TaxTMI 
TaxTMI 
2023 (10) TMI 1128
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 Marketing expenses u/s 37 of the Act Rs.. 6,68,10,499/- (fo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....,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 consideration. Allowability of set off of brought forward business losses and unabsorbed depreciation of Bharavi Laboratories Private Limited ('Bharavi Laboratori....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 was restored back to the file of the assessing officer in an earlier year, and no appeal was filed against the same, ignoring the fact that the direction to the assessing officer was for verification of claim and not for allowing of the claim ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f 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 tax u/s 132(4) during the course of search action for AY 2012-13 to AY 2017-18, the Assessee offered such expenditure (being sales promotion expenses) for disallowance u/s. 37(1) of the Act based on estimate basis under various heads. Subsequently, the ITSC in its order dated 10.04.2019, acce....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 The AO did not find the sales and marketing expenses incurred by the Assessee to be violating any guidelines/circulars of the Medical Council of India. The AO did not find any shortcomings in the documentary evidences filed by the Assessee. However, the Assessing Officer without giving any cogent reason made following disallowance of expenses incurred during the period 1 January 2018 to 31 March 2018 to the extent of INR 6,68,10,449/- based on percentages of disallowance offered by the Assessee before the ITSC under section 37(1) of the Ac....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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. 01.01.2018 to 31.03.2018 that too on what is the percentage of disallowance to be applied on the expenditure incurred during the said three (3) months. It is submitted that the Assessee in its application and all other submissions before the ITSC has mentioned that the percentage of disallowance offered before ITSC was only with an intention to arrive around the amount offered to tax u/s 132(4) of the Act. This fact has also been acknowledged by the ITSC, while considering the PCIT report wherein the ITSC has observed that the PCIT has not substantiated a higher disallowance and the Assessee has offered a higher disallowance compared to what the Assessing Officer has disallowed in other years. The relevant extract is reproduced below: "From the conduct of the applicant we also find suffi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 knowledge and thereafter share with the research and marketing teams of the Assessee. Disallowance was offered for this portion at the rate of 20% on the basis of assessment order for AY 2015-16. The relevant extract is reproduced below: "3.2.3 A careful examination of the details provided by the assessee shows that the it entered into the agreements with respective advisors wherein the latter is required to provide his services from time to time. As per the terms of the agreement, in the course of assignment as an advisor, he may be required to update his knowledge by attending conferences and provide feedback. The copies of the agreements with the details of the conferences attended and the reported outcome/feedback of the same to the management were produced by the Assessee and kept on record. The expenses ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f 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 the case of Apex Laboratories Pvt. Ltd (2022) 135 taxmann.com 286 (SC) which has held that expenses 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. It is submitted that in the impugned case, it is neither the Assessing Officer nor the Ld. CIT(A)'s contention that there has been any violation of the MCI circular. Reliance placed by the Ld.DR on the decision of the Supreme Court is misplaced and distinguishable on facts. The said decision cannot be applied generally to all pharma companies incurring expenditure on payment to doctors who acts as advisor or incidental payments made to third parties (where services of doctors have been availed in the capacity of an advisor). Each case has to be evaluated on its merits as to whether there has bee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f 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 disallowances. In the given case, the assessing officer merely followed the percentage of disallowance adopted by the ITSC without their being any material to support the disallowances for the impugned assessment year. Similarly, the Ld.CIT(A) even though agreed that the percentage declared before ITSC cannot be adopted but proceeded to adopt percentage on adhoc basis. Therefore, in our considered view, the reasons given by the Ld CIT(A) to adopt the respective percentage are mere assumptions and there is no basis. In our view, the assessee adopted the relevant percentage of disallowance based on the findings of appellate authorities particularly the ITAT. Therefore, we are inclined to direct the Assessing Officer to verify the percentage proposed by the assessee and the relevant findings of the coordinate bench in each and every expense. Before we depart, for the distribution of Bran....