TaxTMI 
TaxTMI 
2023 (10) TMI 1128
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....Income-tax Act, 1961 (in short "Act") on 15.11.2017. Pursuant thereto, the Assessee made a declaration of certain amount u/s. 132(4) of the Act. The Assessee, so as to avoid protracted litigation, filed a petition before the Income Tax Settlement Commission ("ITSC"), for AY 2011-12 to 2017-18 u/s. 245C of the Act requesting for settlement of its pending cases which petition has been disposed off. 3. In relation to the impugned A.Y. 2018-2019, the Assessee filed its original Return of Income for AY 2018-19 on 29.11.2018, declaring a total income of Rs.. 714,42,91,300/- under normal provisions of the Act and tax payable under normal provisions of Rs.. 2,46,90,82,534/-. The case of the Assessee was selected for scrutiny. Before the Assessing Officer, Assessee had made fresh claim of set-off of brought forward losses arising out of amalgamation, and deduction of expenses of Rs.. 38,94,47,850/- being payment made to Continues Pharmaceuticals Inc for scientific research. The Assessing Officer passed an assessment order u/s. 143(3) r.w.s. 153A of the Act dated 12.12.2019. As per the said order, the Assessing Officer made following additions i. Net disallowance of sales and Mar....
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....nses were incurred wholly and exclusively for business purposes. Weighted deduction under section 35(2AB) of the Act of INR 3,29,50,220/- 4. Erred in upholding the action of the leaned AO in disallowing weighted deduction under section 35(2AB) of the Act (i.e. 150% of actual expenditure) of the analysis and testing charges being Research and Development (R&D) expenditure amounting to INR 3,29,50,220 under section 35(2AB) of the Act, thereby granting only 100% deduction. Claim for deduction of expenses incurred on scientific research 5. Erred in not allowing deduction of INR 38,94,47,850 under section 35(1)(i) of the Act for the year under consideration, in respect of payments made to Continuus Pharmaceuticals Inc. towards R&D for improvement in the existing manufacturing process of the Appellant being in the nature of scientific research. 6. Was not justified in not allowing the claim of expenditure under section 35(1X) of the Act during the year of incurring of expenditure of INR 38,94,47,850/- paid to Continuus Pharmaceuticals Inc. even after accepting that the expenditure was incurred for the purpose of R&D during the year under consi....
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....ees, and Rent & repairs to building, even though the same have not been approved by DSIR 4. On the facts and in circumstances of the case, the Ld CIT (A) erred in facts and law in allowing the appeal. of the assessee after relying on the decision in the case of M/s Cadila Healthcare Ltd which has not been accepted by the revenue and SLP already been filed and admitted vide SLP(Civil) 770 of 2015. 5. On the facts and circumstances of the case and in law, whether the Ld CIT(A) is justified in holding that gross expenditure with no netting off with income should be allowed as deduction under section 35(2AB), ignoring the nature of the income. 6. On the facts and circumstances of the case and in law, whether the Ld CIT(A) is justified in holding that gross expenditure with no netting off with income should be allowed as deduction under section 35(2AB), ignoring the relevant findings of fact establishing that the income was not from the research and development activity. 7. On the facts and circumstances of the case and in law, whether the Ld CIT(A) is justified in holding that the gross expenditure should be allowed u/s 35(2AB) just because the issue....
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....r which was not in appeal before him. 14. The appellant craves to leave to add, to amend and/ or to alter any of the ground of appeal, if need be. 8. We shall decide the issues/grounds wise of both the appeals filed by revenue as well as assessee. 9. At the outset, Ld. AR of the assessee submitted that Ground No. 2 & 3 of grounds of appeal raised by the assessee and Ground No. 1 of grounds of appeal raised by the revenue are similar which are in respect of disallowance of sales and marketing expenses u/s. 37(1) of the Act. The relevant facts of the above grounds are, the Assessee has incurred sale promotion expenses in relation to brand reminders, Medical Camp expenses, Professional fees-Medical Advisory, Market Research / Survey and Travel & Accommodation relating to advisors attending conferences amounting to Rs.. 1,24,04,19,626. In respect of A.Ys. 2012-13 to 2017-18, the assessee has filed petition before the ITSC, the Assessee had stated that the aforesaid expenses incurred are purely business expenses and ought to be allowed. 10. Without prejudice to this, to avoid protracted litigation and with an intention to arrive around the amount that was offered to ta....
