2024 (9) TMI 16 - AT - Income Tax

Doctor Sponsorship Expenses - Legitimate business expenditure incurred for sponsorship expenses of medical practitioners/doctors - assessee, a public company, engaged in the business of manufacturing and marketing of pharmaceutical products - HELD THAT - The prohibition imposed by the MCI regulation and further by the CBDT circular is applicable on the pharmaceutical and allied health industries and the expenses incurred in providing the freebies to the doctors cannot by allowed as deduction under section 37(1) of the Act. Whether the CBDT Circular 05/2012 dated 01-08-2012 shall be applicable prospectively or retrospectively i.e. whether applicable from the date on which circular was published (01-08-2012) or from the date on which MCI regulation was published (14-12-2009)? - Hon ble Supreme court in case of M/s Apex Laboratories (P.) Ltd. 2022 (2) TMI 1114 - SUPREME COURT held that The CBDT circular being clarificatory in nature, was in effect from the date of implementation of Regulation 6.8 of the 2002 Regulations, i.e., from 14-12-2009. Hence, it is settled position now that CBDT circular prohibiting allowance/ deduction of expenses incurred by the pharmaceuticals industries in nature of freebie to doctor is applicable retrospectively from 14-12-2009. Any expense incurred by the pharmaceutical company in the nature of freebie to doctor is required to be disallowed by virtue of the Hon ble SC in the case discussed above. As such there is no requirement that the incurred by the pharmaceutical company under particular head should be exclusively for doctors. Hence, we are not in agreement with finding of the CIT(A). AO in the absence of detailed bifurcation has estimated the amount pertaining to freebies to doctors at @ 10% of the gross expenses on ad-hoc basis. As such, in the absence of any detail working provided by the assessee, the AO left with no option but to estimate the amount pertaining to freebies to doctors. Indeed, the AO even for making estimates, should adopt some reasonable criteria but the AO in its finding failed to point out the basis of such estimation. Therefore, in the absence of any working provided by the assessee and in the absence of any basis to be adopted for making such estimation by the AO, we in the interest of justice and fair play, restrict the disallowance at 5% of the gross amount claimed by the assessee under the head Business Advancement Sales Promotion. Expenses claimed under the head Doctors Sponsorship , both the AO and CIT(A) agree that expenses incurred under the impugned head are in nature of freebie to doctors - CIT(A) divided the amount incurred before and after the date of issue of CBDT circular bearing No. 05/2012 dated 1-8-2012. The learned CIT(A) accordingly held that the expenses incurred before 1st August 2012 shall not be subject to the disallowance. As such, the learned CIT(A) held the applicability of the impugned circular with prospective effect. On the other hand, as taken the view that the impugned circular is clarificatory in nature and applicable with retrospective effect from 1st April 2009. Hence, we hereby set aside the finding of CIT(A) and held that entire amount of expenses incurred during the year under the head Doctors Sponsorship shall be disallowed. Thus, in view of the above discussion, the grounds of appeal raised by the assessee and Revenue are hereby partly allowed. Disallowance of employee s contribution to PF/ESI made by AO on account of late deposits - HELD THAT - We note that the learned AR before us submitted that the issue on hand has been covered against the assessee by the judgment of G.S.R.T.C 2014 (1) TMI 502 - GUJARAT HIGH COURT Therefore, following the binding decision of the Hon ble Jurisdictional High Court, we hereby confirm the finding of the learned CIT(A). Hence, the ground of appeal of the assessee is hereby dismissed. Reducing the eligible profit u/s 80IC of Baddi Unit - We hold that the assessee is eligible for deduction under section 80-IC of the Act with respect to the income being Notice Pay Sale of scrap. Service Tax Refund - As not disputed by the revenue that the assessee, at the time of making payment to custom clearing agent, debited the profit and loss and account along with the amount of service tax. Thus, the profit of the eligible unit got reduced by the amount of service tax. Therefore, when such services tax is refunded to the assessee, the same will reduce the expense of eligible unit. The assessee instead of reducing the expense has shown such receipt separately. Thus, it is just a manner of representation - No infirmity in the order of the CIT(A). Thus, we hold that the assessee is eligible for deduction u/s 80-IC with respect to the income being service tax discussed above in the given facts and circumstances. Miscellaneous income - As relying on assessee own case 2019 (5) TMI 1932 - ITAT AHMEDABAD we hold that the assessee is eligible for deduction u/s 80-IC of the Act with respect to the income being Miscellaneous Income. Export benefit Insurance Income - As relying on assessee own case 2019 (5) TMI 1932 - ITAT AHMEDABAD assessee is eligible for deduction u/s 80-IC of the Act with respect to the income being Export Benefits Insurance claim Forex Gain, Cash discount - Tribunal in the own case of the assessee for AY 2012-13 2022 (3) TMI 340 - ITAT AHMEDABAD where the issue has been decided in favour of the assessee to hold that the assessee is eligible for deduction under section 80-IC of the Act with respect to the income being Forex Gain. Interest Income - We direct the AO to exclude the net interest income i.e. excluding the expenses incurred in earning such interest income. Hence the ground of appeal of the assessee in this regard is partly allowed. Government grant in the Baddi unit from the Department of Biotechnology under the scheme of Biotechnology Industry Partnership Program - The assessee on one hand has not allocated the expenditure incurred on R D activity to eligible units by treating the same as separate activity and at the same time, it is claiming the receipt of grant for conducting futuristic research in biotechnology as part of manufacturing unit. In our considered opinion