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 building 5978966 Netting off sale proceeds of fixed assets against the expenses 25,000 26. Aggrieved assessee preferred appeal before Ld.CIT(A) and filed written submission dated 10/8/2020. The Ld.CIT(A) accepted the Assessee's contention relying on ITAT orders in Assessee's own case for earlier years and other judicial precedents that to be eligible to claim deduction u/s. 35(2AB) only the facility was required to be approved and the expenditure was not required to be quantified. The Ld.CIT(A) held that after amendment in the Rule 6(7A) w.e.f 1-7-2016 the DSIR can also quantify the expenditure. The Ld.CIT(A) observed that for the impugned year i.e. AY 2018-19 quantification of expenditure as per DSIR was required as per Rule 6(7A). However, the Ld.CIT(A) observed that the ITAT had in Assessee's own case independently dealt with the different heads of expenditure and held that they we....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ee'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]. However, the ITAT for AY 2008-2009 & 2009-2010 relied upon Gujarat High Court decision in CIT v. Cadila Healthcare 263 CTR 686 and held that expenses incurred for clinical trials were eligible for deduction u/s.35(2AB) though incurred outside the R & D facility and thus the view of DSIR came to be rejected. 31. With regard to Consultancy and Professional fees, Ld. AR of the assessee submitted that these are fees paid to consultants inside and outside India in connection with patent information of competitors etc to help the Assessee in it's research and development. Further, Ld. AR of the assessee relied on the decision of Gujarat High Court in CIT v Cadila Healthcare 263 CTR 686 and submitted that the issue is decided by the Coordinate Bench in assessee's own case for AY 2008-09 and 2009-10. Copies of the orders are placed on record. 32. With regard to Rent taxes and repairs to building, Ld. AR of the assess....
X X X X Extracts X X X X
X X X X Extracts X X X X
....te 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 rules can never have any effect on the interpretation or operation of the parent statute. When the language of the main section is clear, it would be immaterial what the relevant form (i.e. Form 3CL in this case) prescribed under the Rule provide. The Assessee would like to rely on the following case law on the proposition that rules cannot override or travel beyond the Substantive provisions under which the rules are framed. - CIT v. Tulsyan NEC Ltd [2010] 8 taxmann.com 228 (SC) - CIT v. Bombay State Transport Corporation [1979] 118 ITR 399(Bombay) - Kayyar Subbanna Shetty v. ITO [ITA No. 2563/Bang/2018] - CIT v. Taj Mahal Hotel [1971] 82ITR44 (SC) 37. Ld. AR of the assessee prayed that the Assessee appeal Ground No 4 may be allowed and department appeal Ground No 2-8 may be dismissed. 38. On the other hand, Ld. DR relied on the order of the Assessing Officer and submitted that the weighted deduction claimed by the assessee is not appr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ook (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 companies and obtaining innovator samples for R&D purposes. The payments have been accepted towards research and not towards registering the patents. Therefore, these expenditures have been incurred towards research expenses and not towards any patent filing. Further, it is also observed that the expenditure incurred in respect of patent application filed under The Patent Act, 1970. Explanation to section 35(2AB), as reproduced herein above, specifically provides that the expenditure on scientific research for the purpose of section 35(2AB) of the Act shall include filing of application for a patent under The Patent Act, 1970, in relation to drugs and pharmaceuticals. Any application for patent foreign country has to be filed in India as per section 7 of The Patent Act, 1970, according to patent cooperation treaty. Therefore, we hold that the Commissioner (Appeals) has rightly held that the said expenditure incurred by the assessee towards patent filing charges is eligible for weighted d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessee 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 off of sale proceeds of fixed assets against the expenses, we observe that there are contrary orders passed by the Tribunal in assessee's own case in different Assessment Years in relation to sale proceeds of fixed asset. The relevant portion of the orders are reproduced below:- In Favour of the Assessee - ITAT order for AY 2010-11 & 2011-12 "13. We have heard the rival submissions and perused the relevant materials on record. In the case of Microlabs Ltd. (supra), the Tribunal has held that where the assessee-company engaged in the business of pharmaceuticals received 'product development charges' which were credited the profit and loss account as a part of normal sales, same was not to be reduced from expenditure incurred by the assessee on carrying out scientific research on which section 35(2AB) deduction had to be allowed. The Tribunal held as under: "In respect of sale of products acquired emanating out of research and development work done in an approved facility, the sale proce....