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TMI Blog2022 (8) TMI 1127X X X X Extracts X X X X X X X X Extracts X X X X ..... re - amount paid to Asean Patent Bureau - revenue or capital expenditure - HELD THAT:- We observe from the record that the ITAT in assessee s own case in particular A.Y. 2011-12 [ 2018 (2) TMI 2081 - ITAT MUMBAI] has decided in favour of the assessee and against the revenue. Disallowance of Consultancy charges - Consultancy charges paid to the consultants for the purpose of business only, we direct the Assessing Officer to verify the genuineness of the claim and if it is within the category of other consultancy charges which this bench as allowed in Ground we direct him to allow the same X X X X Extracts X X X X X X X X Extracts X X X X ..... y the above amount should not be disallowed. In response assessee vide letter dated 19.02.2016 submitted that except for the disallowance on account of the payment made to Dr. May Pharma and Ventures Corp Consultants all other disallowances have been deleted by the Ld. CIT(A) so it should 'not be disallowed again. Payment made to Dr. May Pharma which was disallowed by Ld. CIT(A) is allowed by ITAT for A.Y.2008-09 and A.Y. 2009-10 hence it should not be considered for disallowance during this year. Assessing Officer rejected the submissions of the assessee and proceeded to disallow the same and added to the total income by considering the same as capital in nature. 6. Aggrieved assessee preferred an appeal before the CIT(A)-22, Mumbai and filed the following submissions with regard to disallowance on R & D expenditure and professional fee: - "3.2 Appellant's Submission: Ground 1: Disallowance of R&D Exp: 162.32.595. Facts of the case: R & D Expenses incurred during the year are as per the separate sheet enclosed. As a result the AO has disallowed 162.38 Lacs u/s. 35(2AB). Submission of Appellant: Sale realisation cannot be reduced from revenue expenditure, since s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of the assessee Ld.CIT(A) sustained the additions made by the Assessing Officer on R&D expenditure and with regard to professional fee, he partly allowed with regard to Dr. May Pharma and Ventures Corp Consultants, he sustained the addition with the following observations: - "Next issue in this ground of appeal-3 is the disallowance of expenditure of Rs. 3,70,354/- made to Asian Patent Bureau (APB for short) as fees for product registration. Assessee company is engaged in the business of manufacture and sale of pharmaceuticals and appears to have incurred these expenses for the registration of various products developed by it with patents and registration office under the relevant law.' It means that the reason for the product registration was to make registering authority for the pharma product become aware of the product developed by the company and hence register the same as its owner and become entitled for the patent rights in the product which will endure for the benefit of the company for a period of more than 10/20/30 years as per the provisions of the patent law of the land. Thus, the process of product registration conferred an enduring benefit to the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Book which is the revised claim of the assessee which assessee has claimed before the Ld.CIT(A) relying upon the decision of the Hon'ble Karnataka High Court in the case of CIT v. Micro Lab Ltd. [383 ITR 0490] and he submitted the revised claim as under: - Asstt.Year- 2013-14 4 Comparative Working of Claim u/s 35(2AB) (Rupees in Crores) Original Claim AO & CIT-A Calculation Auditors Certificate DSIR-Certificate 3CL Revised Claim before AO / CIT-A & ITAT A A B C D E Capital Expenditure i Capital Expenditure - Note # 1 - 109.63 109.63 109.63 109.63 109.63 B Revenue Expenditure Total Revenue Expenditure as per Audited Accounts. - Note # 2 1,145.42 1,145.42 1,145.42 1,145.42 1,145.42 Note #3 (2) 1,145.42 918.63 1,145.42 918.63 918.63 ii Less : Revenue Income from R&D -. Note #4 861.33 857.75 857.75 857.75 - Net Revenue Expenditure -(3) 284.09 60.88 287.67 60.88 918.63 Total Eligible Expenditure (1) + (3) 393.72 170.51 397.30 170.51 1,028.26 C CALCULATION OF DEDUCTION 200% of the Total Eligible Expenditure 341.02 341.02 D Appellants' Calculation - [(A-1) * 2] + (A-2) Note #5 503.35 506.93 1,137.89 Amount Mention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7-08 to A.Y. 2011-12. The relevant orders are placed on record. 12. On the other hand, Ld.DR relied on the findings of the lower authorities and he brought to our notice Para No. 3.3 and Para No. 5.3 of the Ld.CIT(A) order. 