the assessee cannot take a different stand for expenses incurred and grant received for research activity. Therefore, we hereby confirm the finding of the learned CIT(A) by holding that the receipt of government grant for biotechnology research is not connected to the activity of units eligible for deduction under section 80-IC of the Act. Hence, the assessee is not eligible for a deduction under section 80-IC of the Act on account of receipt of the government grant. Allocating the administrative expenses to Baddi and Sikkim Unit eligible for deduction u/s 80-IC and 80-IE - HELD THAT - As decided in own case 2019 (5) TMI 1932 - ITAT AHMEDABAD it is because the turnover of any undertaking is very much volatile and keep on changing depending upon the market forces, competition, Government policies, etc. There can be a situation that the turnover of one undertaking is very high in a particular year but in the subsequent year the turnover may go done or vice versa which will affect the pattern and consistency in the allocation of the administrative expenses and distort the presentation of the financial statements for different years. Therefore we are of the considered view that the basis of the allocation of administrative expenses based on the turnover is not advisable.Generally, the human resources working in any of the undertakings of the assessee does not frequently change as the market forces do not regulate it, unlike the sales. Therefore, we are of the view that the allocation of the administrative expenses should be done based on the human resources engaged in the different undertaking of the assessee. Decided in favour of assessee. Disallowance of claim representing the provision for leave encashment - AO found that the provision of section 43B clearly specifies that the amount payable to employees on account of leave encashment will be allowed on payment basis only - HELD THAT - As decided in own case 2022 (3) TMI 340 - ITAT AHMEDABAD there are certain expenses which are allowed on payment basis in pursuance to the provisions of section 43B of the Act irrespective of the year of incurrence. One of such expenditure is leave encashment. Admittedly, the assessee has not made the payment of the leave encashment and therefore the same can t be allowed as deduction. However, the assessee is at liberty to claim the deduction of such expense in the year of payment. Thus the ground of appeal of the assessee is dismissed. Disallowance of weighted deduction u/s 35(2AB) - AO disallowed the claim of the weighted deduction on such expenditure whereas the learned CIT(A) deleted disallowances of deduction on certain items of the expenditure and at the same time, confirmed the disallowance on certain items - HELD THAT - Issue squarely covered in favour of the assessee by the order of this Tribunal in the own case of the assessee 2012 (7) TMI 273 - ITAT AHMEDABAD we do not find any infirmity in the order of the learned CIT(A) with respect to the claim of deduction on salary to Dr. C Dutt, Building repairs and Municipal tax. Claim of weighted deduction on the expenditure of clinical trials studies and on product/ patent registration etc. allowed. We hereby set aside the finding CIT(A) with respect to the claim of weighted deduction on the expenditure of interest on loan, labour job works charges, furniture and fixture and electrical equipment and direct the AO to allow the claim of the assessee. Addition in book profit by the amount of disallowance made u/s 14A - HELD THAT - We note that the Special Bench in the case of ACIT vs. Vireet Investment Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI has held that the disallowance made u/s 14A r.w.r. 8D cannot be the subject matter of disallowance while determining the net profit u/s 115JB of the Act. Upward adjustment in TP on account of corporate guarantee, capital infusion, interest on loan - HELD THAT - The assessee company has extended corporate guarantee to its AE. Such guarantee was not utilized by the AE. Therefore, we are of the considered opinion that no inherent risk arises to the assessee company or financial services utilized by the AE from the assessee company. However, the assessee has suo-moto offered guarantee commission on the corporate guarantee to the one AE namely Zao Torrent Pharma Russia @ 1.5% of the guaranteed amount. In the present case the assessee has already offered ALP commission @ 1.5% of the guaranteed value extended to the AE namely Zao Torrent Pharma Russia. Therefore, in our considered opinion no further adjustment is required to be made. AO with respect to guarantee furnished to Torrent Pharma GmbH has calculated @ 0.205% as guarantee fees against the NIL offered by the assessee. Therefore, we are of the view that the same cannot be determined at 0.50% based on the order of the ITAT discussed above in the earlier year. As such, we hold that the guarantee fee charged by the revenue is at the ALP. Hence the ground of appeal of the assessee is partly allowed. Interest on loan to AE - The reasonable rate of interest shall be LIBOR 2%, we hereby hold that suo-moto notional interest offered by the assessee at LIBOR 400 basis is at ALP and no further adjustment is required to be made. Hence, we hereby set aside the finding of the learned CIT(A) and direct the AO to delete the upward adjustment made on account of benchmarking of loan to AE. Thus, the ground of the appeal filed by the assessee is hereby allowed. Capital Infusion - As respectfully following the order of the Tribunal in the own case of the assessee for AY 2012-13 2022 (3) TMI 340 - ITAT AHMEDABAD we hereby set aside the finding of the learned CIT(A) and direct the AO to delete the addition made by him on account of capital infusion. Hence, the ground of appeal of the assessee with respect to capital infusion is hereby allowed whereas the ground of revenue s appeal in this regard hereby dismissed. Disallowance of deduction u/s 80-IE in Sikkim Unit on other incomes - similar disallowances have been made by the AO with regard to Baddi Unit of the assessee eligible under section 80-IC of the Act. The provision of section 80-IC and 80-IE of the Act are perimetria. Both the sections deal with the deduction