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or 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 note that in that case the remand to the assessing officer was for determining whether the receipts reduced by the assessee were in the nature of reimbursement of expenses. However, in the present appeal it is admitted position sale proceeds of INR 9,22,898/- arising from sale of R&D products and sale proceeds of INR 14,32,019/- arising from sale of R&D assets have been realized during the relevant previous year. Accordingly, we hold that CIT(A) was justified in holding that sale proceeds of INR 9,22,898/- pertaining to sale of R&D products would not be reduced from R&D expenses while computing weighted deduction under Section 35(2AB) of the Act. However, in view of the decision of the Tribunal in the case of Microlab (supra) the sale proceeds arising from sale of assets would have to be reduced from research and development expenses while computing weighted deduction under Section 35(2AB) of the Act. The aforesaid view also draws support from the decision of Mumbai Bench of the Tribunal in the case of M/s. Centaur Pharmaceuticals P....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 resources of an organization, research is conducted within the organization rather than through utilization of external use of resources or staff, it can be stated to be an in-house research. On such basis, the Tribunal rejected the Revenue's contention that merely because an expenditure which was not incurred in the in- house facility cannot be discarded for the weighted deduction under section 35(2AB) of the Act. Learned counsel for the Revenue, however, strongly relied on the certificate issued by the Prescribed Authority, which segregated the expenditure in two parts, that incurred in in-house facility and that incurred outside. In our opinion, the Tribunal committed no error. Section 35(2AB) of the Act provides for deduction to a company engaged in business of bio-technology or in the business of manufacture or production of any article or thing notified by the Board towards expenditure of scientific research development facility approved by the prescribed authority. Such deduction at the relevant time was one-and-a-half times expenditure whi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....have to be outside the in-house research facility. Thus the restricted meaning suggested by the Revenue would completely make the explanation quite meaningless. For the scientific research in relation to drugs and pharmaceuticals made for its own peculiar requirements, the Legislature appears to have added such an explanation. 11. In the case The Deputy CIT v. Mastek Limited, in Tax Appeal No. 242 of 2000 and connected matters, a Division Bench of this Court had touched on the aspect of what can be termed as scientific research. In the context, certain observations made by the Bench may be of some relevance. "25. It can thus be seen that the term scientific research in the context of the deduction allowable under section 35(1) of the Act would include wide variety of activities. It can also be appreciated that every scientific research need not necessarily result into the ultimate goal with which it may have been undertaken. Often times in the field of research and invention, the efforts undertaken may or may not yield fruitful results. What is to be ascertained is whether any scientific research was undertaken and not whether such scientific research resulted into the ultima....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r of the CIT(A) on this issue is rejected." 49. Further, as discussed above, the decision of Laxmi Organic Industries Ltd., v. DCIT in ITA.No. 38/Mum/2020 in which this issue is discussed and allowed in favour of the assessee. Relevant portion is reproduced below: - "Quantum of deduction u/s 35(2AB) 6.1 The assessee had recognition for in-house R & D units from Department of Scientific & Industrial Research (DSIR) and accordingly, it claimed deduction u/s 35(2AB) for Rs. 150.19 Lacs in the computation of income on account of scientific research & development. The deduction was claimed for revenue expenditure as well as capital expenditure. The expenditure debited to Profit & Loss Account was Rs.92.34 Lacs whereas capital expenditure was Rs. 57.85 Lacs (excluding the cost of land & building). The claim was duly certified by the Tax Auditor. However, going by the approval letter dated 08/07/2013 in Form No.3CL, the assessee submitted that enhanced deduction u/s 35(2AB) was to be restricted to the extent of Rs. 115.48 Lacs. Accordingly, the differential of Rs. 34.70 Lacs was added back to assessee's income. 