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TMI Blog2019 (6) TMI 1252X X X X Extracts X X X X X X X X Extracts X X X X ..... Respondent by: Shri O. P. Sharma, CIT-D.R. ORDER PER Ms. MADHUMITA ROY - JM: The instant appeal filed by the assessee is directed against the order dated 28.03.2016 passed by the Pr. Commissioner of Income Tax -2, Vadodara under section 263 of the Income Tax Act, 1961 (in short the Act ) arising out of the order dated 28.03.2014 passed by the ACIT, Central Circle-1, Baroda under section 143(3) r.w.s. 92CA of the Act for the Assessment Year 2010-11. 2 . Ground No.1 and 2 are general in nature and hence no order needs to be passed. 3. Ground No.3 relates to disallowance u/s 35(2AB) of ₹ 12,99,26,499/-; deduction restricted to the amount contained in Form No.3CL. 4. The plea of the assessee before us is this that the Learned CIT disallowed deduction of such benefit on the allegation that the said expense was not approved by DSIR without appreciating the followings: 1. The provisions of the Income Tax Act, 1961 does not contain any specific provision for the allowance of expenditure u/s 35(2AB) to be restricted to the amount as certified by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The relevant portion thereof is as follows: 29. The issue raised by the assessee in the ground no. 6 is that the Ld.CIT (A) erred in not allowing the weighted deduction under section 35(2AB) of the Act in respect of certain expenses. 30. The assessee during the year has incurred total research and development expenses amounting to ₹ 11,962.75 lacs. But the assessee claimed weighted deduction under section 35(2AB) of the Act in respect of the expenses amounting to ₹ 11,271.35 lacs only. As such the assessee omitted to claim the weighted deduction in respect of the expenses of ₹ 689.37 lacs inadvertently. Accordingly, the assessee claimed the weighted deduction in respect of such expenses under section 35(2AB) of the Act during the assessment proceedings by way of filing a letter dated 7th February 2014. 30.1. However, the AO disregarded the contention of the assessee by observing that it has not claimed the weighted deduction under section 35(2AB) of the Act in the books of accounts. Moreover, the assessee should have filed the revised return of income for claiming the weighted deduction under section 35(2AB) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rely because the same was not claimed in the return of income nor through a revised return of income, the same cannot be denied. The relevant portion of Section 35(2AB) reads as under:- 35[2AB] (1) where a company engaged in the business of [bio-technology or in [any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule]] incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority, then, there shall be allowed a deduction of [a sum equal to [two] times of the expenditure] so incurred. [Explanation.- For the purposes of this clause, expenditure on scientific research , in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority . A.Y. 2009-10 under any Central, State or Provincial Act and filing an application for a patent under the patents Act, 1970 (39 of 1970).] 42.A perusal of the aforementioned section clearly e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essed in order revising the above regular assessment. We deem its appropriate at this stage to throw some light on the nature and ambit of Form 3CL. The same comes under Rule 6(7A) of the Income Tax Rules, 1962 framed under the provisions of the Act. The above sub rule is relevant for approval of expenditure incurred on in house research development facility by a company u/s.35(2AB). Sub clause (b) thereof is the specific provision thereto stipulating that the prescribed authority shall submit its report in relation to the approval of in house Research Development facility in Form No.3CL to the Director General (Income Tax Exemptions) within 60 days of its granting approval. The same is merely in the form of intimation to be sent from prescribed authority's end to the department. An assessee engaged in such Research Development activity having already obtained Form 3CM approval of its facility has no role to play in such correspondence. We notice that a co-ordinate bench of this tribunal in ACIT vs. M/s. Torrent Pharmaceuticals ITA No.3569/Ahd/2004 decided on 13.11.2009 holds that the impugned weighted deduction is not to be restricted to the extent of the amount of the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to send intimation in Form 3CL, would not be reason enough to deprive the assessee's claim of deduction under section 35(2AB) of the Act. However, in facts of the present case, it would be open for the Assessing Officer to verify the actual expenditure incurred by the assessee. 37.3 Thus respectfully, following the same, we do not find any reason to interfere in the order of the Ld. CIT-A. Hence the ground of appeal of the Revenue is dismissed. 