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TMI Blog2012 (9) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... said claim of the assessee is not the expenditure on rents, rates and taxes relating to R&D premises the said expenditure has to form part of weighted deduction as per section 35(2AB) - in favour of assessee. Denial of weighted deduction on the claim as not reported in DSIR certificate, thus in the absence of any details submitted no point to interfere with the order of the Commissioner for denial - against assessee. Disallowance of weighted deduction in respect of consulting charges and patent filing charges - Held that:- As the consultancy charges had been paid by the assessee in providing technical services regarding the patents, obtaining patent information from innovator companies and obtaining innovator samples for R&D purposes, thus the payments have been accepted towards research and not towards registering the patents. Therefore, these expenditures have been incurred towards research expenses and not towards any patent filing. Explanation to section 35(2AB) specifically provides that the expenditure on scientific research for the purpose of section 35(2AB) shall include filing of application for a patent under The Patent Act, 1970, in relation to drugs and pharmaceuticals. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll; Unit at MIDC Lote Parshuram, Taluka Khed, Ratnagiri District, for manufacture of bulk drugs treated as converted EOU-I, under provision of section 10B of the Income Tax Act, 1961. The allowability of deduction under this section is discussed later in my order; • Unit at OIDC Daman for manufacture of formulations. This unit was set up in December 2001, and is eligible towards deduction under section 80IB claimed. The allowability of deduction under this section is discussed later in my order; • Unit at Plot no.6, HPSIDC Industrial Area, Solan, Baddi, HP, for manufacture of formulations and is eligible towards deduction under section 80IC. This is the first year of assessee claim under section 80IC. 3. The assessee company also markets formulations manufactured using the manufacturing facilities of third parties, either on job work basis under loan license arrangement, or by purchasing the same from such parties on principal-to-principal basis. Sales are affected through dealer/stockiest who are appointed all over India. The assessee company also exports both bulk drugs and formulations to various countries. In the assessment year under consideration, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce between the amount reported in annual report and claimed in ROI Rs. 1,25,17,261 Rs. 7,81,95,972 The assessee has vide its above submissions have also submitted its explanation over the details of the expenses which has been shown separately in the DSIR report." 6. In respect of clinical trials, the assessee submitted that the same is eligible for weighted deduction under section 35(2AB) as the expenditure was, in fact, related to and emanating out of the activities carried out in the approved in-house R&D facilities. In this regard, the assessee filed the following reply before the Assessing Officer which has been stated by him at Page-6 of the assessment order, which reads as follows:- "Rs. 4,00,32,682 towards expenses related to clinical trials outside the approved facilities. The company carries out research at its R&D facilities, which are approved by DSIR. The research is conducted basically on pharmaceutical products for which clinical trials are mandatory. Trials on humans for bio-equivalence etc., are done on volunteers who are patients of the disease for which the medicine under research applies. For such clinical trials, the company has to tie up with various hos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -house R&D facilities. It was contended that the clinical trials have to be conducted on various subjects like human patents, volunteers and animals for studies like bio-equivalence, etc. Therefore, by its very nature, this activity is largely dependent on and is to be carried out through various eternal activity is largely dependent on and is to be carried out through various external agencies, hospitals, doctors, institutions, etc. However, the Commissioner (Appeals) did not agree with the above contention of the assessee and stated that similar issue has been considered by the Tribunal in assessee's own case in assessment year 2005-06, and it was held that the expenditure has not been incurred in-house in respect of clinical trials and accordingly, the weighted deduction of 150% is not allowable under section 35(2AB) to the assessee. Therefore, the Commissioner (Appeals) has confirmed addition made by the Assessing Officer amounting to Rs. 4,00,32,682. Hence, the assessee is in appeal raising ground no.1(a). 9. In respect of the expenditure of Rs. 1,84,87,038, under the head "patient filing" in various foreign countries and foreign consultancy, the details of the amount spent a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is first required to be gathered. Therefore, these expenditures have been incurred for consultancy are purely towards research expenditure and, hence, weighted deduction is to be allowed. 13. The Commissioner (Appeals) has stated that the above issue has been discussed in assessment year 2006-07 and allowed weighted deduction of the assessee. Accordingly, he has directed the Assessing Officer to allow weighted deduction of Rs. 8,65,131, after verification. 14. In respect of the expenditure pertaining to patent filing of Rs. 74,38,119, it was stated that the payment is covered under The Patent Act, 1970, as per the Explanation of section 35(2AB). It was contended that the said clause provides that the expenditure on scientific research in relation to drugs and pharmaceutical shall include expenditure incurred on clinical drug trial obtaining approval from any regulatory authority under any Central or State Provincial Act and filing an application for a patent under The Patents Act, 1970. Therefore, the eligibility for claiming 150% under section 35(2AB), the criteria laid down under the Act are obtaining approval from any regulatory authority under any Central or State Provincial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... half of the assessee, it was contended that the Assessing Officer has not allowed this deduction in respect of building used for research R&D units merely because DSIR has not approved the expenditure for the purpose of deduction. It was contended that the legislature as per section 35(2AB), only excluded from weighted deduction, cost of land or building and not any charges and expenses related to land or building. However, the Commissioner (Appeals) did not accept the contention of the assessee and stated that since DSIR has not allowed weighted deduction, rent, rates and taxes on repairs on the R&D unit, the Assessing Officer is justified in not allowing deduction on these expenses. Hence, the assessee is in appeal before the Tribunal raising ground no.1(b). 