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2012 (6) TMI 13 - AT - Income TaxExpenditure on Scientific Research - deduction u/s 35(2AB) - Revenue denied weighted deduction in respect of Clinical Trial and Bio-equivalence Study on ground that research were not incurred by the assessee in the approved in-house facility - Held that - The term in-house means, in the present context, that by utilizing the staff of an organization or by utilization of resources of the organization if a research is conducted within the organization; rather than utilization of external resources or staff; then it can be called as in-house research. Language of Section do not suggest that the research is to be conducted within four walls of an undertaking. To conduct the research, data may be collected from several resources, both, within the premises or outside the premises and then researched upon in in-house research facility. Once the scientific research facility is approved, then the expenditure incurred on research and development facility has to be allowed for weighted deduction u/s.35(2AB) - Decided in favor of assessee. Restriction of deduction u/s 80IC on ground that assessee had shown abnormally higher profit of Baddi Unit to claim deduction - AO suggested that, sales of Baddi Unit must be recorded at arm s length price for internal transfer and not the ultimate sale price - Held that - This is a case where manufacturing products were sold through C&F in the market. Even this is not the case that first sales were made by the Baddi Unit in favour of the head office or the marketing unit and thereupon the sales were executed by the head office to the open market. Once it was not so, then the fixation of market value of such good is out of the ambits of this section. If there is no intercorporate transfer, then the AO has no right to determine the fair market value of such goods or to compute the arm s length price of such goods. Statute do not subscribe such deemed inter-corporate transfer but subscribe actual earning of profit, then the impugned suggestion of the AO do not have legal sanctity in the eyes of law Regarding AO s proposition of segmentation of eligible profit of the manufacturing unit it is held that when the method of accounting as applicable under the Statute do not require segregation or bifurcation of profit of a unit into manufacturing profit and trading/marketing profit, it is no correct on the part of AO to resort to such segregation or bifurcation. There is no such concept of segregation of profit. Rather, the profit of an undertaking for section 80IA deduction purposes should be computed as a whole by taking into account the sale price of the product in the market. Legal and professional expenses incurred for expansion of business - dis-allowance - Revenue contending the same to be pre-operative expenses of a capital nature - Held that - It has been demonstrated that the expenditure in question was not for setting up a new line of business but for the setting up a new production unit for expansion of the same line of business already in existence hence allowable as revenue expenditure - Decided in favor of assessee. Product Registration Expenses, Trademark Registration Fees, Patent Registration Fees and reimbursement of expenses for Product Registration Support Services - dis-allowance - Revenue contending the same to be intangible assets eligible for depreciation u/s 32 - Held that - Payments in question are inextricably linked with the working of the assessee s business. By incurring those expenditure the 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. 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 - Decided in favor of assessee. Dis-allowance u/s 14A - Held that - In present case, on one hand the direct nexus of utilization of assessee s own funds towards investment in the impugned equity shares was not established and on the other hand from the side of the Revenue equally it was not placed on record that having regard to the accounts of the assessee the A.O. was not satisfied with the claim by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income. Matter restored back to file of AO. Transfer Pricing - adjustment to ALP - eligibility for availability of benefit of variation between ALP and price determined u/s 92C(2) - Held that - The matter requires reconsideration at the level of the AO only to examine the correctness of the computation as suggested by the assessee and if any relief is permissible, then the same can be granted but as per law. partial relief provided by DRP by allowing mark-up @ 2% is not disturbed. MAT - provision for doubtful debt not added to the book profit for computing income u/s 115JB - Held that - Provision for doubtful debt to be added to the book profit for computing income u/s 115JB - Decided against the assessee. Benefit of carry forward of MAT credit u/s 115JAA - Held that - Since the necessary facts are yet to be examined, therefore, we refer this ground back to the stage of the Assessing Officer to decide accordingly.
