TaxTMI 
TaxTMI 
2023 (1) TMI 1542
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....s case in respect of A. Y. 2010-11 and A.Y. 2011-12 has not been accepted by the Revenue and an appeal is pending before the Hon'ble Bombay High Court." 3. The grounds raised by the assessee in A.Y. 2011-12 are reproduced as under: - "1. The authorities below have erred in law as well as facts in apportioning/ upholding the apportionment of Research & Development expenses u/s 35(2AB) to units eligible for deduction u/s 80IB and 80IC. 2. The authorities below have erred in holding that the appellant has inflated claim of deduction u/s 80IC by inter unit transfer of material at lower prices. 3. The learned Assessing Officer has erred in initiating penalty proceedings in a case which has been highly litigated." 4. Briefly stated, facts of the case are that the assessee company was engaged in the business of manufacturing of formulations and various pharmaceutical products. In the year under consideration, the assessee filed its return of income electronically on 28/09/2011 declaring total income at Rs.15,83,93,089/-, which was subsequently revised on 11/10/2011 to Rs. 28,69,03,699/- The return of income filed by the assessee was selected for scruti....
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....eard rival submissions of the parties on the issue in dispute and perused the relevant material on record. We find that in this case, the original assessment was completed by the Assessing Officer under section 143(3) of the Act on 29/01/2014 which is much before the date of the search action in the case of the assessee i.e. 28/01/2016 and, therefore, the assessment year falls under the completed or unabated assessment. Thus, in view of the Hon'ble Bombay High Court judgment in the case of CIT vs. Continental Warehousing Corporation (supra), no addition could have been made qua the assessment year except based on any incriminating material. Since we find that in this assessment year, the issue of free gifts/promotional items to doctors/medical representatives, was raked up in the original assessment proceedings and, therefore, addition made on the same issue of free gifts to Doctors etc in assessment order consequent to search is not a new addition. Actually, the Assessing Officer should have started computation of Total Income under the order passed u/s 153A read with 143(3) from the last income assessed or upheld in appellate proceedings, instead, he has repeated the addition....
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....rtioning/ upholding the apportionment of Research & Development expenses u/s 35(2AB) to units eligible for deduction u/s 80IB and 80IC. 2. The authorities below have erred in holding that the appellant has inflated claim of deduction 80IC by inter unit transfer of material at lower prices. 3. The learned Assessing Officer has erred in initiating penalty proceedings in a case which has been highly litigated." 10. In this year also, the Revenue is before the Tribunal by way of raising grounds against the deletion of expenses on promotional items, free gifts, etc. to doctors / medical representatives by the Ld. CIT(A), whereas the assessee is in appeal for withdrawing the deduction under section 80IB / 80IC for allocation of research and development expenses and disallowance of deduction u/s 80IC for inter unit transfer of material. 11. In this year also, the assessee has raised additional ground challenging the addition made under section 153A without aid of any incriminating material, which is admitted in view of our finding in AY 2011-12. However, we find that in the year under consideration, the Ld. CIT(A) has wrongly mentioned that assessment was made prio....
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....im of any such expense, il the same has been incurred for a purpose which is either an offence or prohibited by 4. Thus, the claim of any expense incurred in providing freebees in violation of the provisions of Indian Medical Council (Professional Conduct. Etiquette and Ethics)Regulations, 2002 shall not be adhissible under section 37(1) of the Income Tax Act being an expense prohibited by the law. This disallowance shall be made in the hands of such pharmaceutical or allied health sector industries or other assessee which has provided aforesaid freebies and claimed it as a deductible expense in its accounts against income. 5. Once this has been prohibited by the Medical Council under the powers vested in it. Section 37(1) of Income Tax Act comes in to play. The amendment to the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 would only be clarificatory in nature. 6. Further, the explanation inserted to the section 37(1) by the Finance Act (No.2), 1998 is with retrospective effect from 01.04.1962. Therefore, the expense of the nature specifically mentioned to be not allowable in the captioned circular of CBDT would ha....
