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TMI Blog2021 (12) TMI 583X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of the product licenses. The manufacturing was done in strict adherence to Product License and the labeling on products was of assessee s AE. The same is evident from Technical agreement (page no. 342-356 of the Paper Book) between the assessee and FDC-UK (AE). In case of non-AE sales, these expenses are to be borne by the assessee, which fact remains undisputed before us. Therefore, the adjustment of this component has rightly been allowed by Ld. CIT(A). Adjustment of Marketing Costs - The marketing costs differ with geographical conditions. Sales in local markets are prescription drugs and therefore, sale promotion forms major expenses. In exports, the marketing expenses are not as high as compared to local markets as the sale would be made to fixed distributors. Marketing costs may not vary with pack size but it would vary with selling price as marketing costs are calculated as percentage of selling price. Since Ld. TPO is comparing local sale price with that of export sale price, the adjustment of marketing expenses need to be allowed as the same are already incorporated in the selling price since expenses incurred in local markets would be high and therefore, selling price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eimburses the same to retailers. The assessee has also submitted its value chain of UK drug market and functions performed by each party in value chain to justify its margins and arm s length price. In the absence of any adverse findings by lower authorities, we concur with these submissions and accordingly, the assessee s plea is to be accepted. Accordingly, we direct Ld. AO / TPO to grant this adjustment. Wrong claim of R D Deduction u/s 35(2AB) for Jogeshwari Unit - expenditure has been accumulated as work-in-progress in earlier years and no deduction thereof has even been claimed by the assessee, in any manner - HELD THAT:-. The assessee has already furnished permission from Directorate General of Health Service in support of the fact that the technology became operative in this year only. We find that the Accounting Standard-26 (AS-26) on intangibles as issued by The Institute of Chartered Accountants of India mandate the assessee to recognize / capitalize intangibles only if it is probable that future economic benefits will flow to the enterprise, the asset is commercially viable and the cost of the asset can be measured reliably. Following the same, the assessee has capitali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... products - HELD THAT:- We find that the assessee is a pharmaceutical company engaged in the manufacturing of formulation (final medicinal products) and API (Active Pharmaceutical Ingredients). The pharmaceutical industry is prohibited from advertising its products and the biggest customer for this industry is practicing doctors who in the course of professional practice prescribe medicines for consumption by patients. Due to existence of competition in the market because of availability of pharmaceuticals from different suppliers, it would be necessary for the assessee to ensure awareness and visibility of its products amongst doctors as against advertising its products - The nature and the type of items distributed amongst doctors are not the type which can be considered as intended to influence the decisions of the Doctors. It could be gathered that the value of items given to doctors is generally below 1000/- per article. Assessee has incurred aggregate expenditure of 2922.18 Lacs during the year out of which expenditure of 1921.55 Lacs has been incurred between the period 01/04/2009 to 09/12/2009 whereas balance expenditure of 1000.63 Lacs has been incurred from 10/12/2009 to 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oceedings and therefore, there could be no occasion to doubt the same in this year. Hence, we delete the addition. Bogus purchases - receipt of certain information from Sales Tax Department, Maharashtra, it transpired that the assessee made suspicious purchases - HELD THAT:- As relying on assessee own case [ 2018 (9) TMI 2066 - ITAT MUMBAI] we direct Ld. AO to restrict the additions to the extent of 12.5% of suspicious purchases. Allocation of Corporate Expenses to 80-IB / 80-IC Units - reallocation of expenditure as paid to Vision Research foundation - assessee claimed deduction u/s 80-IB @ 30% on two units viz. Goa (ORS) and Goa (Unit-III) whereas it claimed deduction u/s 80-IC @100% on Baddi Unit - HELD THAT:- It is the submissions of Ld. AR that the same may not be reallocated since such contribution is in the form of contribution / donation and is not in any way related to any of the plants. Since it is in the nature of a