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TMI Blog2013 (7) TMI 1130X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance of claim of weighted portion of deduction u/s 35(2AB). 3. Re: Disallowance of proportionate scientific research expenses of ₹ 1,75,72,136/- 3.1 On the facts and in the circumstances of the case and in law, the CIT (A) erred in upholding disallowance of proportionate portion of revenue and capital expenditure on scientific research which had been claimed by the Appellant on the ground that no business was carried out. 3.2 Without prejudice to the above, the CIT (A) grossly erred in upholding the computation of the disallowance by the Assessing Officer for 4 months (beginning from 1 December, 2005) without appreciating that the Appellant continued its manufacturing business till I 5 December, 2005. 3.3 Without prejudice to the above, the CIT (A) ought to have allowed expenditure on scientific research under head Income from other sources as the manufacturing service income derived by the Appellant was intimately connected with scientific research carried on. 3.4 Without prejudice to the above, the CIT (A) ought to have allowed depreciation to the Appellant in respect of capital expenditure for which no deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re inter-linked and brief facts of the case are as under. 3. The assessee is in the business of manufacturing and trading of bulk drugs and research having an in-house research facility. During the year, by virtue of an agreement dated 01.08.2005 with M/s. Aarti Industries Ltd. another group concern, the assessee entered was to provide services relating to manufacture of bulk drugs (API) and intermediaries by deploying its own technical resources, in terms of its skilled technical staff and technical knowledge and expertise. As part of terms of the agreement the assessee was to receive fees for the service rendered, a sum calculated @ 30% of the gross contributions from APIs and intermediaries sold during three calendar months by AIL (cl.6). The gross contribution was defined as an amount equal to amount of sales price net of taxes less cost of raw materials, fuel, power and water used directly in manufacturing of the produces on goods sold (cl.7). It was also provided that in case of gross contribution being negative no amount shall be payable by the assessee to AIL and vice-versa. Eventhough, this agreement was to commence from 16th day of August, 2005, the same was imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsidered allowed for statistical purposes. 5. Ground Nos.3, 4 and 5,6 are in a way interlinked. Consequent to the treatment given to the receipt of manufacturing service income as income from other sources and not as business income, AO proportionately disallowed the claim of scientific research expenses. In case incomes were treated as business income in Ground No.5 automatically the ground No.3 and 4 gets allowed to assessee. There are sub-grounds in the above grounds which are without prejudice to each other that Assessing Officer should have disallowed only 3 months claim as against 4 months, as assessee continued its own manufacturing activity till 15th December, 2005. 5.1 Arguing mainly on ground No.5 it was the submission of the ld. Counsel that both Assessing Officer and CIT(A) mistook the two arguments entered by the assessee as one of leasing manufacturing activity to the Aarti Industries Ltd. He referred to the various terms and conditions, details placed on record, reimbursement of salary expenses etc. to submit that the assessee in fact had two separate activities. The factory has been leased out along with its plant and machinery separately to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e enquired about the license for manufacturing bulk drugs and nature of services being rendered along with details of reimbursement of expenses. The ld. DR also pointed out that the so called research personnel were not paid very highly so as to indulge in the research activity. It is also noticed, on the argument raised that the assessee has work in capital loans from banks as on 31.3.2006, the same was also repaid in the next year. The details of reimbursement of expenses, licenses obtained from drug control authorities and nature of supervisory services were not placed on record so as to examine them. It is also noticed that ld. CIT(A) opined that it was transfer of profits of the parent company (AIL) in the guise of manufacturing service charges apparently with the motive to avoid taxability, since the appellant was having huge losses. This observation the CIT(A) was not based on any facts nor any such disallowance seems to have been made in the hands of Aarti industries Ltd. Therefore, we are of the view that the issue was not examined properly by AO or by the CIT(A) who had not at all considered the detailed submissions made by the assessee before him. 7. In view of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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