Case Law Details
DCIT Vs Troikaa Pharmaceuticals Ltd. (ITAT Ahmedabad)
ITAT Ahmedabad held that the assessee (pharmaceutical company) is not entitled for claiming deduction under section 37(1) of the Income Tax Act on account of freebies given to the doctors.
Facts- The assessee is a public company and engaged in the business of manufacturing of Drugs & Pharmaceuticals. During the year, the assessee has claimed certain expenditures aggregating to Rs. 10,66,27,149/- under the head business promotions.
AO was of the view that expenditures were incurred in violation of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulation 2002 and thus, the same needs to be disallowed as per the CBDT Circular. Accordingly, the AO purposed to disallow the same by issuing a show cause notice to the assessee.
AO not being satisfied with the contentions of the assessee, AO disallowed Rs. 5,31,91,547/- and added to the total income of the assessee. CIT(A) partly allowed the appeal. Being aggrieved, both revenue and assessee has preferred the present appeal.
Conclusion- CBDT Circular No. 5 of 2012, forbids medical professionals and their professional associates from accepting any form of incentives or “freebies” from the pharmaceutical and allied health sector industries. In the said circular, it was also made clear that any costs incurred in providing the freebies or those like them would be considered illegal expenses in violation of Regulation 6.8.1 of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (the Regulations) in pursuance to the explanation attached to section 37(1) of the Act. Accordingly, the deductions for having supplied freebies and written them off as business expenses by the companies in the pharmaceutical and allied health industries, as well as any other assesses will be denied.
Hon’ble Supreme Court, in the case of M/s. Apex Laboratories (.) Ltd., making the Circular applicable on pharmaceutical companies and holding the judgment against the assessee, highlighted on the essence where the freebies or gifts have the potential to influence or manipulate the prescription of a medical practitioner which can be incentivize the doctor’s intention to avail more luxurious and expensive freebies offered by the pharmaceutical companies.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
The captioned appeals and CO have been filed at the instance of the Revenue and the assessee against the separate orders of the Learned Commissioner of Income Tax (Appeals)-8, Ahmedabad (in short “Ld. CIT(A)”) arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here-in-after referred to as “the Act”). The assessee has filed the Cross Objection in the Revenue’s appeals bearing ITA No. 107/AHD/2020 for the Assessment Year 2013-14.
2. First, we take up ITA No. 107/AHD/2020, an appeal by the Revenue for A.Y 2013-14. The Revenue has raised following grounds of appeal:
1. Whether the Ld.CIT(A), has erred in law and on facts in deleting the disallowance of promotion expenses amounting to Rs.2,42,73,068/- u/s. 37(1) of the IT Act.
2. Whether the Ld. CIT(A) has erred in law and on facts in deleting the disallowance of depreciation on electric installation of Rs.1,36,285/-
3. Whether the Ld. CIT(A) has erred in law and on facts in deleting the disallowance of foreign commission expenses of Rs.1,37,26,983/-
4. Whether the Ld. CIT(A), has erred in law and on facts in deleting the disallowance of claim amounting to Rs.1,22,29,000/- incurred outside the approved facility u/s.35(2AB) ?
5. Whether the Ld. CIT(A) has erred in law and on facts in deleting the disallowance of deduction u/s.80IC of the Act amounting to Rs.37,44,802/- in respect of R & D expenses?
3. The first issue raised by the Revenue is that the learned CIT-A erred in deleting the addition of Rs. 2,42,70,068/- on account of disallowances of promotion expenses under section 37(1) of the Act.