corporate expense, no such allocation should be made. Concurring with the same, we direct Ld. AO consider the nature of receipt and if the same is in the form of donation, no allocation thereof should be made while computing the deduction. Exclusion of other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ements. This ground stand allowed for statistical purposes. X X X X Extracts X X X X X X X X Extracts X X X X ..... MACEUTICALS SA PTY LTD 6) The Ld. CIT(A) erred in making adjustments in ALP of LIBOR plus mark up of 3% relating to interest on loan given to the AE namely FDC Pharmaceuticals SA Pty Ltd, South Africa, without appreciating the fact that the interest charged on loan by the Assessee to its AE was at Arm's Length Price and hence the adjustment sustained by the Ld. CIT(A) may be deleted. 6.1) Without prejudice to the above, the adjustment of LIBOR plus mark up of 3% is very high and unreasonable in the facts of the present case and same may be reduced. DEDUCTION U/S 35(2AB) OF ₹ 3,29,67,717/- TOWARDS DEVELOPMENT OF E-COLI CLONE 7) The Ld. CIT(A) erred in disallowing a sum of ₹ 3,29,67,717/- claimed u/s 35(2AB) pertaining to corresponding expense of ₹ 2,19,78,478/- on the ground that it is ineligible for deduction as Assessee did not have Form 3CM without appreciating that no proper opportunity of hearing was given and Form 3CM is not a mandatory requirement in the facts of the present case and hence, deduction u/s 35(2AB) may be granted. 8) The Ld.CIT(A) erred in not adjudicating that deduction u/s 35(2AB) of ₹ 3,29,67,717 pertained to current year a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowable. DISALLOWANCE OF BALANCE PUBLICITY EXPENSES 16) The Ld. CIT(A) erred in remanding the issue of balance publicity expenses of ₹ 80,98,309/- to Ld. AO though Ld. CIT(A) has no power to do so and thus said direction may be set-aside and balance publicity expenses may be allowed. DISALLOWANCE OF ALLEGED BOGUS PURCHASE 17) The Ld CIT(A) erred in disallowing alleged bogus purchases of ₹ 65,56,421/- without appreciating that purchases were genuine and purchases of articles were made in the regular course of business duly supported by the goods received note from its godown, bills received from the supplying parties (who at that material point of time were not declared as defaulters by the Sales Tax department), payment by A/c Payee cheques, bank certificate reflecting amount credited to party's A/c, stock register, dispatch advice along with lorry receipts and distribution of articles so purchased in its normal course of business, and hence the disallowance may be deleted. 17.1) The Ld CIT(A) erred in disallowing genuine purchases of ₹ 7,31,027/- from Shakti Trading Company having valid TIN as on 31st March 2010 since its TIN cancellation date w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d circumstances of the case and in the law, the Ld.CIT(A) erred in granting the adjustment pertaining to marketing cost without considering the fact that the marketing cost does not vary by pack size and also the expenses incurred on marketing are already included in the actual expenses of the assessee. 3. Whether on the facts and circumstances of the case and in the law, the Ld.CIT(A) erred in granting the adjustment pertaining to functional differences without giving any reasons for the same. 4. Whether on the facts and circumstances of the case and in the law, the Ld.CIT(A) erred in granting the adjustment pertaining to functional differences, without prejudice, in not commenting upon the correctness of the computation done for granting the adjustment. 5. Whether on the facts and circumstances of the case and in the law, the Ld.CIT(A) erred in granting the adjustment pertaining to functional differences without taking notice of the act that as per the agreement produced by the assessee, no instances were found wherein it was mentioned that the assessee is going to give discount / adjustment on account of product license and lab analysis cost and these expenses are part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sallowance of Publicity Expenses 17. & 17.1 Addition on account of alleged bogus purchases 18. & 19. Allocation of Corporate Expenses to 80IB / 80IC units 20. & 22. Deduction u/s 80IB /80IC on scrap sales & allocation of certain R & D Expenses 23. General in Nature Additional Grounds 2.0 Deduction of Education and Secondary & Higher Education cess 3.0 & 4.0 Disallowance u/s 14A 1.0 Erroneous levy of interest u/s 234C 1.7 Similarly, the grounds of the revenue could be tabulated in the following manner: - G.Nos. Grounds / Issue 1. to 5. Grant of Various adjustment while computing ALP 6. & 7. Depreciation on intangible assets 1.8 The Ld. AR placed on record ground-wise chart to assail the additions as sustained in the appellate order. The Ld. CIT-DR, on the other hand, pleaded for dismissal of assessee's appeal. The Ld. DR also assailed the relief granted by Ld. CIT(A) in the impugned order. For the same, reliance has been placed on various judicial pronouncements, the copies of which have been placed on record. 