2020 (3) TMI 333 - AT - Income Tax

Deduction claimed u/s. 35(2AB) - AO had disallowed claim as the assessee had carried out certain expenditures outside the in-house R D center - HELD THAT - CIT(A) correctly allowed relief to the assessee keeping in view the judgment of Hon ble Gujarat High Court in the case of Cadila Healthcare Ltd. 2013 (3) TMI 539 - GUJARAT HIGH COURT where the Hon ble Court had held that clinical trials conducted outside approved facility were eligible for exemption under s.35(2AB) of the Act. - Decided against revenue Disallowance on account of depreciation on electric installations - AO had restricted the depreciation to 15% instead of 25% by holding that electrical fittings are eligible for depreciation at a particular rate prescribed under the Rules - HELD THAT - As before the learned CIT(A), the assessee demonstrated that electrical installations were connected to plant and machinery and were parts of plant and machinery itself. It was also submitted to learned CIT(A) that similar disallowance was made in the case of assessee in AY 2009-10 2010 (7) TMI 1096 - ITAT AHMEDABAD which the learned CIT(A) had deleted. The learned CIT(A) has also allowed relief to the assessee by following the order of Hon ble ITAT in the case of assessee itself for AYs. 2005-06 2009-10. - Decided against revenue Disallowance on account of prior period expenses - HELD THAT - CIT-A after noting down the break up of expenses which were classified by the assessee as per prior period expenses and the year of their crystallization rightly deleted the addition by holding that it is clear from the details given by the appellant that the appellant had proper explanation with supporting evidence to prove that the liability is crystallized only in the previous year - AO is directed to allow prior period expenses - Decided against revenue TDS u/s 195 - disallowance on account of foreign commission expenses for non deduction of TDS - HELD THAT - This issue is also covered in favour of the assessee vide order of Hon ble ITAT for AY 2009-10 2010 (7) TMI 1096 - ITAT AHMEDABAD in the case of assessee itself where the Hon ble Tribunal after discussing the entire fact and after noting down the provisions of Section 9(1)(vii) and Section 195 of the Act has held that the provisions of Section 195 and Section 9 were not applicable to the assessee and therefore has held that assessee was not liable to deduct TDS and therefore no disallowance was warranted under s.40(a)(ia) Disallowance on account of product registration fees - Allowable revenue expenses - HELD THAT - This issue is now covered, in favour of the assessee, by Hon'ble jurisdictional High Court's judgments in the cases of CIT v. Torrent Pharmaceutical Ltd. 2013 (4) TMI 570 - GUJARAT HIGH COURT and CIT v. Cadila Healthcare Ltd. 2013 (3) TMI 539 - GUJARAT HIGH COURT wherein Their Lordships have, inter alia, held that the product registration expenses is eligible for deduction as revenue expenditure. Disallowance of the professional fees on patent - revenue or capital expenditure - HELD THAT - Where a sum of money is laid out for the acquisition or the improvement of a fixed capital asset it is attributable to capital but of no alteration is made in the fixed capital asset by the payment, then it is properly attributable to revenue, being in substance a matter of maintenance, the maintenance of the capital structure or the capital asset of the company. In our opinion, the advantage derived by the owner of the trade mark by registration falls within this class of expenditure The fact that a trade mark after registration could be separately assigned, and not as a part of the good will of the business only, does not also make the expenditure for registration a capital expenditure. That is only an additional and incidental facility given to the owner of the trade mark. It adds nothing to the trade mark itself. The observation of the AO and the submission of the appellant is considered carefully. As the facts of the case on this point are similar to the facts dealt with by the Hon'ble High Court of Gujarat in case of Cadila Healthcare Ltd. 2013 (3) TMI 539 - GUJARAT HIGH COURT respectfully following the decision, the AO is directed to allow the professional fees - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance of deduction claimed under Section 35(2AB) of the Income Tax Act for research and development expenditure.
2. Disallowance of depreciation on electric installation.
3. Disallowance of prior period expenses.
4. Disallowance of foreign commission expenses.
5. Disallowance of product registration fee and professional fee on patents.

Issue-wise Detailed Analysis:

1. Disallowance of deduction claimed under Section 35(2AB) of the Income Tax Act for research and development expenditure:
The Revenue challenged the deletion of disallowance of ?74,50,738 made by the Assessing Officer (AO) on the grounds that the expenses were incurred outside the approved in-house R&D center. The CIT(A) allowed the deduction following the judgment of the Gujarat High Court in CIT vs. Cadila Healthcare Ltd., which held that clinical trials conducted outside the approved facility were eligible for exemption under Section 35(2AB). The Tribunal upheld the CIT(A)'s decision, finding no infirmity and dismissed the Revenue's appeal on this ground.

2. Disallowance of depreciation on electric installation:
The AO restricted the depreciation to 15% instead of 25%, treating the electric installations as separate from plant and machinery. The CIT(A) allowed the higher depreciation rate, following the Tribunal's decision in the assessee's own case for AY 2005-06 and 2009-10, which held that electrical fittings integral to plant and machinery should be depreciated at the higher rate. The Tribunal found no infirmity in the CIT(A)'s order and dismissed the Revenue's appeal on this ground.

3. Disallowance of prior period expenses:
The AO disallowed ?3,72,824 on account of prior period expenses. The CIT(A) allowed the claim, noting that the expenses had crystallized during the relevant year, following the Bombay High Court's decision in CIT vs. Mahanagar Gas Ltd. The Tribunal upheld the CIT(A)'s decision, finding no infirmity, and dismissed the Revenue's appeal on this ground.

4. Disallowance of foreign commission expenses:
The AO disallowed ?40,01,829 on account of foreign commission expenses, citing non-deduction of TDS under Section 195. The CIT(A) deleted the disallowance, relying on the Tribunal's decision in the assessee's case for AY 2009-10, which held that the provisions of Section 195 and Section 9 were not applicable as the services were rendered outside India and no TDS was required. The Tribunal upheld the CIT(A)'s decision, finding no infirmity, and dismissed the Revenue's appeal on this ground.

5. Disallowance of product registration fee and professional fee on patents:
The AO disallowed ?34,42,638 for product registration fees and ?11,48,325 for professional fees on patents, treating them as capital expenditure. The CIT(A) allowed these expenses as revenue expenditure, following the Tribunal's decision in the assessee's case for AY 2009-10 and the Gujarat High Court's judgments in CIT vs. Torrent Pharmaceuticals Ltd. and CIT vs. Cadila Healthcare Ltd. The Tribunal upheld the CIT(A)'s decision, finding no infirmity, and dismissed the Revenue's appeal on this ground.

Conclusion:
The Tribunal dismissed the Revenue's appeal on all grounds and upheld the CIT(A)'s order, finding no infirmity in the deletion of disallowances for deduction under Section 35(2AB), depreciation on electric installation, prior period expenses, foreign commission expenses, and product registration and professional fees on patents. The assessee's cross-objection, being merely supportive of the CIT(A)'s order, was also dismissed.