2023 (9) TMI 1600 - AT - Income Tax

Declaration of dividend (final as well as interim) in its financial statements along with the provision for Dividend Distribution Tax - Applicability of Dividend Distribution Tax DDT u/s 115O of The Income Tax Act or lower rate of tax in case of Non-Resident Assessee who are eligible for the benefit of Double Taxation Avoidance Agreement DTAA - HELD THAT - No provisions have been shown by the learned authorized representative wherein the domestic company is entitled to invoke the articles of double taxation avoidance agreement between India and the country of residence of non-resident shareholders. Of course, the non-resident shareholders can take benefit of the double taxation avoidance agreement if it benefits them, however Indian company cannot invoke provisions of double taxation avoidance agreement, as held by the special bench Therefore any attempt by the assessee to invoke the provisions of double taxation avoidance agreement is contrary to the decision of the special bench and therefore all those arguments deserves to be rejected which refers to the articles of double taxation avoidance agreement by the assessee i.e. an Indian company. Therefore, Indian company is deprived of referring to the Double Taxation Avoidance Agreement with respect to dividend distribution tax under section 115O of the act. In view of various observations made with respect to the applicability of double taxation avoidance agreement, we dismiss the additional ground raised by the assessee. Disallowance of payments made to Drs in alleged violation of Indian medical Council (professional conduct, adequate and ethics) regulations, 2002 (IMC regulations) - Payment made for customer gifts, brand reminders and medical books etc - Disallowance under section 37 (1) - HELD THAT - Brand reminder is in the purchase of medical books and journals for the medical professionals are specifically covered under the gift prohibited by the rules of Indian medical Council. Nobody can deny that it is not a free be given by assessee to those doctors. We also find that the decision of the honourable Supreme Court in Apex Laboratories (P) Ltd. 2022 (2) TMI 1114 - SUPREME COURT is a lot of land and decision is not at all narrow in its scope. Therefore, for this reason it needs to be applied to the facts of each case irrespective of its consequences With respect to the claim of the assessee that purchase of medical books and journals are provided for dissemination of knowledge and education. There is no doubt about that that the profession of medical is always evolving. Therefore, the need of medical books and journals is imperative. Similarly is the purpose of attending conferences seminars et cetera by the Drs. We are also aware about the various clauses 1.2.2., 1.2.3. and 6.8.1 (g) of the IMC Regulations, wherein these are provided for. But those regulations does not provide that the Drs should accept freebies of books, journals, conference fees paid, seminar fees, registration charges, hotel charges et cetera paid by a pharmaceutical company. Nobody denies that every profession should have a continuing education program but the cost of such a continuing education program should be borne by the professional himself and cannot be given as a free be by the other parties. The similarly, there is no bar in attending the conference and seminar purchasing books et cetera by the Drs, but footing of those bills defrayed by pharmaceutical companies is prohibited. Therefore, allowance of such expenditure in the hands of pharmaceutical company, which is required to be incurred by the Drs for their continuing professional education, is against the letter and spirit of the law as well as against decision of the honourable Supreme Court. Undoubtedly, the decision of the honourable Supreme Court in case of Apex laboratories has strong binding precedent and serves as an authority on the facts with respect to the payment of freebies by the pharmaceutical companies and on all the legal issues arising out of such payment and its allowability in the hence of pharmaceutical companies. In view of this, we reverse the order of the learned and CIT A deleting the disallowance on account of brand reminders and customer gifts and purchase of medical books and journals for the medical professionals i.e. doctors. Accordingly, ground number 1 3 of the appeal of the learned assessing officer is allowed. Allowance of write-off of bad debts - only grievance of AO is that the deduction is allowed to the assessee without granting assessing officer and opportunity to consider the submissions made by the assessee during the appellate proceedings - HELD THAT - We find that it is not the claim of the revenue that the allowance of writeoff of bad that is granted to the assessee by the learned first appellate authority is not sustainable in law. For the 11 s of bad debts the AO was directed to furnish remand report, it was furnished on 8/1/2018 as stated in paragraph number 8.1 of the learned CIT appeal s order. Therefore, it is incorrect to say that no opportunity was available to the assessing officer for verification of the claim. In any case, when there is no grievance that the claim allowed to the assessee by the first appellate authority is easy in accordance with the law, we failed to understand what purpose it would achieve if the learned assessing officer is given and unfortunately once again. In view of this, we dismiss ground number 4 of the appeal. Undisclosed income - difference between the AIR data of the assessee and the income shown by the assessee in its books of accounts - HELD THAT - No doubt, difference between AIR data and books of account triggers the examination by the learned AO. However, when the assessee is helpless and unable to obtain confirmation from those parties, it is the duty of the assessing officer to issue notices under section 133 (6) of the act to those parties, which the assessing officer has done in this case also, but unless the information is received contrary to what assessee has stated, the addition cannot be made in the hence of the assessee. In view of this we set-aside ground number 1 of the appeal to the file of the learned assessing officer to examine if the response to those 133 (6) notices are showing any evidence contrary to what assessee has stated, assessee must be confronted with that, after hearing the assessee, the learned AO may decide the issue afresh. Accordingly, ground number 1 and 2 of the appeal are allowed. Depreciation on Goodwill Arising from Amalgamation - DR submitted that there is no question of granting depreciation to the assessee over and above the assets acquired by the assessee from the target company - HELD THAT - The surplus price paid by the purchaser is towards buying the goodwill of the business which is self generated. The valuation report also suggest that a sum of ₹ 6908 crores though classified as a goodwill is also including valuation of workforce, synergies, customer relationships, distribution network, vendor relationships, contacts et cetera. It also says that goodwill is primarily arise in also due to the future earning capacity of the business to generate profits and returns to the shareholders. Therefore it is not clear whether in the valuation of goodwill of ₹ 6908 crores there are any other intangible assets or it is purely goodwill. Though assessee has accounted for in the books of account ₹ 6908 crores as goodwill, however for the purpose of depreciation the accounting entries do not either supports the case of the assessee or goes against the assessee. However when the income tax act requires the cost of acquisition of the assets to be recorded at a particular price in a particular manner, regard shall be made to those specific provisions of the act. In view of this, we set-aside the issue back to the file of the learned assessing officer to examine the actual cost of the goodwill, and if allowable in accordance with the law, to allow depreciation on it. The assessee is directed to show before the learned assessing officer that the claim of depreciation on goodwill satisfies the provisions of the income tax act, the learned AO may verify the same and decide the issue in accordance with the law. Needless to say, the proper opportunity of hearing is given to the assessee. In the result ground number 3 5 of the appeal of the assessee are allowed. Claim of deduction u/s 35DD - assessee has incurred amalgamation expenditure being 1/5 of the expenditure on amalgamation incurred - HELD THAT - Assessee has been granted deduction under section 35DD of the act with respect to all the expenditure which assessee supported by producing evidences in the form of invoices/vouchers/men that letter et cetera. However when the assessee has failed to produce the evidence of incurring the expenditure as well as the purpose for which it is incurred, we do not find any infirmity in the order of the lower authorities in denying the deduction to the assessee to that extent under section 35DD of the act. Accordingly ground number 6 of the appeal of the assessee is dismissed.