3.1 The facts in are brief that the assessee is a public company and engaged in the business of manufacturing of Drugs & Pharmaceuticals. During the year, the assessee has claimed certain expenditures aggregating to Rs. 10,66,27,149/-under the head business promotions. The details of the same stand as under:
| Sr. No. | Particulars | Amount Claimed as expenditure |
| 1 | Business Convention | Rs.1,59,662/- |
| 2. | CME Expenses | Rs.22,65,108/- |
| 3. | Exhibition Expenses | Rs.10,35,967/- |
| 4. | MCM Expenses | Rs.25,65,562/- |
| 5. | Oher Business Convention Expenses | Rs.26,454/- |
| 6. | Patron Networking Expenses | Rs.78,61,571/- |
| 7. | Promotional Materials | Rs.3,51,38,004/- |
| 8. | Sales Promoion Expenses | Rs.72,94,225/- |
| 9. | Stationary & Printing For Field Staff | Rs.3,75,355/- |
| 10. | Travelling expense for Doctors | Rs.32,21,338/- |
| 11. | Suprabhat Campaign |
Rs.75,39,670/- |
| 12. | Paron Networking Expenses (IDBI) | Rs.1,62,37,214/- |
| 13. | Promotional Materials(ABC) | Rs.12,13,940/- |
| 14. | Promotional Materials (GHC) | Rs.1,02,12,210/- |
| 15. | Travelling expense for Doctors (IS) | Rs.11,442,529/- |
| 16. | Taxi Expenses for Doctors | Rs.38,340/- |
| Total | Rs.106,627,149/- |
3.2 The AO was of the view that above expenditures were incurred in violation of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulation 2002 and thus, the same needs to be disallowed as per the CBDT Circular No. 5/2012 dated 01-08-2012. Accordingly, the AO purposed to disallow the same by issuing a show cause notice dated 13-01-2014 to the assessee.
3.3 The assessee in response to such show cause notice explained the nature of expenses incurred under each sub-head as discussed above. The gist of assessee’s submission is that all the expenses were incurred to promote and spread the awareness about its products which were necessary for the growth of its business. Generally, these expenses are incurred by every assessee engaged in the pharmaceuticals industry. The assessee accordingly contended that all these expenses were incurred wholly and exclusively for the purpose of the business and therefore, the same are allowable under section 37 of the Act. The assessee also submitted that the Code of Ethics issued by the Medical Council is applicable to the doctors only and not to the manufacturer of pharmaceuticals products. Therefore, there was no violation of the law committed by it as alleged by the AO.
3.4 However, the AO disagreed with the contentions of the assessee and after considering the facts in detail made the disallowance of certain expenses on ad hoc basis and some of the expenses in full which were falling under the head sales promotion expenses. As such the AO in aggregate made the disallowance of ₹5,31,91,547.00 and added to the total income of the assessee.
4. Aggrieved assessee preferred an appeal to learned CIT-A who partly allowed relief to the assessee.
4.1 Against the finding of the learned CIT-A, both the revenue and the assessee are in appeal before us. The revenue is in appeal against the relief granted by the learned CIT-A for an amount of Rs. 2,42,73,068 whereas the assessee is in appeal against the confirmation of the addition by the learned CIT-A for an amount of Rs. 2,89,18,509 and 1,06,925.00 only. The assessee has challenged the confirmation of the addition in ITA No. 78/AHD/2020 on the ground reproduced as under:
1. The disallowance of u/s.37(1) of the Act of Rs.2,89,18,509/- confirmed by the Ld. CIT(A) may kindly be deleted.
2. The disallowance of Rs.1,06,925/- on account of business convention expenses confirmed by the Ld. CIT(A) may kindly be deleted.
4.2 The learned DR before us contended that the freebies given to the doctors are not allowable deduction under the provisions of explanation to section 37 of the Act. The learned DR in support of his contention has referred to the judgement of Hon’ble Supreme Court in the case of M/s Apex Laboratories (P.) Ltd. v. Dy. CIT reported in 135 taxmann.com 286.
4.3 On the contrary, the learned AR before us filed a containing the gist of his arguments running from pages 1 to 9 and contended that the issue regarding the freebies to the doctors has already been decided in its favour by the ITAT in its own case in the earlier assessment years. The learned AR in support of his contention drew our attention to the order of the ITAT bearing ITA No. 2458/AHD/2017, 939 and 1129/AHD/2019 for the assessment years 2010-11 to 2012-13.
4.4 The learned AR also pointed out that disallowance on account of freebies to the doctors was brought under the statute by the Finance Act 2022 applicable from 01-04-2022. Furthermore, the Hon’ble Supreme Court delivered the judgement in the case of Apex laboratories prior to such amendment. Therefore, the learned AR contended that the principles laid down by the Hon’ble Supreme Court cannot be applied in the given case for the year in dispute.
4.5 Both the learned DR and the AR before us vehemently supported the order of the authorities below to the extent favourable to them.
5. We have heard the rival contentions of both the parties and perused the materials available on record. Based on the judicial trend, freebies given by pharmaceutical companies were allowed as a deduction under section 37(1) of the Act for all the expenditures which fall outside the ambit of Section 30 to 36 of the Tax Act. These expenses were considered to have been incurred wholly or exclusively for business or professional purposes.
