Ld.CIT(A) at para 7.3 of his order are as under:

“7.3 The submission of the appellant have been considered. The assessing officer has disavowed 1/3 o advertisement expenses incurred by the appellant company on the ground that brand owned by the parent company ie GSK Pic, UK is being promoted and therefore benefit is reaching to the parent company. The appellant has submitted that even it is presumed that the benefit of the said advertisement accrues to the owner of the brand, than too it would not be commercially expedient for the assesses to recover any amount on account of advertisement from the owner of the brand as the owner of the such brand has allowed the appellant to use their brand without charging any royalty. The similar issue was before the DRP in AY 2006-07 wherein appellant submitted that even if there is some incidental benefit derived by the parent company in the promotion of brand name the entire expenses are eligible for deduction u/s 37(1) of the Act. Therefore, there is no denying the fact that incurring of advertisement expenses has resulted in the promotion of brand name owned by the parent company in UK. Hence, the contention of the appellant that the entire advertisement expenses have been incurred wholly and exclusively for the purpose of the business of the appellant cannot be accepted. Therefore, the entire expenses cannot be attributed to the business of the appellant and AO has rightly attributed 1/3 of such expenses to brand building. The disallowance made by the AO of Rs.8,94,33,333/- is upheld. Grounds of appeal No.3, 3.1, 3.2, 3.3, 3.4 and 3.5 are different.

10. Before us, the Ld. Counsel for the assessee reiterated the submissions made before the CIT(A). At the outset he drew our attention to the details of advertisement and promotion expenses, 1/3^rd of which was disallowed by the AO, as reproduced in the brief submissions filed before us and pointed out that it was evident from the same that all expenses were incurred for promoting the sales of the assessee company only and had nothing absolutely to do with the promotion of the brand of the parent company. That the assessee locally incurred routine expenses for advertising and promoting the products dealt in by the assessee company for increasing its turnover. The Ld. Counsel for the assessee contended that the assessee was in the business of manufacture and sale of over the counter products i.e. eno, crocin, etc., for which it had acquired the licence to manufacture and sell in India from M/s GSK PLC. That the assessee was the exclusive user of the brand name of such products in India. The Ld. Counsel for the assessee contended that the benefit of the entire expenses inured to the assessee only by way of higher sales and higher profits and the benefit, if any, to the parent company was only incidental and, therefore, the expenditure was incurred wholly and exclusively for the purpose of the business of the assessee and was thus allowable. He contended that the reasonableness of expenditure has to be seen from the stand point of the business man and not that the revenue. A number of case laws were relied upon in support of his contention. A brief gist of the submissions, filed before us is as under:

“During the relevant previous year, in order to promote the sales of products produced/ traded and marketed in India, the appellant incurred expenses amounting to Rs. 26.83.00,000 on advertisement and sale promotion expenses respectively [Pg. 62 of PB-Merits].

Advertisement and Promotion expenses	Amount
Media-Tele vision	956.96
Media-Radio	12.46
Media-Film	4.43
Media-Press	5.05
Out Door Media / Internet Advertising	0.00
Prod – Television	82.26
Production – Radio	0.00
Production-Press	0.07
Out Door Production	0.00
Consumer / Product Research	229.14
ORG-Retail Service	17.60
Other Marketing Related Expenses	51.88
Consumer Promotion/Relation/Samples	142.80
Mailings	6.62
Literature	297.63
POP	71.93
Promotional Packaging	3.09
Promotional materials to doctors, etc.	36.99
Medical Conference	24.27
Trade Marketing/Field Activity	221.08
Medical Marketing & Rural Promotion	286.14
Promotional Products to consumers	233.32
Total	2,683.00

The assessing officer, held that (i) the appellant has Incurred a large amount on advertisement and publicity which is resulting in benefit to the associated enterprises who own the brand and (ii) the appellant was not able to demonstrate as to how it is wholly benefited from such brand building and that whole arrangement was concocted to lower its profit and to save expenditure of the associated enterprises. The assessing officer, accordingly made an adhoc disallowance of Rs.8,94,33,337 being 1/3^rd of the expenditure on advertisement and publicity. The CIT(A) vide order dated 24-03-2014 disposed off the appeal filed by the appellant challenging the said disallowance holding as under:

“7.3  The submission of the appellant have been considered. The assessing officer has disallowed 1/3 of advertisement expenses incurred by the appellant company on the ground that brand owned by the parent company i.e. GSK Plc. UK is being promoted and therefore, benefit is reaching to the parent company. The appellant has submitted that even it is presumed that the benefit of the said advertisement accrues to the owner of the brand, than too it would not be commercially expedient for the assessee to recover any amount on account of advertisement from the owner of the brand as the owner of the such brand has allowed the appellant to use their brand without charging any royalty. The similar issue was before the DRP in AY 2006-07 wherein appellant submitted that even if there is some incidental benefit derived by the parent company in the promotion of brand name the entire expenses are eligible for deduction u/s 37(1) of the Act. Therefore, there is no denying the fact that incurring of advertisement expenses has resulted in the promotion of brand name owned by the parent company in UK. Hence, the contention of the appellant that the entire advertisement expenses have been incurred wholly and exclusively for the purpose of the business of the appellant, cannot be accepted. Therefore, the entire expenses cannot be attributed to the business of the appellant and AO has rightly attributed 1/3 of such expenses to brand M/s. GlaxoSmithKline Asia Pvt. Ltd. “

The disallowance made by the assessing officer and sustained by the C1T(A) is unlawful and not sustainable for the reasons submitted as under:

The appellant is engaged in the business of manufacture and sale of ‘Over the Counter” (OTC) products, viz. ENO, Crocin etc. The appellant vide agreement dated 18-01-1996 with GSK plc. (earlier known as SB plc.) [Pg. 1-7 of PB – CL 1 for AY 2006-07] acquired license to manufacture and sale of such products in India. The appellant, it is submitted, is the exclusive user of brand name of such products in India and entire expenditure on advertisements and sales promotion was incurred for promoting the sales of these products by the appellant in India and benefit of which was derived entirely by the appellant.

The aforesaid are routine expenses, incurred in connection with promotion of products through print, audio as well as visual media such as banners, television, commercial hoarding, glow sign boards etc. expenses on new products launch, exhibitions, payments made to advertising agencies to undertake promotion work etc.

The aforesaid advertisement and sales promotion expenses are generally required to be incurred to beat competition in the trade and for promoting sales of products. Such expenses have direct nexus with the sales of the products in India. Similar advertisement and sales promotion expenses are incurred by the competing companies for promoting sales of their products as well.

The above advertisement and promotion expenses were incurred for sales promotion and advertisement in India only and that, too, in respect of products, viz.. ENO, Crocin, etc., which are being dealt in by the appellant in India.

Therefore, the benefit of advertisement and brand promotion expenses incurred in India inure to the appellant in the form of higher sale and consequently higher profit. The entire benefit of advertisement and sales promotion expenses inured to the appellant as none of its affiliate company has sold any product in the domestic Indian market and it is only the latter which has sold the products (which were advertised) in the Indian market. Such expenses incurred in India, do not have any reach outside India so as to result in any benefit to the other group company which are the owner of the said brand.

(a) It is the settled position of law that the reasonableness of the expenditure has to be seen from the point of view of businessman and not that of the Revenue, as laid down by the Supreme Court repeatedly in the following cases:

– CIT v. Malayalam Plantations Limited: 53 ITR 140 (SC)

– CIT v. Walchand & Co.: 65 ITR 381

– J.K. Woollen Manufacturers v. CIT: 72 ITR 612 (SC)

-CIT v. Birla Cotton Spg. and Wvg. Mills Ltd.: 82 ITR 166 (SC)

– Madhav Prasad Jatia v. CIT U.P.: 118 ITR 200 (SC)

– S.A. Builders Ltd. v. CIT : 288 ITR 1 (SC)

– C1T v. Bharti Televentures Ltd: 331 ITR 502 (Del)

-C1T v. Padmani Packaging (P) Ltd. : 155 Taxmann 268 (Del)

-C1T v. Rockinan Cycle Industries Ltd.: 331 ITR 401 (P&H) (FB)

-CIT v. EKL Appliances Ltd. : 345 ITR 241 (Del HC)

It is a settled position that the expenditure incurred wholly and exclusively for the purpose of the business would be allowable as deduction under section 37(1) of the Act, even if it results in a direct or incidental benefit to a third party.