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....56055468 3377069 89782538 60% 33633281 6745414 40378695 Total 94,1030,601 299389025 1240419627 373027881 31076360 40,4104,241 less : Deduction - 80IC Units 5.73% Net Disallowance 38,09,49,068/- 11. During the course of assessment, Assessee submitted details of the expenses along with documentary evidence which are part of the paper book filed before us. The relevant Page Nos of details of expenses and documentary evidences are submitted during the hearing. - Submission before AO dated 22/11/2019 giving details of various expenses. [Pg 78-343] - Submission before AO dated 27/11/2019 giving sample documentary evidences. [Pg 344-751] - Submission before AO dated 2/12/2019 [Pg 752-756] and 11/12/2019 [Pg 758-763] justifying the suo-moto disallowance from 1/1/2018 to 31/3/2108 at lower rate as compared to 1/4/2017 to 31/12/2017.[Rel Pg 752-756]. Ld. AR submitted that....
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....de additional disallowance in the range of 2-5% for different heads. The summary of disallowance based on the directions of Ld. CIT(A) is as under: Sr. No . Particulars Amount of expenditure disallowance as per CIT(A) (Refer CIT(A) order Pg.23-25 01.01.18 to 31.03.18 % applied for 01.01.18 to 31..03.18 by CIT(A) disallowance as per CIT(A Confirmed by CIT(A 1 Brand Reminder -below 1000 2,97,98,091 2% 5,95,962 5,95,962 Brand Reminder -above 1000 23,55,434 - 2 Medical Camp 10,93,08,623 7% 76,51,604 21,86,172 3 Professional Fees 9,08,50,827 20% 1,81,70,165 45,42,541 4 Market research/ Survey 3,33,48,981 20% 66,69,796 16,67,449 5 Travel and Accommodation 3,37,27,069 25% 84,31,767 16,86,353 Total 29,93,89,025 4,15,19,294 1,06,78,478 less : Deduction - 80IC 6,11,877 Net Disallowance 1,00,66,601 13. Aggrieved, the assessee is in appeal before us and Ld. AR submitted that only dispute is in relation to three (3) months i.e. 01.01.20....
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.... "29. We have heard the rival submissions and perused the relevant materials on record. We find that these expenses incurred comprise largely of low value mementoes like pen, pen drives, towels, eatables, cosmetics etc. with an individual value of Rs. 5000/- or less, meant for distribution to stockists/druggists/chemists/paramedical persons for brand recall / target completion/incentive to promote and market assessee's products / as a goodwill gesture during festival/birthdays etc. to maintain/enhance business below Rs. 5000 as the same is sales promotion expenditure incurred for purpose of business and is thus incurred wholly and exclusively for the purpose of business relationships. Thus it is crystal clear that the aforesaid expenditure is sales promotion expenditure incurred for the purpose of enhancing the assessee's business and is thus incurred wholly and exclusively for the purpose of business and therefore allowable as deduction u/s 37(1) of the Act." 17. Further, Ld. AR of the assessee with regard to Travel and Accommodation submitted that these comprise of expenses incurred for conferences attended by the Advisors of the Assessee who update their knowl....