5.1 However, the CBDT Circular No. 5 of 2012, forbids medical professionals and their professional associates from accepting any form of incentives or “freebies” from the pharmaceutical and allied health sector industries. In the said circular, it was also made clear that any costs incurred in providing the freebies or those like them would be considered illegal expenses in violation of Regulation 6.8.1 of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (the Regulations) in pursuance to the explanation attached to section 37(1) of the Act. Accordingly, the deductions for having supplied freebies and written them off as business expenses by the companies in the pharmaceutical and allied health industries, as well as any other assesses will be denied.
5.2 Earlier there was a confusion as to whether the Circular will be applicable to pharmaceutical companies or not but after the judgment of Hon’ble Supreme Court in the case of M/s Apex Laboratories (P.) Ltd. (P.) Ltd. v. Dy. CIT reported in 135 taxmann.com 286, there remains no confusion that the same would apply to pharmaceutical companies. In the case of M/s Apex Laboratories (P.) Ltd. despite the Hon’ble Supreme Court making the Circular applicable on pharmaceutical companies and holding the judgment against the assessee, highlighted on the essence where the freebies or gifts have the potential to influence or manipulate the prescription of a medical practitioner which can be incentivize the doctor’s intention to avail more luxurious and expensive freebies offered by the pharmaceutical companies. The relevant extract of the judgment is extracted below:
33. Thus, pharmaceutical companies’ gifting freebies to doctors, etc. is clearly “prohibited by law”, and not allowed to be claimed as a deduction under section 37(1). Doing so would wholly undermine public policy. The well-established principle of interpretation of taxing statutes – that they need to be interpreted strictly – cannot sustain when it results in an absurdity contrary to the intentions of the Parliament.
5.3 The meaning of gift/freebie has not been defined in the Circular. Generally, the word gift refers to the transfer of certain existing movable or immovable property voluntarily and without any direct or indirect consideration. A gift is understood to be something that neither the donee ever demanded nor for which the donee can be compelled to give back something in return to the donor. However, the intent behind giving gifts to a medical practitioner has been observed to be for the motive and purpose to influence the prescription of the medical practitioner with the intention of seeding the medicines/products of such donor pharmaceutical companies to the patients at a preferential level. Thus, in view of the above, we hold that the assessee is not entitled to the deduction on account of the freebies given to the doctors.
5.4 At this juncture, it is important to note that the AO has made the disallowance of certain items of the expenses falling under the head business promotion expenses on ad-hoc basis which is not permissible in the eyes of law. Likewise, the learned CIT-A has also allowed and disallowed the expenses incurred by the assessee considering the date i.e. 1 August 2012 when the CBDT circular bearing number No. 5 of 2012 was issued.
5.5 Before parting, we are of the considered view that only so much of the expenses involving freebies to the doctors shall be subject to disallowance. As the basis adopted by the AO and the ld. CIT-A is not in alignment with the finding of the Hon’ble Supreme Court as discussed above. For this limited purpose, we are inclined to set aside the issue to the file of the AO for fresh/ de-novo verification of the expenses falling under the category of freebies. It is also equally important to note that the AO in the set aside proceedings shall not make the disallowance exceeding the disallowance originally made in the assessment framed under section 143(3) of the Act. Hence, the grounds of appeal of the revenue and the assessee are allowed for statistical purposes.
6. The next issue raised by the Revenue is the learned CIT-A erred in deleting the disallowance of depreciation on electrical installations for Rs. 1,36,285/- only.
7. The assessee during the year under consideration has claimed deprecation on Electrical Installation for Rs. 3,09,321/- @ 15% by treating the same as part of plant and machinery. The assessee, in addition to the above, also claimed additional depreciation of Rs. 33,178/- only on the same. The assessee in support its contention, treating the electrical installation as plant and machinery, submitted that the Electrical Installations are integral part of plant and function along with the plant only. A such the impugned electrical installations are incapable of being used separately or independently from the plant and Machinery. Therefore, the same are part and parcel to the plant and machinery and eligible for depreciation along with block of assets being plant and machinery. The assessee further claimed that electrical fittings like fans etc. were also installed but the same was added to the block of furniture and fixture. However, these electrical installations are used along with plants and machinery. Accordingly, the same was shown in the block of plants and machinery.
7.1 The submission of the assessee was rejected by the AO by holding that the depreciation schedule explicitly provides the rate of depreciation for electrical fitting which stand at @ 10% only. Likewise, the additional depreciation is only applicable in the case of installation of plant and machinery but not on electrical installation. Therefore, the AO disallowed the excess depreciation of Rs.1,03,107/- and additional depreciation of Rs. 32,178/ and added to the total income of the assessee.
