2021 (12) TMI 1467 - AT - Income Tax

Nature of expenses - Product Registration Charges - Revenue or capital expenditure - mercantile method of accounting followed as in the business of manufacturing of pharmaceutical products - whether product registration expenses have been charged off in the accounts constitutes as an expenditure allowable u/s 37(1) and hence disallowance is ought to be deleted? - HELD THAT - On perusal of ledger accounts revels that payments have been made to statutory bodies either for approval or as statutory maintenance in foreign nations. Assessee has also made payments being annual fees to the Medical agencies in foreign nations. All these are recurring in nature. These payments are inextricably linked to the business of the assessee. In respect of Patent expenditure, it is submitted that assessee has to get the patent registered in various regions in order to safeguard its product from any infringement. Further nothing has been placed on record to establish that the patent expenditure has been incurred by assessee on a new product. One aspect cannot be ignored that assessee incurs these expenses every year. Coming to the expensed incurred by assessee in respect of the drug called Dolenio , we note that it is sold by assessee in many countries. The expenses incurred by assessee towards Mutual recognition process variation is necessary based on any change in the packing of the drug like change in color etc., or shape of the drug, or even the change of supplier. The expenses incurred by assessee in respect of Dolenio during the years under consideration towards Mutual recognition process variation, Patent and Trade mark and other registration expenses, are be considered as revenue expenditure, allowable under section 37(1) of the Act. Annual fee/license fees paid the ledger account revels that these are recurring in nature, and hence cannot be treated to be one time payment. These are in respect of renewal of licence with the drug authorities in respective countries to continue to hold the licence to export and sell the products developed by assessee. Accordingly we do not find any infirmity in the observation of CIT(A) to treat the payments to be revenue expenditure allowable u/s 37(1) Disallowance u/s 14A r.w.s. D(2) (ii) - Assessee suo moto disallowed u/r 8 D(2)(iii) - AR submitted that the nature of dividend, was from investment in Mutual Funds (MFs) and that the investment was made out of surplus funds and funds from other sources and that no part of the borrowed funds was utilised for making the investment in MFs - HELD HAT - If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. However this needs verification as on the date of investment. The cash flow statement would disclose as on the date of making investments, which had given rise to the exempted income, that the assessee had interest free funds available with it. In the interest of justice and equity, we deed it fit to remand the case to the Assessing Officer for fresh consideration. AO shall afford reasonable opportunity of being heard to the assessee. The assessee shall prove its case that it is having interest free funds for making investments, by furnishing cash flow state for the respective assessment years.

Summary

Issues Involved:
1. Disallowance of Product Registration Expenses
2. Disallowance under Section 14A read with Rule 8D(2)(ii)
3. Interest under Sections 234B and 234C
4. General Disallowance and Excessiveness of Disallowance

Issue 1: Disallowance of Product Registration Expenses

The primary issue revolved around whether the product registration expenses incurred by the assessee were capital or revenue in nature. The assessee argued that these expenses were recurring and necessary for the business, thus qualifying as revenue expenditure under Section 37(1) of the Income Tax Act. The assessee's expenses included license renewal fees, mutual recognition variation expenses, patent expenses, trademark expenses, and registration expenses.

The Assessing Officer (AO) initially treated these expenses as capital in nature, granting depreciation at 25%. The CIT(A) partially overturned this decision, categorizing license renewal fees and mutual recognition variation expenses as revenue expenditure, while treating patent, trademark, and registration expenses as capital expenditure.

Upon appeal, the Tribunal examined the nature of these expenses in detail. It was noted that expenses related to "Dolenio" (a drug sold by the company) were recurring and necessary for maintaining the product's market presence, thus qualifying as revenue expenditure. The Tribunal also observed that the assessee did not acquire any new assets or trademarks, and the expenses were essential for the protection and continuation of existing business operations. Consequently, the Tribunal allowed the expenses as revenue expenditure, dismissing the grounds raised by the revenue.

Issue 2: Disallowance under Section 14A read with Rule 8D(2)(ii)

The second issue concerned the disallowance of interest expenditure under Section 14A read with Rule 8D(2)(ii). The AO had disallowed an additional amount of Rs. 14,85,109 towards interest expenditure, arguing that the assessee had earned exempt income from mutual funds and had not adequately disallowed related expenses.

The CIT(A) deleted this disallowance, noting that the assessee had sufficient own funds (share capital and reserves) to cover the investments in mutual funds, and no part of the borrowed funds was used for these investments. The Tribunal upheld this view, stating that if interest-free funds are available to an assessee sufficient to meet its investments, it can be presumed that the investments were made from these interest-free funds. However, the Tribunal remanded the case to the AO for verification of the cash flow statements to ensure that the investments were indeed made from interest-free funds.

Issue 3: Interest under Sections 234B and 234C

The assessee also contested the imposition of interest under Sections 234B and 234C of the Income Tax Act. The CIT(A) upheld the interest, and there was no specific discussion or separate judgment on this issue in the Tribunal's order. Therefore, the Tribunal's decision on this point remains consistent with the CIT(A)'s order, maintaining the imposition of interest under these sections.

Issue 4: General Disallowance and Excessiveness of Disallowance

The assessee argued that the disallowances confirmed by the CIT(A) were arbitrary and excessive. This general ground was addressed implicitly through the detailed examination and rulings on the specific issues of product registration expenses and disallowance under Section 14A. The Tribunal's detailed analysis and decisions on these specific issues effectively addressed the concerns of arbitrary and excessive disallowance.

Conclusion:

In conclusion, the Tribunal allowed the appeals filed by the assessee, treating the product registration expenses as revenue expenditure and remanding the issue of disallowance under Section 14A for verification. The appeals filed by the revenue were partly allowed for statistical purposes, pending further verification by the AO. The Tribunal's order emphasized the importance of the recurring nature of expenses and the availability of interest-free funds in determining the nature of disallowances.