1.9 We have carefully heard the rival submissions and perused relevant material on record. We have also deliberated on various judicial pronouncement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rk the transactions and compared product-wise margin earned on sales to AE vis-à-vis margin earned on sales made to unrelated parties in the export market as well as in the local market. One product viz. Chloramphenicol Eye-drops 0.5% 10ml. was not sold to any unrelated parties. Therefore, the margin on this product were compared with margin earned on sales of all types of eye-drops made to unrelated parties both local and export. The assessee computed product-wise %age margin on cost of sales to AE and compared the same with %age margin on cost of sales to non-AE. The same has been tabulated on para-7 of Ld. TPO's order. The product-wise margins on sales were computed by deducting total cost per unit from selling price. Certain adjustments were then made to per unit margin and %age margin on cost was computed which has been tabulated in para-8 of Ld. TPO's order. However, the assessee was asked to submit detailed working of the Arm's Length price (ALP) by comparing selling price of products exported to AE in comparison to products sold in local market by considering selling price of product sold in local market as the starting point and giving reasons for difference in adj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt made by the assessee on account of tabulated factors was denied. No adjustment was proposed against sales made to other AE i.e. FDC-SA. Aggrieved, the assessee preferred further appeal before Ld. CIT(A). 2.6 Regarding selection of most appropriate method (MAM), the Ld. CIT(A) noted that Cost-Plus-Method as adopted by the assessee was never rejected by Ld. TPO. The manner of computation resorted to by Ld. TPO was merely recasting of method adopted by the assessee. The assessee contested the rejection of 5 adjustments before Ld. CIT(A). Few of the adjustments were allowed whereas few of the adjustments were denied which has led to cross-appeal before us. The adjudication to the adjustments by Ld. CIT(A) was as under:- (i) Non-variable cost The assessee submitted that change in packing size would affect cost of packing and packing material and would require change in machinery, tools, dies etc. The Ld. TPO held that in case of change in packing size, these costs would not change substantially unless evidenced by the assessee. The Ld. CIT(A) confirmed the action of Ld. TPO on account of lack of data based evidence. (ii) Functional difference The Ld. TPO refused to grant this a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring only. The assessee performs the function of contract manufacturer. The product licenses were held by the AE who was also responsible for maintenance of the product licenses. The manufacturing was done in strict adherence to Product License and the labeling on products was of assessee's AE. The same is evident from Technical agreement (page no. 342-356 of the Paper Book) between the assessee and FDC-UK (AE). In case of non-AE sales, these expenses are to be borne by the assessee, which fact remains undisputed before us. Therefore, the adjustment of this component has rightly been allowed by Ld. CIT(A). (ii) Marketing Costs This adjustment was granted by Ld. CIT(A) by observing that the nature of marketing would be different in different geographical locations. Marketing costs also vary. The Ld. AR has submitted that marketing cost is actually incurred by the assessee for local as well as export sales to non-AEs. However, in case of sales to AE, the selling expenses were to be borne by AE and not the assessee. The marketing costs differ with geographical conditions. Sales in local markets are prescription drugs and therefore, sale promotion forms major expenses. In exports, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on AE only without any recourse to the supplier. In case of non-AE sales, the said liability would be on assessee. Therefore, this crucial factor would require adjustment in the selling price while benchmarking the transactions. We order so. (v) Competition We are of the opinion that the competition in two geographical locations would vary due to market conditions and government regulations prevailing in the market. The assessee, vide letter dated 06/01/2014, has submitted detailed chart scientifically quantifying the competition effect. The assessee has also produced invoices raised by the AE to its customers to prove competition effect. In UK, National Health Service determines reimbursement price of each drug and reimburses the same to retailers. The assessee has also submitted its value chain of UK drug market and functions performed by each party in value chain to justify its margins and arm's length price. In the absence of any adverse findings by lower authorities, we concur with these submissions and accordingly, the assessee's plea is to be accepted. Accordingly, we direct Ld. AO / TPO to grant this adjustment. 