8. Aggrieved assessee preferred an appeal before the learned CIT-A who allowed the appeal of the assessee by observing that the issue is covered in favour of the assessee by the order of this Tribunal in the own case of the assessee for the AY 2005-06 as well as of subsequent years.
9. Being aggrieved by the order of the learned CIT-A, the Revenue is in appeal before us.
9.1 The learned DR before us reiterated the finding contained in the assessment order by placing his reliance therein.
9.2 On the other hand, the learned AR before us submitted that the issue on hand is covered in assessee’s favour by the order of this tribunal in its own case of the assessee for the AY 2009-10 bearing ITA No. 2028/Ahd/2013. The ld. AR vehemently supported the order of the Ld. CIT-A.
10. We have heard the Rival contentions of both the parties and perused the materials available on record. At the outset, we find that the issue of depreciation allowance on electrical installation came before this tribunal in own case of the assessee in ITA No. 2028/Ahd/2013 corresponding to A.Y. 2009-10 where the coordinate bench vide order dated 16-08-2016 decided the issue in favour of the assessee by observing as under:
12. In ground no. 3, the Assessing Officer is aggrieved that the learned CIT(A) erred in “deleting the disallowance of Rs 10,66,974 made on account of electric installations”.
13. Learned representatives fairly agree that this issue is also covered, in favour of the assessee, by order dated 9th July 2010 of a coordinate bench, in assessee’s own case for the assessment year 2005-06. Learned CIT(A) has merely followed this decision. Respectfully following this binding judicial precedent, we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter.
14. Ground no. 3 is also dismissed.
10.1 The issue on hand is squarely covered by the order of the coordinate bench in the own case of the assessee as discussed above. Before us, no material has been placed on record by the Revenue to demonstrate that the decision of the Tribunal as discussed above has been set aside / stayed or overruled by the Higher Judicial Authorities. Before us, the Revenue has not placed any material on record pointing out any distinguishing feature in the facts of the case for the year under consideration and that of earlier years nor has placed any contrary binding decision in its support. Therefore, respectfully following the same, we uphold the finding of the learned CIT-A. Hence, the ground of appeal raised by the Revenue is hereby dismissed.
11. The next issue raised by the Revenue is that the learned CIT-A erred in deleting the disallowance of commission expenses of Rs. 1,37,26,983/- under section 40(a)(ia) of the Act.
12. The assessee in the year under consideration made payment of commission of Rs. 1,37,26,983/- to foreign agent without deducting withholding tax under section 195 of the Act. The assessee explained that commission was paid to different agents based in different foreign countries for services provided by them outside India. They do not have business establishment in India in any manner. Therefore, the payment made to those agents are not taxable in India and accordingly, it was not required to deduct withholding tax.
12.1 However, the AO disagreed with the submission of the assessee by observing that the commissions charges paid to the agents were in the nature of fee for managerial or consultancy services which falls under the ambit of “Fee for Technical Services” as provided under the provisions of section 9(1)(vii) of the Act. Thus, the assessee was required to deduct the withholding tax as per the provisions of section 195 of the Act but failed to do so. Therefore, the AO disallowed the impugned commission expenses by invoking the provisions of section 40(a)(ia) of the Act and added the same to the total income of the assessee.
13. The aggrieved assessee preferred an appeal before the learned CIT-A, who allowed the appeal of the assessee by following the order of his predecessor in the own case of the assessee for AY 2009-10 to 2012-13 and order of Tribunal in case of the assessee for A.Y. 2009-10 in ITA No. 2028/Ahd/2013.
13.1 Being aggrieved by the order of the learned CIT-A, the Revenue is in appeal before us.
13.2 Both the ld. DR and AR before us vehemently supported the order of the authorities as favourable to them.
14. We have heard the rival contentions of both the parties and perused the materials available on record. At the outset, we find that the identical issue whether the assessee was required to deduct withholding tax on commission paid to foreign agent or not came before this tribunal in own case of the assessee in ITA No. 2028/Ahd/2013 corresponding to A.Y. 2009-10 wherein the coordinate bench vide order dated 16-08-2016 decided the issue in favour of the assessee by observing as under:
3. So far as this grievance is concerned, learned representatives fairly agree that the issue is covered by the decision of a coordinate bench of this Tribunal, in the case of ITO Vs Excel Chemicals India Pvt Ltd (ITA No 5/Ahd/16; order dated 29th June 2016). Learned counsel, however, hastens to place his reliance on the stand of the Assessing Officer, and that, in the present case, reliance has been placed on Section 9(1)(vii) rather than 9 (1)(i) as was the case in the Excel Chemicals (supra).