20. In respect of difference between the amount reported in the annual report and claimed in the return of income of Rs. 1,25,17,261, which is the subject matter of the appeal as ground no.1(c) of the assessee, the Assessing Officer has given a break up at Page-10, as follows:- Expenditure Head Amount (Rs. ) Employment cost 78,36,366 Service tax on R&D expenses 16,45,503 Vehicle Insurance 5,34,026 Housekeeping Consu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's own case for assessment year 2006-07, in ITA no.453/Mum./2009, order dated 18th March 2010, a copy of which is placed at Pages-209 to 213 of the paper book and the Tribunal, by following assessee's own case for assessment year 2005-06 in ITA no.2179/ Mum./2009, held that the expenditure on scientific research eligible for weighted deduction under section 35(2AB), should be the expenditure on scientific research on in-house research and development facilities and, therefore, the action of the Assessing Officer to disallow weighted deduction of 50% was confirmed. The learned Counsel for the assessee, at the time of hearing, admitted that the facts in the assessment year under consideration are identical to the facts of the assessment year 2006-07 and the Tribunal has decided this issue against the assessee. However, he submitted that the assessee has filed an appeal before the Hon'ble High Court and the said appeal is pending. 24. Learned Departmental Representative submitted that in view of the above facts, the issue is covered against the assessee by order of the Tribunal in assessee's own case for preceding assessment year and, therefore, the order of the Commissioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned Departmental Representative justified the order of the Commissioner (Appeals) and submitted that the DSIR certificate is pre-requisite for any expenditure to be allowed under section 35(2AB) of the Act has weighted deduction @ 150%. He submitted that since DSIR did not approve the said expenditure in certificate issued by it, the Assessing Officer rightly disallowed the same on the basis of certificate of DSIR as he is to follow the said certificate of DSIR for considering as to whether the assessee is entitled for weighted deduction under section 34(2AB) or not and he is not to apply his mind for that purpose. He submitted that the order of the Commissioner (Appeals) should be confirmed. 29. In the rejoinder, the learned Counsel for the assessee to his submissions referred to Rule-6(7A) of the I.T. Rules, 1962, and submitted that this rule lays down the condition subject to which the expenditure incurred on in-house research and development facilities is to be allowed under section 35(2AB) of the Act and the said rule does not provide that the expenditure incurred in connection with building of R&D facilities should not be allowed. He submitted that there is no authority give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... land or building. The repairs, rent, etc., the expenditure incurred relating to R&D premises cannot form part of cost of land or building. In the absence of any fact that the said claim of the assessee aggregating to Rs. 62,00,689, is not the expenditure on rents, rates and taxes relating to R&D premises, we are of the considered view that the said expenditure has to form part of weighted deduction as per section 35(2AB) of the Act. Therefore, we, by reversing the orders of the authorities below, hold that the assessee is entitled to weighted deduction on the said amount @ 150% as per section 35(2AB) of the Act. Hence, ground no.1(b) of the appeal taken by the assessee is allowed. 32. In respect of ground no.1(c) of the appeal taken by the assessee relating to denial of weighted deduction on the claim of Rs. 1,25,17,261, not reported in DSIR certificate, we, in the absence of any details before us, do not find any reason to interfere with the order of the Commissioner (Appeals). Hence, we uphold the order of the Commissioner (Appeals) to deny weighted deduction on the above claim of the assessee under section 35(2AB) of the Act. Therefore, ground no.1(c), taken by the assessee is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction under section 35(2AB) r/w Explanation thereto. In view of the above, we uphold the order of the Commissioner (Appeals) by rejecting ground no.3 of the appeal taken by the Department. 35. Now we take up ground no.1 of the appeal taken by the Department which reads as under:- "On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in directing to treat the expenses of Rs. 3,97,373, paid to Trade Mark Attorneys by treating as revenue expenditure." 36. At the time of hearing, the learned Counsel for the assessee submitted that the same very issue has been considered by the Tribunal in assessee's own case for assessment year 2006-07 in the appeal filed by the Department being ITA no.453/Mum./2009, order dated 18th March 2010, and the Tribunal, by following its earlier order for assessment year 2005-06 in assessee's own case, held that the expenditure for registering trade mark in India is a revenue expenditure and not capital expenditure. 37. Learned Departmental Representative has not disputed the above contentions of the learned Counsel for the assessee. 38. We also observe that the Commissioner (Appeals), while deciding the issue also f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ans there would be many such authorisation of similar products being taken. Therefore, the expenditures incurred is allowable as revenue expenditure. The Commissioner (Appeals) considered the above submissions of the assessee vide Para-2.3 of the impugned order and held that it is a business expenses. The said para reads as follows:- "2.3 I have considered the reply of the appellant and perused the assessment order. Anti National Drug Application registration is required for marketing of the product of the appellant company in USA. Thus, the regulatory requirement to sell the product in the market. In the absence of registration of ANDA, the appellant may not be able to sell his product without hindrance. The appellant has not acquired any benefit of enduring nature, therefore, the expenditure of professional fees for registration of ANDA is allowable as revenue expenditure. Hon'ble Calcutta High Court in the case of CIT v. Varas International, 225 ITR 831, has held that the payment made to Excise Department for obtaining license is allowable as business expenditure. In view of this fact, the Assessing Officer is directed to delete the addition of Rs. 7,03,927, and also withdraw t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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