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....sis ignoring the detailed submission made by the Assessee giving description and also detailed documentary evidence for each head of expense. The relevant pages of the paper book are as below: Sr. no. Particulars Description Details of expense Documentary Evidence 1. Brand reminder PB pg. 44 PB pg. 114-124 PB pg. 359 - 392 2. Medical Camp PB pg. 45 PB pg. 125- 208 PB pg. 425 - 541 3. Professional Fees PB pg. 46 PB pg. 87 - 112 PB pg. 542 - 669 4. Market research/ Survey PB pg. 47 PB pg. 209 343 PB pg. 670 - 751 5. Travel and Accommodation PB pg. 47 PB pg. 113 PB pg. 393 - 424 20. On the other hand, Ld. DR relied on the order of the Assessing Officer and relying on the decision of Apex Laboratories Pvt. Ltd (2022) 135 taxmann.com 286 (SC) submitted that the expenses are in violation of the Circular issued by Medical Council of India under MCI regulations, 2002 would be prohibited by law and thus would not be allowed as deduction u/s. 37 of the Act. 21. In the rejoinder, Ld. AR of the assessee submitted that, Ld.DR during the course of hearing relied on the decision of the Supreme Court in....
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....percentage of disallowance offered before ITSC is to match the agreed declaration of income during search proceedings. Therefore, we are inclined to accept the submissions of the assessee and Ld CIT(A) that the purpose of declaration before ITSC are completely different and the same cannot be applied for the regular assessment unless and until it is brought on record the relevant material to support the additions proposed in the assessment order. In the given case, the assessee had offered the percentage of disallowance to match the amount agreed to declare during the search proceedings. The same was adopted during the present assessment year, for the period 1.4.2017 to 31.12.2017 and for the period 1.1.2018 to 31.3.2018, it has revised the percentage of disallowance based on the subsequent developments in the appellate proceedings. The assessee also demonstrated the relevance of adopting the relevant percentage of disallowances based on result of appellate proceedings. In our considered view, the offer before ITSC to settle the dispute amicably cannot be the basis of making any regular assessment without their being any proper material on record to substantiate the relevant disall....
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....ed deduction @150% u/s. 35(2AB) of the Act for R&D expenses incurred by the said units. Revenue expenditure of Rs.. 1,19,95,03,530/- along with capital expenditure of Rs.. 9,87,08,100/- was claimed as deduction u/s. 35(2AB). Accordingly, a sum of Rs.. 194,73,17,445/- (i.e. being 150% of the total R&D expense of Rs.. 129,82,11,630/-) was claimed by the Assessee in its return of income. The said expenses were claimed by the Assessee based on the DSIR approval obtained for the R&D facility in Form 3CM. 25. During assessment proceedings, assessee filed submission dated 27/11/2019 explaining why certain expenses which were disallowed in earlier years should be allowed. The Assessing Officer rejected the submission made by the Assessee, based on amount quantified by the DSIR in the certificates for previous year made disallowance of weighted deduction claimed for Rs.. 14,06,23,314/- u/s. 35(2AB) of the Act, thereby granting only 100% deduction and rejected additional 50% of following R&D expenses. Particulars Disallowance in INR Clinical Trials 90043616 Consultancy and Professional fees 11625514 Analysis and Testing charges 32950220 Rent taxes and repairs to....
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..... These API's are required to be tested for their efficacy. Such testing takes place mostly within the R & D facility. Sometimes based on the requirement such testing is also outsourced. It is this outsourcing which is held against the Assessee by DSIR. It is akin to the view of the DSIR on clinical trials which take place outside the R&D facility. However, this view of DSIR is not found to be legally tenable by the Gujarat High Court in CIT v. Cadila Healthcare 263 CTR 686 wherein it is held that expenses incurred on clinical trials outside the R & D facility is also eligible for weighted deduction u/s 35(2AB). Same reasoning also applies to testing charges. Ld. AR of the assessee relied on the decision of the Hon'ble Gujarat High Court in the case of CIT v Cadila Healthcare [263 CTR 686] and Ld. AR of the assessee brought to our notice Page No. 76 of the Paper Book which is the order of the ITAT in assessee's own case for the A.Y. 2014-15 and 2015-16. 30. With regard to Clinical Trial, Ld. AR of the assessee submitted that, in A.Y. 2007-08, expenses for clinical trial were disallowed based on the views of DSIR. [Case Law paper book Pg 11-12 ITAT order for A.Y. 2007-08]....
