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TMI Blog2021 (12) TMI 1467X X X X Extracts X X X X X X X X Extracts X X X X ..... nt registered in various regions in order to safeguard its product from any infringement. Further nothing has been placed on record to establish that the patent expenditure has been incurred by assessee on a new product. One aspect cannot be ignored that assessee incurs these expenses every year. Coming to the expensed incurred by assessee in respect of the drug called Dolenio , we note that it is sold by assessee in many countries. The expenses incurred by assessee towards Mutual recognition process variation is necessary based on any change in the packing of the drug like change in color etc., or shape of the drug, or even the change of supplier. The expenses incurred by assessee in respect of Dolenio during the years under consideration towards Mutual recognition process variation, Patent and Trade mark and other registration expenses, are be considered as revenue expenditure, allowable under section 37(1) of the Act. Annual fee/license fees paid the ledger account revels that these are recurring in nature, and hence cannot be treated to be one time payment. These are in respect of renewal of licence with the drug authorities in respective countries to continue to hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) erred in disallowing Product registration expenses without appreciating that same is in nature of capital in nature. Rs. 31,46,292/- 3. The learned CIT(A) further ought to have appreciated that Appellant following mercantile method of accounting, the product registration expenses have been charged off in the accounts constitutes as an expenditure allowable u/s 37(1) and hence disallowance is ought to be deleted. Rs. 31,46,292/- 4. The learned CIT(A) erred in disallowing expenditure to the tune of Rs. 31,46,292/- without appreciating the submissions of the Appellant Rs. 31,46,292/- 5. The learned CIT(A) erred in upholding the interest u/s 234B and 234C of the Act General 6. Without prejudice the disallowance as confirmed by the learned CIT (Appeals) are arbitrary excessive and ought to be reduced substantially. General 7. For these and such other grounds that may be urged at the time of hearing the Appellant prays that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Particulars Amount(in Rs.) License Renewal Fee-Dolenio 4,32,597/- Mutual Recognition Variation Expenses- Dolenio 1,25,43,851/- Patent-Sustained Release Drug Delivery System 29,62,433/- Patent Expenses- R D 3,26,277/- Trademark Expenses-Mktg 13,555/- Registration Expenses-RA 8,92,790/- Total 1,17,71,503/- 2.5 The Ld.AO after considering the submissions advanced by assessee held the Product development expenses to be capital expenditure, as assessee did not prove the expenses to be recurring in nature. He relied on the decision of Hon ble Supreme Court in case of R.B.Seth Moolchand Suganchand Vs.CIT reported in (1972) 86 ITR 647. The Ld.AO however granted depreciation @ 25 %. The Ld.AO observed that assessee had earned exempt free income from mutual funds of Rs.2,03,59,232/-. It was also noted by the Ld.AO that assessee had voluntarily disallowed Rs.18,52,411/- as expenditure under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Registration Expenses-RA 8,92,790 10,28,534 10. Rates Taxes Product Registration 1,57,541 Total 1,17,71,503 4. On perusal of impugned order, we note that for both years under consideration, item number 1-5 has been allowed by the Ld.CIT(A) as revenue expenditure against which revenue is in appeal and item no.6-10 has been upheld to be capital expenditure against which assessee is in appeal. In general for all these above expenses, the Ld.AR submitted that these are incurred every year by assessee, as has been submitted before the authorities below. He submitted that the above tabulated payments are in the nature of regulatory payments that are paid by assessee to the foreign Government. He submitted that, Dolenio related expenses: Dolenio is drug registered and sold by the company, in various countries and the expenses related to this product are: Annual fee - Dolenio- This is the annual renewal fees payable in various countries to sell the Dolenio serie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation expenses /MRP Variation as mentioned in S.No 2 for A.Y 2011-12 sl.No.8-10 for A 2012-13 are fees paid only when there is a variation in the registered product. These expenses were incurred only when there was variation from the registered patent. This variation may be on content of the drug or the raw material or the outlook of the drug or its Package. Examining the invoice other evidence, it is noticed that taxpayer has submitted few evidence like formA2 other forms ,which are country specific .These forms are to, inform the relevant regulatory bodies about the variation in the product registered . This fee is paid only when there is variation from registered product .This variation may not happen every year. The fee has been paid only when there was variation on the product registered. If there is no variation from the registered product ,than, there no need of payment of these fee. From this it very clear that these expenses are not incurring every year and these are not annual fee collected by Drug regulatory bodies across the globe. These are expenses incurred for the increasing/sustain the value of intangible asset i.e. patent registered. It means,these expenses w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in due course. Thus, to protect the rights, the innovation in the form of an Intellectual Property is registered locally in a particular regime. In the eyes of law, it is common asset if due process is not followed. Therefore, the expenses incurred to create such a property right assumes the character of it being incurred prior to asset coming into existence in that regime. Accordingly, these expenses can be considered as part of the creation of the asset and hence treated as capital. 5.4 The expenditure claimed by the appellant under product registration charges, is further incurred under various heads, as reported by the AO in the Remand Report (supra). 