2013 (1) TMI 655 - AT - Income Tax

Product Registration Expenses and reimbursement of Product Registration Support Services expenses - Trademark Registration Fees and Patent Registration Fees - capital v/s revenue - Held that - Assessee has not acquired any new right of permanent character. The licenses or the registrations are required to be renewed and therefore part of the day to day running expenditure of the business. ACIT v. Vodafone Essar Gujarat 2010 (1) TMI 941 - ITAT, AHMEDABAD . If an expenditure can give a benefit which is said to be endured for one year or even annually year after year then it is unreasonable to hold that any enduring benefit taken place to the assessee. Comsat Max Limited. 2009 (1) TMI 314 - ITAT DELHI-H . An expenditure incurred in the existing line of business in order to run the business smoothly in the years to come but in the absence of creation of any new asset we hereby held that such an enduring benefit may not tantamount to rendering of capital expenditure. DCIT v. Core healthcare 2008 (10) TMI 74 - GUJARAT HIGH COURT . Also as decided in CIT v. Finley Mills Ltd. 1951 (10) TMI 1 - SUPREME COURT that an expenditure incurred in registering for the first time its trademark, then by registration the owner is merely absolved thereafter from obligation to prove his ownership of trademark. Thus the expenditure is neither for the creation of an asset nor an advantage for ever - in favour of assessee. Weighted deduction for expenditure on Scientific Research u/s. 35(2AB) in respect of Clinical Trial and Bio-equivalence Study disallowed - Held that - From the contents of the explanation of Section 25(2AB) it is found that not only the expenditure incurred on clinical drug trial but the expenditure incurred for obtaining approval from any regulatory authority under any Central, State or Provincial Act and also the expenditure incurred for filing an application for a patent under the Patent Act 1970 are stated to be covered within the definition of expenditure on scientific research. For a clinical drug trial, the first stage is to enroll volunteers and/or patient into small pilot studies and subsequently large scale studies are carried out on patients and such clinical drug trial may be in one country or in multiple countries. Carrying out drug trial is essential for approval of the drug in question to be sold in the public and hence, clinical drug trial cannot be carried out inside an in-house research facility i.e. usually the laboratory. Hence, this explanation to Section 35(2AB)(1) does not require that these expenses which are included in this explanation are essentially to be incurred inside an in-house research facility because in our considered opinion, it is not possible to incur these expenses inside in-house research facility - in favour of assessee. Disallowance u/s. 14A - Held that - Matter be restored back to the file of the A.O. for a fresh decision as was done by the tribunal in assessment year 2006-07 because as per this judgement of Godrej & Boyce Manufacturing Co. Ltd. v. DCIT 2010 (8) TMI 77 - BOMBAY HIGH COURT as Rule 8D is applicable from assessment year 2008-09 - in favour of assessee for statistical purposes. Unexplained investment u/s. 69 - purchase of Hummer H2 imported motor car - Held that - As per the provisions of Section 69, addition can be made only if it is found that the assessee has made investments, which are not recorded in the books. Hence, it is essential that first it has to be established that some investments are made by the assessee which have not been recorded in the books of the assessee. Regarding the alleged difference in the price of imported car, it is the explanation of the assessee that whatever had been paid by the assessee is properly accounted for in the books and disclosed. Regarding the cost of US 20,800 in respect of conversion of this car from LHD to RHD, it is the submission of assessee that this payment is not actually made and is still outstanding. Once this explanation is furnished by the assessee, it was incumbent upon the A.O. to bring evidence on record to establish that payment was in fact made by the company. The A.O. has not done so. It could have been done by obtaining the confirmation from the concerned party as to whether the payment is received by that party or not and if received, in which year. Even this simple exercise was not even attempted to by the A.O. and hence, the addition is not justified in the absence of any evidence regarding actual payment by the assessee on this cost of conversion of the car - in favour of assessee. Disallowance of depreciation on Hummar H2 motorcar - Held that - As decided in CIT Vs Varanasi Auto Sales Pvt. Ltd. 2010 (1) TMI 19 - ALLAHABAD HIGH COURT even if the trucks are in the name of the Director, depreciation is allowable to the assessee because the trucks were purchased in the name of the Director just for the convenience but the funds have been invested by the assessee company and hiring rent received from such tucks have been credited by the company in their account. As in the present case there is no finding by the authorities below on the aspect whether the car in question was used for the business purpose the assessee and disallowance was made merely on this basis that the car in question is in the name of the Director of the assessee company - restore this matter back to the file of the A.O. for a fresh decision & burden is on the assessee to establish the business use of this car and, thereafter, the A.O. should pass necessary order - in favour of assessee for statistical purpose. Restricting the deduction u/s. 80IC & 80IB - Held that - The stand of the A.O. cannot be approved because it is not a reasonable basis for computation of profit of an eligible unit. The profit has to be computed on the basis of selling price less cost of goods produced along with various overheads and only where there is some inter unit transfer of goods or service between various units of the same assessee, then it has to be ensured that recording of such transfer of goods or services should be at market value of such goods or services on the date of transfer and even if such recording of transfer is not as per market value, the A.O. can bring it to market value and he cannot proceed to estimate the profits and gains on a reasonable basis unless he establishes that there is any exceptional difficulty in adopting the market value and even then, the basis adopted by the A.O. to compute the profits and gains, should be reasonable basis. In the present case, we have seen that neither the pre requirement of sub-section (8) or its proviso to section 80-IA has been fulfilled by the A.O. nor the basis adopted by him is a reasonable basis and, therefore, we do not find any basis to confirm or approve the action of the A.O. - in favour of assessee. Disallowing the mark to market exchange loss on foreign exchange derivatives - Held that - Decided in favour of assessee relying on DCIT v. Bank of Bahrain & Kuwait 2010 (8) TMI 578 - ITAT, MUMBAI . Addition as upward adjustment on international transactions - Transfer Pricing adjustment - Held that - Since in the earlier year, similar issue was restored back to the file of the A.O. for a fresh decision, we restore this mater back to the file of the A.O. for a fresh decision for this year also with similar directions - in favour of assessee for statistical purposes. Adjustment on account of Expenses disallowed u/s. 14A for purposes of computation of book profit u/s. 115JB - Held that - Decided in favour of assessee in the case of Goetz (India) Ltd. v. CIT in the case of 2009 (5) TMI 615 - ITAT DELHI & there is no contrary decision on this issue till date - in favour of assessee

