TaxTMI 
TaxTMI 
2025 (7) TMI 1688
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.... sustained by the CIT(A). Facts of the Case 2. The assessee is engaged in the business of manufacturing and trading of pharmaceutical products and development of pharmaceutical formulation technologies. For the year under consideration, the assessee filed its return of income on 23.09.2016 declaring total income of Rs. 14,79,62,060/-. The return was processed under section 143(1), and the case was selected for scrutiny through CASS. The Assessing Officer issued notice under section 143(2) on 16.08.2017 and subsequently issued notices under section 142(1) along with detailed questionnaires. 3. The assessment was completed under section 143(3) by the Assessing Officer, vide order dated 29.12.2018, determining the total income at Rs. 22,74,37,450/- after making aggregate additions/disallowances of Rs. 7,94,75,390/-. Penalty proceedings under section 271(1)(c) were also initiated on various additions. In the course of assessment proceedings, a separate penalty proceeding under section 271(1)(b) was also initiated for alleged non-compliance with statutory notices. The Assessing Officer, vide penalty order dated 18.12.2018, levied a penalty of Rs. 20,000/- under section 271(1)(b....
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....ssessee in respect of regulatory and technical consultancy services obtained from Quality Executive Partners Inc., USA, for obtaining approvals from the USFDA for its manufacturing facility at Baska. The CIT(A) was of the view that the said expenditure conferred an enduring benefit to the assessee and therefore fell within the nature of capital expenditure not allowable under section 37(1) of the Act. The CIT(A) also confirmed the disallowance of foreign exchange fluctuation loss to the extent of Rs. 2,78,31,758/- incurred in connection with the purchase of capital goods from overseas suppliers. It was held that such loss, being directly relatable to acquisition of capital assets, was required to be capitalised under section 43A of the Act. The assessee's contention that the payments were made in advance and hence section 43A was not applicable was not accepted by the appellate authority. Lastly, the claim of the assessee for deduction of education cess of Rs. 12,63,048/- under section 37(1) was also rejected by the CIT(A), following the Revenue's stand that such cess was not allowable as deduction from business income under the prevailing interpretation of the law. 5. A....
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....her, if the approval is not provided, then the Company is required to undertake research and evolve the product to make it fit for receiving the approval from the Regulatory Authority and thereby marketing it. Thus, unless the approval of the Regulatory Authority is received the phase of research does not get completed. 1.4. It is imperative to note that expenditure incurred on research and approval process are debited to the Statement of Profit and Loss account being of revenue nature and that any expenditure incurred on development is capitalized. This treatment is also in accordance with the principles laid down in accounting standards. 1.5. The Appellant, to comply with these regulatory requirements, has taken assistance of professional consultants being Quality Executive Partners Inc, USA that help in obtaining these approvals for Appellant's manufacturing facility situated at Baska for a professional fee of Rs. 1,88, 13, 146/- 1.6. The nature of consultancy fees is majorly towards on-site visit charges, reimbursements of travelling expenses, etc. The intention of hiring a consultant was to assist in obtaining approvals in order to conduct busine....
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....al goods which may be disallowed as per section 43A of the Act. 2.4 However, the Assessing Officer who is duty bound to compute and assess the correct income, accepted the amount so wrongfully determined by the Appellant. Not only this, but the Assessing Officer also went on to further disallow the entire foreign exchange loss arising in relation to purchase of capital goods amounting to Rs. 2,78,31,758/- without providing any explanation under the Act authorizing such erratic action. Thus, a total disallowance of Rs. 3,17,88,107/- (Rs. 2,78,31,758/- + Rs. 20,71,664/-) was made by the Assessing Officer which led to a double disallowance of Rs. 20,71,664/- as the said amount is already included in Rs. 2,78,31,758/- being amount debited to the Statement of Profit and Loss. 2.5 In doing so, the Assessing Officer conveniently overlooked the fact that payments towards purchase of capital goods from outside India were made in advance and hence, the provisions of section 43A mandating capitalization of foreign exchange fluctuation loss would not be attracted. 2.6 On further appeal, the Hon'ble CIT(A) upheld the disallowance made by the Assessing Officer only....