13. Considered the rival submissions and material placed on record, with regard to enhanced claim of the assessee on R & D expenses u/s.35(2AB) of the Act, assessee made the excess claim u/s. 35(2AB) of the Act heavily relying on the decision of the Hon'ble Karnataka High Court in the case of CIT v. Micro Lab Ltd. (supra) and ongoing through the decision of above said case; the Hon'ble Karnataka High Court held as under: - "3. On the first question, the observations made by the Tribunal in the impugned order from paragraph Nos. 12 to 17 are as under: "12. We have heard the submissions of the Id. DR and the Id. counsel for the assessee and also perused the documents filed in paperbook. As we have already seen, the assessee carries on scientific research. It is in the business of manufacture of drugs and pharmaceuticals. It incurred expenditure on scientific research and the quantum of such expenditure on scientific research, which is a sum of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , such sales realization would go to reduce the expenditure on scientific research and that is why sales realization arising out of assets sold is required to be offset against R&D expenditure. The above explanation will be sufficient to hold that the order passed by the CIT(A) u/s. 154 of the Act is unsustainable. Nevertheless, we will also examine as to what is the exact nature of receipts from sale of products. 14. A copy of license and supply agreement which was filed by the assessee before the AO as well as CIT(A) is at pages 5 to 26 of the assessee's paperbook. The sale of products is nothing but the sale of Dossiers by the assessee to persons not associated with the assessee or its directors. In the course of carrying out the scientific research, the assessee prepares elaborate documents regarding the products that would emanate from carrying out scientific research. This would also include the requirement of health authorities for grant of license to approve the products for human use. The assessee gives the Dossiers so prepared to entities outside India, who are interested in getting the marketing authorization for the product in a particular territory. They pay to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We are, therefore, of the view that there is no merit in ground No.2 raised by the revenue and that the order passed by the CIT(A) DATED 9.4.2014 U/S. 154 of the Act cannot be sustained and the same is hereby reversed. Thus, ITA No.764/B/14 by the assessee is allowed, while ground No.2 raised by the revenue is dismissed." The aforesaid paragraphs show that the Tribunal has proceeded on the premise that when the regular work is in the nature of R&D work done and sold, it becomes a business income and chargeable as business income. It is only when the assets acquired in the process of carrying on R&D work, if they are sold, such realization would go to reduce the expenditure of scientific research. 4. In our view, the approach to the issue considered by the Tribunal is appropriate. In any case, no substantial question of law would arise for consideration as canvassed." 14. On a careful reading of the above decision, we observe that Hon'ble Karnataka High Court reviewed the DSIR Guidelines 5(vii) and observing that according to them in the process of carrying out R & D work, if the assessee acquires any assets or products that should not be disposed of without the appro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R brought to our notice that auditor of the assessee company had certified the expenditure incurred by them which include capital as well as revenue expenditure to the extent of Rs.1255.05 lakhs and assessee has credited the R&D services income in its Profit and Loss Account (in Schedule - 22 of the balance sheet notes to financial statements) to the extent of Rs.857.75 lakhs. As observed from the Hon'ble Karnataka High Court decision as per which assessee can exclude the income earned from the product emanating out of R & D work like dossier etc., in the given case assessee has only submitted the R&D services earned by the assessee and they were not submitted any details of the income earned by the assessee. 17. From the records, we observe that assessee is in R&D work for its business purposes as well as undertaking contract research. The income earned by the assessee may include income earned by the assessee for the mere services on contract research as well as certain products which is considered by the DSIR and excluded the same while approving the project and R & D expenditure for the purpose of claiming deduction u/s. 35(2AB) of the Act. Therefore, in our considered vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and against the revenue and the relevant findings are given below: - "25. It is not in dispute that the services of Dr. Dilip Sanvordekar have been utilized for the purposes of assessee's business. It is also not in dispute that the payments made by the assessee are genuine. As per the record, it is seen that and which has also been accepted by the A.O. that the services of Dr. Dilip Sanvordekar, Consultant have been utilized for some projects which are part of assessee's running business. Considering all these facts of the case, we do not find any reason to tamper with the findings of the ld. CIT(A) and accordingly we confirm the same. Ground No. 2 of Revenue's appeal is accordingly dismissed." 21. Facts being identical, respectfully following the above said decision, we allow the ground raise by the assessee. 22. With regard to Ground No. 4, which is in respect of confirming disallowance of Rs.5,85,448/- being the amount paid to John A. Macrerie as capital expenditure, we observe that in the earlier assessment year i.e., A.Y. 2012-13 the Coordinate Bench has remitted this issue back to the file of the Assessing Officer to follow the decisions made in A.Y. 2008-09 and 2009-10. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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