Pharmaceutical company wins appeal on sales expenses and R&D deductions under Sections 37(1) and 35(2AB)

ITAT Mumbai allowed assessee's appeal regarding sales and marketing expenses disallowance under Section 37(1), finding AO and CIT(A) made disallowances without proper material basis, merely following ITSC settlement percentages. For weighted deduction under Section 35(2AB), tribunal allowed claims for clinical trials, consultancy fees, rent/repairs, and analysis charges, following precedents in assessee's own case and Gujarat HC decision in Cadila Healthcare. Set-off of merged company's losses was allowed subject to NCLT order verification. MAT credit including surcharge and cess was upheld. However, education cess deduction was denied under Section 40(a)(ii) following Finance Act 2022 amendment.

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Issues Involved:

1. Disallowance of Sales and Marketing Expenses.
2. Disallowance of Weighted Deduction under Section 35(2AB).
3. Deduction of Expenses Incurred on Scientific Research.
4. Allowability of Set-off of Brought Forward Business Losses and Unabsorbed Depreciation.
5. Levy of Interest under Section 234B.
6. Inclusion of Surcharge and Cess while Computing MAT Credit.
7. Deduction for Education Cess.

Summary:

1. Disallowance of Sales and Marketing Expenses:
The assessee incurred sales and marketing expenses for brand reminders, medical camps, professional fees, market research, and travel & accommodation. The Assessing Officer (AO) disallowed these expenses based on percentages used in previous settlement proceedings. The CIT(A) partly allowed the expenses but made additional ad-hoc disallowances. The ITAT directed the AO to verify the percentages proposed by the assessee based on appellate orders and allowed the appeal of the assessee while dismissing the revenue's appeal.

2. Disallowance of Weighted Deduction under Section 35(2AB):
The AO disallowed weighted deduction on certain R&D expenses not quantified by DSIR. The CIT(A) allowed the weighted deduction for clinical trials, consultancy fees, and rent & repairs based on ITAT orders in the assessee's own case. The ITAT upheld the CIT(A)'s decision and directed the AO to allow the deduction on gross expenditure, following the decisions in the assessee's own case and relevant judicial precedents.

3. Deduction of Expenses Incurred on Scientific Research:
The assessee claimed deduction for expenses paid to Continuus Pharmaceuticals Inc. for R&D, which was disallowed by the CIT(A) for AY 2018-19 but directed to be allowed in AY 2020-21. The ITAT noted that the deduction was already allowed in AY 2020-21, making the grounds of appeal by both parties infructuous.

4. Allowability of Set-off of Brought Forward Business Losses and Unabsorbed Depreciation:
The assessee sought to set off brought forward losses and unabsorbed depreciation of Bharavi Laboratories, which merged with the assessee company. The ITAT admitted the additional ground raised by the assessee and directed the AO to verify the claim and allow the set-off as per law.

5. Levy of Interest under Section 234B:
The issue of interest under Section 234B was deemed consequential and remitted to the AO to give effect according to the final taxable income determined for the assessment year.

6. Inclusion of Surcharge and Cess while Computing MAT Credit:
The ITAT dismissed the revenue's grounds, holding that surcharge and cess should be included while computing MAT credit, following the decisions in the assessee's own case and other judicial precedents.

7. Deduction for Education Cess:
The ITAT allowed the revenue's ground, disallowing the deduction for education cess based on the retrospective amendment in Section 40(a)(ii) of the Act by the Finance Act 2022.

Conclusion:
The ITAT partly allowed the appeals of both the assessee and the revenue, providing specific directions to the AO for verification and computation as per law. The decision emphasized the importance of adhering to judicial precedents and statutory provisions while determining the allowable deductions and credits.

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