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 ... Weighted deduction under section 35(2AB) - interest under sections 234B and 234C - deduction under section 80IB and allocation of head office R&D and interest - tax deduction at source liability under section 40(a)(i) for payments to CROs and characterisation as fees for technical/consultancy servicesWeighted deduction under section 35(2AB) - Claim for weighted deduction in respect of pilot bio study, consultancy and analysis charges relating to clinical trials at Chikalthana R&D facility - HELD THAT: - The Tribunal followed its earlier coordinate bench decision in the assessee's own case for A.Y. 2004 05 and the decision in Concept Pharmaceuticals, holding that the claimed expenditures do not qualify for the enhanced (weighted) deduction under section 35(2AB) as advanced by the assessee. The bench rejected the assessee's submissions that the explanatory provision should be given a purposive/beneficial construction to allow weighted deduction for the listed items, and declined to refer the matter to a Special Bench, applying the existing precedent to dismiss the ground raised by the assessee. [Paras 7]Assessee's ground contesting disallowance of weighted deduction under section 35(2AB) dismissed.Interest under sections 234B and 234C - Levy of interest under sections 234B and 234C where income was returned and assessed under the Minimum Alternate Tax (MAT) provisions - HELD THAT: - Relying on the Supreme Court decision in Rolta India Ltd. and consistent authority, the Tribunal held that the provisions for interest under sections 234B and 234C are not attracted in a case where income is assessed under the MAT regime; accordingly the assessee's challenge to the levy of interest was rejected in favour of the assessee being not liable. [Paras 8]Assessee's ground against levy of interest under sections 234B and 234C dismissed.Deduction under section 80IB and allocation of head office R&D and interest - Whether R&D and interest expenses must be allocated to eligible manufacturing units for computing deduction under section 80IB - HELD THAT: - The Tribunal, following its earlier orders in the assessee's own cases for prior assessment years, held that the R&D institute operates as a separate head office function and the R&D expenditure and interest were accounted for at head office level; the Assessing Officer failed to discharge the onus of showing that such expenditures were related to the specific units claiming the section 80IB deduction. Applying precedent and the factual finding that R&D and interest were not shown to have been incurred for particular eligible units, the Tribunal upheld the CIT(A)'s approach and set aside the AO's allocation. [Paras 10]Revenue's ground to allocate R&D and interest to units for computing section 80IB deduction dismissed; CIT(A) order upheld.Weighted deduction under section 35(2AB) - Allowability of section 35(2AB) deduction for expenditures on Scientific Information, Scientific Literature and Clinical Trials where incurred otherwise than in house - HELD THAT: - Having regard to the Tribunal's earlier decision in the assessee's own case for A.Y. 2004 05 and consistent precedent, the bench held that the CIT(A) was not correct in allowing the deduction for such items when they do not satisfy the requirements for weighted deduction under section 35(2AB). On that basis the Tribunal allowed the revenue's appeal on this ground, reversing the CIT(A)'s allowance. [Paras 11]Revenue's ground upheld; deduction under section 35(2AB) for the specified items disallowed as held by the Tribunal.Tax deduction at source liability under section 40(a)(i) for payments to CROs and characterisation as fees for technical/consultancy services - Disallowance under section 40(a)(i) for payments to contract research organisations (CROs) on the ground that such payments constituted 'fees for technical services' requiring TDS - HELD THAT: - Relying on the Tribunal's earlier findings in the assessee's related assessments and on authorities distinguishing commercial testing services from technical/consultancy services, the Tribunal concluded that payments made to CROs for testing and reports did not amount to fees for technical services and were commercial in nature. The assessee had acted under a bonafide belief that no TDS was required; accordingly the AO's disallowance under section 40(a)(i) was not sustained and the CIT(A)'s relief was upheld. [Paras 12, 13]Revenue's disallowance under section 40(a)(i) in respect of payments to CROs dismissed; CIT(A) order in favour of assessee upheld.Final Conclusion: Assessee's appeal dismissed. Revenue's appeal allowed in part: the Tribunal upheld denial of weighted deduction under section 35(2AB) and sustained the non levy of interest under sections 234B/234C in the assessee's favour; as to the departmental grounds, the Tribunal dismissed the revenue's challenge on allocation for section 80IB and on TDS liability for CRO payments, but allowed the revenue's ground disallowing certain section 35(2AB) claims for Scientific Information, Scientific Literature and Clinical Trials. 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.