Reliance is placed on the following decisions:

• • Sassoon J. David and Co. P. Ltd. v. CIT: 118 ITR 261 (SC) [Pg. 228 of PB-CL-2 for AY 2006-07]
  • CIT v. Chandulal Keshavlal & Co. 38 ITR 601 (SC) 230 of PB-CL-2 for AY 2006-07)
  • SA Builders v. CIT: 288 ITR 1 (SC) [Pg. 236 of PB-CL-2 for AY 2006-07]
  • CIT v. Sales Magnesite (Pvt.) Ltd.: 214 ITR 1 (Bom)
  • R. Patel & Sons (P) Ltd. v. CIT: 69 ITR 782 (Guj)
  • CIT v. Adidas India Marketing (P) Ltd: 195 Taxman 256 (Del) [Pg. 243 of PB-CL-2 for A Y 2006-07]
  • CIT v. Agra Beverages Corporation (P) Ltd: 200 Taxman 43 (Del)
  • Star India (P) Ltd. : 103 ITD 73 (TM)
  • National Panasonic (India) Ltd. v. JCIT: ITA 3238/Del/2002 (Del)
  • Nestle India Ltd. v. DC1T (Del)(2007) 111 TTJ 498 (Del). (The Revenue’s appeal has been dismissed by the Hon’ble Delhi High Court vide order dated 22-10-2007 in ITA No. 96/08. The
  • Revenue’s SLP against the decision of the High Court is also dismissed by the Supreme Court vide order dated 02-04-2009 in ITA No. 96/2002 and the decision of the Tribunal has become final.]
  • Samsung India Electronics Ltd. (ITA Nos. 98. 1 B & 143/2010)(DHC)
  • DCIT vs Maruti Countrywide Auto Financial Services Pvt Ltd: ITA no. 2181 to 2183/Del/2010 (Del). [Pg. 262 of PB-CL-2 for AY 2006-07]
  • CIT vs. N. G.C. Network (India) P. Ltd. : 368 ITR 738 (Mumbai) [Pg. 114 of PB -CL-1 for AY 2006-07|

Hon’ble Delhi High Court in the case of CIT vs. Discovery Communication India: 370 ITR 57, reiterated the law in this regard |Pg. 287 of PB-CL-2 for AY 2006-07):

“10.4. When expenditure is Incurred for appellant’s own business, the mere fact that the expenditure would Inure or benefits a third party or the third party incidentally obtains some advantage, would not affect or distract from the finding that the expenditure was wholly and exclusively was for appellant’s business. For example, a retail trader may advertise different products which may incidentally benefit the manufacturers, but this does not mean that advertisement expenditure fails to meet the requirement of “wholly and exclusively”. Law in this regard is well settled”

Hon’ble Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. vs. CIT : 374 ITR 118, too, held [Pg. 265 of PB-CL-2 for AY 2006-07]:

“54 Expenditure and decision of the appellant, whether or not to incur the said expenditure; the quantum thereof, cannot be a subject matter of challenge or disallowance by the Assessing Officer, once it is accepted that the expenditure was wholly, i.e. the quantum of expenditure incurred was fully, and exclusively for business purpose. In Sassoon J. Davit & Co. Pvt. Ltd. versus CIT [1979] 118 ITR 261 (SC), it has been held that an appellant can claim deduction for expenditure incurred for business purposes and no one else has authority to decide whether or not the appellant should have incurred the said expenditure. The expenditure cannot be disallowed wholly or partly because it would incidentally benefit a third person once the requirements of Section 37(1) were satisfied. Reference can be also ITA 16/2014 & connected matters Page 42 of 142 made to the decision of Delhi High Court in CIT versus Nestle India Limited [2011] 337 ITR 103 (Del), holding that the question of reasonableness or measure of expenses to be allowed cannot be a subject matter of adjustment or disallowance under Section 37(1) of the Act.”

It was held similarly by the Hon’ble Delhi High Court in the case of CIT vs. Whirlpool of India Limited 381 ITR 154 (Pg. 278 of PB-CL-2 for AY 2006-07).

Recently Hon’ble Delhi High Court in the case of Pr. CJT-3 vs. Seagram Manufacturing (P) Ltd. 245 Taxman 389 reiterating the law in this regard, held (Pg. 288 of PB-CL-2 for AY2006-07]:

“6. Regarding Question No. 2, during the course of proceedings in the relevant Assessment Year 2003-04, the AO disallowed 10% from the expenditure on brand enhancement on the ground that it was allocable to the overseas owner/collaborator. The AC) reasoned that any enhancement in the brand presence of the assesses invariably had a fail-out vis-a-vis brand value of the overseas IPR. proprietor. The AO a/so recorded the relevant facts that not all brands which belong to the overseas owner were available in the Indian market and in the eventuality of the brand proprietor deciding to wind-up operations, its reputation would still remain intact. The CIT(A), however disagreed with this reasoning. The ITAT confirmed the order but with little or seconded or no reasoning.

7. The expenses in this case were incurred by the assessed. The arrangement inter alia between the assessee and the brand proprietor was such that specified required brands were made available in the assessee deals. No doubt, the profits reported were put through the recourse of transfer pricing exercise for the purpose of Arm’s Length Price determination. Yet, the fact remains that the overseas owner did not set up any other licensee, at least in the area where the assessee operated, to operate as a rival. Under the Trade Mark Act, especially Section 48, as long as [he arrangement existed, the assessee. who was a licensee of the products, was entitled to claim them as business expenditure though in the ultimate analysis they might have enhanced the brand of the overseas owner. No doubt, if the arrangements were terminated, the brand presence of the overseas owner of the articles/TPR would have subsisted. But that would nevertheless subsist in any event on the theory of trans-national reputation of the IPR owner. In the circumstances, disallowing a certain proportion on an entirely artificial and notional basis from the expense otherwise deductible, in our opinion, was not justified. The question of law is answered against the revenue. For the above reasons, the appeal fails. It is accordingly dismissed.

The AO has, on the basis of assumption and surmises, held that incurring of advertisement expenses has resulted in promotion of brand name owned by the foreign AE and, therefore, it cannot be said that the entire expenses have been incurred wholly and exclusively for the purpose of the business of the appellant. The aforesaid observation by the AO are only in the realm of assumption and surmises in as much as such expenses on advertisement have undisputedly incurred by the appellant in the course of carrying on of its own business and promoting sale of product manufactured by it in India. The incidental benefit allegedly resulting by way of promotion of brand owned by foreign AE cannot be the reason to disallow such expenditure incurred by the appellant wholly and exclusively for the purpose of its business even if it results in an indirect benefit to ihe overseas group company as per the settled position laid down in the aforesaid decision.

In view of the aforesaid, adhoc disallowance of Rs. 8,94,33,333 being l/3^td of the expenditure on advertisement and publicity is unlawful and is liable to be deleted.”

The Ld. DR relied upon the order of the Ld. CIT(A) and stated that since admittedly the benefit had accrued to the parent company who was the owner of the brand, the expenditure has been rightly disallowed by the authorities below.

11. We have heard both the parties. We are convinced with the arguments of the Ld. Counsel for the assessee that there was no reason/basis at all for holding that the advertisement /promotion expenses benefited the parent AE and hence a portion of it was liable to be disallowed as having not been incurred wholly and exclusively for the purpose of the business of the assessee.

There is clear distinction between brand building and advertising & marketing. While the end purpose of both may be the same, i.e increasing sales/turnover, but the approach is definitely different. While advertising only communicates what a business has to offer, reaching out to the end customer and impacting immediate sales, brand building exercise on the other hand creates an identity/perception of the business, generating awareness about the business using strategies and campaigns with the goal of creating a unique and lasting image of the business in the market place. Brand building creates a customer base establishing long term relationship with the customer.

With this clear distinction between the two expenses, the onus to establish incurrence of either of the expenses is on the party claiming so. The Revenue claiming that the assessee has incurred brand building expenses, the onus is on the Revenue to establish the said fact. It cannot simply be derived from the fact that assessee has incurred huge expenses on advertisement and sale promotion of products the brand of which belonged to another entity, considering the clear distinction in the end objective of the said expenses and the assessee consistently claiming that it had acquired the exclusive license to manufacture and sell the products in India and thus being the sole user of the brand name in India. These contentions of the assessee have remained uncontroverted. The entire benefit, in such circumstances, inured to the assessee alone as it alone was operating in the Indian market. Benefit if any to the AE was only incidental. And on account of such incidental benefit accruing to a third party it cannot be said that the expense was not wholly and exclusively for the benefit of the assessee. As long as the objective /purpose for incurring an expenditure is to benefit the assessee solely, the expenditure can be said to be incurred wholly and exclusively for the benefit of the assessee. Any incidental benefit accruing to a third party on account of the same, being beyond the control of the assessee, does not dilute the character of the expense.

We do not find any reason or basis therefore for holding a part of the expense as pertaining to brand building. We therefore direct deletion of the disallowance made on account of brand building expenses amounting to Rs.8,94,33,333/-

Ground of appeal No. 2 is allowed.

12. Ground No.2.2, 3.1, 3.3 and 3.4, it was stated by the Ld. Counsel for the assessee related to the same issue of disallowance made of amount paid to M/s GlaxoSmithKline Biological S.A., Belgium , being Rs.16,08,70,538/- for purchase of vaccine, on account of non-deduction of tax at source thereon ,holding that there was a permanent establishment of the said entity in India and, therefore, the profits attributable to the purchases made by the assessee from the said entity were liable to tax in India. The grounds raised by the assessee read as under:

“2.2 That the Commissioner of Income-tax (Appeals) erred on facts and in law in sustaining disallowance of Rs. 90,20,655 under section 40(a)(i) of the Act, with respect to purchase of vaccine amounting to Rs.16,08,70,538 lacs made from GlaxoSmithKline Biological S.A. (‘GSK, Bio’), Belgium, allegedly holding that the appellant has failed to deduct tax at source from such payment.

3.1  That the Commissioner of Income-tax (Appeals) erred on facts and in law in allegedly holding that GSK Bio has outsourced its core activity to the appellant and all the activities are undertaken under direct supervision and control of GSK Bio and thereby establishing that there is a constant touch between the appellant and GSK Bio for R&D activities.

3.3 That the Commissioner of Income-tax (Appeals) erred on facts and in law in holding that clinical trial activities constitute permanent establishment of GSKBio in India within the meaning of Double Taxation Avoidance Agreement (DTAA) between India and Belgium on account of the following:

a. Fixed place of business in the form of place where clinical trials and research and development takes place including but not limited to CDMCI and BDSI, Bangalore under Article 5(1) of the DTAA;

b. Premises used as a sales outlet or for receiving or soliciting orders with respect to vaccines under Article 5(2)(i) of the DTAA;

c. CDMCI, Bangalore under Article 5(2)(c) of the DTAA;

d. BDSI, Bangalore under Article 5(2)(c) of the DTAA; and

e. Dependent agent PE in the form of the appellant under Article 5(4) of the DTAA.

3.4 That the Commissioner of Income-tax (Appeals) erred on facts and in law in alternatively holding that the assessee constituted business connection with GSK Bio within the meaning of section 9(1)(i) of the Act.”