38. Moreover, we are bound to follow the order of this Tribunal in the own case of the assessee in the earlier year as the facts are identical in the impugned issue before us. It is also important to note that the Ld. DR has not brought anything on record contrary to the argument advanced by the Ld. Counsel for the assessee and the finding of the Ld. CIT-A. 38.1 We also place our reliance on the judgment of Hon ble Madras High Court in the case of CIT v. L.G. Ramamurthi 1977 CTR (Mad.) 416 : [1977] 110 ITR 453 (Mad.). The relevant extract has been reproduced in the preceding paragraph. In the light of the ratio decidendi in the above-said judgment, we are of the considered opinion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as carrying out research and development expenses for the drugs manufactured by both the firms. Accordingly, the assessee claimed the deduction for all the research and development expenses incurred by it in its books of accounts. 41. The AO during the assessment proceeding observed that both the partnership firm are claiming deduction under section 80IC of the Act. As such both the partnership firms were showing a huge amount of profit which was allocated to the partners of the firm. The assessee being a major shareholder in the firms received a huge amount as a share of profit which was claimed as exempted under section 10(2A) of the Act. Accordingly, the AO was of the view that the research and development expenses incurred by the assessee on the drugs manufactured by the partnership firms should be allocated to these partnership firms. Thus the AO worked out the research and development expenses pertaining to the firms for ₹ 58,07,48,088/- on the basis of the turnover of the formulations and disallowed the same by adding to the total income of the assessee. 42. The aggrieved assessee, preferred an appeal to the Ld. CIT (A) who partly co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... extent of the amount not so allowed to be deducted. Now as per the provisions of section 40(b)(i), any payment of salary, bonus, commission or remuneration to any partner who is not a working partner is not allowed as a deduction in computation of the total income of the firm. The explanation 4 to clause (b) says that working partner means an individual who is actively engaged in conducting the business or provision of the firm of which he is a partner. Hence, the appellant being a company cannot be a working partner of a firm for the purposes of provisions of Income Tax Act 1961. Accordingly, any remuneration paid to the appellant is not allowable as a deduction in the computation of the total income of the firm and at the same time such remuneration will not form part of total income of the appellant. Thus, both the share of profit and remuneration received by the appellant from the firm will not form part of its total income and accordingly any expenditure incurred by the appellant for earning such share of profit or remuneration cannot be allowed as a deduction in computation of its total income. Hence it is held that the AO has rightly disallowed the R D expenditure incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, the appellant has also submitted the copy of Financial statement for FY 2007-08 of Sun Pharmaceutical Industries. As per this, the turnover of this firm is 1086.2 crore, which is the same figure as adopted by the Ad in his order. Besides in Clause 8' of the Notes on Financial Statement, it has been mentioned that the firm operates in one reportable geographical segment i.e. within India . On the basis of details furnished by the appellant it is seen that the firm is not into bulk drug formulations. Hence, R D expenditure related to bulk formulation are not to be allocated towards the expenditure for the firm SPI and the AO has also accepted this contention. But the AO has allocated entire R D expenditure for formulation drugs in the ratio of total turnover of the appellant and of the firm M/s. SPI. The appellant's claim that R D expenditure Incurred for export formulations should not be allocated to SPI is found to be correct as SPI has not exported any drug during the FY 2007-08. But at the same time if this method is adopted, then the export turnover of the appellant will have to be reduced from its total turnover for the purposes of computing the allocation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic market. R D Professional Fees Other.- Miscellaneous expenditure a) b) 4751.79 167.71 62.90 Expenses for Professional Charges for products for overseas market. Expenses for Professional Charges for products for Domestic market. Grand Total R D Expenditure 13104.19 Thus, the total expenses for formulation drug for domestic market is 1651.48,+ 2193.40 + 167.61 +.62.90 = 4075.49 lakhs. The balance expenditure of 9028.7 lakhs is for the purpose of overseas market. The appellant's claim that only 1651.48 lakhs of expenditure should be considered for allocation to SPI is not acceptable due to lack of proper details filed by it before the AO or during the current appellate proceedings. The Domestic formulations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Regulatory/Overseas Expenses Annexure 6 a) 812.71 Expenses on acox'rfc of Products Registration, C .rfJc:.'.~. Trails, Subscription cLc. for | product for overseas market,, , 1 b) 194.80 Expenses on Accounts Clinic:1 Trails for Domestic market R D Professional Fees Other.