4. As learned counsel rightly points out, the issue, as to whether the commission paid to non resident agents could be disallowed when it was paid without deduction of tax at source under section 195, came up for consideration in the case of Excel Chemicals (supra). Rejecting the contentions of the revenue, the coordinate bench, inter alia, observed as follows:
3. To adjudicate on this appeal, only a few material facts need to be taken of. The assessee before us is a resident company engaged in the business of trading in chemicals. During the course of the scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has claimed deduction of Rs 58,73,635 in respect of the commission paid, out of which sums aggregating to Rs 51,79,355 were paid to be non-resident entities without any tax withholding at source. In response to the Assessing Officer’s requisition to show cause as to why these payments not be disallowed under section 40(a)(i), for want of appropriate tax withholding at source, it was explained by the assessee that the sale commission was paid in respect of services rendered abroad, and, as such, no tax was deductible at source. Since there was no tax deduction at source in requirement, according to the assessee, there could not have been any occasion to invoke disallowance under section 40(a)(i). The assessee also referred to, and relied upon, certain judicial precedents in support of the proposition that unless the recipient of commission is carrying on business in India, through a permanent establishment, the sales commission so paid to non-resident entities is not taxable in India. None of these submissions, however, impressed the Assessing Officer. The Assessing Officer noted that under section 5(2)(b) of the Act, a nonresident assessee is taxable in India in respect of all his incomes accruing or arising in India and incomes deemed to accrue or arise in India, and that, by the virtue of deeming fiction under section 9(1)(i), income accruing or arising in India, directly or indirectly through any business connection in India or through any source of income in India, shall be deemed to accrue or arise in India. He then referred to a ruling of Hon’ble Authority for Advance Ruling, in the case of SKF Boilers and Driers Pvt Ltd In Re [(2012) 343 ITR 385 (AAR)] in support of the proposition that commission remitted abroad to non-resident agent rendering services abroad, was income accruing or arising in India, and the fact that the non-resident agent rendered services abroad was wholly irrelevant for the purpose of determining situs of their income. It was also, according to the Assessing Officer, held in the said case that since the right to commission arose in India, for the simple reason that the orders were executed in India. The Assessing Officer was of the view that “the facts of the assessee’s case are identical to the afore cited case since assessee was liable to pay the export commission to nonresident for export order from abroad, but the orders were executed from India”. A reference was then made to Explanation 4 to Section 9(1)(i), introduced by the Finance Act 2012 w.r.e.f 1st April 1962, that the expression ‘through’ shall mean to include, and shall always be deemed to have included, “by means of”, “in consequence of” and “by reason of”. The claim of the assessee that the income did not accrue or arise in India was thus rejected. As regards the reliance on the certificate issued by the chartered accountant, certifying that no tax deduction at source was warranted from the remittances for commission, the Assessing Officer relied upon decision of the Tribunal, in the case of DCIT Vs Rediff.com India Limited [(2011) 47 SOT 310 (Mum)] in support of the proposition that such a certificate cannot be conclusive determination of taxability in the hands of the recipient. As regards all the judicial precedents cited by the assessee, the Assessing Officer rejected the same by observing that “various decisions cited by the assessee, CBDT circular no. 786 by way of new circular 7 of 2009 dated 22/10/2009 whereby all the payments to nonresidents without deduction of tax at source have been withdrawn”. On the basis of this line of reasoning, the Assessing Officer held that the commission paid to nonresident agents, amounting to Rs 51,79,355, is to be disallowed under section 40(a)(i). Aggrieved, assessee carried the matter in appeal before the CIT(A) who deleted the disallowance by holding that the income was not taxable in India, as no operations were carried out in India, and that, since no income was taxable in India, there could not have been any occasion to deduct tax at source from the remittances in question. Learned CIT(A) further held that the advance ruling relied upon by the Assessing Officer, i.e. SKF Boilers (supra) and Rajeev Malhotra In Re [(2006) 284 ITR 564 (Del)] did not apply to the facts of this case. The disallowance was thus deleted. The Assessing Officer is aggrieved and is in appeal before us.
