2022 (6) TMI 398 - AT - Income Tax

Addition of sales promotion expenses - Payment to Doctors / medical practitioners- payments made to general practitioners and other sales promotion expenses - Nature of Transaction - violation of Explanation to section 37 - As per AO assessee could not submit any confirmation or receipts given by these medical practitioners, therefore, the same cannot be allowed - HELD THAT - Assessee has incurred certain expenditure on sales promotion by making payments to various doctors. However, assessee claims that these payments were made to those doctors in line of its business. These expenditures were in the nature of advisory services to obtain information regarding the acceptability of medicine and necessity for improvement in them and also to gain information on similar products of other companies which are being sold in the same market. Assessee has not submitted any technical record or any agreement entered with those doctors to carry out this kind of activities which can prove that these doctors have done or carried out certain services to the assessee. In the absence of any documentary evidences or cogent material in support of the assessee s claim, we are inclined to reject the same. Since this issue is already considered in the case of Apex Laboratories (P.) Ltd. 2022 (2) TMI 1114 - SUPREME COURT which is against the assessee. Respectfully following the decision of the Hon'ble Supreme Court, we are inclined to dismiss the grounds raised by the assessee. Weighted deduction @ 125% u/s. 35(1)(iia) in respect of the payment for R D - HELD THAT - We observe that assessee has entered into a scientific research service agreement for the purpose of development of certain intermediates which will be useful for the production of the final products owned by the assessee - AR brought to our notice the various invoices raised by the M/s. Calyx Chemicals and Pharmaceuticals Ltd., which is nothing but the supply of technical staff for the purpose of research activities. No doubt it involves various research activities and which are agreed by the assessee to avail the services to develop chemical process and manufacturing of API and intermediates. This will help assessee to improve its process and manufacturing activities and improvement in its intermediates. Since it involves lot of labour activities which assessee has utilized from M/s. Calyx Chemicals and Pharmaceuticals Ltd. Since there is no document or any evidence that assessee has created any capital assets by doing of such research activities, however, these activities are carried out for the purpose of business only. Therefore these expenditures can be considered to incur only for the purpose of business and initially assessee claimed weighted deduction u/s. 35(1)(iia) of the Act and since there is no proper documents submitted by the assessee to claim any benefit u/s.35(1)(iia), the Assessing Officer has rejected the claim of the assessee. However, we find that assessee has incurred these expenditures for the purpose of business and in relation to development activities in order to improve the process and manufacturing activities. There is no evidence of creation of any capital assets anywhere in the financial records. Therefore, these expenditures can be treated as development expenditure allowable u/s.35 of the Act without any weighted deduction. Accordingly, we direct the Assessing Officer to allow this expenditure u/s. 35 of the Act. Additional ground allowed.

Summary

Issues Involved:
1. Sustaining addition of sales promotion expenses.
2. Allowance of expenditure incurred for scientific research under Section 35 of the Income-tax Act, 1961.
3. Revenue's appeal regarding the tax effect below the threshold limit as per CBDT Circular.

Detailed Analysis:

1. Sustaining Addition of Sales Promotion Expenses:
The primary issue was whether the sales promotion expenses incurred by the assessee, particularly payments made to general practitioners, should be disallowed under Explanation to Section 37(1) of the Income-tax Act, 1961. The Assessing Officer observed that these expenses were similar to those disallowed in the previous assessment year (2011-12) as they compromised the professional autonomy of medical practitioners and were prohibited by the Indian Medical Council (IMC) Regulations. The assessee argued that these payments were for consultancy and advisory services regarding the acceptability and improvement of medicines. However, the assessee failed to provide any documentary evidence or agreements to substantiate the claim. Consequently, the Tribunal upheld the disallowance, citing the Supreme Court's decision in Apex Laboratories (P.) Ltd. v. DCIT LTU, which was against the assessee.

2. Allowance of Expenditure Incurred for Scientific Research under Section 35:
The assessee claimed a weighted deduction under Section 35(1)(iia) for payments made to Calyx Chemicals and Pharmaceuticals for research and development (R&D). The Assessing Officer rejected this claim, stating that the assessee did not provide the necessary approval as per Rule 5F of the Income-tax Rules and treated the expenditure as work-in-progress. The assessee raised an additional ground, seeking allowance of the actual expenditure under Section 35 without weighted deduction. The Tribunal found that the payments were for scientific research services to develop intermediates useful for the assessee's production processes. Since there was no evidence of the creation of any capital assets, the Tribunal directed the Assessing Officer to allow the expenditure under Section 35, treating it as revenue expenditure incurred for business purposes.

3. Revenue's Appeal Regarding the Tax Effect Below the Threshold Limit:
The Revenue filed an appeal for the assessment year 2012-13. During the hearing, the Departmental Representative submitted that the tax effect was ?46,24,644, which is below the ?50 Lacs threshold as per CBDT Circular No. 17/2019. Consequently, the appeal was dismissed on the grounds of low tax effect.

Conclusion:
The Tribunal partly allowed the appeals filed by the assessee, specifically allowing the scientific research expenditure under Section 35. The appeals related to the disallowance of sales promotion expenses were dismissed, aligning with the Supreme Court's precedent. The Revenue's appeal was dismissed due to the low tax effect.