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....escribed authority shall submit its report in relation to the approval of the said facility to the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General in such form and within such time as may be prescribed." 35. Referring to the above, Ld. AR of the assessee submitted that by Co-joint reading of the above provisions, it is clear that Section 35(2AB) requires the approval of the said facility by DSIR and not the quantum of expenditure for the purposes of claiming weighted deduction of expenditure incurred on in-house research and development. 36. The amendment in sub-rule (7A) of rule 6 of Income Tax Rules, (with effect from 1-7-2016), to provide for quantification of expenditure as well as a condition for allowing weighted deduction goes beyond the provisions of the Act wherein there is no corresponding amendment to the same effect. It is a well-recognized principle of interpretation of statute that conferment of rule-making power by an Act does not enable the rule-making authority to make a rule which travels beyond the scope of the enabling Act, or which is inconsistent therewith or repugnant thereto. It is settled law that r....
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.... High Court as mentioned hereinabove, we are following the decision of the Hon'ble Gujarat High Court and accordingly we set aside the findings of the Ld. CIT(A) and direct the AO to allow the claim of weighted deduction u/s. 35(2AB) in respect of clinical trials as claimed by the assessee. Ground No. 1 is accordingly allowed." 40. Further, we observe that the above said order has also been followed by ITAT in its order for A.Y. 2010-11 & 2011-12 [Pg 30-68 (66- 67) and 2014-15 & 2015-16 [Pg 69-94(76-79)]. 41. With regard to consultancy and professional fees, we observe that in assessee's own case the Coordinate Bench for the A.Y. 2007-08 in ITA.No. 4517/Mum/2010 dated 04.07.2012 observed as under: - "34. We have considered the orders of the authorities below and submissions of the learned Representatives and we have also carefully considered the Commissioner (Appeals)'s order for assessment year 2006-07, a copy of which is placed at Pages-197 to 208 of the paper book (relevant pages 206-208. We observe that the consultancy charges had been paid by the assessee in providing technical services regarding the patents, obtaining patent information from innovator c....
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....nce, ground no.1(b) of the appeal taken by the assessee is allowed." 44. In view of our above observation in respect of each head of expenses i.e., Clinical Trials (Page No. 76/PB Assessee's own case for A.Y. 2014-15), consultancy and professional fees (Assessee's own case ITA No 4517/MUM/2010 dt 4/7/2012), rent taxes, repairs to building (Assessee's own case ITA No 4517/Mum/2010 dt 4/7/2012) and netting off of sale proceeds of fixed assets against the expenses are covered in the assessee's own case by the coordinate benches. This decision of coordinate benches are based on the decisions of Cadilla Ltd (supra) and other decisions which are also relied on the decision of Cadilla Ltd (supra), the same was relied by Ld CIT(A) to give relief to the assessee. Since these reliefs are given based on the decisions of coordinate benches and the same are contested by the revenue before higher forum, will not change the status of the present issues under consideration which are decided in favour of the assessee at this stage therefore, respectfully following the decision of the Coordinate Bench, we are inclined to grant relief to the assessee at this stage. 45. With regard to Netting of....
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....offset against research and development expenditure, whereas sale realization arising out of the research and development products sold need not be reduced from the research and development expenditure. Similarly, we note that in the case of Wockhardt Ltd. (supra) also the Tribunal has held that income of INR 6.45 Crores earned by the Assessee in that case in respect of clinical research project should not be reduced from the research and development expenditure while computing weighted deduction under Section 35(2AB) of the Act. In the appeal pertaining to the Assessee for the Assessment Year 2008-09 and 2009-10 disposed of by way of common order dated 20.02.2015, the Tribunal had remanded matter back to the file of Assessing Officer with the direction to verify and allowed the claim of the Assessee in light of the decision of the Tribunal in the case of Wockhardt Ltd. (supra). During the course of hearing the Learned Departmental Representative had contended that the issue be remanded back to the file of the Assessing Officer for verification in view of the decision of the Tribunal in the case of Bosch Ltd. VS ACIT, LTU, Banglore: (2016) 74 Taxmann.com 161 (Banglore Trib). We not....