4. We have heard the rival contentions, perused the material on record and duly considered the facts of the case as also the applicable legal position.
5. The basic contention of the Assessing Officer is that in view of the scope of deeming fiction under section 9(1)(i), which inter alia holds that any income ‘arising directly or indirectly from any business connection in India’ will be deemed to accrue or arise in India, read with the scope of charging Section 5(2), which enables taxability of a nonresident in respect of “income accruing or arising or deemed to accrue or arise, in India,, income arising in the hands of the nonresident commission agent is taxable in India. What he overlooks, however, is the impact of Explanation 1 to Section 9 (1)(i) which states that “for the purpose of this clause [i.e. 9(1)(i)], in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India”. Only if he was to take into account the scope of Explanation 1 to Section 9(1)(i), coupled with the fact that admittedly no part of operations of the non-resident commission agent were carried out in India, he would have realized that even though deeming diction under section 9(1)(i) is triggered on the facts of this case, on account of commission agent’s business connection in India, it has no impact on taxability in the hands of commission agent because admittedly no business operations were carried out in India, and, therefore Explanation 1 to Section 9(1)(i) comes into play. The seemingly erudite analysis by the Assessing Officer is based on a half-baked legal theory, and the conclusions, therefore, clearly fallacious.
6. As for the AAR ruling in the case of SKF Boilers (supra), on which so much reliance has been placed by the Assessing Officer, we find that this decision merely follows the earlier ruling in the case of Rajiv Malhotra (supra) which, in our considered view, does not take into account the impact of Explanation 1 to Section 9(1)(i) properly. That was a case in which the non-resident commission agent worked for procuring participation by other non-resident entities in a food and wine show in India, and the claim of the assessee was that since the agent has not carried out any business operations in India, the commission agent was not chargeable to tax in India, and, accordingly, the assessee had no obligation to deduct tax at source from such commission payments to the nonresident agent. On these facts, the Authority for Advance Ruling, inter alia, opined that “no doubt the agent renders services abroad and pursues and solicits exhibitors there in the territory allotted to him, but the right to receive the commission arises in India only when exhibitor participates in the India International Food & Wine Show (to be held in India), and makes full and final payment to the applicant in India” and that “the commission income would, therefore, be taxable under section 5(2)(b) read with section 9(1)(i) of the Act”. The Authority for Advance Ruling also held that “the fact that the agent renders services abroad in the form of pursuing and soliciting participants and that the commission is remitted to him abroad are wholly irrelevant for the purpose of determining situs of his income”. We do not consider this approach to be correct. When no operations of the business of commission agent is carried on in India, the Explanation 1 to Section 9(1)(i) takes the entire commission income from outside the ambit of deeming fiction under section 9(1)(i), and, in effect, outside the ambit of income ‘deemed to accrue or arise in India’ for the purpose of Section 5(2)(b). The point of time when commission agent’s right to receive the commission fructifies is irrelevant to decide the scope of Explanation 1 to Section 9(1)(i), which is what is material in the context of the situation that we are in seisin of. The revenue’s case before us hinges on the applicability of Section 9(1)(i) and, it is, therefore. important to ascertain as to what extent would the rigour of Section 9(1)(i) be relaxed by Explanation 1 to Section 9(1)(i). When we examine things from this perspective, the inevitable conclusion is that since no part of the operations of the business of the commission agent is carried out in India, no part of the income of the commission agent can be brought to tax in India. In this view of the matter, views expressed by the Hon’ble AAR, which do not fetter our independent opinion anyway in view of its limited binding force under s. 245S of the Act, do not impress us, and we decline to be guided by the same. The stand of the revenue, however, is that these rulings, being from such a high quasi-judicial forum, even if not binding, cannot simply be brushed aside either, and that these rulings at least have persuasive value. We have no quarrel with this proposition. We have, with utmost care and deepest respect, perused the above rulings rendered by the Hon’ble Authority for Advance Ruling. With greatest respect, but without slightest hesitation, we humbly come to the conclusion that we are not persuaded by these rulings.
7. In view of the above discussions, in our considered view, learned CIT(A) was indeed justified in holding that given the undisputed and uncontroverted facts of this case, the nonresident commission agents were not taxable in India in respect of their commission earnings from orders procured abroad.