2.8 In the result, Ground No.2 of assessee's appeal stan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atory condition of claiming the benefit, the weighted deduction would not be available to the assessee. The expenditure would also be not allowable as revenue expenditure. However, the assessee would be eligible to claim depreciation on the same from this year onwards. Aggrieved, the assessee as well as the revenue is in further appeal before us. Our findings & adjudication 3.4 From the factual matrix, it could be gathered that though the technology was acquired by the assessee in earlier years, however, for commercial feasibility the technology had to be scaled up from 5 liters to 15 liters fermentation scale. Thus, further R&D work was involved. Till such time, the assessee debited all the related expenditure as 'Work-in-progress' and reflected the same in the Balance Sheet. It is undisputed fact that no deduction whatsoever has been claimed by the assessee against this expenditure in earlier years. During this year, the assessee's formulated protein received permission from Director General of Health Services (Page 389 of paperbook-2; letter dated 10/07/2009) for containerization of experimental batches of recombinant protein Filgrastim in pre-filled syringes from third pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er having complied with all the conditions for issuance of Form 3CM, the assessee has already applied in Form 3CK for this year vide letter dated 12/03/2010 (Page Nos. 430 to 438 of Paper Book-2; submitted with the DSIR on 23/03/2010). Further, the assessee has already obtained Form 3CM for the period from 01/4/2004 to 31/03/2007 as well as for the period from 01/04/2012 to 31/03/2015 for all its R&D Units (Pg. 426 to 429 of Paper Book- 2). In such a case, the ratio of decision of Hon'ble Gujarat High Court in CIT V/s Claris Lifesciences Ltd. (326 ITR 251) would squarely apply in favor of the assessee. In this decision, it has been held by Hon'ble Court that the approval of R&D facility by DSIR is sufficient to claim deduction u/s 35(2AB). This decision has been followed by coordinate bench of Mumbai Tribunal in Advance Enzyme Technologies P Ltd V/s ACIT (2020; 116 Taxmann.com 498) wherein it has been held that once existence of R&D facility was not disputed and expenditure for that purpose was genuine in nature and recognition to facility was valid during relevant period, then merely for reason of non-issuance of approval for certain period in prescribed Form 3CM by competent auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Consequently, revenue expenditure would be allowable as per actuals whereas depreciation would be allowable on capital expenditure incurred at Roha unit. Similar working was done for Goa unit-III. In other words, weighted deduction as claimed against both the units was denied to the assessee and revenue expenditure was allowed as per actuals whereas depreciation was allowed on the capital expenditure. 4.4 During appellate proceedings, to prove the fact of carrying out of R&D activities at these units, the assessee submitted additional evidences which were in the shape of DSIR approval for in-house R & D activities at these units for the period 01/04/2010 to 31/03/2015, patents filed for products developed at Roha unit, affidavit of persons clarifying their earlier statements and confirming that R&D activity took place outside Jogeshwari unit also. However, Ld.AO, in the remand report, taking a new ground, stated that the disallowance was justified in the absence of Form No. 3CM for these R&D units. For the same reason, Ld. CIT(A) rejected the affidavits and confirmed the stand of Ld. AO. Aggrieved, the assessee is in further appeal before us. Our findings and Adjudication 4.5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er fact borne out of the record is that all these officials have submitted sworn affidavits clarifying their earlier statements and confirming that R & D activity took place outside Jogeshwari unit also. These evidences have nowhere been controverted and no further investigation has been carried out. The Ld. CIT(A) has rejected the same on the ground that these were not pre-existing document and no efforts were made by lower authorities