2022 (8) TMI 129 - AT - Income Tax

Tribunal upholds CIT(A) decisions on business expenses, deductions, and foreign commission expenses

The Tribunal upheld the CIT(A)'s decisions, dismissing the Revenue's appeals on various issues including deletion of disallowances for business promotion ... Disallowance of business promotion expenses u/s 37(1) - expenses incurred for the benefit of Doctors/medical practitioner - AO was of the view that above expenditures were incurred in violation of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulation 2002 and thus, the same needs to be disallowed as per the CBDT Circular No. 5/2012 dated 01-08-2012 - CIT-A deleted the addition - HELD THAT:- We find that the issue of business promotion expenses incurred for the benefit of Doctors/medical practitioner came before this tribunal in the own case of the assessee [2019 (10) TMI 731 - ITAT AHMEDABAD] if the nature of this expenditure is being viewed with angle of commercial organization, then it would reveal that these were essential expenditure for the purpose of a pharmaceutical industry. The only caveat for their non-disallowance is Explanation 1 appended to section 37, which is applicable on the expenditure which are incurred for infringement of any law. Before us, Revenue has not placed any material on record to point out any distinguishing feature in the facts of the case for the year under consideration and that of earlier years nor has placed any contrary binding decision in its support. Therefore, respectfully following the same, we uphold the finding of the learned CIT-A and hereby dismissed the ground of appeal raised by the Revenue. Deduction claimed u/s 80IC - whether the research and development expenses incurred by the assessee should be allocated to eligible unit while working out the deduction under section 80-IC? - HELD THAT:- This question has been answered by the judgment of the Hon’ble Gujarat High Court in the case of the CIT Vs. Torrent Pharmaceuticals Ltd [2016 (7) TMI 1301 - GUJARAT HIGH COURT] wherein it was held that the R and D expenses should not be allocated to the units eligible for deduction under section 80-IA. Revenue in the own case of the assessee for the assessment year 2010-11 in the assessment framed under section 143(3) of the Act has not allocated the research and development expenses to the eligible unit for the purpose of computing the deduction under section 80-IC of the Act. Admittedly, there is no change in the facts and circumstances of the year under consideration viz a viz the earlier assessment year i.e. 2010-11, thus we are of the view that the principles of consistency should be adopted. Thus we hold that the research and development expenses are not to be allocated to the eligible undertaking while calculating the deduction of the assessee under the provisions of section 80 IC. Additional claim u/s 35(2AB) on account of clinical trial expenses incurred outside the approved facility - HELD THAT:- We find that the issue of allowability of weighted deduction under 35(2AB) on clinical trial expenses incurred outside approved facility came before this tribunal in own case of the assessee [2020 (3) TMI 333 - ITAT AHMEDABAD] decided in favour of assessee. Before us, no material has been placed on record by the Revenue to demonstrate that the decision of Tribunal as discussed above has been set aside / stayed or overruled by the higher Judicial Authorities. Before us, Revenue has not placed any material on record to point out any distinguishing feature in the facts of the case for the year under consideration and that of earlier year nor has placed any contrary binding decision in its support. Therefore, respectfully following the same we uphold the finding of the learned CIT-A and hereby dismissed the ground of appeal raised by the Revenue. Issues Involved:1. Deletion of disallowance of business promotion expenses under section 37(1) of the Income Tax Act, 1961.2. Deletion of disallowance of deduction under section 80IC of the Act.3. Allowance of additional claim for expenses incurred outside the approved facility under section 35(2AB) of the Act.4. Deletion of disallowance of depreciation on electrical installations.5. Deletion of disallowance of foreign commission expenses under section 40(a)(i) of the Act.Detailed Analysis:1. Deletion of Disallowance of Business Promotion Expenses:The Revenue argued that the CIT(A) erred in deleting the disallowance of Rs. 9,70,63,667/- claimed as business promotion expenses under section 37(1). The Assessing Officer (AO) disallowed these expenses, citing that they violated the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulation 2002, as per CBDT Circular No. 5/2012. The assessee contended that these expenses were necessary for business promotion and were not in violation of any law applicable to pharmaceutical manufacturers. The CIT(A) observed that the AO did not doubt the genuineness of the expenses and that the MCI regulations were applicable to medical practitioners, not pharmaceutical companies. The Tribunal upheld the CIT(A)'s decision, referencing previous judgments that the MCI regulations do not apply to pharmaceutical companies and that the CBDT circular cannot be enforced retrospectively.2. Deletion of Disallowance of Deduction under Section 80IC:The AO attributed research and development (R&D) expenses to the Dehradun unit, reducing its profit and thus the deduction under section 80IC. The assessee argued that R&D expenses were not attributable to any specific unit but were incurred at the enterprise level. The CIT(A) accepted this argument, noting that the AO had accepted this treatment in previous years. The Tribunal upheld the CIT(A)'s decision, citing the principle of consistency and the Gujarat High Court's judgment in Torrent Pharmaceuticals Ltd., which held that R&D expenses should not be allocated to units eligible for deduction under section 80-IA.3. Allowance of Additional Claim under Section 35(2AB):The AO rejected the assessee's additional claim for weighted deduction on clinical trial expenses incurred outside the approved facility, citing a Supreme Court judgment in Goetze (India) Ltd. The CIT(A) allowed the claim, referencing the Gujarat High Court's judgment in Cadila Healthcare Ltd., which held that clinical trials conducted outside the approved facility are eligible for deduction under section 35(2AB). The Tribunal upheld the CIT(A)'s decision, noting that the issue was covered in the assessee's favor by previous Tribunal orders.4. Deletion of Disallowance of Depreciation on Electrical Installations:The AO restricted depreciation on electrical installations to 10%, treating them as furniture and fixtures. The assessee argued that these installations were part of the plant and machinery. The CIT(A) allowed the higher depreciation rate of 15%, following previous Tribunal decisions in the assessee's favor. The Tribunal upheld the CIT(A)'s decision, noting that the issue was covered by previous orders in the assessee's favor.5. Deletion of Disallowance of Foreign Commission Expenses:The AO disallowed commission expenses paid to foreign agents, treating them as fees for technical services under section 9(1)(vii), requiring withholding tax under section 195. The assessee argued that the payments were for services rendered outside India and were not taxable in India. The CIT(A) allowed the expenses, following previous Tribunal decisions in the assessee's favor. The Tribunal upheld the CIT(A)'s decision, noting that the issue was covered by previous orders and that the foreign agents' services did not constitute technical services under section 9(1)(vii).Conclusion:The Tribunal dismissed the Revenue's appeals and upheld the CIT(A)'s decisions on all issues, following previous judgments and principles of consistency. The Cross Objections filed by the assessee were dismissed as infructuous.