8. It is also now well settled in law that when the payment made to a non-resident does not have an element of income, tax deduction source requirements under section 195(2) do not come into play at all. Hon’ble Supreme Court, in the case of G E India Technology Centre Pvt Ltd Vs CIT [(2010) 327 ITR 436 (SC)], has inter alia observed as follows:
In our view, Section 195(2) is based on the “principle of proportionality”. The said sub-Section gets attracted only in cases where the payment made is a composite payment in which a certain proportion of payment has an element of “income” chargeable to tax in India. It is in this context that the Supreme Court stated, “If no such application is filed, income-tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such ‘sum’ to deduct tax thereon before making payment. He has to discharge the obligation to TDS”. If one reads the observation of the Supreme Court, the words “such sum” clearly indicate that the observation refers to a case of composite payment where the payer has a doubt regarding the inclusion of an amount in such payment which is exigible to tax in India. In our view, the above observations of this Court in Transmission Corporation case (supra) which is put in italics has been completely, with respect, misunderstood by the Karnataka High Court to mean that it is not open for the payer to contend that if the amount paid by him to the non-resident is not at all “chargeable to tax in India”, then no TDS is required to be deducted from such payment. This interpretation of the High Court completely loses sight of the plain words of Section 195(1) which in clear terms lays down that tax at source is deductible only from “sums charge able” under the provisions of the I.T. Act, i.e., chargeable under Sections 4, 5 and 9 of the I.T. Act. (Emphasis by underlining supplied by us)
9. Clearly, therefore, for application of Section 195, it is sine qua non that the payment to no- resident must have an element of income liable to be taxed under the Indian Income Tax Act, 1961. On the facts of this case, as we have already concluded, no part of the remittance to the commission agent was taxable in India. The assessee was, therefore, not under any obligation, on the facts of this case, to deduct any tax at source from the commission payments to the non-residents. Since there was no obligation to deduct tax at source, the very foundation of impugned disallowance under section 40(a)(i) ceases to hold good in law. Learned CIT(A) was, therefore, quite justified in deleting the impugned disallowance. We uphold his action, and dismiss the grievance raised by the Assessing Officer.
5. As regards the references to Section 9(1)(vii), as made by the Assessing Officer and the learned Departmental Representative, we find that aspect of the matter is also covered, in favour of the assessee, by a large number of judicial precedents- including Hon’ble Madras High Court’s judgment in the case of CIT Vs Farida Leather Co. [(2016) 66 taxmann.com 321 (Madras)], wherein Their Lordships have, inter alia, observed as follows:
5. The main contention of the learned counsel for the assessee / respondent is that the agency commission / sales commission paid by the assessee to nonresident agents, for the services rendered by them, outside India, in procuring export orders for the assessee, would not attract or partake the character of “fees for technical services” as explained in the context of 9 (1) (vii) of the Act and therefore, there is no scope for the application of the provisions of Section 195 of the Act (Tax Deducted at Source). It is also contended that as the non-resident agents have neither business connection in India nor they have permanent establishment in India, they are liable to be taxed in India.
5.1 Yet another contention of the learned counsel for the assessee is that: (a) the assessee paid the amount by way of commission to foreign agents for the services rendered outside India; (b) the Tax Deduction at Source (TDS) is required to be made on all payments to non-residents, only if such payments are liable to be taxed in India. (c) following the decision of this Court, CIT v. Faizan Shoes (P.) Ltd. [2014] 367 ITR 155/226 Taxman 115/48 taxmann.com 48 (Mad.), the assessee is not liable to deduct tax at source, when the non-resident agent provides services outside India on payment of commission.
5.2 The contention of the Revenue is that such services are attracted by Explanation (2) to Section 9 (1) (vii) of the Act and therefore TDS certificate is essential.
6. Whether this contention is correct, is the issue to be decided.
7. In order to appreciate this contention, it is necessary to consider the relevant provisions of the Act:—
(i) Section 40(a)(i) of the Act:—
“Section 40-Amounts not deductible:
Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”, —
(a) in the case of any assessee —
(i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,—
(A) outside India; or
(B) in India to a non-resident, not being a company or to a foreign company, on which tax is deductible at source under Chapter XVIIB and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139: Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.
Explanation: For the purposes of this sub-clause,—
A “royalty” shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9:
(B) “fees for technical services” shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9:
(ia) thirty per cent of any sum payable to a resident, on which tax is deductible at source under Chapter XVIIB and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139.
Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub section (1) of section 139 thirty per cent of, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.
Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso.’
(ii) Explanation 2 to Section 195(1) of the Act :—
‘Section 195 – Other sums: (1) Any person responsible for paying to a non-resident not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC) or section 194LD or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries”) shall, at the time of credit of such income to the account of the payee or at the time ofpayment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force:
Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode:
Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-O.
