2021 (7) TMI 1408 - AT - Income Tax

Disallowance of stock written-off - Assessee 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 - 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 - HELD THAT - It is not that the claim was entirely unsubstantiated - 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. 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.The claim of the assessee to write off of toothbrush also is therefore allowed. Disallowance being 1/3rd of the expenditure on advertisement and promotion - Addition on the ground that the said expenditure resulted in promotion of brand name owned by the foreign company - HELD THAT - 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. No 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. TDS u/s 195 - disallowance made of amount paid to M/s GlaxoSmithKline Biological S.A., Belgium 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 - HELD THAT - As 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 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 8th 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. 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. Thus 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. Admission of additional ground - whether the education cess paid by the assessee and calculated as proportion of the income tax, is allowable as expenditure? - HELD THAT - 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. Allowability of education cess - The education cess is an additional surcharge levied by the Union. Considering that tax on income has been so defined 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 1971 (11) TMI 2 - SUPREME COURT 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. Claim of Product Development Research Expenses - HELD THAT - 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 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 1999-2000.

Summary

Issues Involved:
1. Disallowance of stock written-off.
2. Disallowance of advertisement and promotion expenditure.
3. Disallowance under section 40(a)(i) for non-deduction of tax at source on payments to GlaxoSmithKline Biologicals SA.
4. Disallowance of product development expenses.
5. Allowability of education cess as a deduction.

Detailed Analysis:

1. Disallowance of Stock Written-off:
The assessee claimed a deduction of Rs. 50,79,000 for writing off stocks, including Aquafresh toothbrushes and vaccines nearing expiry. The Assessing Officer (AO) disallowed the claim due to insufficient evidence, and the CIT(A) upheld this decision. The ITAT found that the assessee had provided sufficient evidence, such as emails and stock write-off sheets, to substantiate the claim. The ITAT noted that the Revenue had not contested the evidence provided by the assessee. Consequently, the ITAT allowed the assessee's claim for the write-off of both vaccines and Aquafresh toothbrushes, amounting to Rs. 50,79,000.

2. Disallowance of Advertisement and Promotion Expenditure:
The AO disallowed 1/3rd of the advertisement and promotion expenses, amounting to Rs. 8,94,33,333, on the grounds that these expenses benefited the parent company, GSK Plc, UK. The CIT(A) upheld this disallowance. The ITAT, however, distinguished between brand building and advertising, noting that the latter directly impacts sales and is incurred wholly for the assessee's business. The ITAT found no basis for the Revenue's claim that the expenses were for brand building and directed the deletion of the disallowance.

3. Disallowance under Section 40(a)(i) for Non-deduction of Tax at Source on Payments to GlaxoSmithKline Biologicals SA:
The AO disallowed Rs. 16,08,70,538 for non-deduction of tax at source on payments to GlaxoSmithKline Biologicals SA, claiming it constituted a Permanent Establishment (PE) in India. The CIT(A) upheld this disallowance. The ITAT noted that the AO's findings were based on internet data and not on concrete evidence. The ITAT found merit in the assessee's contention that GSK Biologicals SA did not have a PE in India and that the clinical trials and research activities did not constitute core business activities. The ITAT restored the issue to the AO for fresh adjudication, considering all factual and legal contentions.

4. Disallowance of Product Development Expenses:
The AO disallowed Rs. 14.55 lakhs incurred on product development, treating it as capital expenditure. The ITAT noted that similar issues in earlier years had been restored to the AO for fresh adjudication. The ITAT restored the issue to the AO, directing a fresh examination of the nature and impact of the expenses vis-à-vis the existing business.

5. Allowability of Education Cess as a Deduction:
The assessee claimed education cess as an allowable deduction, citing decisions from the Hon'ble High Courts of Bombay and Rajasthan. The ITAT admitted the additional ground but dismissed the claim, relying on the Hon'ble Supreme Court's decision in K. Srinivasan, which held that surcharge and additional surcharge are part of the tax and thus not allowable as deductions under section 40(a)(ii).

Conclusion:
The appeals were partly allowed for statistical purposes, with specific issues restored to the AO for fresh adjudication. The ITAT directed the AO to reconsider the disallowance of product development expenses and the issue of PE of GlaxoSmithKline Biologicals SA, while allowing the write-off of stock and deleting the disallowance of advertisement expenses. The claim for education cess as a deduction was dismissed.