13. Brief facts relating to the issue, as stated at para 9.1 of the CIT(A)’s order, are that the assessee company had made payment amounting to Rs.16,08,70,538/- to Glaxosmithkline Biologicals SA (hereinafter referred to as GSK Biologicals SA) at Belgium for purchase of vaccine. The Assessing officer (AO) noted that no TDS had been deducted on this payment as required u/s 195 of the Act. He further noted that the assessee was responsible for undertaking clinical trials as well as research and development activities on behalf of M/s GSK Biologicals SA, for which reason he held that the core activities of the Belgium Company were being carried out in India, and therefore it constituted permanent establishment of M/s GSK Biologicals SA in India within the meaning of Article – 5 of the DTAA between in India and Belgium. He also held that the assessee constituted “Business connection” of M/s GSK Biologicals SA SA within the meaning of section 9(1)(i) of the Act. Accordingly the AO held that the income of the Belgium company was taxable in India and therefore, the assessee was under obligation to deduct tax at source, which having not been deducted, the amount paid to GSK Biologicals SA ,of Rs. 16,08,70,538/- was liable to be disallowed u/s 40(a)(i}of the Act.

14. The assessee made detailed submissions before the Ld.CIT(A) against the aforesaid disallowance contending that no PE of GSK Biologicals SA SA can be said to have been formed in India as per Article 5 of Double Taxation Avoidance Agreement(DTAA) between India and Belgium read with the facts of the case and that even if it was presumed that there was a PE of GSK Biologicals SA,SA, in India, no business could be attributable to it since the purchase of vaccine took place on principal to principal basis outside India for which even payment was made outside India. The same find mention in para 9.2 of the CIT(A)’s order. The Ld. CIT(A), however, dismissed the contention of the assessee and upheld the disallowance made by the AO.

Before us, at the outset itself, the Ld. Counsel for the assessee contended that his plea on this ground raised was that the issue be restored back for the reason that specific factual and legal contentions made before the Ld.CIT(A) had neither been considered, nor dealt with by him while confirming the disallowance. The Ld. Counsel for the assessee contended that it had been pleaded before the Ld. CIT(A) that GSK Biologicals SA SA did not have a PE in India in terms of any of the criterias mentioned in the DTAA between India and Belgium. He contended that it had been specifically pointed out to the Ld. CIT(A) that there was neither any fixed place in India where the business of GSK Biologicals SA was being carried out, nor could the activity allegedly being carried out by GSK Biologicals SA in India, of clinical trials and research and development, be said to constitute its core activities, which is a pre-requisite for creation of PE in India. He further contended that it had also been pointed out that carrying out of research and development activities would not create a PE in India as per Article 5(3) of DTAA in India and Belgium and it had also been stated that agency PE had also not been created in India since no agent had been appointed by GSK Biologicals SA SA.It was contended that, the facts were shown to the Ld.CIT(A) ,to the contrary, pointing out that an agreement had been entered into between GSK Biologicals SA and GSK Pharma, a company based in Mumbai for rendering services in relation to research and clinical trials undertaken by GSK Biologicals SA in the course of carrying out its business of production of vaccine in Belgium. It was pointed out that the said two entities had entered into an agreement for provision of services in relation to procurement, organization and coordination of clinical trials in India by GSK Pharma to GSK Biologicals SA and also for rendering services involving pretrial scientific activities, data entry, data clinic, data analysis and reporting of clinical trials and other medical data. The Ld. Counsel for the assessee pointed out that GSK Biologicals SA did not have at its disposal, nor had legal right or access to any fixed place for carrying out its business in India and further even the activities carried out by GSK Biologicals SA of rendering services in relation to conduct of clinical trials could not be said to constitute the core business of GSK Biologicals SA which need to be carried out from a fixed place for constituting a PE in India as per Article 5(1) of the DTAA. The Ld. Counsel for the assessee contended that it was also pointed out that neither the assessee, nor GSK Pharma was engaged in soliciting orders for or on behalf of GSK Biologicals SA and, therefore, the assessee could not be said to be a dependent agent PE in terms of Article(4) of DTAA. The Ld. Counsel for the assessee also contended that in any case, the assessee had procured vaccine directly from GSK Biologicals SA on principal to principal basis and the purchases were not be attributable to PE, if any, of GSK Biologicals SA and, therefore, also no profits on account of the said transaction could be attributable to the PE in terms of the Double Taxation Avoidance Agreement. The Ld. Counsel for the assessee drew our attention to the detailed submissions made to the CIT(A), reproduced at pages 74 to 87 of the Paper Book. He also drew our attention to all the necessary documents substantiating the above arguments being copies of agreement entered into between GSK Biologicals SA and GSK Pharma which were also placed before the Ld. CIT(A). In this regard a brief summary of the contentions made were also placed before us which are as under:

“During the relevant previous year, the appellant purchased /imported vaccines for a sum aggregating to Rs. 16,08,70,538 from GSK Biologicals SA (GSK Biologicals SA), a group company incorporated under the Jaws of Belgium and engaged in the business of production of vaccines.

GSK Biologicals SA for the purpose of manufacture of vaccines, undertakes intensive research and development with the objective of discovering and developing new and improved vaccines.

GSK Biologicals SA has entered into the following agreements with GSK Pharma, a group company based in Mumbai. for rendering services in relation to research and clinical trials undertaken by GSK Biologicals SA in the course of carrying on of its business of production of vaccines in Belgium;

(a) GSK Belguim and GSK Phanna entered into an Inter-company Agreement dated 6″¹ April, 2004, which was replaced by a new Inter-company Agreement dated 25^lh 2006, for provision of services in relation to the procurement, organization and coordination of clinical trials in India by SK Phanna to the GSK Biologicals SA. |Pg. 8-26 of PB-CL-I for AY 2006-07]

(b) GSK Biologicals SA and GSK Pharma entered into Clinical Data Managemenl Center Agreement dated 1st December, 2004, (which was subsequently amended on 20lh

February, 2008), for rendering of services by GSK Pharma to GSK Biologicals SA involving pre-trial scientific activities, data entry, data cleaning, data analysis and reporting of clinical trials and other medical data (Pg. 27-37 & 35 of PB-CL-1 for AY 2006­07].

The assessing officer held that clinical trial activities constitute permanent establishment of GSK Biologicals SA in India within the meaning of Article 5 of Double Taxation Avoidance Agreement with Belgium (DTA A) [Pg. 52-77 of PB-CL-1 for AY 2006-07] on account of the following:

(a) Fixed place of business in the form of place where clinical trials and research and development takes place including but not limited to CDMCI and BDS/, Bangalore under Article 5(1) of the DTAA;

(b) Premises used as a sales outlet or for receiving or soliciting orders with respect to vaccines under Article 5(2)(i) of the DTAA;

(c) CDMCI, Bangalore under Article 5(2)(c) of the DTAA;

(d) Bangalore under Article 5(2){c) of the DTAA; and

(e) Dependent agent PE in the form of the appellant under Article 5(4) of the DTAA.

In coming to the conclusion that GSK Biologicals SA had a PE in India and. therefore, consideration paid by the appellant for import of vaccines were chargeable to tax in India, the assessing officer made ex-parte inquiries and investigation. From the various websites, the assessing officer gathered that appellant had got conducted clinical trials in India at centres in Mumbai and Bangalore. Based on the ex-parte enquie assessing officer came to the conclusion that all the core activities, related to vaccine development, were undertaken in India by the appellant on behalf of GSK Biologicals SA and under direct supervision and control of GSK Biologicals SA. The assessing officer inferred that the appellant was responsible for undertaking clinical trials as well as research and development activities on behalf of the applicant.

The assessing officer, accordingly, made a disallowance of Rs. 16,08,70,538 under section 40(a)(i) of the Act, with respect to purchase of vaccine being payment made to GSK Biologicals SA for purchase of vaccine, on the ground that the appellant failed to deduct tax at source from such payments. The CIT(A), on the basis of order passed by the assessing officer for the assessment year 2011-12, disallowed Rs. 90.20.655, in terms of aforesaid circulars 2/2014 and 3/2015 has made disallowance of 23% of net profit earned by GSK Bio., as against disallowance of entire sum of purchase made by the assessing officer in the year under consideration.

The disallowance of Rs. 90,20.655 under section 40{a)(i) of the Act, with respect to purchase of vaccine amounting to Rs. 1 6,08,70,538 made by the assessing officer and sustained by the C1T(A) is unlawful and not sustainable for the reasons submitted in our written submissions separately filed.

Further, it has been repeatedly held by the Courts in the following decisions that the question of existence of the Permanent Establishment and consequent taxability of payment in the hands of the payee in India is dependent on the outcome of the assessment of the payee:

CIT vs Samsung Electronics Co Ltd: 185 Taxman 313 (Kar) [Pg. 313 of PB-CL-2 for AY 2006-07]

CIT, International Taxation, Bangalore vs Sonata Information Technology Ltd: 232 CTR 20 (Kar) [Pg. 339 of PB-CL-2 for AY 2006-07]

Van Oord ACZ India (P) Ltd vs CIT: 189 Taxman 232 (Del) [Pg. 339 of PB-CL-2 for AY 2006-07]

Mahindra & Mahindra Ltd vs DCIT: 122 TTJ 577 (Mum)(SB) [approved by the Bombay High Court in the case reported as DIT(IT) vs Mahindra and Mahindra Ltd: 365 ITR 560 (Bom)] [Pg. 352-387 of PB-CL-2 for AY 2006-07]

It is submitted that GSK Biologicals SA under section 245Q(1) of the Act filed application before the Authority of Advance Rulings to decide, whether it would result in a Permanent Establishment in India within the meaning of Article 5 of the Double Taxation Avoidance Agreement between India and Belgium.