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....es, these tests are outsourced. It is part of operations and activities which are necessary to carry out the R&D and its efficacies. These trials are integral part of any R&D. These activities are part of R&D but DSIR will permit clinical trials but will not approve where it needs to be done. This aspect of allowability was specifically approved by the Hon'ble Gujarat High Court in Cadilla Healthcare (supra). The Hon'ble Gujarat High Court in the case of CIT v. Cadila Healthcare (supra) observed as under: - "10. More or less, facts are not in dispute. The assessee carried out scientific research in its facility approved by the prescribed authority. It incurred various expenditure including on clinical trials for developing its pharmaceutical products. These clinical trials were conducted outside the approved laboratory facility. The Revenue holds a belief that such expenditure not having been incurred in the approved facility cannot form part of the deduction provided under section 35(2AB) of the Act. The Tribunal observed that the term 'in-house' used in section 35(2AB) of the Act must be viewed in the context of which it has been used. If by utilizing the staff or re....
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....s would insist on strict tests and research on all possible aspects, such as possible reactions, effect of the drug and so on. Extensive clinical trials, therefore, would be an intrinsic part of development of any such new pharmaceutical drug. It cannot be imagined that such clinical trial can be carried out only in the laboratory of the pharmaceutical company. If we give such restricted meaning to the term expenditure incurred on in-house research and developoment facility, we would on one hand be completely diluting the deduction envisaged under sub-section (2AB) of section 35 and on the other, making the explanation noted above quite meaningless. We have noticed that for the purpose of the said clause in relation to drug and pharmaceuticals, the expenditure on scientific research has to include the expenditure incurred on clinical trials in obtaining approvals from any regulatory authority or in filing an application for grant of patent. The activities of obtaining approval of the authority and filing of an application for patent necessarily shall have to be outside the in-house research facility. Thus the restricted meaning suggested by the Revenue would completely make the exp....
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.... case in ITA.No. 2575 & 2576/Mum/2021 for the A.Y. 2014-15 and 2015-16 held as under: - "12. We note that the deduction for Quality Control/Testing Expenses under Section 35(2AB) of the Act was restricted to 100% by the Assessing Officer solely on the ground that the aforesaid expenses were not approved by DSIR. The CIT(A) overturned the decision of the Assessing Officer on this issue and allowed the claim of the Assessee for weighted deduction at the rate of 200% under Section 35(2AB) of the Act. We note that the above decision of the Tribunal in the case of Crompton Greaves Ltd. (supra) has also been followed by the Mumbai Bench of the Tribunal in the case of Laxmi Organic Industries Ltd. v. DCIT [ITA No. 38/Mum/2020] cited by the Learned Authorised Representative for Assessee. In view of the aforesaid and our findings in paragraph 11 above, we do not find any infirmity in the order passed by the CIT(A) in allowing weighted deduction at the rate of 200% in respect of Quality Control/Testing Expenses of INR.2,54,29,652/-. Therefore, the challenge of the Revenue to the order of the CIT(A) on this issue is rejected." 49. Further, as discussed above, the decision of Laxmi....
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....d certified by the Auditors since the amendment was brought in the Rule 6(7A)(b) w.e.f. 01/07/2016 only. Prior to the amendment, the prescribed authority was to submit its report in relation to the approval of in-house research & development facility in form No.3CL to the DG (IT exemptions) within 60 days of its granting approval. It was only with effect from 01/07/2016, the prescribed authority was required to quantify the expenditure incurred by the assessee on in-house research & development facility. The relevant findings of Pune Tribunal in Cummins India Ltd. V/s DCIT (ITA No.309/Pun/2014 dated 15/05/2018) were as under: - 45. The issue which is raised in the present appeal is that whether where the facility has been recognized and necessary certification is issued by the prescribed authority, the assessee can avail the deduction in respect of expenditure incurred on in-house R&D facility, for which the adjudicating authority is the Assessing Officer and whether the prescribed authority is to approve expenditure in form No.3CL from year to year. Looking into the provisions of rules, it stipulates the filing of audit report before the prescribed authority by the person....
