Commissioner of Income Tax and Others vs Allergan India P. Ltd.

N. Kumar, J.—In all these eight appeals, the assessee is the same and the following substantial questions of law arise for our consideration in these appeals:

"1. Whether the Tribunal was correct in directing the Assessing Officer to verify the payment of TDS in subsequent years and allow the expenditure in the year of payment as per section 40(a)(i) of the Act when the proviso was introduced with effect from April 1, 2004, when the challans produced was for the assessment years 2003-04, 2004-05 and 2005-06?

Whether the Tribunal was correct in holding the machinery installed in the premises of the contractors, M/s. Nicholas Piramal, for the purpose of manufacturing of goods for the assessee can be said to be used for the purpose of the business of the assessee and depreciation should be allowed to the assessee?

Whether the Tribunal was correct in holding that M/s. Nicholas Piramal, the contractor entrusted with the work of manufacturing medicines by the assessee, the payments made for quality control tests was allowable deduction even when no TDS was made and the same was disallowable under section 40(a)(i) of the Act?

Whether the Tribunal was correct in remitting the matter to the Assessing Officer to verify the oral statement of the assessee that there are certain documents to establish the liability of the assessee to reimburse the expenditure to M/s. Nicholas Piramal towards quality control tests?"

Reg. substantial question No. 1: The contention of the Revenue is, section 40(a)(i) was substituted by the Finance Act, 2004, which came into effect from April 1, 2005. Therefore, the said provision has no application for the assessment years prior to April 1, 2005, and, therefore, he submits, the impugned orders passed granting the benefit in terms of the substituted provision is erroneous and requires to be interfered with. In order to appreciate this contention, it is necessary to have a look at the earlier provision and the subsequent provision and then find out what is the difference and what is exactly the intention of the Legislature in enacting the substituted provision. Section 40(a)(i), prior to April 1, 2005, reads as under, which in fact was brought on the statute book by the Finance Act, 1998, with effect from April 1, 1989:

"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) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable, under this Act, which is payable outside India, on which tax has not been paid or deducted under Chapter XVTI-B:

Provided that where in respect of any such sum, tax has been paid or deducted under Chapter XVII-B in any subsequent year, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid or deducted.

Explanation.--For the purposes of this sub-clause,--

(A) ''royalty'' shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9;

(B) ''fees for technical services'' shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9."

Substituted by the Finance Act 2004, with effect from April 1, 2004

"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) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,--

(A) outside India,

(B) or India to a non-resident, not being a company or to a foreign company,

on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200:

Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.

Explanation.--For the purposes of this sub-clause,--

(A) ''royalty'' shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9;

(B) ''fees for technical services'' shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9."

A careful reading of the aforesaid provisions makes it clear there is no substantial difference in the language employed. The benefit which is now conferred on the assessee was available to him prior to the amendment also. In that view of the matter, we do not see any merit in the said contention and the said substantial question of law is answered in favour of the assessee and against the Revenue.

Reg. substantial question No. 2: The contention of the Revenue is, the Tribunal was in error in granting depreciation to machinery which was in use by the assessee in manufacturing of its products and, therefore, the requirement of section 32 is not complied with and, therefore, it is contended the impugned order requires to be set aside.

The material on record discloses, the assessee is engaged in the business of manufacture and trading of pharmaceutical products and its machines. The assessee had entered into a contract with M/s. Nicholas Piramal and the products manufactured are ophthalmic which require particular type of machinery to manufacture the moulds. M/s. Nicholas Piramal had the particular type of machinery to manufacture the moulds and as per the manufacturing agreement, the assessee also could purchase the second machinery which would be installed in the premises of M/s. Nicholas Piramal and used for the manufacture of the said moulds. Accordingly, M/s. Nicholas Piramal had one machine and the assessee purchased another machine and installed the same in the premises of M/s. Nicholas Piramal and the same was used for manufacturing the moulds. During the financial years 1997-98 and 1998-99, the assessee claimed depreciation on the second machine purchased by it. The assessing authority disallowed the depreciation claimed by the assessee on the ground that the assessee-company had purchased the second hand machine and that it had not undertaken any manufacturing activity. The Commissioner of Income-tax (Appeals) confirmed the disallowance. In the second appeal before the Tribunal, the Tribunal held, for allowing the claim of depreciation on any machinery, section 32 of the Income-tax Act provides that the machinery should be owned wholly or partly by the assessee and used for the purpose of business or profession of the assessee. There is no dispute that the assessee owns the machinery but the only dispute is, whether it is used for the purpose of the assessee''s business or profession. The assessee had entered into contract for manufacturing of certain ophthalmic solutions and for the said purpose the machinery was purchased and installed in the premises of M/s. Nicholas Piramal during the relevant financial years. The said machinery had been used by M/s. Nicholas Piramal for manufacturing of the said solutions and moulds. He held, when the manufacturing is done as per the specifications of the assessee and the goods are also recognised as manufactured by the assessee, since they are sold in the brand name of the assessee, though M/s. Nicholas Piramal manufactured the said goods, in the facts of the case, it is the assessee who is manufacturing the goods. Therefore, it cannot be said that the machinery is not used for the business or profession of the assessee. Therefore, they were of the view that the assessee satisfied the condition of using the machinery for the purpose of his business. Accordingly, he is entitled to depreciation on this machinery.