against the profit and gains derived by the undertaking from eligible business i.e. manufacturing of articles or things - AO also disallowed the deduction u/s 80-IE on same reasoning used for disallowing the deduction claimed u/s 80-IC - In the case of disputes u/s 80-IC, CIT(A) in identical manner has allowed deduction on certain income and simultaneously sustained the disallowances of deduction on certain item of incomes. Against the order of the CIT(A) with respect to deduction under section 80-IC both the assessee and Revenue were in appeal before us. The issue for the deduction u/s 80-IC relating to different items of income has been adjudicated, therefore the findings given in the above-mentioned paragraph shall also be applicable to the issue in hand. Similarly, the assessee s ground for deduction under section 80-IC of the Act with respect to insurance income has been allowed whereas interest income and government grant have been dismissed as shown in the above said paragraphs. Hence, the assessee s grounds of appeal for the same u/s 80IE of the Act are hereby partially allowed. Exclusion of excise refund from the computation of book profit under section 115JB - As decided in the case of Ambuja Cement Limited 2022 (11) TMI 1420 - ITAT MUMBAI we uphold the plea of the assessee and direct the AO to exclude the sales tax incentive subsidy for computing book profit u/s 115 JB. Additional ground of appeal - no R D expenses either for discovery or product development or capital expenses shall be allocated to the eligible units - HELD THAT - R D expenditure incurred by the assessee constitute an independent unit not having any link to the units eligible for deduction under section 80IC or 80IE of the Act. Therefore,no expenses of R D unit be it discovery stage, product development stage or capital expensescan be allocated to the units eligible for deduction under section 80IC or 80IE of Act while computing the profit eligible for deduction u/s 80IC or 80IE of Act. Hence the ground of appeal raised by the assessee in additional ground of appeal regarding allocation of R D expense is hereby allowed. Depreciation on computer software @ 60% - HELD THAT - As decided in Computer Age Management Services (P.) Ltd. 2019 (7) TMI 1153 - MADRAS HIGH COURT case of the Revenue is that software are licences and that they are intangible assets and would fall under Part B of New Appendix I, which deals with knowhow, patents, copyrights, trademarks, licenses, francises or any other business or commercial rights of similar nature. We find that Part B of New Appendix I is a general entry whereas Entry 5 of Part A of New Appendix I is a specific entry read with Note 7. In the instant case, the Tribunal, in our considered view, rightly held that the assessee is eligible to claim depreciation at 60%. Disallowance of depreciation made on capital investment subsidy by treating the costof capital assets - HELD THAT - Once the year in which impugned capital subsidy was received it has been held that such receipt shall not be adjusted against the cost of the block assets then the disallowances of depreciation in subsequent year based on same cannot be sustained. Hence, the ground of appeal raised by the Revenue is hereby dismissed. Depreciation with respect to pallets, trolleys, and mobile racks allowed. Deduction claimed by the assessee u/s 80G and 80GGB allowed - As decided own case 2019 (5) TMI 1932 - ITAT AHMEDABAD donation paid by the assessee has no connection with the unit eligible for deduction u/s 80IC - The scheme of the Act provides to claim the deduction u/s 80G after claiming all the deduction provided under chapter VI-A of the Income Tax Act. Therefore the assessee can claim the deduction on account of such donation only against the Gross Total Income after claiming all other deduction. The donation paid by the assessee cannot be claimed as an expense in the profit and loss account as the same has not been incurred wholly and exclusively for the purpose of the business as provided u/s 37(1) - Thus even if the assessee claimed the donation as an expense in the profit and loss account, then it has to be disallowed while computing the income under the head business and profession. Thus the only option available to the assessee to claim the deduction on account of such donation is only under the provisions specified u/s 80G which can be claimed - Decided against revenue. TP adjustment on account of Liason Services by restricting it to 2% is not sustainable - AO is directed lo delete the addition made on the basis of this adjustment. TP adjustment on account of Dossier licensing fee is hereby dismissed - The profit sharing ratio has already been accepted by the revenue in the earlier years. There is no change in the facts and circumstances for the year under consideration viz a viz the earlier years. It is the same agreement based on which the income has been shared between the assessee and the AE in the year under consideration. As such the agreement was entered dated 18-02-2003 which was still in force in the year under consideration without any modification. Therefore we are of the view that, the principles of consistency should be adopted. Custodian Fees - TPO has determined the ALP of the custodian fees paid by the assessee to its AE at Rs. NIL. CIT-A has held that the custodian fees paid by the assessee are at ALP. The basis of the ld. CIT-A was this that the assessee has paid custodian fee to another company which was much more than the amount in dispute and the same was also accepted by the Revenue. CIT-A also observed that all the economic benefits were transferred to the assessee and there was no of sharing the income for the marketing of assessee s product. In our considered view, the ld. CIT-A has given the reason and detailed finding which has not been controverted by the learned DR. Addition made on account on unutilized MODVAT/CENVAT u/s 145A - As decided in own case 2022 (3) TMI 340 - ITAT AHMEDABAD no justification for the AO to add unutilized MODVAT credit to the closing stock. The ld. CIT(A) has not committed any error in allowing claim of the assessee on this issue, which we uphold, and this ground of Revenue s appeal is dismissed.