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....r to commercialize the new manufacturing process for the said product. For this, Continuus was required to provide periodical reports of costs undertaken, milestones achieved and further research to be undertaken. The study concluded that while the raw material cost, the overall cost of production through new manufacturing process was much higher as compared to the cost of production being achieved for manufacturing product through batch processes, on account of high fixed cost (capital cost) and operating cost. Considering the above circumstances, the developed process was not found to be financially viable. Therefore, the Assessee had dropped the project after development stage. It was an ongoing project in AY 2018-19 and dropped in AY 2020-21. 52. The Ld. CIT(A)observed that the said payments were revenue is nature, however considering the project was abandoned only in A.Y. 2020-21, he directed that the same be allowed as revenue expenditure u/s. 37(1) in A.Y. 2020-21 and not A.Y. 2018-19. The Assessee while filing the Return of income of AY 2020-21 claimed the said amount as deduction u/s 35(1)(1) of the Act. During the scrutiny proceedings the Assessing Officer had specific....
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....port submitted during the course of Assessment Proceedings. The Assessing Officer however did not allow the set off while passing the Assessment order. It is submitted that the Assessee inadvertently missed taking a ground before the Ld.CIT(A) as the Assessing Officer did not adjudicate this claim. It was submitted that the Scheme was approved by the Hon'ble National Company Law Tribunal vide its order dated 6.07. 2017 and filed with the Ministry of Corporate Affairs on 10.08.2017. This fact was mentioned in the Financial Statements and unabsorbed depreciation/ losses were declared in the Return of income. 58. Before us, assessee raised additional ground and Ld. AR submitted as under: - "The Assessee had raised this point before the Assessing Officer. Though the said ground is not strictly additional ground as it was raised before the Assessing officer, as a matter of abundant caution the Assessee has filed an application for admission of additional ground. The Assessee further submits that the relevant documents for adjudication of the grounds on merits are already part of record of the lower authorities and this claim is rather consequential to the outcome of the fina....
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....claim with respect to Bharavi Laboratories was never a matter before the settlement commission and thus the Tribunal has power to adjudicate on the same. Ld. AR further submitted that the Assessee would also like to place reliance on the decision in case of Perfect Equipments v. DCIT 120031 85 ITD 50 (Ahmedabad - ITAT) wherein it is held that the Tribunal by virtue of powers vested upon it under provisions of section 254(1) for disposal of an appeal may pass such orders thereon as it thinks fit and only limitation on powers of Tribunal to give directions or finding in relation to another assessment year would be that these are necessary for disposal of appeal. Therefore, in the facts of the impugned case it is necessary for disposal of appeal that the Tribunal has power to direct the Assessing Officer to allow the set off in either AY 2017-18 or alternatively AY 2018-19. 64. Considered the rival submissions and material placed on record, we observe that the company Bharavi Laboratories was merged with the assessee company and as per the provisions and in line with the NCLT directions, the assessee is eligible to set off the losses carried forward by the Bharavi Laboratories at t....
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....e. Ground No. 8 raised by the Revenue is, therefore, dismissed." In view of the above submission the Department Ground of Appeal No 9-10 may be dismissed. 68. Considered the rival submissions and material placed on record, we observe that the issue of giving MAT credit in the subsequent assessment years are already well settled that the tax paid as per provisions of sec.115JB always includes surcharge and cess. Similarly, while giving credit in the subsequent year shall include the surcharge and cess. One cannot separate the tax liability differently while calculating tax due and tax credit. Therefore, we are inclined to dismiss the grounds raised by the revenue. 69. With regard to Ground No. 11 of ground raised by the revenue which is relating to education Cess. 70. Ld.DR relied on the order of the Assessing Officer and prayed that the order of the Ld.CIT(A) be set-aside. 71. On the other hand, Ld. AR of the assessee submitted as under: - "It is fairly submitted that this ground is decided against the Assessee by ITAT order for AY 2014-15 & 2015-16. The relevant extract is reproduced below "Ground No. 8 raised by the Revenue is directed against the or....