Summary

Issues Involved:

1. Addition of unreconciled transactions.
2. Depreciation on goodwill arising from amalgamation.
3. Deduction under Section 35DD for amalgamation expenses.
4. Disallowance of expenses related to gifts to medical practitioners.
5. Write-off of bad debts.
6. Applicability of Dividend Distribution Tax (DDT) under Double Taxation Avoidance Agreement (DTAA).

Detailed Analysis:

1. Addition of Unreconciled Transactions:
The assessee faced an addition of Rs. 338,302 due to unreconciled transactions in the Annual Information Return (AIR). The assessee argued that it could not reconcile these transactions due to a lack of response from third parties. The CIT (A) partially accepted the assessee's contention, deleting Rs. 206,277 where ICICI Bank admitted an error. The remaining addition was confirmed due to insufficient evidence. The tribunal remanded the issue back to the AO to verify responses to notices under Section 133(6) and reassess based on any contrary evidence.

2. Depreciation on Goodwill Arising from Amalgamation:
The assessee claimed depreciation on goodwill amounting to Rs. 2,716,300,000 from the amalgamation of Wyeth Ltd. The CIT (A) disallowed this, citing the sixth proviso to Section 32(1), which restricts depreciation claims in amalgamations. The tribunal noted that the Supreme Court in CIT v. Smif Securities Ltd recognized goodwill as a depreciable intangible asset. However, the tribunal remanded the issue to the AO to determine the actual cost of goodwill and verify compliance with tax provisions, particularly focusing on whether the goodwill included other intangible assets.

3. Deduction Under Section 35DD for Amalgamation Expenses:
The assessee claimed a deduction under Section 35DD for amalgamation expenses amounting to Rs. 290,372. The CIT (A) allowed a partial deduction based on substantiated invoices. The tribunal upheld the CIT (A)'s decision, denying the deduction for expenses lacking supporting evidence.

4. Disallowance of Expenses Related to Gifts to Medical Practitioners:
The AO disallowed expenses of Rs. 116,034,713 related to brand reminders and medical books provided to healthcare professionals, citing the Indian Medical Council (IMC) regulations and CBDT Circular prohibiting such gifts. The CIT (A) allowed the deduction, referencing a prior tribunal decision that the IMC regulations apply to doctors, not pharmaceutical companies. However, the tribunal reversed this decision, aligning with the Supreme Court's ruling in Apex Laboratories Pvt. Ltd., which disallowed such expenses under Section 37(1) as they violate public policy.

5. Write-off of Bad Debts:
The AO contested the CIT (A)'s allowance of a bad debt write-off without proper verification. The tribunal found that the AO had an opportunity to verify the claim during remand proceedings and upheld the CIT (A)'s decision, dismissing the AO's appeal on this ground.

6. Applicability of Dividend Distribution Tax (DDT) under DTAA:
The assessee raised an additional ground concerning the applicability of a lower DDT rate under DTAA for dividends paid to non-resident shareholders. The tribunal admitted this ground, noting sufficient information was available on record. However, it dismissed the claim on merits, following the special bench decision in TOTAL OIL LTD, which held that DDT is a tax on the company, not the shareholder, and thus not subject to DTAA provisions.

In conclusion, the tribunal partly allowed the appeals of both the AO and the assessee, while dismissing the assessee's cross-objections. The tribunal remanded certain issues for further examination by the AO, ensuring compliance with legal provisions and adequate opportunity for the assessee to present its case.