The Hon’ble Authority of Advance Rulings, however, vide order dated 21-07-2015 dismissed the application of the assessee as not maintainable on the grounds that questions raised in the application had been decided in the assessment of the captioned assessee and were pending before the CIT(A).

Also the cases of GSK-Balguim for assessment year 2005-06 to 2009-10 were reopened by the issuing officers under section 148 of the Act in order to bring to tax its income holding existence of permanent establishment in India. The assessee has challenged the re-assessments in writ petitions before the Delhi High Court, which are admitted and are also pending disposal.

It would be appreciated that the question in the above appeal as to whether GSK-Belgium has a permanent establishment in India can only be decided in the hands of the payee company, which matters are pending at present before the Hon ‘ble Delhi High Court.”

15. The Ld. Counsel for the assessee contended that despite the above specific and detailed submissions made by the assessee the Ld. CIT(A) gave no cognizance to the same and upheld the disallowance reiterating the order of the AO. He drew our attention to para 9.3 of the Ld. CIT(A) which is reproduced as under:

“9.3 The submission of the appellant have been considered. It is seen that M/s GSK Biologicals SA has outsourced its core activity to the assessee company and all the activities are undertaken under the direct supervision and control of M/S GSK Biologicals SA. Thus there is a constant touch between Indian center and the center of the assessee of the abroad for R&D activities. This arrangement where assessee is responsible for undertaking clinical trial as well as R&D activities on behalf of GSK Biologicals SA constitute permanent establishment of M/s GSK Biologicals SA in India within the meaning of DTAA between India and Belgium as under:

Fixed place of business in the form of place where clinical trials and research and development takes place including but not limited to CDMCI and BDSt Bang/ore under Article 5(1] of the DTAA.

“a. Premises used as a sales outlet or for receiving or soliciting orders with respect to vaccines under Ariicle-5(2)(i) of the DTAA.

b) CDMCI, Bangalore under Article 5(2)(c) of the DTAA.

c) BDSI, Bangalore under Article 5(2](c) of the DTAA.

d) Dependent Agent PE in the form of the assessee under Article 5(4) of the DTAA,”

a) The assessee company also constitutes ‘business connection’ of M/s GSK Biologicals SA SA within the meaning of section 9(1)(i) of the Act as discussed above_: Therefore, M/s GSK Biologicals SA is chargeable to tax in India for the payment received on account of vaccine purchase from the assessee company. The appellant company has failed to deduct TDS u/s 195 of the Act and therefore provisions of section 40(a)(i) are attracted. Appellant has also submitted that the entire disallowance is not called for in terms of CBDT circular no 2/2014 and 3/2015. I have perused these circulars and it is seen that these circulars have been followed by the assessing officer in AY 2011-12 in the case of the appellant. The appellant filed copies of assessment order u/s i43{3) for AY 2011-12 in the case of the assessee and copy of annual accounts of Glaxosmithkline Biologicals SA for the year ending December, 2004 and December 2005 as additional evidence. These additional evidence were forwarded to AO for his report. The report of the AO is as under:

“The Circular states that, for the purpose of making disallowance of ‘other sum chargeable’ u/s 40(a)(i) of the Act, the appropriate portion of the sum which is chargeable to tax under the Act shall form the basis of such disallowance and shall be the same as determined by the AO having jurisdiction. The assessee has also submitted the copy of the assessment order for AY 2011-12 passed by the AO to show the method of arriving at the disallowance to be made u/s 40(a)(i). With respect to the above it should be state that the circulars came in to force only during the FY 2013-14 and FY 2014-15 and cannot be used as a basis of disallowance made by the AO for AY 2005-06.

The circulars were issued in the light of decision of supreme court of India in the case of G£ Technology Pvt. Ltd. vs CIT and Transmission Corporation of AP Ltd. vs. CIT. It should also be stated here that these decisions came much after the assessment was completed under section 143(3) of the IT Act and could not be adopted by the AO for the year under consideration.

Without prejudice to the above, the AR of the assessee has restricted the income attributable to the applicant (PE) in India at 15.38%. However, this is not acceptable. In this case reliance is placed on the decision of Motorola Inc vs. DCIT 96 TTJ 1 and M/s National Petroleum Construction Co. vs. Add!. Director of International Taxation ITA No. 5168/Del/2010 where the tribunals have held that the income attributable to the PE is 20% to 25%. The AO during the AY 2011-12 has also adopted 22.5% based on the above decisions. Hence, the assessee’s version of 15.38% is on the lower side and is not acceptable.”

b) The additional evidence filed by the appellant are admitted as these go to the route of the matter and AO has also not objected for admission. Circular 2/2014 came much after the relevant assessment was completed in the light of the decision of Hon ‘ble Supreme in the case of GE Technology Pvt. Ltd. vs. CIT and Transmission Corporation of AP Ltd. vs. CIT. But the circular is clarificatory in nature as this was issued against various references received from the field officers by the CBDT in which clarification was sought whether the tax is to be deducted under sub section 1 of section 195 on the whole sum being remitted to a non-resident or only the portion representing the sum chargable to tax particularly if no application has been made under subsection 2 of section 195 of the Act to determine the sum. Vide circular No 3/2015 dated 12.02.2015 CBDT has clarified as under:

“4. As disallowance of amount under section 40(a)(i) of the Act in case of a deductor is interlinked with the sum chargeable under the  Act as mentioned in section 195 of the Act for the purposes of tax deduction at source, the Central Board of Direct Taxes {‘CBDT”}, in exercise of powers conferred under section 119 of the Act, hereby clarifies that for the purpose of making disallowance of ‘other sum chargeable” under section 40(a)(i) of the Act, the appropriate portion of the sum which is chargeable to tax under the Act shall form the basis of such disallowance and shall he the same as determined by the assessing officer having jurisdiction for the purpose of sub-section (1) of section 195 of the Act as per instruction No.2/2014 dated 26-02-2014 of CBDT. Further, where determination of ‘other sum chargeable’ has been made under sub­section (2), (3) or (7) of section 195 of the Act, such a determination will form the basis for disallowance, if any, under section 40(a)(i) of the Act.”

c) Following the above circulars which have been followed by Assessing Officer, in AY 2011-12 in the case of the appellant, the disallowance of the appellant is computed as per the principle followed by the AO in A.Y 2011-12. The appellant has worked out the ratio of operating profit to operating income of the deductee i.e. GSK Biologicals SA SA @ 24.38%. By applying the same rate of profit on the sale transactions of vaccines to the assesse, the amount of Rs.3,92,20,237/-(i.e.24.38% of Rs.16,08,70,538/-) is attributable to the net profit earned by the GSK Biologicals SA SA on the sale of vaccines to the assessee. The Assessing Officer has worked out the net profit attributable to PE services taking the average of the percentages held as net profit of the company attributable to the PE services in the case of Motorolla Inc. Vs DCIT (Supra) and M/s National Petroleum Construction co,(Supra) as 20% and 25% of gross receipts respectively. By applying the average @ 23%, the net profit attributable to PE functions of the GSK Biologicals SA SA is determined at Rs.90,20,655/- (being 23%o f Rs.3,92,20,237/-. Therefore the disallowance u/s 40(a)(i) is restricted to Rs.90,20,655/-. The grounds of appeal nos. 5, 5.1 to 5.11 are partly allowed.”

16. Referring to the above, he pointed out that the Ld.CIT(A) held that GSK Biologicals SA had PE in India was based on his findings that GSK Biologicals SA had outsourced its core activities to assessee company and all activities were undertaken under direct supervision and control of GSK Biologicals SA. These findings he contended had no basis at all except some data collected by the AO from the internet and this despite specific submissions made by the assessee before him that there was no agreement between GSK Biologicals SA and the assessee and even the core activities of GSK Biologicals SA were not being carried out in India. The Ld. Counsel for the assessee contended that since all the factual submissions made by the assessee and even the position of law stressed upon by the assessee have been completely ignored by the Ld.CIT(A), the matter needs reconsideration.

He further stated that GSK Biologicals SA had approached the AAR for a ruling whether it had a PE in India, which application had been dismissed finding that the issue had been decided by the AO in the case of the present assessee and the matter was before the CIT(A), without giving any findings on merit . That the cases of GSK Bilogicals SA had been reopened u/s 148 of the Act for A.Y 2005-06 TO 2009-10, against which a writ had been filed to the Hon’ble Delhi High Court which had been admitted and was pending for disposal. Ld. Counsel contended that the fact of PE of GSK Biologicals SA could be established in its own case and even the DRP had stated so while dealing with identical issue in the objections of the assessee to the draft order passed in the case of the assessee for subsequent year i.e., 2006-07.Thatsince the determination of PE of GSK Biologicals SA was pending before the Hon’ble High Court therefore also the issue needed to be restored back for deciding on the basis of the disposal of the same.

17. The Ld. DR, on the other hand, drew our attention to para 9.3(c) of the order of the Ld.CIT(A) as reproduced above and stated that the disallowance had been upheld by the Ld.CIT(A) based on the principle followed by the AO in assessment year 2011-12. She further referred to Ground No.3.1,3.3 & 3.4 raised by the assessee challenging the order of the CIT(A) holding that GSK Biological SA had outsourced its key activities to the assessee, that clinical trial activities constituted PE of GSK Bio and that of the assessee constituting business connection of GSK Bio. She contended that the AO had given detailed findings on the above, based on facts before him and she heavily relied on the order of the AO in this regard.

18. We have heard both the parties and have also carefully gone through the orders of the authorities below as also the documents referred to by the Ld. Counsel for the assessee before us. On going through the same and after carefully considering the same we find merit in the contention of the Ld. Counsel for the assessee that the issue needs reconsideration.