5.5 Further, in this regard, it has been brought to my notice that the DRP, while disposing off the petition filed by the appellant for the Asst. Year 2014-15 in File No. 08/DRP-112018-19, have held as under: 2.12.4 Having considered the submissions, and on perusal of the details filed, we note that the expenses incurred at SI. No. 1 to 4 i.e., Annual fee, License Renewal fee, MRP variation, Mutual Recognition, Variation expenses - pertain to expenses incurred for renewing the existing licences, variation in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to allow the expenditure to the extent of Rs. 1,29,76,448 out of total amount disputed in this appeal. 7. The admitted factual position is that the assessee is manufacturing pharmaceutical products. Those products have been branded with their distinctive trademarks. By the registration of the product the assessee has safeguard against infringement of its patent. By the registration of trademark and patent the assessee has exclusive right of use. By incurring the said expenditure the assessee has protection of its running business, It is argued that patent is a set of exclusive rights granted by a state to an inventor for a limited period of time for a public disclosure of an invention. The exclusive right granted to a patentee in most countries is the right to prevent others from making or using the patented invention without permission. The expenses incurred by us for carrying out various patent registration formalities including statutory fees prescribed in different countries are duly reflected in the copy of accounts, as above. All that the registration of patents did was to enable the Assessee Company to obtain a speedy and less expensive remedy against the infringement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. In respect of this submission, the revenue has not placed any thing contrary. It is an admitted fact that the assessee was already in the business of manufacturing of pharmaceutical products, and that the assessee also carries on scientific research work. For the protection of the result of the research the assessee has to get the patent registered. Enduring benefit is not the only criteria. An enduring benefit has to be coupled with the acquisition of an asset. There is nothing on record placed by the revenue to establish that there was a new product that was patented or in respect of which trade mark was registered by assessee during the years under consideration. 9. On perusal of ledger accounts placed at page 110 to 242 revels that payments have been made to statutory bodies either for approval or as statutory maintenance in foreign nations. Assessee has also made payments being annual fees to the Medical agencies in foreign nations. All these are recurring in nature. We are thus of the opinion that these payments are inextricably linked to the business of the assessee. Hon'ble Supreme Court in the case of Finlay Mills Ltd. (supra) opined as under: Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting staff should rank for pension. That sum was arrived at by an actuarial calculation on the basis that the sum would ultimately be exhausted when the object for which it was paid was attained. The House of Lords held that this payment was in the nature of capital expenditure and was therefore not an admissible deduction. Although in the opinions expressed by the different members of the House of Lords the line of approach is not completely the same, the principle stated by Lord Cave in his speech has been accepted as a safe test to distinguish capital expenditure from revenue expenditure. It was recognised that a sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of business, may yet be expended wholly and exclusively for the purposes of the trade. The Lord Chancellor observed that the question appeared to be a question of fact which was proper to be decided by the Commissioners upon the evidence brought before them in each case. The test that capital expenditure is a thing that is going to be spent once and for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allow the grounds raised by assessee and dismiss the grounds raised by revenue for both the assessment years. 12. Next issue is raised by Revenue in Ground no.4 for both the years under consideration. Revenue is alleged with the action of the Ld.CIT(A) in deleting the disallowance under section 14A read with Rule 8 D(2) (ii) of the Act. In the course of assessment proceedings, the Assessing Officer noted that the assessee has earned dividend income of Rs.3,14,10,280 which has been claimed as exempt under section 10(34) of the Act. The assessee had added back an amount of Rs.22,94,435, being 0.5% of the average value of the investment, as disallowance towards expenditure for earning exempt income as per clause (iii) of sub-Rule (2) of Rule 8D of the IT Rules, 1962. The Assessing Officer, however, made disallowance of further amount of Rs.1,39,55,097 towards interest expenditure to be disallowed under Rule 8D, On appeal, before the Ld. CIT(A), the addition made by the Ld.AO was deleted by observing as under: 6.1 Further, in the context of the disallowance u/s 14A in respect of which the appellant submitted that it had disallowed voluntarily Rs. 118,52,411 under Rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al and reserve Surplus totaling to Rs.1,29,35,94,928 and for assessment year 2013-14 the share capital and reserve Surplus totaling to Rs.1,21,85,03,570/- It is noted that the total investment made by assessee for the years under consideration totaled to Rs.34.27 crores and 32.95 crores respectively. Assessee during the years had suo moto disallowed Rs.1,18,52,411/- and Rs.16,80,670/- under Rule 8 D(2)(iii). If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. However this needs verification as on the date of investment. The cash flow statement would disclose as on the date of making investments, which had given rise to the exempted income, that the assessee had interest free funds available with it. In the interest of justice and equity, we deed it fit to remand the case to the Assessing Officer for fresh consideration. The Ld.AO shall afford reasonable opportunity of being heard to the assessee. The assessee shall prove its case that it is having interest free funds for making investments, by furnishing ..... X X X X Extracts X X X X X X X X Extracts X X X X
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