to examine / verify the same. 4.7 As against this, it is quite evident that the assessee, during the course of proceedings before lower authorities, furnished ample evidences to substantiate its claim. These evidences were as follows: - (i) DSIR Approval for in-house R&D activity at Roha and Goa Unit III for the entire period from 01/04/2007 to 31/03/2010 and from 01/04/2010 to 31/03/2015 (ii) Patent filed for products developed at Roha R&D namely Amlodipine and Lornoxicam. (iii) R&D Activity chart along with explanatory notes. (iv) Scheme of DSIR for granting recognition and registration to in-house R&D units. (iv) Diagrammatic representation of the flow of R&D activities. (v) Photos of R&D facility at Roha and Goa Unit III. (vi) List ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as submitted that since the expenditure fulfilled the conditions laid down u/s 37(1), the same were allowable business expenditure. 5.2 Regarding applicability of CBDT Circular No.5/2012 dated 01/08/2012 which provided that freebies given in violation to the Indian Medical Council (Professional conduct, etiquette and ethics) Regulations, 2002 would be inadmissible deduction, it was submitted that these rules were meant for medical professionals only and these rules would otherwise be applicable only from 01/08/2012 i.e. from the date on which the circular was issued. 5.3 However, rejecting assessee's submissions, Ld.AO opined that the Circular would apply to the assessee w.e.f. 10/12/2009 i.e. the date on which the Medical Council of India imposed the prohibition. Finally, the following publicity expenses incurred by the assessee from 10/12/2009 to 31/03/2010 were held to be illegal and inadmissible u/s 37(1): - No. Particulars Amt. (Rs.) 1. Books, Journals, reference articles ₹ 13.74 Lacs 2. Prescription pad /chit block ₹ 35.27 Lacs 3. Calendars, New year Diaries ₹ 10.42 Lacs 4. Items given for use in dispensary (stethoscope, BP apparatus, Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion and demonstration of nature of gifts proving it as an item for medical / pharmaceutical business. Aggrieved the assessee is in further appeal before us. Our findings and Adjudication 5.6 Upon careful consideration, we find that the assessee is a pharmaceutical company engaged in the manufacturing of formulation (final medicinal products) and API (Active Pharmaceutical Ingredients). The pharmaceutical industry is prohibited from advertising its products and the biggest customer for this industry is practicing doctors who in the course of professional practice prescribe medicines for consumption by patients. Due to existence of competition in the market because of availability of pharmaceuticals from different suppliers, it would be necessary for the assessee to ensure awareness and visibility of its products amongst doctors as against advertising its products. In other words, the assessee has to ensure that maximum number of doctors is made aware of the existence of the assessees' products as well as its availability. Therefore, it would be necessary for the assessee to incur such publicity expenditure so as to bring awareness and knowledge of the existence of its produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missible deduction. 5.8 We find that the issue of applicability of CBDT circular to pharmaceutical companies has been examined in various decision of this Tribunal and it has finally been settled that the Circular do not apply to AY 2010-11 as it was issued on 01/08/2012 and the same is not applicable retrospectively. The Mumbai Tribunal in Syncom Formulations (I) Ltd. V/s DCIT (ITA Nos. 6429/Mum/2012 & ors.; 23/12/2015 for AYs 2010-11 and 2011-12) has concluded that the aforesaid CBDT Circular No. 5/2012, dated 01/08/2012 would not be applicable to AYs 2010-11 & 2011-12 since the same was introduced only w.e.f. 01/08/2012. Similar is the view in Aristo Pharmaceuticals Pvt. Ltd. Vs. ACIT (ITA No.6680/Mum/2012 & ors.; AYs 2009-10, 2011-12 & 2012-13; 26/07/2018) wherein it has been held that MCI regulations would not be applicable to pharmaceutical companies. Further CBDT circular enlarging the scope of Indian Medical Council Regulation, 2002 could not be reckoned to have a retrospective effect. In this decision, the bench has referred to another decision of Tribunal in DCIT V/s PHL Pharma Ltd. [2017; 78 Taxmann.com 36). In the decision of ICPA Health Product Ltd. (ITA Nos.6244-45/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - DCIT V/s Esaote India (NS) Ltd. (53 CCH 0648 Ahmedabad Tribunal) - M/s. Unicure Remedies Pvt. Ltd V/s ACIT (ITA No. 3058/AHD/2014) - J.B. Chemicals & Pharmaceuticals Ltd (ITA No. 6075/Mum/2014) - Eisai Pharmaceuticals India Pvt. Ltd V/s DCIT (ITA No. 1381/Mum/2016) - Macleods Pharmaceuticals Ltd. Vs. ACIT (2016) 48 CCH 0298 (Mumbai ITAT) - DCIT V/s Bayer Pharmaceuticals Pvt. Ltd. (ITA No. 6222/Mum/2018) - India Medtronic Pvt. Ltd. V/s DCIT (ITA No. 1246/Mum/2016) - Troikaa Pharmaceuticals Ltd. V/s DCIT (ITA No. 2458/Ahd/2017) - Emcure Pharmaceuticals V/s DCIT (ITA No. 1532/Pun/2015) - Aishika Pharma (P.) Ltd. V/s ITO (106 taxmann.com 192; Delhi - Trib.) - Serum Institute of India Ltd. V/s DCIT (ITA No. 549/Pun/2016) 5.10 Therefore, considering the ratio of all the above decisions, we would hold that CBDT circular was not applicable to the assessee during this year. Accordingly, the promotional / recall items being distributed to doctors for ₹ 633.13 Lacs would not be hit by cited CBDT circular and therefore, these expenses would be an allowable deduction. We order so. 5.11 So far as the remaining items viz. books, journals, reference articles, presc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entirety of facts and circumstances, the impugned additions are not sustainable in law. By deleting the same, we allow ground nos. 14 to 16 of assessee's appeal. 6. Addition on account of alleged bogus purchases 6.1 Pursuant to receipt of certain information from Sales Tax Department, Maharashtra, it transpired that the assessee made suspicious purchases aggregating to ₹ 65.56 Lacs from 5 entities as detailed in para 5.1 of the assessment order. Notices issued u/s 133(6) to all the suppliers did not elicit any satisfactory response. Though the assessee supplied copies of invoices & other documents, however, many deficiencies were noted by Ld.AO in the same. The perusal of suppliers' bank statements established that there were huge cash withdrawals from their bank accounts at regular intervals. In the light of all these observations, these purchases were disallowed and added back to the income of the assessee. 6.2 During appellate proceedings, to substantiate these purchases, the assessee furnished Good Inward Transaction Report, Stock statement reflecting receipt and dispatch of goods, Lorry receipts, bank statements etc. These were subjected to remand proceedings. However ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated to above three units in net sales ratio, the details of which are as under: - Sr. No. Particulars Amount (Rs.) 1 Operating Expenses 1,51,74,178/- 2 Finance Expenses 1,10,51,559/- 3 Depreciation 98,52,309/- Total 3,60,78,046/- 7.4 It was noted by Ld.AO that R&D salary was booked by assessee in corporate office account only. However, R&D activity was done to enhance the profitability of manufactured goods. Therefore, the weighted deduction claimed on R&D revenue expenses as well as capital expenses were to be allocated amongst the manufacturing units on the basis of SVOP ratio. The activities like purchase for resale and loan licensee could not be linked with any R&D activity. Therefore, weighted deduction on R&D formulation, R&D biotech and other R&D was allocated on the basis of SVOP ratio which has been given in para 7.5 of the order. 7.5 The segmental results of the three units also contained receipts in the nature of sale of scrap of packing material and raw material which could not be said to be derived from industrial activity and therefore, the same was to be excluded while computing the deduction u/s 80-IB / 80-IC. Similarly, export incentives as well ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s mentioned at Serial Nos. C-1 to 3 above pertains to Head Office Plant & Machinery and the same has no connection with Sec. 80-IB/80-IC units. Similarly, it is the submission of Ld. AR that the Interest expense should not be allocated as the assessee has not made any specific borrowings for setting up of 80-IB / 1C unit and its working capital requirement is met by the funds generated from the profits made by the unit. 8.2 Finding strength in the aforesaid arguments, we direct Ld. AO to re-consider the factual matrix as submitted before us and re-adjudicate the issue of allocation of deprecation as mentioned at Serial Nos. C-1 to 3 and interest expenditure as mentioned at serial no.B-2. 8.3 Regarding allocation of R&D expenses of ₹ 1022.62 Lacs to Sec.80-IB / 1C units, we find that the assessee has R&D centers at Jogeshwari, Roha and Goa Unit-III. The R&D expenses pertain to formulations, synthesis and foods. The drugs being developed by R&D formulations is manufactured in all Sec.80-IB/ 1C units. The re-allocation made by Ld. AO and the adjudication of Ld. CIT(A) could be summarized as under: - No. Particulars of R&D Deduction Amount (Rs.) Remarks 1 Formulation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot; within the ambit of section 80IB. It was immaterial that the assessee was doing the job of forging also for customers and was charging them on job work basis or on the basis of labour charges. It would still be qualified