The AO has held PE of GSK Biologicals SA in India based on his findings that clinical trials and R &D are core activities in vaccine development which is got done by GSK Biologicals in India through the assessee and other affiliates. These findings we find are based on, as mentioned in the assessment order at page 35 “facts extracted from various websites of the assessees group companies which throw light on the vaccine business of the group and role of Indian affiliates”. The role of the assessee is based on decision taken in the 63^rd meeting of the Genetic Engineering Approval Committee on the 8^th February 2006.The AO has contended that GSK Biologicals is carrying on vaccine development activity through these fixed place of business. That all intellectual property in the vaccine vests with GSK Biologicals, while R&D activity is carried out in India, the assessee is economically dependent on GSK Biologicals SA and has no other business. The Ld. CIT(A) ,we have noted has merely reiterated the findings of the AO.

The assessee on the other hand, we find has made specific factual and legal submissions countering the findings of the AO/CIT(A), pointing out that the facts are to the contrary that there was no agreement of GSK Biologicals SA with the assessee but in fact it had entered into two agreements with GSK Pharma, an Indian Company, for carrying out clinical research and data management. Copies of the agreement had been placed on record. It was also pointed out that in terms of the DTAA with Belgium, there was no fixed place PE of GSK Biologicals SA in India as it did not have any such place at its disposal. That conducting clinical trials did not constitute the core activity of GSK Biologicals SA, which was engaged in manufacturing vaccines. That neither GSK Pharma nor the assessee were acting as agents of GSK Biologicals SA, and that in terms of DTAA, PE did not include maintaining premises for research and development . That without prejudice to the aforestated arguments, even if there was a PE of GSK Biologicals, no purchases made by the assessee of vaccines were attributable to the PE and therefore also no profits on account of the said purchases were taxable in India ,therefore requiring no taxes to be deducted at source.

None of these factual and legal contentions we find have been dealt with by the Ld. CIT(A).

On the contrary it was brought to our notice that the AO’s findings were based on data/information extracted from websites none of which was related to the assessee. That even the information extracted regarding conducting of clinical trials at pages 39-47 of the AO’s order did not mention the assessee as the site where trials were to be carried out. That even the Genetic Engineering Committee report did not relate to the impugned year, being dated 8^th February 2006.That the findings to the effect that no other activity was being carried out by the assessee except clinical trials was incorrect as the assessee was manufacturing Eno and Crocin.

The findings of the AO therefore that the assessee was carrying out clinical trials for GSK Biologicals, we find, has been demonstrated before us to be not based on relevant facts. And the Ld. CIT(A) has merely reiterated the findings of the AO despite specific factual and legal contentions made by the assessee to the contrary. We have also noted that the determination of PE of GSK Biologicals SA, is pending before the Hon’ble Delhi High Court in writ petitions filed by GSK Biologicals SA against proceedings initiated u/s 148 of the Act on the basis that there exists PE, for A.Y 2005-06 TO 2009-10.

Considering the above, we are of the view that it would be in the fitness of matter to restore the issue back to the AO for adjudication afresh in accordance with law after giving due opportunity of hearing to the assessee and after considering all factual and legal contentions raised by it.

Ground No 2.2 – 3.4 are accordingly restored back to the AO with the above directions and therefore stand allowed for statistical purposes.

19. During the course of hearing the assessee raised additional grounds before us under Rule 11 of the Income Tax Rules, 1962 vide application dated 20^th day of May 2021. The additional grounds raised read as under:

“1.  That on the facts and circumstances of the case and in law, the assessing officer ought to have allowed, in pursuance to law clarified by the Hon’ble Rajasthan High Court in the case of Chambal Fertilisers and Chemicals Ltd vs JCIT: D.B. ITA No.52/2018 and Hon’ble Bombay High Court in the case of Sesa Goa Ltd vs JCIT: 117taxmann.com 96 (Bom HC), deduction of Rs. 43,95,675, being education cess computed on returned income, paid by the Appellant before the due date of filing return of income for the subject assessment year.

2. That on the facts and circumstances of the case and in law, pursuant to law clarified in the case of Chambal Fertilisers and Chemicals Ltd (supra) and Sesa Goa Ltd (supra), the assessing officer also ought to have allowed further deduction in respect of any additional amount paid by the Appellant towards education cess during the financial year relevant to the subject assessment year.”

20. On the admission of the aforesaid additional grounds the Ld. Counsel for the assessee contended that the issue raised in the additional grounds related to claim of the assessee of education cess paid as allowable deduction. The Ld. Counsel for the assessee contended that the issue stood squarely covered by the decision of the Hon’ble High Courts of Bombay and Rajasthan in the case of Sesa Goa Ltd. Vs. JCIT, 117 com 96 (Bom) and Chambal Fertilizers & Chemicals Ltd. Vs. JCIT (DB) in ITA No.52/2018, order dated 31.07.2018 respectively. He further contended that following the aforesaid decision the ITAT in a number of cases had held education cess as an allowable claim. He further stated that there was no contrary decision of any other High Courts on the issue. In view of the above he contended that since a legal ground has been raised requiring no fresh investigation into the facts the same be admitted. In this regard he relied upon the decisions of the Hon’ble Apex Court in the case of N.T.P.C. Limited Vs. CIT, 229 ITR 383 and Jute Corporation of India Vs. CIT, 187 ITR 688. On the merits of the case, he relied upon the decision of the Hon’ble High Courts as referred to above, stating that the issue was squarely covered in favour of the assessee.

21. The Ld. DR raised no objection to the admission of the additional ground but contended that since the same were being raised for the first time, they needed to be restored to the CIT(A) , pointing out that the Hon’ble Madhya Pradesh High Court in the case of Commissioner of Income Tax vs Tollaram Hassomal(MP) 298 ITR 22 had held that the additional grounds admitted by the Tribunal and raised for the first time before it, need to be restored back to the CIT(A) for adjudication.

To this the Ld. Counsel for the assessee contended that as per Rule 11 of the Rules, the ITAT is entitled to admit the additional grounds and the admission is not restricted to mere admitting it only and not adjudicating it. That the decision relied upon by the Ld. DR was rendered in the facts of those case wherein it was considered expedient by the Hon’ble High Court to restore the issue to the CIT(A) for proper adjudication after admission of the additional grounds raised by the assessee. He contended that the decision relied upon by the Ld. DR could not by any stretch be said to be laying down a blanket proposition that additional grounds raised need to be considered by the ITAT only for the purpose whether they can be admitted or not and the adjudication of the same has invariably to be left and restored to the CIT(A).

On the merits of the issue, the Ld. DR stated that the issue was covered against the assessee by the decision of the Hon’ble Apex Court in the case of CIT Vs. K.Srinivasan, 83 ITR 346 wherein the Hon’ble Apex Court had held that all surcharge and additional surcharge levied on income tax were in the nature of income tax itself and the education cess, therefore, was in the nature of income tax and thus not allowable as deduction by virtue of the provisions of section 40(a)(ii) of the Act. The Ld. DR pointed out that the decision of the Hon’ble High Court’s relied upon by the Ld.Counsel for the assessee had not considered the decision of the Hon’ble Apex Court in the case of K.Srinivasan (supra) and being the decision of the Hon’ble Apex Court, the same would prevail.

22. We have heard both the parties. Dealing first with the admission of the additional ground raised as above before us, the assessee has raised a legal ground relating to admissibility of education cess paid as a deduction and the adjudication of the same surely does not require any investigation of fresh facts. Even the Ld. DR has not objected to the admission of the same. The additional grounds raised are accordingly admitted for adjudication. The order was pronounced during the course of hearing.

Now coming to the contention of the Ld. DR that the additional ground, having not been raised before the CIT(A) and thus not dealt with by him ,needs to be sent back to him for adjudication, we are not convinced with the contention of the Ld. DR. Section 253 of the Act grants right of appeal to the assessee, aggrieved by any of the orders specified therein , to the ITAT. As per Section 254 of the Act, the ITAT may after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it deems fit. Rule 11 of the ITAT Rules,1963,which deals with Grounds which may be taken in appeal, permits raising of additional grounds by appellants, being other than those raised in the memorandum of appeal, subject to the same being heard by the leave of the Tribunal. The Rule further permits the Tribunal to not confine itself to the grounds raised while deciding an appeal.

Reading the above together, there is no restriction to the power of the Tribunal in entertaining an additional ground raised before it for adjudication. As long as all facts are available on record all additional grounds, including those raised for the first time can be adjudicated by the ITAT. This issue stands settled by the apex court in the case of NTPC Limited (supra) where on the question whether the Tribunal has jurisdiction to examine a question of law not raised before the lower authorities, it was categorically held that the power of the ITAT in dealing with appeals has been expressed in the statute in the widest possible terms. That there is no restriction of its power to deal only with those issues which arise from the CIT(A)’s order and any question of law ,facts relating to which are on record ,can be raised before the Tribunal for the first time. It was emphasized in the decision that the purpose of assessment proceedings is to correctly assess the tax liability of assessees in accordance with law and to this end the power of the Tribunal cannot be restricted only to decide issues which arise from the CIT(A)’s order. The decision of the Hon’ble apex court on the issue is as under:

“The Tribunal has framed as many as five questions while making a reference to us. Since the Tribunal has not examined the additional grounds raised by the assessee on the merits, we do not propose to answer the questions relating to the merits of those contentions. We reframe the question which arises for our consideration in order to bring out the point which requires determination more clearly. It is as follows:

“Where on the facts found by the authorities below a question of law arises (though not raised before the authorities) which bears on the tax liability of the assessee, whether the Tribunal has jurisdiction to examine the same ?”

3. Under s. 254 of the IT Act the Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit. The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceeings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction denied, we do not see any reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of that item. We do not see any reason to restrict the power of the Tribunal under s. 254 only to decide the grounds which arise from the order of the CIT(A). Both the assessee as well as the Department have a right to file an appeal/cross-objections before the Tribunal. We fail to see why the Tribunal should be prevented from considering questions of law arising in assessment proceedings although not raised earlier.