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.... under section 37(1) of the Act. 8.2 In appellate proceedings, the assessee contended that the disallowance was made without verifying the nature and description of the software expenditure and that the AO had erroneously clubbed hardware items which were capitalised separately in the fixed asset schedule. It was submitted that the expenditure actually pertained to software license fees, annual renewals, upgrades, and user access costs relating to quality control and inventory systems, and the same were incurred recurrently in the normal course of business. The CIT(A) accepted the assessee's explanation and held that the expenditure, being incurred towards application software that did not create any asset of enduring nature, was rightly allowable as revenue expenditure. It was further observed that the AO had not brought any conclusive evidence on record to establish the capital nature of the expenditure or any error in the assessee's claim. 8.3 Before us, the learned Departmental Representative (DR) reiterated the findings of the AO. The learned Authorised Representative (AR), on the other hand, supported the order of the CIT(A) and pointed out the submission made before CI....
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....alance, resulting in a disallowance of Rs. 1.76 crores. 10.2 In appellate proceedings, the assessee submitted that the entire interest expenditure had been incurred on borrowings utilised for working capital requirements and meeting routine business obligations, and not for acquiring capital assets or making capital advances. It was pointed out that there was no direct nexus established by the Assessing Officer between any specific borrowing and the acquisition of capital assets. The assessee further demonstrated, with reference to its financial statements, that it had sufficient own funds aggregating to Rs. 51.48 crores as on 31.03.2016- comprising share capital, reserves and surplus-and had earned a post-tax profit of Rs. 12.97 crores during the year. In contrast, the capital work-in-progress and capital advances stood at Rs. 23.34 crores and Rs. 3.04 crores, respectively. Based on this comparison, it was contended that the investments in capital assets were well within the assessee's own funds. The Ld. CIT(A) accepted the assessee's explanation and recorded a categorical finding that, in the absence of any positive material brought on record by the Assessing Officer to demons....
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....ion in light of the disproportionality between the increase in finance cost and the marginal decline in borrowings. 11. We have carefully considered the rival submissions and perused the orders of the lower authorities and material placed on record. It is not in dispute that the Assessing Officer has not established any direct nexus between the borrowed funds and the capital assets or advances. The disallowance has been made solely on a presumptive basis by applying a notional allocation formula. The Ld. CIT(A), after examining the assessee's submissions and financial position, has given a categorical finding that the assessee had sufficient own funds amounting to Rs. 51.48 crores as on 31.03.2016, comprising share capital, reserves and surplus, whereas the capital work-in-progress and capital advances aggregated to Rs. 26.38 crores. The CIT(A) also accepted the assessee's contention that the borrowings were primarily utilised for repayment of old trade liabilities and general business operations, and that there was no evidence to suggest diversion for capital purposes. These findings are not controverted by the Revenue by bringing any positive material on record. The CIT(A) has....
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....order of the CIT(A) and dismiss this ground raised by the Revenue. 14. Adjudication on Assessee's Grounds of Appeal We shall now take up for adjudication the substantive grounds raised by the assessee in its cross-appeal (ITA No. 623/Ahd/2024). Two principal issues arise for our consideration are the disallowance of Rs. 2,18,58,050/- towards consultancy fees paid for regulatory approvals, and the disallowance of Rs. 2,78,31,758/- representing foreign exchange fluctuation loss in respect of capital goods. 15. Disallowance of Consultancy Fee Rs. 2,18,58,050/- 15.1 The first ground pertains to the disallowance of Rs. 2,18,58,050/- incurred by the assessee towards consultancy services obtained from M/s. Quality Executive Partners Inc., USA, in connection with the process of obtaining regulatory approvals from the United States Food and Drug Administration (USFDA) for the assessee's pharmaceutical manufacturing facility located at Baska. It was contended that such expenditure was incurred in the regular course of business to fulfil mandatory regulatory requirements, which are a precondition for marketing pharmaceutical products in foreign jurisdictions. The assessee submitte....