6.2 During appellate proceedings, the assessee submitted that as aga....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g of audit report before the prescribed authority by the persons availing the deduction under section 35(2AB) of the Act but the provisions of the Act do not prescribe any methodology of approval to be granted by the prescribed authority vis-à-vis expenditure from year to year. The amendment brought in by the IT (Tenth Amendment) Rules w.e.f. 01.07.2016, wherein separate part has been inserted for certifying the amount of expenditure from year to year and the amended form No.3CL thus, lays down the procedure to be followed by the prescribed authority. Prior to the aforesaid amendment in 2016, no such procedure / methodology was prescribed. In the absence of the same, there is no merit in the order of Assessing Officer in curtailing the expenditure and consequent weighted deduction claim under section 35(2AB) of the Act on the surmise that prescribed authority has only approved part of expenditure in form No.3CL. We find no merit in the said order of authorities below. Similar is the decision of Mumbai Tribunal in ACIT V/s M/s. Crompton Greaves Ltd. (111 Taxmann.com 338; 27/09/2019) and various other decisions as placed on record. We find that fact as well as issue is p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....proceedings the Assessing Officer had specifically raised questions in relation to the said payment and after evaluating the same did not make any addition on this count. 53. On the other hand, Ld.DR relied on the order of the Assessing Officer and prayed that the order of the Ld.CIT(A) be set-aside. At the same time, filed report from Assessing Officer on this issue. 54. In the rejoinder, Ld. AR submitted that, Ld. DR during the course of the hearing submitted a report from the Assessing Officer, wherein it is accepted that deduction of the said expenses has been allowed in A.Y. 2020-21. Hence considering the same, the Assessee's as well as Department's ground have become infructuous. 55. Considered the rival submissions and material placed on record, the issue involved is, the assessee incurred expenses towards R&D in order to achieve improvement in the manufacturing process, after the study, it was observed that the project evaluated with the help of 'Continuus' was not viable, hence the assessee decided to discontinue the study. It was discontinued in the AY 2020-21, accordingly, the Ld CIT(A) has directed to claim the same in the AY 2020-21. The assessee also claime....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to the outcome of the final assessments in the hands of amalgamating company i.e., Bharavi Laboratories. It is submitted that the additional ground goes to the root of the matter, is purely a legal ground and would not require any investigation into fresh facts. The Income-tax Appellate Tribunal is empowered to entertain additional grounds and adjudicate upon the claim made for the first time before it even if such claim was not made before the Assessing Officer or the first appellate authority. In support of the above proposition, we place reliance upon the following decisions: - Jute Corporation of India Ltd. v. CIT [187 ITR 688 (SC)] - CIT v. S. Nelliappan [66 ITR 722 (SC)] - National Thermal Power Co. Ltd. v. CIT [229 ITR 383 (SC)] Ahmedabad Electricity Co. Ltd. & Ors. v. CIT [199 ITR 351 (Bom)] - Ashok Vardhan Birla v, CWT [208 ITR 958 (Bom)] Inaroo Ltd. v. CIT [204 ITR 312 (Bom)] - CIT v. Govindram Bros. P. Ltd. [141 ITR 626 (Bom)] 59. Ld. DR objected for admission of the additional grounds as they were never raised before appellate proceedings and therefore cannot be admitted. 60. Considered the rival submissions and material placed on record, we observe t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ate. Therefore, we direct Assessing Officer to verify the claim of the assessee alongwith the order of NCLT dated 06.07.2017. It is directed to allow the claim as per law. Accordingly, the additional ground raised by the assessee is allowed for statistical purpose. 65. With regard to Ground No. 8 of grounds of appeal raised by the assessee which is relating to levy of interest u/s. 234B of the Act, Ld. AR of the submitted that this ground is consequential in nature. Accordingly, the above said ground is remitted to the file of Assessing Officer to give effect according to the final taxable income determined for this assessment year. 66. With regard to Ground No. 9 and 10 of grounds of appeal raised by the revenue, which are relating to inclusion of surcharge and cess while computing MAT Credit. In this regard Ld DR submitted that as per the provisions of the sec. 115JB, for the purpose of MAT credit, only the tax paid alone should be adopted for computation. Further he submitted that there are conflicting decisions and Ld CIT(A) should not have adopted contradicting views. 67. On the other hand, Ld. AR of the assessee brought to our notice relevant facts relating to the ground a....