as carrying on eligible business under Section 80-IB. The activities of the assessee were in giving heat treatment for which it had earned labour charges and job work charges. It could thus be said that the assessee had done a process on the raw material which was nothing but a part and parcel of the manufacturing process of the industrial undertaking. These receipts could not be said to be independent income of the manufacturing activities of the undertaking of the assessee and thus could not be excluded from the profits and gains derived from the industrial undertaking for the purpose of computing deduction under Section 80-IB. These were gains derived from the industrial undertaking and so entitled for the purpose of computing deduction under Section 80-IB. There could not be any two opinions that manufacturing activity of the type of material being undertaken by the assessee would also generate scrap in the process of manufacturing. The receipts from sale o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the recent decision of Hon'ble Karnataka High Court in Sobha Developers Ltd. V/s DCIT (2021; 125 Taxmann.com 72). 9.3 Upon perusal of assessee's financial statements as placed on record, it could be gathered that the assessee has sufficient opening and closing free funds in the shape of share capital and reserves to make the investments. The free funds are way more than the investments made by the assessee and therefore, as per cited decisions, the presumption would run in assessee's favor that the investments were made out of free funds available with the assessee. Further, in terms of cited decision of special bench, no such disallowance could be made while computing Book-Profits u/s 115JB. Therefore, the additional disallowance as made by Ld. AO while computing income under normal provisions as well as while computing Book-Profits u/s 115JB is not sustainable in law. The Ld. AO is directed to delete the same. This ground stand allowed. 10. Claim of Education Cess 10.1 In this additional ground, the assessee seek deduction of education cess and secondary & higher education cess amounting to ₹ 105.97 Lacs in terms of the decision of Hon'ble Bombay High Court in Sesa Goa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under: "We have heard the rival submissions and perused the material before us. We find that the levy of interest u/s. 234B and 234C in case of companies governed by MAT provisions was finally settled by the Hon'ble Apex Court on 7.1.2011, that before that the assessees were under bona-fide belief that they had not to pay adv tax as per the provisions of Sec.207/208 of the Act, that after 07.1.2011 position became very clear that the assessees to be taxed u/s.115 JB would also have to pay advance tax. Considering the peculiar facts and circumstances of the case, we are of the opinion that interest should be levied for the default of March installment only and not for the earlier three instalments. The AO is directed to recalculate the interest accordingly." 11.2 Finding considerable strength in the above arguments, we admit this ground of appeal. Accordingly, we direct Ld. AO to bring on record the relevant factual matrix for this issue and adjudicate the issue of levy of interest u/s 234C in the light of above judicial pronouncements. This ground stand allowed for statistical purposes. Conclusion 12. The assessee's appeal stand partly allowed whereas the reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e are incurred for business purpose and hence, disallowance may be deleted. 8.1) Without prejudice to the above, the Ld CIT(A) erred in disallowance of entire expense on promotional items given to stockists of ₹ 2,47,23,103/- u/s 37(1) though he accepted that same were legally allowable. 9) The Ld CIT(A) erred in disallowing promotional items given to doctors with name of Assessee's products embossed on them of ₹ 21,34,34,269/- and gifts on occasions of ₹ 13,71,745/- u/s 37(1) without appreciating that said expenses are incurred wholly and exclusively for business and Assessee has proved that same are incurred for business purpose and hence, disallowance may be deleted. 9.1) Without prejudice to above, the Ld CIT(A) erred in disallowing entire expense on promotional items given to doctors with name of Assessee's products embossed on them and gifts on occasions u/s 37(1) though he accepted that same were legally allowable. DISALLOWANCE OF BALANCE PUBLICITY EXPENSES, ADVERTISEMENT EXPENSES AND SALES PROMOTION EXPENSES 10) The Ld CIT(A) erred in remanding the issue of balance publicity expenses, advertisement expenses and sales promotion expenses a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the circumstances of the case, Education Cess & Secondary and Higher Education Cess on Income Tax and Dividend Distribution Tax may kindly be allowed as a deduction in computing total income under the normal provisions of the Act. 3.0 That on the facts and in the circumstances of the case, the Ld. A.O. ought not to have made proportionate disallowance pertaining to interest u/s 14A under the normal provisions of the Act since the appellant had sufficient interest free funds available to make such tax free investment. 