4. In the case of Jute Corporation of India Ltd. vs. CIT (1990) 88 CTR (SC) 66 : (1991) 187 ITR 688 (SC) : TC 7R.343, this Court, while dealing with the powers of the AAC observed that an appellate authority has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations, if any, prescribed by the statutory provisions. In the absence of any statutory provision, the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter. There is no good reason to justify curtailment of the power of the AAC in entertaining an additional ground raised by the assessee in seeking modification of the order of assessment passed by the ITO. This Court further observed that there may be several factors justifying the raising of a new plea in an appeal and each case has to be considered on its own facts. The AAC must be satisfied that the ground raised was bona fide and that the same could not have been raised earlier for good reasons. the AAC should exercise his discretion in permitting or not permitting the assessee to raise an additional ground in accordance with law and reason. The same observations would apply to appeals before the Tribunal also.

5. The view that the Tribunal is confined only to issues arising out of the appeal before the CIT(A) takes too narrow a view of the powers of the Tribunal [vide, e.g., CIT vs. Anand Prasad (1981) 128 ITR 388 (Del) : TC 8R.1021, CIT vs. Karamchand Premchand (P) Ltd. (1969) 74 ITR 254 (Guj) : TC 8R.547 and CIT vs. Cellulose Products of India Ltd. (1985) 44 CTR (Guj) 278 (FB) : (1985) 151 ITR 499 (Guj)(FB) : TC 8R.965]. Undoubtedly, the Tribunal will have the discretion to allow or not allow a new ground to be raised. But where the Tribunal is only required to consider a question of law arising from the facts which are on record in the assessment proceedings we fail to see why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee.

6. The reframed question, therefore, is answered in the affirmative, i.e., the Tribunal has jurisdiction to examine a question of law which arises from the facts as found by the authorities below and having a bearing on the tax liability of the assessee. We remand the proceedings to the Tribunal for consideration of the new grounds raised by the assessee on the merits.”

In view of the settled position as above, we do not find any merit in the argument of the Ld. DR and even the case law relied upon by the Ld. DR, we find, is of no assistance as it does not lay a blanket proposition as canvassed by the Ld. DR, but has been rendered in the facts of the case before the Hon’ble High Court. In the said case the Hon’ble High Court found that the ITAT had set aside the order of the CIT(A) and annulled the order of the AO by deciding the appeal on the additional grounds raised after admitting them for adjudication. That instead of concentrating on the issues already decided by the CIT(A) ,the Tribunal only concentrated on the grounds which had not been taken before him and decided the appeal annulling the assessment. In this background the Hon’ble High court held that the Tribunal had exhibited undue haste in deciding the appeal by adjudicating only the issues which were not even there before the CIT(A) and that such approach was neither legal nor proper. In the present case it is not that the outcome of the entire appeal depends on the additional ground raised. On the contrary the additional ground impacts only one claim of the assessee to deduction of education cess paid, which neither requires any facts to be uncovered or even verified or investigated. There is no finding of fact to be recorded vis a vis the impugned issue and hence no impediment to the ITAT in adjudicating the issue. Therefore we find there is no reason to restore it for adjudication to the CIT(A). The contention of the Ld. D.R. therefore that the additional ground raised should be restored to the CIT(A) is accordingly dismissed.

Now coming to the issue to be adjudicated, whether the education cess paid by the assessee and calculated as proportion of the income tax, is allowable as expenditure. This issue arises in the context of the provisions of section 40(a)(ii) of the Act which deals with certain amounts which are not allowable while computing the income under the head ‘business and profession’ and sub-clause(ii) thereof mentions taxes paid on profits and gains of business and profession as not allowable. The relevant provisions of section reproduced as under:

“40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”,—

(a) in the case of any assessee—

(i) ………………………….

…………………………………

(ii) any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains.

Explanation 1.—For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes and shall be deemed always to have included any sum eligible for relief of tax under section 90 or, as the case may be, deduction from the Indian income-tax payable under section 91.

Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes any sum eligible for relief of tax under section 90A.”

23. Undoubtedly, the decision referred to by the Ld. Counsel for the assessee of the Hon’ble High Courts of Bombay and Rajasthan have categorically held education cess to be not covered u/s 40(a)(ii) of the Act. The reasoning being that this provision originally included cess also which was specifically omitted later on and even the CBDT in Circular No.91/58/66-ITJ(19) dated 18­05-1967 clarified that cess was not covered u/s 40(a)(ii). But at the same time we are aware of and even the Ld DR has pointed out the decision of the Hon’ble Apex Court in the case of K. Srinivasan (supra) wherein it has been categorically held that the “tax on income” would include all surcharge and additional surcharge levied on it. The Hon’ble Apex court was seized with the issue whether surcharge is to be paid by assessees on their income considering that it is not mentioned in the charging section of the Act. The Hon’ble apex court , in a detailed order tracing the concept of surcharge in taxation laws, its legislative history ,its dictionary meaning and the language employed in the Finance Bills specifying rates of taxes to be levied and the surcharge and additional surcharge to be paid thereon, found that it only increased the rate of tax. Accordingly the Hon’ble apex court held that surcharge and additional surcharged levied under the Act formed part of tax and therefore was liable to be paid as per the charging provision of the Act. The relevant portion of the order of the Hon’ble apex court in this regard is as under;

“Sec. 2 of the Finance Act, 1964, which is headed as “Income- tax and super­tax” provides in sub-s. (1) that income-tax and super-tax shall be charged at the rates specified in Parts I and II of the First Schedule respectively and that in cases to which certain paragraphs of those parts apply these taxes shall be increased by a surcharge for the purpose of the Union. According to sub-s. (2) where the total income of an assessee not being a company includes any income chargeable under the head “Salaries” income-tax and super-tax payable by the assessee on the salary portion of the total income shall be the proportionate amount payable according to the rates provided in the Finance Act, 1963. Under s. 2 of the Finance Act, 1963, income-tax was to be charged at the rates specified in Part I of the First Schedule and super-tax at the rates specified in Part II of that Schedule. The income-tax was to be increased in the cases mentioned by a surcharge and additional surcharge for the purpose of the Union and a special surcharge. The super-tax was, however, to be increased by a surcharge for the purpose of the Union and a special surcharge. It will be noticed that s. 2(2) of the Finance Act, 1964, did not contain mention of any of the surcharges. This led to the controversy which resulted in the reference.

4. Before the High Court the assessee relied on ss. 4 and 5 of the IT Act, 1961, hereinafter called “the Act”. These sections provide for charge of income-tax and super-tax. It was pointed out that surcharges was treated in the Finance Acts as a tax different from the income-tax and super-tax and that surcharge was levied by the Finance Act while the income and super-taxes were levied by the Act. Reference was made in this connection to the First Schedule to the Finance Act, 1963. Part I of that Schedule dealt with “income-tax and surcharge on income-tax”. Under that heading were given the rates of income-tax as also the rates of surcharge. Similarly, Part II of the Schedule dealt with super-tax and surcharge on super-tax and under that heading the rates of super-tax and the rates of surcharge on super-tax were given. Among the surcharges in the case of income-tax were mentioned : (a) a surcharge for the purpose of the Union, (b) a special surcharge and (c) an additional surcharge. As regards the surcharge on super­tax there was mention of (a) a surcharge for the purpose of the Union and (b) a special surcharge. The High Court examined the aforesaid provisions of the Finance Acts of 1963 and 1964 and Arts. 270 and 271 of the Constitution apart from the legislative entry 82 in List I of the Seventh Schedule. It came to the conclusion that income-tax and super-tax did not include surcharge and that these were called by different nomenclature in all the statutory provisions.

5. In order to determine the point before us, which is of considerable complexity, it is necessary to trace the concept to surcharge in taxation laws in our country. The power to increase federal tax by surcharge by the federal legislature was recommended for the first time in the report of the committee on Indian Constitutional Reforms, Volume I, Part I. From paragraph 141 of the proposals it appears that the word “surcharge” was used compendiously for the special addition to taxes on income imposed in September, 1931. The Government of India Act, 1935, Part VII, contained provisions relating to finance, property, contracts and suits. Secs. 137 and 138 in Chapter I headed “Finance” provided for levy and collection of certain succession duties, stamp duties, terminal tax, taxes on fares and freights, and taxes on income, respectively. In the proviso to s. 137 the Federal legislature was empowered to increase at any time any of the duties or taxes leviable under that section by a surcharge for Federal purposes and the whole proceeds of any such surcharge were to form part of the revenues of the federation. Sub-s. (3) of s. 138 which dealt with taxes on income related to imposition of a surcharge. Under the Government of India Act, 1935, the surcharge was levied for the first time by the Indian Finance No. 2 Act, 1940. Sec. 3(1) of that Act read :

“Subject to the provisions of this section, the rates of income-tax and rates of super-tax…imposed by sub-s. (1) of s. 7 of the Indian Finance Act, 1940, shall, in respect of the year beginning on the first day of April, 1940, be increased by a surcharge for the purposes of the Central Government.”

Similar phraseology was employed in respect of surcharge on super-tax. The provisions relating to surcharge were omitted in the Finance Acts of 1946 to 1950. It was reintroduced in the Finance Act of 1951 and the same has been continued in the Finance Acts of subsequent years. Special surcharge came to be levied in the Finance Acts of 1958 to 1964 and 1966 to 1971 and the additional surcharge was levied only by the Finance Act of 1963.

6. In the Finance Act of 1951, s. 2 relating to income-tax and super-tax provided that these taxes would be levied at the rates specified in Parts I and II of the First Schedule increased in each case by a surcharge for the purpose of the Union. The Finance Act of 1952 was a short document and s. 2 thereof simply provided :

“The provisions of s. 2 of, and the First Schedule to, the Finance Act, 1951, shall apply in relation to income-tax and super-tax for the financial year 1952-53 as they apply in relation to income-tax and super-tax for the financial year 1951­52….”