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....ndustry (Supra), the Hon'ble High Court of Himachal Pradesh has observed that MCI has imposed certain prohibition on medical practitioners as mentioned above under The Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations 2002. The Court held that this regulation is a very salutary regulation which is in interest of the patients and the public. This Court is not oblivious to the increasing complaints that the medical practitioners do not prescribe generic medicines and prescribe branded medicines only in lieu of the gifs and other freebies granted to them by some particular pharmaceutical industries. Once this has been prohibited by the Medical Council under the powers vested in it. Section 37(1) of the Income-tax Act comes into play. The Court further held that the explanation to Section 37 (1) makes it clear that an expenditure incurred by an assessee for any purpose which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession. Therefore. if the assessee satisfies the nssessine authority that the expenditure is not in violation of the regulations framed by the medical council then it may legitimately ....
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....doctors, had a direct result of exposing the recipients to the odium of sanctions, leading to a ban on their practice of medicine. Those sanctions are mandated by law, as they are embodied in the code of conduct and ethics, which are normative, and have legally binding effect. The conceded participation of the assessee- i.e., the provider or donor- was plainly prohibited, as far as their receipt by the medical practitioners was concerned. That medical practitioners were forbidden from accepting such gifts, or "freebies" was no less a prohibition on the part of their giver, or donor. 14. Respectfully following the finding of the Hon'ble Supreme Court (supra), we set aside the finding of the Ld. CIT(A) on the issue in dispute and uphold the order of the Assessing Officer on the issue. The ground No. 1 of appeal of the Revenue is accordingly allowed. 15. As far as ground of the assessee regarding allocation of research and development expenses to the units eligible for deduction under section 80IB / 80IC of the Act is concerned, we find that the assessee claimed deduction of Rs.102.18 crores under section 35 (2AB) for research and development expenses incurred through its tw....
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....ormulations developed by the R &D wing and status of such products. From the same, it is amply clear that the R & D expenditure is totally unrelated to the present manufacturing activities of the appellant. Moreover, in a large number of cases, most notably CIT Vs. Sterling Foods (SC) and Pandian Chemicals Ltd. Vs. CIT (SC), it has been repeatedly held that the words "derived from" used in sections 80HH, 80I (and 80IA and 80IC) means that there must be a direct nexus between the profits and gains and an industrial undertaking. It must follow equally that there must be a direct nexus between the industrial undertaking and the expenses sought to be apportioned to it." 16. The Ld CIT(A) upheld the disallowance observing as under: "5.2.1. The assessee has relied on the Bombay High Court decision in the case of Zandu Pharmaceuticals Ltd., whereby it was held that R&D expenses in relation to new drugs cannot be assigned to eligible manufacturing units. I have considered the facts of the case. The submission of the assessee are not acceptable and are in fact contrary to the facts of asseseee's case in view of the following :- a) As stated by AO i....
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....ugs & chemical formulation), it would be very logical & as per law to assign these expenses proportionately to all manufacturing units. The hollow argument without verilying actual facts of assessee's R&D work thus fall flat and loses all its strength. 5.2.2 The reliance in case of Zandu Pharmaceuticals Ltd. is misplaced as in that case, on the facts, it was decided that R&D expenses were in relation to totally new drugs. However, the case of assessee is different as has been illustrated above. In view of this, the findings given by AO is found to be correct and the appeal of the assessee in this ground is dismissed. Hence ground no. 2 of appeal is dismissed." 17. We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. The Ld. CIT(A) has held that research and development carried out with assessee has been applied for manufacturing in units eligible for deduction under section 80IB and 80IC of Act. Before us the Ld. Counsel of the assessee has filed a detailed list of items manufactured by the units eligible under section 80IB and 80IC of the Act and also the formulations/items underdevelopment in research a....
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....as API at its R&D unit. e) Rifampicin: The appellant manufactured tablets and capsules containing this APIRifampicin at its non-eligible unit. However, there was no activity related to any similar tablet containing Rifampicin as API at its R&D unit. f) Isoniazid: The appellant did not manufacture any formulation containing this API at its eligible unit. There was no activity related to any formulation containing Isoniazid as API at its R&D unit. g) Ethambutol: The appellant did not manufacture any formulation containing this API at its eligible unit. There was development effort for a combination drug containing Ethambutol as one of the API at its R&D unit. h) Paracetamol: The appellant manufactured a tablet having combination of Nimesulide and Paracetamol at its eligible unit. However in R&D we tried to develop a new tablet having Sustained Release (SR) of Paracetamol having 665mg of Paracetamol which was designed to be completely different from existing combination drug. However, the LAO has failed to appreciate that the new tablet being developed at R&D was not approved by regulator and hence was never manufactured till date." 18. On perusa....