Summary

Issues Involved:
1. Disallowance of Doctor Sponsorship Expenses
2. Disallowance of Employees' Contribution to PF/ESI
3. Reduction of Deduction under Section 80-IC for Baddi Unit
4. Reduction of Deduction under Section 80-IE for Sikkim Unit
5. Disallowance of Provision for Leave Encashment
6. Disallowance of Weighted Deduction under Section 35(2AB)
7. Exclusion of Income from Profits of Sikkim Unit for Deduction under Section 80-IE
8. Exclusion of Excise Refund from Book Profit under Section 115JB
9. Allocation of R&D Expenditure to Eligible Units
10. Upward Adjustment in TP on Corporate Guarantee, Capital Infusion, and Interest on Loan
11. Disallowance of Garden Expenses
12. Depreciation on Computer Software
13. Depreciation on Capital Investment Subsidy
14. Additional Depreciation on Pallets, Trolleys, and Mobile Racks
15. Disallowance of Deduction under Section 80G and 80GGB
16. Disallowance under Section 14A for Book Profits
17. Addition of Unutilized MODVAT/CENVAT Credit under Section 145A

Detailed Analysis:

1. Disallowance of Doctor Sponsorship Expenses:
The Tribunal upheld the disallowance of Rs. 15,15,09,216 out of Rs. 19,63,90,203 for doctor sponsorship expenses, citing violation of Indian Medical Council regulations and CBDT Circular No. 05/2012. The expenses incurred before the circular date (01-08-2012) were allowed, resulting in a partial relief for the assessee.

2. Disallowance of Employees' Contribution to PF/ESI:
The Tribunal confirmed the disallowance of Rs. 21,29,612 for late deposits of employees' contributions to PF/ESI, following the Gujarat High Court's decision in CIT vs. G.S.R.T.C.