- Miscellaneous expenditure a) b) 640.65 130.68 - Expenses for Professional Charges for products for overseas market. Expenses for Professional Charges for products for Domestic market. Grand Total R D Expenditure 12776.45 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orities below as favorable to them. 47. We have heard the rival contentions and perused the materials available on records. At the outset, we find that in the identical facts and circumstances in the own case of the assessee s (supra), the ITAT deleted the addition made by the TPO/AO. The relevant extract of the order is reproduced as under: We have given a thoughtful consideration to the facts in issue before us. There is no dispute that the assessee did incurred expenditure under the head Research Development activity. The only dispute relates to the . A.Y. 2009-10 allegation that part of such expenditure belong to the business activity of the partnership firm SPI. There is also no denying by the lower authorities that the entire Research and Development activities are done by the appellant company only being the flagship company of Sun Pharma Group. In our understanding of the facts, the appellant company had assisted the partnership firm in carrying on its business by using its network for marketing the pharmaceuticals products successively. Since the assessee is holding 97.5% of share in the partnership firm, SPI it becomes the duty of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red by the earlier order of the Tribunal has necessarily to be followed by us in line and tune with the judicial discipline and decorum. In view of the above and respectfully following the ITAT order as discussed above, we allow the ground of appeal of the assessee and dismiss the ground of appeal of the Revenue. Taking into consideration the order passed by the Co-ordinate Bench in identical issue in assessee s own case as discussed above, we find no reason to disallow the claim of the assessee towards R D expenditure allocated to Sun Pharma Industries of ₹ 22,93,81,646/-. We, therefore, respectfully relying on the said order passed by the Co-ordinate Bench, delete such addition made by the authorities below. Hence, assessee s ground of appeal is allowed. 10. Ground No.5 relates to the addition on account of re-characterization of remuneration earned from partnership firm (SPI) as royalty income of ₹ 44,09,54,508/-. 11. At the very outset of hearing of the instant appeal, the Learned Sr. Counsel appearing for the assessee submitted that the issue is covered in assessee s own case passed by the Co-ordinate Bench repo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity that the proposed addition is based on the findings of the A.O. given in the case of the firm SPI wherein the A.O. had made addition of ₹ 73.38 crores and ₹ 17.29 crores applying the provisions of Section 80-18(10) of the Act. Assessee drew further attention to the decision; of the Tribunal, Amritsar Bench in ITA No. 129/ASR/2009 wherein the Bench deleted the addition made by the A.O. in the case of firm SPI. It was further contended that in assessee's own case in earlier years, such remuneration has never been re-characterized and added back. 131. The contentions of the assessee did not find any favour with the First Appellate Authority who stated that the order of the' Tribunal Amritsar Bench has been challenged by the Department before the Hon'ble High Court, therefore, the same has not reached finality. The ld, CIT (A) further opined that the assessee company has arranged the Business affairs with the partnership firm SPI in such a manner that such arrangement is an obvious device of tax evasion. The ld. CIT (A) observed that the payment of remuneration was not allowed in the hands of the partnership firm SPI because the recipient w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also not offered the same for taxation taking a shelter behind the provisions of Section 28(v) of the Act. No doubt, the profits of the partnership firm are exempt u/s. 80-IB(4) of the Act, Even, if the partnership firm had not charged ₹ 40.12 crores as remuneration to the appellant company, the profits of the firm would have increased by this amount. Since the assessee is holding 97.5% share in the profits of the partnership firm, this amount of 40.12 crores would have otherwise come to the assessee in the firm of share of profit which again is exempt from taxation u/s. 10 (2A) of the Act, Therefore, in our considered opinion, the allegation that it is a case of tax evasion is ill-founded. The fact of the matter is that such payments were never re-characterized as royalty in earlier assessment years and the action of the First Appellate Authority in the year under consideration is nothing but based Upon assumptions and presumptions. No addition can be sustained which are based upon assumptions, surmises or conjectures. We, therefore, set aside the findings of the ld. CIT (A) and direct the A.O. to delete the amount of ₹ 40.12 crores re-characterized by the First Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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