Summary

Issues Involved:
1. Addition of Rs. 3,65,18,252/- for Product Registration Expenses and Product Registration Support Services.
2. Addition of Rs. 1,69,53,133/- for Trademark Registration Fees and Patent Registration Fees.
3. Addition of Rs. 23,90,72,788/- for disallowance of weighted deduction u/s 35(2AB) for Clinical Trial and Bio-equivalence Study.
4. Disallowance of Rs. 5,00,37,043/- u/s 14A.
5. Addition of Rs. 11,63,644/- as unexplained investment u/s 69 for Hummer H2 imported motor car.
6. Disallowance of depreciation of Rs. 4,54,684/- on Hummer H2 imported motor car.
7. Restriction of deduction u/s 80IC for Baddi Unit to Rs. 14.45 crores.
8. Restriction of deduction u/s 80IB for Goa Unit to Rs. 18,40,530/-.
9. Disallowance of mark to market exchange loss on foreign exchange derivatives of Rs. 28,06,887/-.
10. Addition of Rs. 10,81,143/- as upward adjustment on international transactions under Transfer Pricing.
11. Adjustment of Rs. 5,00,37,043/- for computation of book profit u/s 115JB.

Issue-wise Detailed Analysis:

1. Addition of Rs. 3,65,18,252/- for Product Registration Expenses and Product Registration Support Services:
The Tribunal found that these expenses were inextricably linked with the working of the assessee's business and did not result in acquiring any new right of permanent character. The licenses or registrations were required to be renewed, making them part of day-to-day running expenses. The Tribunal referenced its previous decision for the assessment year 2006-07 and similar cases (ACIT v. Vodafone Essar Gujarat, Cosmat Max Ltd., DCIT v. Core Healthcare, CIT v. Finley Mills Ltd.), concluding that such expenses should be treated as revenue expenses. Consequently, the addition was disallowed, and the ground was decided in favor of the assessee.