Issues Involved:
1. Disallowance of Legal and Professional Expenses. 2. Addition of Product Registration Expenses and Trademark/Patent Registration Fees. 3. Disallowance of weighted deduction for Scientific Research under Section 35(2AB). 4. Disallowance under Section 14A. 5. Restriction of deduction under Section 80IC and 80IB. 6. Upward adjustment on international transactions under Transfer Pricing provisions. 7. Adjustments while computing book profits under Section 115JB. 8. Allowance of deduction under Section 80G. 9. Benefit of carry forward of MAT credit under Section 115JAA. 10. Initiation of penalty proceedings under Section 271(1)(c). 11. Enhancement of interest chargeable under Section 234B. Issue-wise Detailed Analysis: 1. Disallowance of Legal and Professional Expenses: The assessee claimed Rs. 24,00,000/- as revenue expenditure under Legal and Professional Expenses for a project that was later abandoned. The AO disallowed it, treating it as capital expenditure. The Tribunal concluded that since the expenses were for the expansion of the existing business, they should be treated as revenue expenditure. Thus, this ground was allowed in favor of the assessee. 2. Addition of Product Registration Expenses and Trademark/Patent Registration Fees: The AO treated Product Registration Expenses and Trademark/Patent Registration Fees as capital in nature, eligible only for depreciation under Section 32. The Tribunal, however, held that these expenses were incurred for the smooth running of the existing business and did not create any new asset. Therefore, these were allowable as revenue expenditure. Consequently, these grounds were allowed. 3. Disallowance of weighted deduction for Scientific Research under Section 35(2AB): The AO disallowed the weighted deduction for expenses on clinical trials conducted outside the approved facility. The Tribunal held that clinical trials are an integral part of scientific research and should be considered as in-house research. Therefore, the assessee was entitled to the deduction under Section 35(2AB). This ground was allowed. 4. Disallowance under Section 14A: The AO disallowed Rs. 118,84,177/- under Section 14A for expenses related to exempt income. The Tribunal noted that the AO did not establish a direct nexus between the borrowed funds and the investments. Following the Bombay High Court's decision in Godrej & Boyce Mfg. Co. Ltd., the matter was remanded back to the AO for fresh determination. This ground was allowed for statistical purposes. 5. Restriction of deduction under Section 80IC and 80IB: The AO restricted the deduction under Section 80IC for the Baddi Unit to Rs. 45.92 crores and under Section 80IB for the Goa Unit to Rs. 17,80,758/-. The AO argued that only the manufacturing profit should be considered for deduction. The Tribunal disagreed, stating that the entire profit from the eligible business, including marketing and brand value, should be considered. These grounds were allowed. 6. Upward adjustment on international transactions under Transfer Pricing provisions: The AO made an upward adjustment of Rs. 23,81,922/- for service charges paid to Zydus Healthcare (USA) LLC. The DRP allowed a mark-up of 2% instead of NIL. The Tribunal directed the AO to verify the computation in light of the second proviso to Section 92C(2) and grant relief if applicable. This ground was allowed for statistical purposes. 7. Adjustments while computing book profits under Section 115JB: The AO added "provision for doubtful debts" and expenses disallowed under Section 14A to the book profits. The Tribunal upheld the addition of the provision for doubtful debts following the Delhi High Court's decision in Indo Rama Synthetics. However, it allowed the exclusion of Section 14A disallowance from book profits, following the decision in Goetze Ltd. This ground was partly allowed. 8. Allowance of deduction under Section 80G: The assessee claimed that the deduction under Section 80G should be Rs. 27,57,600/- instead of Rs. 5,50,000/-. The Tribunal noted that this ground was consequential and not contested, hence dismissed. 9. Benefit of carry forward of MAT credit under Section 115JAA: The assessee claimed carry forward of MAT credit of Rs. 1,65,98,236/- relating to A.Y. 2000-01. The Tribunal remanded the matter back to the AO to decide in light of the decision in ITO v. Data Software Research Company (International) Pvt. Ltd. This ground was allowed for statistical purposes. 10. Initiation of penalty proceedings under Section 271(1)(c): The Tribunal noted that this ground was pre-mature and hence dismissed. 11. Enhancement of interest chargeable under Section 234B: This ground was noted as consequential and hence dismissed. Conclusion: The Tribunal allowed several grounds in favor of the assessee, particularly concerning the disallowance of expenses and deductions under Sections 80IC, 80IB, and 35(2AB). It remanded certain issues back to the AO for fresh consideration and dismissed a few grounds as either pre-mature or consequential. Overall, the judgment provided significant relief to the assessee on multiple counts.
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