3. Reduction of Deduction under Section 80-IC for Baddi Unit:
The Tribunal allowed the deduction for notice pay, sale of scrap, service tax refund, miscellaneous income, and forex gains, following its earlier decisions. However, it disallowed deductions for cash discount, export benefits, insurance income, and interest income, citing lack of direct nexus with manufacturing activity.

4. Reduction of Deduction under Section 80-IE for Sikkim Unit:
The Tribunal upheld the allocation of additional administrative expenses to the Sikkim Unit, reducing the eligible deduction under Section 80-IE. However, it allowed deductions for notice pay, sale of scrap, excise duty on scrap, cash discount, miscellaneous income, and forex gains.

5. Disallowance of Provision for Leave Encashment:
The Tribunal confirmed the disallowance of Rs. 7,72,50,875 for leave encashment provision, following its earlier decision that such expenses are allowed only on payment basis as per Section 43B(f).

6. Disallowance of Weighted Deduction under Section 35(2AB):
The Tribunal allowed weighted deductions for salary to Dr. C Dutt, building repairs, and municipal tax, following its earlier decisions. It also allowed deductions for clinical trials, patent registration, and professional fees, citing the Gujarat High Court's decision in Cadila Healthcare. However, it disallowed deductions for interest on loans, labor and job work charges, furniture, and electrical equipment.

7. Exclusion of Income from Profits of Sikkim Unit for Deduction under Section 80-IE:
The Tribunal allowed deductions for insurance income and export benefits but disallowed deductions for interest income and government grants, citing lack of direct nexus with manufacturing activity.

8. Exclusion of Excise Refund from Book Profit under Section 115JB:
The Tribunal set aside the issue to the AO for fresh adjudication, following the ITAT decisions in Greenply Industries Limited and Ambuja Cement Limited, which held that excise refunds are capital receipts and not part of book profit.

9. Allocation of R&D Expenditure to Eligible Units:
The Tribunal held that R&D expenses should not be allocated to units eligible for deduction under Sections 80-IC and 80-IE, following the Gujarat High Court's decision in the assessee's own case.

10. Upward Adjustment in TP on Corporate Guarantee, Capital Infusion, and Interest on Loan:
The Tribunal upheld the adjustment for corporate guarantee at 0.5% of the guaranteed value, following its earlier decision. It disallowed the adjustment for capital infusion, following its earlier decision that such transactions are capital in nature and not subject to TP adjustments. It also disallowed the adjustment for interest on loans, holding that LIBOR + 2% is a reasonable rate.

11. Disallowance of Garden Expenses:
The Tribunal allowed the garden expenses, following its earlier decision that such expenses are revenue in nature and incurred for maintaining a good atmosphere and complying with pollution control regulations.

12. Depreciation on Computer Software:
The Tribunal allowed depreciation at 60% on computer software, following the Madras High Court's decision in CIT vs. Computer Age Management Services (P.) Ltd.

13. Depreciation on Capital Investment Subsidy:
The Tribunal disallowed the reduction of WDV by the amount of subsidy, following the Supreme Court's decision in CIT vs. PJ Chemicals, which held that government subsidies do not reduce the actual cost of assets.

14. Additional Depreciation on Pallets, Trolleys, and Mobile Racks:
The Tribunal allowed additional depreciation on these assets, following its earlier decision that they are part of plant and machinery.

15. Disallowance of Deduction under Section 80G and 80GGB:
The Tribunal allowed the deduction, following its earlier decision that donations are not connected to eligible units and should be claimed under Section 80G after claiming all other deductions.

16. Disallowance under Section 14A for Book Profits:
The Tribunal held that disallowance under Section 14A cannot be imported for computing book profit under Section 115JB, following the Delhi Tribunal's decision in ACIT vs. Vireet Investment Pvt. Ltd. However, it directed an ad-hoc disallowance of Rs. 5 lakhs for exempted income.

17. Addition of Unutilized MODVAT/CENVAT Credit under Section 145A:
The Tribunal deleted the addition, following the Supreme Court's decision in Indo Nippon Chemicals Co. Ltd., which held that MODVAT credit is not taxable income.

Conclusion:
The Tribunal's judgments are consistent with earlier decisions and higher judicial authorities, ensuring fair and just treatment of the issues involved. The appeals by both the assessee and the revenue were partly allowed, with detailed reasoning provided for each issue.