There was no specific mention whatsoever of surcharge in s. 2 nor was there any modification of the First Schedule to the Finance Act of 1951 which contained the rates, etc., relating to the surcharge. Similar state of affairs existed with regard to the Finance Acts of 1953, 1954 and 1957. Sec. 2 of the Finance Act, 1971, is to the effect that the provisions of s. 2 and of the First Schedule to the Finance Act, 1970, shall apply in relation to income-tax for the assessment year or, as the case may be, the financial year commencing on the first day of April, 1971, as they apply in relation to income-tax for the assessment year commencing on the first day of April, 1970, with certain modifications set out in the section. The First Schedule to the Finance Act of 1970 was modified and the Schedule so modified contains provisions for surcharge on income-tax. It is significant that s. 2 of the Finance Act of 1971 speaks only of income-tax and not of any surcharge. It is only in the modifications made in the Schedule to the Finance Act of 1970 that there is provision for a surcharge.

7. The above legislative history of the Finance Acts, as also the practice, would appear to indicate that the term “income- tax” as employed in s. 2 includes surcharge as also the special and the additional surcharge whenever provided which are also surcharges within the meaning of Art. 271 of the Constitution. The phraseology employed in the Finance Acts of 1940 and 1941 showed that only the rates of income-tax and super- tax were to be increased by a surcharge for the purpose of the Central Government. In the Finance Act of 1958, the language used showed that income-tax which was to be charged was to be increased by a surcharge for the purposes of the Union. The word “surcharge” has thus been used to either increase the rates of income-tax and super-tax or to increase these taxes. The scheme of the Finance Act of 1971 appears to leave no room for doubt that the term “income-tax” as used in s. 2 includes surcharge.

8. According to Art. 271, notwithstanding anything in Arts. 269 and 270, Parliament may at any time increase any of the duties or taxes referred to in those articles by a surcharge for the purposes of the Union and the whole proceeds of any such surcharge shall form part of the consolidated fund of India. Art. 270 provides for taxes levied and collected by the Union and distributed between the Union and the States. Clause (1) says that taxes on income other than agricultural income shall be levied and collected by the Government of India and distributed between the Union and the States in the manner provided in cl. (2). Art. 269 deals with taxes levied and collected by the Union but assigned to the States. The provisions of Art. 268 which is the first one under the heading “Distribution of revenue between the Union and the States” relate to duties levied by the Union but collected and appropriated by the States. Thus, these articles deal with the levy, collection and distribution of the proceeds of the taxes and duties mentioned therein between the Union and the States. The legislative power of Parliament to levy taxes and duties is contained in Arts. 245 and 246(1) read with the relevant entries in List I of the Seventh Schedule.

9. As mentioned before, the legislative entry 82 in List I relates to taxes on income other than agricultural income; income-tax, super-tax and surcharge would all fall under this entry. It is exercise of the legislative power conferred by that entry that the Union Parliament enacts the provision in the Finance Act each year relating to them. It is that Act which authorises these taxes to be charged and prescribes the rates at which they can be charged. Sec. 4 of the Act simply provides that where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates income-tax at that rate or those rates shall be charged in accordance thereto and subject to the provisions of the Act. Sec. 95, which was omitted by the Finance Act of 1965, contained similar provision with regard to super-tax. Although under the Act s. 4 is the charging section yet income-tax can be charged only where the Central Act which, in the present case, will be the Finance Act, enacts that income- tax shall be charged for any assessment year at the rate or rates specified therein. The distinction made by the High Court that the surcharges are levied only under the Finance Act and income- tax under the Act may not hold good if the above view which has been pressed on behalf of the revenue were to be accepted. In our judgment it is unnecessary to express any opinion in the matter because the essential point for determination is whether surcharge is an additional mode or rate for charging income-tax.

10. The meaning of the word “surcharge” as given in the Webster’s New International Dictionary includes, among others, “to charge (one) too much or in addition…”; also “additional tax”. Thus, the meaning of surcharge is to charge in addition or to subject to an additional or extra charge. If that meaning is applied to s. 2 of the Finance Act, 1963, it would lead to the result that income-tax and super-tax were to be charged in four different ways or at four different rates which may be described as : (i) the basic charge or rate (In Part I of the First Schedule); (ii) surcharge; (iii) special surcharge; and (iv) additional surcharge calculated in the manner provided in the Schedule. Read in this way, the additional charges form a part of the income-tax and super-tax. It is possible to argue, and that argument has been commended on behalf of the Revenue, that the word “surcharge” has been used in Art. 271 for the purpose of separating it from the basic charge of a tax or duty for the purpose of distributing the proceeds of the same between the Union and the States. The proceeds of the surcharge are exclusively assigned to the Union. Even in the Finance Act itself it is expressly stated that the surcharge is meant for the purpose of the Union.

11. It would appear that, since the Finance Act, 1943, upto the Finance Act, 1967, a provision was made for taxing the income under the head “Salaries” according to the provisions of the Finance Act of the preceding year rather than of the current year if the assessee had any income in addition to his income by way of salary. According to the Tribunal this was done because if the income under the head “Salaries” was to be assessed at the rates fixed by the Finance Act enacted for the current year it would entail considerable administrative work in the form of a refund or collection in the final assessment. Since by the Finance Act of 1967, this method or procedure was dropped we do not consider that much significance can be attached to this aspect.

12. In the result we are unable to sustain the view of the High Court. The question that was referred must be answered in the affirmative and in favour of the Revenue. In view of the nature of the point involved the parties are left to bear their own costs in this Court. The appeal by certificate is dismissed.”

Considering the decision of the Hon’ble Apex Court, when applied to the provisions of section 40(a)(ii) of the Act, it is abundantly clear that the tax levied on profits or gain of any business or profession, which is not allowable as per the said sub-section, would include all surcharge and additional surcharge levied thereon.

Now coming to the nature of education cess,the Finance Bill, by virtue of which the rate of taxes are determined in Schedule-1 thereof, deals with the levy of education cess at Chapter-II(12) as under:

(12) The amount of income-tax as specified in sub-sections (4) to (10) and as increased by the applicable surcharge, for the purposes of the Union, calculated in the manner provided therein, shall be further increased by an additional surcharge, for the purposes of the Union, to be called the “Health and Education Cess on income-tax”, calculated at the rate of four per cent of such income-tax and surcharge so as to fulfil the commitment of the Government to provide and finance quality health services and universalized quality basic education and secondary and higher education:

24. A perusal of the above reveals that the education cess is an additional surcharge levied by the Union. Considering that tax on income has been so defined by the Hon’ble Apex Court as above as including surcharge and additional surcharge, it stands settled therefore, that the education cess is in the nature of tax levied on the income from the business and profession and thus specifically not allowable as per the provisions of section 40(a)(ii) of the Act. There is no scope for any other interpretation/ view on the issue considering the decision of the apex court in K. Srinivasan (supra) read with the Finance Bill levying education cess.

We therefore hold that education cess falls within the scope of amounts not allowed as deduction u/s 40(a)(ii) of the Act.

The additional grounds raised by the assessee are, therefore, dismissed.

In effect the appeal of the assessee is partly allowed for statistical purposes.

We now take up the appeal of the assessee in ITA No.532/Chd/2014 for assessment year 2006-07.

ITA No. 532/Chd/2014(A.Y.2006-07):

Ground No.1 raised by the assessee in this appeal is general and hence requires no adjudicated.

26. Ground Nos.2 to 2.4 raised by the assessee are as under:

“2. That the assessing officer erred on facts and in law in disallowing a sum of Rs.6,12,00,000, being 1/3^rd of the expenditure on advertisement and publicity of Rs.18,36,00,000 incurred by the appellant holding that the expenditure was incurred for brand building for the entities owning the brand.

2.1 That the assessing officer erred on facts and in law in holding that there was a strong nexus between the advertisement expenditure and revenues  of the associated enterprises and, therefore, the associated enterprises should contribute towards advertisement expenditure incurred by the assesses in India.

2.2 That the assessing officer erred on facts and in law in not appreciating that the assessee is the exclusive licensee authorized to manufacture and sell products under the brand name in India and the entire benefit of such expenditure accrued to the appellant and no one else.

2.3 That the DRP erred on facts and in law in affirming the order passed by the assessing officer allegedly holding that “there is no denying of the fact that incurring of advertisement expenses has resulted in promotion of brand name owned by the foreign associated enterprise………………. It cannot be said that entire expenses have been incurred exclusively and wholly for the purpose of the business of the appellant.”

2.4 That the assessing officer erred on facts and in law in not appreciating that the advertisement and publicity expenses were incurred by the appellant in the course of carrying on of its business and were allowable deduction as business expenditure.”

27. It was common ground that the issue raised in the above grounds was identical to that raised in ground No.1 of ITA No.2453/Del/2016 and our decision rendered therein at para 6 shall apply mutatis mutandis to these grounds also.

Ground No.2 -2.4 accordingly are allowed.

28. Ground Nos.3 to 3.9 raised by the assessee are as under:

“3. That the assessing officer erred on facts and in law in making disallowance of purchase of vaccine amounting to Rs.19,80,75,340 from GlaxoSmithKline Biological S.A., invoking provision of section 40(a)(i) of the Act alleging that the appellant had failed to deduct tax at source from such payments.

3.1 That the assessing officer erred on facts and in law in holding that GSK Biological SA had a permanent establishment in India and was, therefore, taxable in India in as much as (i) vaccine development activities of GSK Biological SA was being carried out through the fixed place of business in India, (ii) GSK Biological SA was conducting its business in India through the facilities in India, (iii) the core business activities of GSK Biological SA were being carried out in India and (iv) GSK Biological SA had a centre for vaccine clinical trial of R&D in Bombay, Bangalore and Delhi.