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....v. DCIT [(2013) 29 taxmann.com 405 (Guj)], where the Hon'ble Court held that expenditure incurred for obtaining product approvals from international agencies does not result in the creation of a capital asset. Reference was also made to the decision of the Hon'ble Karnataka High Court in CIT v. Telco Construction Equipment Co. Ltd. [(2021) 127 taxmann.com 488 (Kar)], where expenditure incurred for technical consultancy in relation to regulatory compliance was allowed as revenue expenditure. It was further submitted that in assessee's own case for A.Y. 2017-18, the CIT(A) had accepted a similar claim and allowed the deduction. 15.4 The DR relied on the order of lower authorities. 16. We find that the facts of the present case are materially similar to those dealt with in the judicial precedents cited above. The approvals from USFDA are necessary for continuing export operations and do not result in a new source of income or acquisition of a capital asset. The consultancy services availed are periodic, compliance-driven, and recurring in nature, and cannot be characterised as resulting in an enduring benefit of the kind contemplated for capitalisation. It is also relevant to ob....
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....ital items, as corroborated by the assessee's own submissions. These included remittances to parties such as Fedegari Asia PTE Ltd, CAMAG, Agilent Technologies Singapore, Groninger & Co. GMBH, and others, where the remittances were clearly made for capital goods, as reflected in the records. The Assessing Officer tabulated the details of such remittances, including the foreign vendors, dates of transaction, gross amounts remitted, and the related fluctuation losses and bank charges. The AO observed that the assessee had not offered these additional losses as capital in nature, despite the transactions relating to the acquisition of capital assets. The AO, therefore, held that the entire foreign exchange fluctuation loss amounting to Rs. 2,97,10,643/- and bank charges of Rs. 5,800/- aggregating to Rs. 2,97,16,443/- were incurred in relation to acquisition of capital goods and hence liable to be capitalised in accordance with section 43A of the Act and judicial precedents including the Supreme Court judgment in CIT v. Woodward Governor India (P.) Ltd. [(2009) 312 ITR 254 (SC)]. Adding the above to the assessee's own suo motu capitalisation of Rs. 20,71,664/-, the AO held that the tot....
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....rores during the year under consideration, out of which Rs.2.78 crores pertained to imported items such as raw materials, capital goods, etc. The AR pointed out that the said amount had been debited to the profit and loss account in accordance with the appellant's consistent accounting policy and in conformity with Accounting Standard-11 (AS-11) issued by the Institute of Chartered Accountants of India (ICAI). It was contended that the treatment accorded was a routine and settled accounting practice regularly followed by the assessee in earlier years as well. 17.5 It was further submitted that the Assessing Officer had erroneously invoked section 43A of the Act to disallow the foreign exchange fluctuation loss by wrongly treating the same as liable to be capitalised. The AR clarified that the said forex loss had arisen on account of advance payments made in foreign currency for the purpose of acquiring capital goods and not on account of any fluctuation occurring after the acquisition of such assets. Accordingly, it was contended that the conditions stipulated under section 43A of the Act, which apply only where the liability changes on account of foreign exchange fluctuation af....
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....moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset along with interest, if any, the amount by which the liability as aforesaid is so increased or reduced during such previous year and which is taken into account at the time of making the payment, irrespective of the method of accounting adopted by the assessee, shall be added to, or, as the case may be, deducted from- (i) the actual cost of the asset as defined in clause (1) of section 43; or (ii) the amount of expenditure of a capital nature referred to in clause (iv) of sub-section (1) of section 35; or (iii) the amount of expenditure of a capital nature referred to in section 35-A; or (iv)the amount of expenditure of a capital nature referred to in clause (ix) of sub-section (1) of section 36; or (v) the cost of acquisition of a capital asset (not being a capital asset referred to in section 50) for the purposes of section 48, and the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset or the amount of expenditure of a cap....