The learned counsel for the Revenue contended, relying on the terms of the contract entered into between the parties that, firstly, the question of assessee providing machinery would arise only in the event of M/s. Nicholas Piramal not possessing the said machinery for manufacturing. In the instant case, M/s. Nicholas Piramal did possess the machinery. In fact they have sold the machinery to the assessee and, therefore, the assessee is not entitled to the benefit as it runs counted to the terms of the contract. Secondly, it was contended, in spite of sufficient opportunity given to the assessee, the assessee has not produced any material to show that the said machinery was used for the manufacture of their pharmaceutical products and, therefore, the finding recorded by the Tribunal that it is used for manufacturing activity is without any supporting evidence and, therefore, he submits, the said finding requires to be set aside.

In order to claim depreciation under section 32, the condition to be satisfied is, the assessee should own wholly or partly the machinery used for the purpose of business or profession. Therefore, how the machinery is acquired, whether acquisition of machinery is contrary to the terms of the contract between the parties, is totally irrelevant. Once the assessee owns wholly or partly any machinery which is used for the purpose of the business or his profession, then section 32 is attracted and is entitled to depreciation. Therefore, we do not see any merit in the first contention.

In so far as user of the machinery is concerned, the assessee has produced the contract between the parties. He has produced documents showing that he owns the machinery. There is evidence on record to show that the assessee is in the business of pharmaceutical products. The assessee has also furnished certain sale bills and eye drops and other pharmaceutical products made during the calendar year 1998-99. The machine in question is used for manufacture of plastic bottles of sizes 360 ml., 120 ml., etc. These bottles have been used by the assessee for selling the eye drops and other pharmaceutical eye care products in support of which he has enclosed the details. Unfortunately, the assessing authority seems to think the assessee has to demonstrate before him in the Income-tax Office how this machinery is used in manufacturing the products and the same is not produced. He has recorded a finding that the said machinery is not used in his business. In those circumstances, rightly, the Tribunal has set aside the said order on appreciation of the aforesaid material which was on record and has categorically recorded a finding of fact that the said machine was used in the business of the assessee and, therefore, he is entitled to depreciation as provided under section 32 of the Act. We do not see any error committed by the Tribunal in recording the said finding and, therefore, the said substantial question of law is answered in favour of the assessee and against the Revenue.

Reg. substantial question No. 3: The contention of the Revenue is, the demonstration equipment in respect of which the assessee had claimed deduction as revenue expenditure, is not proper. According to them, the said machinery is in the nature of capital asset and, therefore, what the assessee is entitled to, is only depreciation. The assessee is trading in medical equipment particularly relating to cataract operations. The said equipment which is to be traded is treated as stock-in-trade of the assessee and the said equipment are shown in the inventory. The expenditure incurred for the purpose of stock-in-trade is revenue in nature and the assessee is entitled to claim the expenditure in the year of its purchase. Now, the question is, if the assessee has not sold some other equipment and distributed them to doctors as demonstration equipment, whether the character of the said equipment changes from revenue expenditure to capital asset. The machinery given to doctors for demonstration purposes is also a part of promoting sale of the said machinery. It is only on such demonstration, the assessee''s goods are accepted in the market. The assessee has submitted that the life of the said equipment is three years and, therefore, in their accounts they have written off the value of the said equipment in a period of three years deducting one-third for each year and they have claimed deduction on the ground that it is revenue expenditure. The Tribunal, on consideration of the aforesaid undisputed facts, has recorded a finding that it amounts to revenue expenditure and not capital asset and, in our view, the said finding is proper and legal and do not call for any interference. In that view of the matter, the said question of law is answered in favour of the assessee and against the Revenue. Reg. substantial question No. 4: In so far as the fourth substantial question of law is concerned, the Tribunal has remanded the matter to the assessing authority for fresh consideration and in accordance with law and, therefore, we decline to answer the said question as it is not necessary.

For the aforesaid reasons, these appeals are dismissed.