TaxTMI 
TaxTMI 
2025 (7) TMI 1688
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 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) for non-compliance of notice under section 142(....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y 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. Aggrieved by the relief granted, the Revenue has filed appeal in ITA No. 632/Ahd/2024 raisi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 business operations smoothly. It is very common to see such services being procured by numerous entities across industries in their normal course of business. The said ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....termined 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 to the extent of Rs. 2,78,31,758/- by treating loss of foreign currency fluctuation on capital goods as capital loss without appreciating that payments were made in advance thereby disregarding that provisions of sect....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hich 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 CIT(A) according to which the sole purpose of obtaining the software licenses was improvement and increase in the efficiency of business operations. It was also pointed out that the software licenses were only for a period of 12 months and therefore the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tions, 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 demonstrate a nexus between borrowed funds and capital expenditure, the notional allocation of interest was unsustainable in law. The CIT(A) further held that, where both interest-free own funds and borrowed funds are available, and the amount of own funds exceeds ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 rightly relied upon the settled legal position laid down by the Hon'ble Bombay High Court in CIT v. Reliance Utilities and Power Ltd. [(2009) 313 ITR 340 (Bom)], wherein it has been held that if the assessee possesses both interest-free funds and interest-bearin....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 submitted that the consultancy services primarily related to technical documentation, dossier preparation, on-site audit assistance, and compliance facilitation, which are recurring and integral to the export operations of a pharmaceutical enterprise. The expenditure, it was asserte....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ourt 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 observe that in assessee's own case for Assessment Year 2017-18, similar expenditure incurred for USFDA compliance was allowed by the CIT(A), and the Revenue has not brought on record any change in facts or legal position to distinguish the present year's claim from the earlier accepted....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... 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 total capital loss on account of foreign currency fluctuation and related bank charges amounted to Rs. 3,17,88,107/-. The AO disallowed the same as inadmissible under section 37(1), holding that these were capital in nature. 17.2 Based on the detailed submissions of the assessee the CIT(A) no....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 after the acquisition of the asset, were not satisfied in the facts of the present case. 17.6 The AR specifically argued that where payments for acquisition of capital assets are made in advance and the exchange fluctuation arises on such advances, section 43A of the Act does not apply. Instead, the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 capital nature or, as the case may be, the cost of acquisition of the capital asset as aforesaid: 18.3 Section 43A(1) opens with a non obstante clause and applies "where an assessee has acquired any asset...from a country outside India...and, in consequence of a change in the rate of exchange during any previous year after the acquisition of such asset, there is an increase or reduction in th....