Tribunal allows royalty payments as reasonable but restores consultancy charges and legal expenses for re-examination

ITAT Mumbai partially allowed the assessee's appeal and Revenue's appeal. The Tribunal deleted disallowance of royalty payments under section 40A(2)(b) as the 0.05% payment was reasonable. Multiple issues were restored to AO including consultancy charges examination, legal expenses for system development, and weighted deduction claims. Advertising expenses for doctor freebies were allowed as MCI regulations were effective from 2009. Computer software depreciation at 60% was directed following precedent. Revenue succeeded on section 80HHC deduction disallowance under section 115JB due to retrospective amendment.

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Issues Involved:

1. Disallowance of payments made to Piramal Corporate Services Ltd under section 40A(2)(b) of the Income Tax Act.
2. Disallowance of legal and professional charges incurred for system development.
3. Disallowance of advertising and business promotion expenses.
4. Disallowance of deduction under section 35(2AB) in respect of Chennai-Ennore unit.
5. Disallowance of excess claim of R & D Revenue Expenditure.
6. Disallowance of depreciation on opening WDV of computer software.
7. Disallowance of depreciation on additions to computer software.
8. Addition on account of increase in the value of closing stock.
9. Deduction under section 80G.

Summary:

Issue 1: Disallowance of Payments to Piramal Corporate Services Ltd under Section 40A(2)(b)
The Tribunal found that the Assessing Officer (AO) disallowed payments made to Piramal Corporate Services Ltd due to lack of evidence and justification. The CIT(A) directed the AO to verify the fair market value of services and restrict the addition to excessive payments. The Tribunal restored the issue to the AO for further examination and directed deletion of disallowance if both companies are in the same tax bracket.

Issue 2: Disallowance of Legal and Professional Charges for System Development
The AO disallowed 50% of the legal and professional charges incurred for system development, treating it as capital expenditure. The CIT(A) upheld this disallowance. The Tribunal restored the issue to the AO for de novo adjudication, directing the AO to verify the nature of services and allow expenses if they are for maintenance of software.

Issue 3: Disallowance of Advertising and Business Promotion Expenses
The AO disallowed 50% of advertising and business promotion expenses, citing lack of substantiation and violation of MCI regulations. The CIT(A) upheld the disallowance. The Tribunal, following the decision in Wockhardt Ltd v/s DCIT, directed deletion of the disallowance as MCI regulations were effective from 14/12/2009, not applicable to the assessment year in question.

Issue 4: Disallowance of Deduction under Section 35(2AB) for Chennai-Ennore Unit
The AO disallowed the weighted deduction claimed under section 35(2AB) due to the absence of formal approval in Form 3CM. The CIT(A) upheld the disallowance. The Tribunal restored the issue to the AO, directing the assessee to furnish the required approval for claiming the deduction.

Issue 5: Disallowance of Excess Claim of R & D Revenue Expenditure
The CIT(A) directed the AO to review the computation of disallowance. The Tribunal restored the issue to the AO for verification and directed to restrict disallowance to the amount computed by the assessee.

Issue 6: Disallowance of Depreciation on Opening WDV of Computer Software
The AO disallowed depreciation on opening WDV of computer software. The CIT(A) upheld the disallowance. The Tribunal restored the issue to the AO to compute depreciation by considering the closing WDV of the preceding year and directed to allow depreciation at 60%.

Issue 7: Disallowance of Depreciation on Additions to Computer Software
The AO recalculated depreciation on computer software at 25% instead of 60%. The CIT(A) upheld the disallowance. The Tribunal directed the AO to allow depreciation at 60%.

Issue 8: Addition on Account of Increase in the Value of Closing Stock
The AO added unutilized MODVAT credit balance to the closing stock value under section 145A. The CIT(A) upheld the addition. The Tribunal restored the issue to the AO to decide in light of the directions rendered in the preceding year.

Issue 9: Deduction under Section 80G
The AO did not grant the deduction claimed under section 80G. The CIT(A) dismissed the ground as not maintainable. The Tribunal directed the AO to consider the plea of the assessee regarding the deduction under section 80G after necessary verification.

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