3.2 That the assessing officer erred on facts and in law in holding that the appellant was responsible for undertaking any clinical trial as well as research and development activities on behalf of GSK Biological SA, the resultant new/ improved product of which belongs to GSK Biological SA.

3.3 That the assessing officer erred on facts and in law in holding that clinical trial activities constitute permanent establishment of GSK Biological SA in India within the meaning of Article 5 of Double Taxation Avoidance Agreement (DTAA) between India and Belgium on account of the following:

b. Premises used as a sales outlet or for receiving or soliciting orders with respect to vaccines under Article 5(2)(i) of the DTAA;

a. Fixed place of business in the form of place where clinical trials and research and development takes place including but not limited to CDMCI and BDSI, Bangalore under Article 5(1) of the DTAA;

c. CDMCI, Bangalore under Article 5(2)(c) of the DTAA;

d. BDSI, Bangalore under Article 5(2)(c) of the DTAA; and

e. Dependent agent PE in the form of the appellant under Article 5(4) of the DTAA.

3.4  That the assessing officer erred on facts and in law in alternatively holding that the assessee constituted business connection with GSK Biologicals SA SA within the meaning of section 9(1)(i) of the Act.

3.5 That the assessing officer erred on facts and in law in holding that “all the core activities related to vaccine development are undertaken in India on behalf of M/s. GSK Biologicals SA instead of operating a full- fledged centre in the form of a branch has outsourced its core activity to the Indian company, the assessee”.

3.6 That the assessing officer erred on facts and in law in holding that “in fact M/s. GSK Biological SA is getting its works done in India through the appellant and other affiliates of the GSK group, which have no intellectual property right in the vaccines they develop or undertake clinical trials for”.

3.7 That the DRP erred on facts and in law in upholding the aforesaid findings of the assessing officer on the basis of assumption and surmises without appreciating the merits of the matter.

3.8 That the assessing officer erred on facts and in law in not appreciating that the appellant did not carry out any clinical trial and research and development activity on behalf of GSK Biological SA in India.

3.9 That the assessing officer erred on facts and in law in not appreciating that no clinical trial / research and development was undertaken in India in respect of various vaccines imported by the appellant during the relevant previous year.”

29. It was common ground that the issue raised in the above grounds was identical to that raised in ground No. 2.2 -3.4 in ITA No.2453/Del/2016 and our decision rendered therein at para 18 of our order above, shall apply with equal force to these grounds also.

The issue raised accordingly is restored back to the AO for adjudication afresh in accordance with the direction in ITA No.2453/Del/2016 and Ground No. 3-3.9 stand allowed for statistical purposes.

30. Ground Nos.4 & 4.1 raised by the assessee are as under:

“4. That the assessing officer erred on facts and in law in disallowing product development expenses amounting to Rs.14,55,000 on the alleged ground that the said expenditure was capital in nature and gave enduring benefit to the appellant.

4.1 That the assessing officer erred on facts and in law in not appreciating that the aforesaid expenses were operational expenses incurred by the appellant in the course of carrying on its business and the same did not result in the creation of a capital asset nor any advantage in the capital field so as to be regarded as capital expenditure.”

31. The issue raised in the aforesaid grounds relates to claim of Product Development & Research Expenses to the tune of Rs.14.55 lacs which was not allowed to the assessee. These were incurred by the assessee for carrying out consumer survey market research & consumer analysis in respect of products that from part of the assessee’s line of business. The Ld. Counsel for the assessee contended that the issue stood squarely covered in favour of the assessee by the decision of the ITAT in the case of GlaxoSmithKline Consumer Healthcare Ltd. for assessment years 1998-99 to 2004-05. Copy of the said order was placed before us. Our attention was drawn to the relevant portion of the order. It was also pointed out that identical issue stood adjudicated in the case of the assessee by the ITAT in earlier years and the issue had been restored back to the AO. Our attention was drawn to the order of the ITAT in the case of the assessee for A.Y 1998-99 and 1999-2000 in ITA No2099/Del/2002 421/Del/2003  and ITA No.2645/Del/2002, 1316/Del/2003 ,Relevant portion is as under:

“After hearing both the parties we are of the view that both the authorities below have disposed off the issue by making general observations without discussing the nature and impact of such expenditure.We therefore set aside the orders of the CIT(A) for both the years on this issue and restore the matter to the AO for fresh adjudication after examining the nature and impact of the expenditure by the assessee vis a vis the existing business in terms of section 37”

32. The Ld. DR, on the other hand, pointed out that this plea had been raised by the assessee before the DRP also which on nothing that the expenses were incurred before actual launch of the project, held that the reliance placed by the Ld. Counsel for the assessee on the decision of the ITAT in the case of GlaxoSmithKline Consumer Healthcare Ltd. (supra) was misplaced. She further pointed out from the findings of the DRP at page 32 of its order that the DRP noted that the impugned expenses were capital in nature as the produce enduring benefit in respect of the new project being launched, she, therefore, contended that the plea of the Ld. Counsel for the assessee was, therefore, not maintainable.

33. We have heard both the parties. Admittedly identical issue arose in the preceding year also in the case of the assessee and the ITAT deemed it fit to restore it back to the AO for adjudication afresh after examining the nature and impact of the expenses vis a vis the existing business of the assessee. In the present case also the Revenue has decided the issue based on general observations without examining the nature and impact of the expenses on the existing business of the assessee. Even the decision of the ITAT in the case of Glaxo Smithkline consumer Health care Ltd.(supra), relied upon by the Ld. Counsel for the assessee ,we find, rendered its judgment after examining the facts relating to the expenses vis a vis its nature and impact on business. The issue therefore, we hold, needs to be reconsidered by the AO for which purpose we restore it to the AO with the direction to adjudicate it in accordance with the direction of the ITAT in the case of the assessee for A.Y 1998-99 and 1999­2000.

Ground of appeal No 4 & 4.1 are allowed for statistical purposes.

34. The assessee has also raised additional grounds before us vide its application under Rule 11 of the Income Tax Rules, 1962, dated 15.03.2019 as under:

Additional ground dated 22.11.2018:

“That on the facts and circumstances of the case and in law, the impugned order passed by the assessing officer giving effect to the appellate order passed by the Hon ‘ble Tribunal, is barred by limitation and therefore, is liable to be quashed. “

Additional ground dated 26.11.2018:

“Without prejudice, that the assessing officer erred on facts and in law in not appreciating that disallowance of expense under section 40(a)(i) of the Act ought to be restricted to the appropriate proportion of the sum chargeable to tax out of the total payment of Rs. 19,80,75,340 made by the appellant to GlaxoSmithKline Biological S.A.”

Additional ground dated 20.05.2021:

“1.  That on the facts and circumstances of the case and in law, the assessing officer ought to have allowed, in pursuance to law clarified by the Hon’ble Rajasthan High Court in the case of Chambal Fertilisers and Chemicals Ltd vs JCJT: D.B. ITA No.52/2018 and Hon’ble Bombay High Court in the case of Sesa Goa Ltd. vs JCIT: 117 taxmann.com 96 (Bom HC), deduction of Rs. 50.38,687, being education cess computed on returned income, paid by the Appellant before the due date of filing return of income for the subject assessment year.

2. That on the facts and circumstances of the case and in law, pursuant to law clarified in the case of Chambal Fertilisers and Chemicals Ltd (supra) and Sesa Goa Ltd (supra), the assessing officer also ought to have allowed further deduction in respect of any additional amount paid by the Appellant towards education cess during the financial year relevant to the subject assessment year.”

35. The Ld. Counsel for the assessee contended that the issues raised in all the grounds were legal and all the facts for adjudicating the same were on record. He, therefore, pleaded that the grounds be admitted for adjudication.

Ld.DR did not object to the same.

The additional grounds raised are legal grounds and admittedly require no investigation of facts,there is ,we find, therefore no impediment in admitting them for adjudication ,as held by the apex court in the case of NTPC Ltd. Vs. CIT, 229 ITR 383(SC). Order was pronounced during the course of hearing itself.

36. Thereafter it was pointed out that the grounds raised vide application dated 20-05-2021 relate to allowability of education cess. It was common ground that the issue raised in the above grounds was identical to that raised in the additional grounds raised in ITA No.2453/Del/2016.Our decision rendered therein at para 22 shall apply mutatis mutandis to these grounds also. Accordingly the additional grounds raised vide application dated 20-05-2021 stand dismissed.

37. Vis-à-vis grounds raised vide application dated 22.11.2018 on the order passed by the AO giving effect to the order of the ITAT being barred by limitation, the ld. counsel for the assessee fairly concededed that identical issue stood decided by the ITAT, Delhi Bench against the assessee in the case of Religare Capital Markets Limited vs DCIT ITA No. 1881/Del/2014 dated10-10-2019. The said additional ground is, therefore, dismissed.

38. The additional ground raised vide application dated 22.11.2018 relates to the issue of apportionment of profits to the PE of M/s GlaxoSmithKline Biological SA. Since this issue is interrelated and dependent on determination of existence of Permanent Establishment of M/s GlaxoSmithKline Biological SA which issue has been contested by the assessee in ground Nos.3 to 3.9 raised before us and on noting that the aforestated grounds have been restored back by us to the AO while dealing with the said grounds at para 29 of our order above, this issue is also restored back to the AO to be adjudicated alongwith the issue of determination of PE of M/s GlaxoSmithKline Biological SA raised ground Nos.3 to 3.9 above. This additional ground is, therefore, allowed for statistical purposes.

In the result, the appeal of the assessee is partly allowed for statistical purposes.

In effect both the appeals are partly allowed for statistical purposes.