4.0 That on the facts and in the circumstances of the case, disallowance u/s 14A made under the provisions of section 115JB of the Act may kindly be allowed. 5.0 That on the facts and in the circumstances of the case, export incentives received under Focus Product Scheme (FPS)/Market Linked Focus Product Scheme (MLFPS) of the Foreign Trade Policy being in the nature of capital receipt may kindly be excluded in the computation of total income under the normal provisions of the Act as well as in computing Book Profits u/s 115JB of the Act. After due consideration of material on record, our adjudication would be as given in succeeding paragraphs. 14. Gr. Nos. 3 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. Books/Journals/Reference article 66,08,454 Allowed subject to verification by AO 5. Calendars/ New Year Diaries /Greeting Cards 45,81,960 -do- 6. Gift given for child patients 47,18,880 -do- 7. Product sample box 6,29,715 No decision 8. Pens 98,10,215 Allowed subject to verification by AO 9. Gifts on occasion 13,71,745 -do- 10. Medical Utility Items given for use in Dispensary 1,35,13,014 -do- 11. Brand Reminders 21,34,34,269 Disallowed Total (II) 30,79,58,162 Grand Total (I + II) 34,31,58,398 The assessee has also incurred Advertisement expenses of ₹ 18.40 Lacs and Sales Promotion expenses of ₹ 135.90 Lacs. The Ld. AO has disallowed aggregate expenses under these three heads for ₹ 3585.89 Lacs primarily on the contention that such expenses are nothing but gift items given to doctors in contravention to the prohibition imposed by Medical Council of India (MCI) Rules as applicable from 10/12/2009. The disallowance was reduced by an amount of ₹ 102.63 Lacs since separate disallowance was made in that respect on account of alleged bogus purchases. In other words, the entire expenditure of ₹ 3483.26 Lacs was disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ower authorities along with requisite documentary evidences. In such an eventuality, the disallowance of the same could not be held to be justified, from any angle. Therefore, we direct Ld.AO to allow the deduction of these expenses. 15.5 In nutshell, the disallowance of ₹ 3483.26 Lacs as made by Ld.AO is not sustainable. By deleting the same, we allow ground nos.8 to 10 of the appeal. 16. Gr. No.11 : Addition on account of alleged bogus purchases 16.1 Similar to AY 2010-11, the assessee has been saddled with addition of ₹ 103.12 Lacs of suspicious purchases pursuant to receipt of certain information from Sales Tax Department, Maharashtra on the basis of which it was alleged that the assessee made suspicious purchases aggregating to ₹ 103.12 Lacs from 3 entities as detailed in the assessment order. The Ld. AO disallowed the same on the basis of assessment proceedings of AY 2010-11. The Ld. CIT(A) confirmed the addition against which the assessee is in further appeal before us. 16.2 Since facts are pari-materia the same as in AY 2010-11 qua this issue, we estimate the addition of 12.5% against these purchase which comes to ₹ 12,89,006/-. The balance addi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om 96) and the decision of Hon'ble Rajasthan High Court in Chambal Fertilizers and Chemicals Ltd. V/s JCIT (ITA No.52/2018 dated 31/07/2018). 20.2 As directed in AY 2010-11, the issue is admitted and restored back to the file of Ld.AO on similar directions. The Ld. AO is directed to verify the claim of the assessee and allow the deduction in terms of the cited decisions. This ground stand allowed for statistical purposes. 21. Deduction of Export Incentives 21.1 It has been submitted by Ld. AR that the assessee has credited to its Profit & Loss Account, certain export incentives in the form of Focus Market Scheme (FMS) / Market Linked Focus Product Scheme (MLFPS) under the Foreign Trade Policy amounting to ₹ 52.04 Lacs. The same is stated to be included under the head 'export incentives' in the Statement of Profit & Loss Account. The Ld. AR submitted that incentive was granted as the assessee made export to various potential new markets and not for all markets. The incentive was given for exploring the new market from a long-term perspective. Therefore, applying the purpose test, the said incentive would be capital in nature and not includible in normal income as well as wh ..... X X X X Extracts X X X X X X X X Extracts X X X X
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