2012 (4) TMI 743 - AT - Income Tax

Tribunal Upholds Deductions Disallowance, Partial Revenue Appeal Success; Section 80IB Deductions Maintained.

The Tribunal dismissed the assessee's appeal, upholding the disallowance of weighted deductions under Section 35(2AB) and the levy of interest under ... Disallowance u/s 40(a)(i) for payments made to CRO’s - HELD THAT:- The Hon’ble Bombay High Court in the case of CAT Vs. Kotak Securities ltd.,[2011 (10) TMI 24 - BOMBAY HIGH COURT] held that transaction charges paid by the assessee to the stock exchange constituted fee for technical services covered U/s. 194 (J). It further held that from the year 1995 to the year 2005, the assessee as well as the revenue, proceeded on the footing that the assessee is not liable to deduct tax at source and hence no fault can be found with the assessee for not deducting tax at source, as it was under a bonafide belief that no tax need be deducted at source on this payment. In the case on hand, the assessee paid charges for testing at laboratories of CRO which used their own skills and equipments etc., to prepare the report. The Tribunal came to conclusion that there is no parting of skills or know-how by CRO and hence the service is not technical in nature, but was only a commercial service. Consisting with the view taken therein, we up-hold the finding of the first appellate authority and dismissed this ground of revenue. In the result the appeal of the revenue is allowed in part. Thus, the appeal of the assesse is dismissed and that of revenue is allowed in part. Issues Involved:1. Weighted deduction under Section 35(2AB) for specific expenses.2. Levy of interest under Sections 234B and 234C.3. Allocation of R&D and interest expenses for deduction under Section 80IB.4. Deduction under Section 35(2AB) for expenses on Scientific Information, Scientific Literature, and Clinical Trials.5. Disallowance under Section 40(a)(i) for payments made to CROs.Detailed Analysis:1. Weighted Deduction under Section 35(2AB):The assessee claimed a weighted deduction under Section 35(2AB) for expenses incurred on Pilot Bio-study, Consultancy charges, and Analysis charges. The CIT (A) upheld the disallowance on the grounds that these expenses did not constitute expenses on clinical trials. The Tribunal referenced its earlier decision in the assessee's case for the assessment year 2004-05, where it was held that the assessee is entitled to only a 100% deduction and not 150% for such expenses. The Tribunal dismissed this ground, following its previous decision.2. Levy of Interest under Sections 234B and 234C:The assessee contested the levy of interest under Sections 234B and 234C, arguing that since the income was returned under Section 115JB (MAT provisions), these sections should not apply. The Tribunal dismissed this ground, citing the Supreme Court's judgment in Rolta India Ltd., which upheld the levy of interest under these sections even when income is assessed under MAT provisions.3. Allocation of R&D and Interest Expenses for Deduction under Section 80IB:The department appealed against the CIT (A)'s decision to grant deduction under Section 80IB without allocating R&D and interest expenses to the eligible units. The Tribunal upheld the CIT (A)'s decision, referencing its earlier ruling for the assessment years 2001-02, 2002-03, and 2003-04. It was noted that the R&D expenses were incurred for specific purposes unrelated to the units claiming deductions under Section 80IB, and the interest expenses were accounted for by the Head Office. There was no justification for allocating these expenses to the units.4. Deduction under Section 35(2AB) for Scientific Information, Scientific Literature, and Clinical Trials:The department also appealed against the CIT (A)'s decision to allow deductions under Section 35(2AB) for expenses on Scientific Information, Scientific Literature, and Clinical Trials. The Tribunal referenced its decision in the assessee's case for the assessment year 2004-05, where it was decided against the assessee. Consistent with this view, the Tribunal allowed the department's appeal on this ground.5. Disallowance under Section 40(a)(i) for Payments Made to CROs:The department challenged the CIT (A)'s decision to allow the deduction of Rs. 3.6 Crores disallowed under Section 40(a)(i). The Tribunal upheld the CIT (A)'s decision, referencing its ruling for the assessment year 2007-08, where it was determined that payments to CROs did not constitute fees for technical services and were not subject to tax deduction at source. The Tribunal also cited the Bombay High Court's decision in CAT Vs. Kotak Securities Ltd., supporting the view that the services rendered by CROs were commercial and not technical.Conclusion:The appeal of the assessee was dismissed, and the appeal of the revenue was allowed in part. The Tribunal's decisions were consistent with its previous rulings and relevant judicial precedents.