2. Addition of Rs. 1,69,53,133/- for Trademark Registration Fees and Patent Registration Fees:
Similar to the first issue, the Tribunal held that these expenses were also part of the day-to-day running expenses and did not create any new asset or advantage of enduring nature. The Tribunal followed its previous decision and relevant case laws, allowing the claim and deciding the issue in favor of the assessee.

3. Addition of Rs. 23,90,72,788/- for disallowance of weighted deduction u/s 35(2AB) for Clinical Trial and Bio-equivalence Study:
The Tribunal examined whether the expenditure on clinical trials conducted outside the in-house R&D facility could be eligible for weighted deduction under section 35(2AB). It was concluded that clinical drug trials, obtaining regulatory approvals, and filing patent applications could not be conducted in-house and thus should be considered part of scientific research expenses. The Tribunal found that the earlier decision in the case of Concept Pharmaceuticals Ltd. did not adequately address this aspect. Consequently, the Tribunal allowed the claim, deciding the issue in favor of the assessee.

4. Disallowance of Rs. 5,00,37,043/- u/s 14A:
The Tribunal restored the matter back to the file of the A.O. for a fresh decision in light of the judgment of Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. v. DCIT. The A.O. was directed to pass a necessary order after providing adequate opportunity to the assessee. This ground was allowed for statistical purposes.

5. Addition of Rs. 11,63,644/- as unexplained investment u/s 69 for Hummer H2 imported motor car:
The Tribunal found that the A.O. had not brought any evidence on record to establish that the alleged additional payment for the car was made by the assessee. The Tribunal noted that the custom duty paid on the car was based on the valuation done by the custom authorities, which does not necessarily reflect the actual payment made by the assessee. Consequently, the addition was not justified, and the ground was decided in favor of the assessee.

6. Disallowance of depreciation of Rs. 4,54,684/- on Hummer H2 imported motor car:
The Tribunal observed that the payment for the car was made from the funds of the assessee company. However, it was necessary to establish whether the car was used for the business purpose of the assessee company. The matter was restored back to the file of the A.O. for a fresh decision, with the burden on the assessee to establish the business use of the car. This ground was allowed for statistical purposes.

7. Restriction of deduction u/s 80IC for Baddi Unit to Rs. 14.45 crores:
The Tribunal examined the provisions of section 80-IC and section 80-IA(8) and found that the A.O. had not established any transfer of goods or services by the Baddi unit to any other unit of the assessee company. The Tribunal also found that the basis adopted by the A.O. was not reasonable. Consequently, the restriction of deduction was not justified, and the ground was decided in favor of the assessee.

8. Restriction of deduction u/s 80IB for Goa Unit to Rs. 18,40,530/-:
Similar to the issue of deduction u/s 80IC for the Baddi Unit, the Tribunal found that the A.O. had not established any transfer of goods or services by the Goa unit to any other unit of the assessee company. The Tribunal held that the restriction of deduction was not justified, and the ground was decided in favor of the assessee.

9. Disallowance of mark to market exchange loss on foreign exchange derivatives of Rs. 28,06,887/-:
The Tribunal found that this issue was covered in favor of the assessee by the decision of the Special Bench of the Tribunal in the case of DCIT v. Bank of Bahrain & Kuwait. Consequently, the disallowance was not justified, and the ground was decided in favor of the assessee.

10. Addition of Rs. 10,81,143/- as upward adjustment on international transactions under Transfer Pricing:
The Tribunal restored the matter back to the file of the A.O. for a fresh decision, similar to the direction given in the earlier year. This ground was allowed for statistical purposes.

11. Adjustment of Rs. 5,00,37,043/- for computation of book profit u/s 115JB:
The Tribunal followed its decision in the case of Goetz (India) Ltd. v. CIT and decided the issue in favor of the assessee, holding that the adjustment for disallowed expenses u/s 14A should not be made for computation of book profit u/s 115JB.

Conclusion:
The appeal of the assessee was partly allowed, with several issues decided in favor of the assessee, some issues restored for fresh consideration, and a few grounds rejected as not pressed.