[Explanation 1] :
[Explanation 2.- For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the nonresident person has—
(i) a residence or place of business or business connection in India; or
(ii) any other presence in any manner whatsoever in India.”
Explanation 4 to Section 9 (1) (i) of the Act:—
“Section 9 -Income deemed to accrue or arise in India —
(1) The following incomes shall be deemed to accrue or arise in India: (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India. ** ** **
Explanation 4.- For the removal of doubts, it is hereby clarified that the expression “through” shall mean and include and shall be deemed to have always meant and included ”by means of”, “in consequence of” or “by reason of”.’
7.1 Section 40 of the Act spells out what amounts are not deductable from the income charged to tax under the profits and gains of business or profession.
7.2 Section 40(a)(i) of the Act deals with interest and other sums payable outside India. The provisions of this sub-clause made applicable to interest have been extended to payment of royalty, technical fees and any other sum chargeable under this Act. The section provides that the sums covered by the sub-clause, which are chargeable under the Act and are payable outside India, shall not be allowed as an expenditure to the assessee, unless tax is paid thereon or is deducted therefrom under Chapter XVII-B of the Act.
7.3 Section 195(1) of the Act deals with deduction of tax from payment to nonresidents and foreign companies. Section 195(1) of the Act comes into play at a stage where the payer, who is enjoined to deduct the tax, either credit such income to the account of the payee or make payment thereof, whether in cash / cheque / draft or any other mode. The taxability of such amount in the hands of the payee or occasioning of the taxable event is alien for the purpose of Section 195(1) of the Act.
7.4 Section 195(2) is an enabling provision, enabling an assessee to file an application before the Assessing Officer to determine the appropriate proportion of the sum chargeable and upon such determination, the tax has to be deducted under Section 195(1) of the Act. The payment is made credited to the account of the payee.
8. The question now is, whether the assessee ought to have deducted tax at source as contemplated under Section 195 of the Act, when the assessee paid commission to foreign agent.
9. This question has been answered by the Hon ‘ble Supreme Court, in the case of G.E.India Technology Centre (P.) Ltd. (supra), in which, it is very categorically held that the tax deducted at source obligations under Section 195(1) of the Act arises, only if the payment is chargeable to tax in the hands of the non-resident recipient. 9.1 Therefore, merely because a person has not deducted tax at source or a remittance abroad, it cannot be inferred that the person making the remittance, namely, the assessee, in the instant case, has committed a default in discharging his tax withholding obligations because such obligations come into existence only when the recipient has a tax liability in India.
9.2 The underlying principle is that, the tax withholding liability of the payer is inherently a vicarious liability on behalf of the recipient and therefore, when the recipient / foreign agent does not have the primary liability to be taxed in respect of income embedded in the receipt, the vicarious liability of the payer to deduct tax does not arise. This vicarious tax withholding liability cannot be invoked, unless primary tax liability of the recipent / foreign agent is established. In this case, the primary tax liability of the foreign agent is not established. Therefore, the vicarious liability on the part of the assessee to deduct the tax at source does not exist.
10. Further, just because, the payer / assessee has not obtained a specified declaration from the Revenue Authorities to the effect that the recipient is not liable to be taxed in India, in respect of the income embedded in the particular payment, the Assessing Officer cannot proceed on the basis that the payer has an obligation to deduct tax at source. He still has to demonstrate and establish that the payee has a tax liability in respect of the income embedded in the impugned payment.
11. In the instant case, it is seen, admittedly that the nonresident agents were only procuring orders abroad and following up payments with buyers. No other services are rendered other than the above. Sourcing orders abroad, for which payments have been made directly to the non-residents abroad, does not involve any technical knowledge or assistance in technical operations or other support in respect of any other technical matters. It also does not require any contribution of technical knowledge, experience, expertise, skill or technical know-how of the processes involved or consist in the development and transfer of a technical plan or design. The parties merely source the prospective buyers for effecting sales by the assessee, and is analogous to a land or a house / real estate agent / broker, who will be involved in merely identifying the right property for the prospective buyer / seller and once he completes the deal, he gets the commission. Thus, by no stretch of imagination, it cannot be said that the transaction partakes the character of “fees for technical services” as explained in the context of Section 9(1)(vii) of the Act.
12. As the non-residents were not providing any technical services to the assessee, as held above and as held by the Commissioner of Income Tax (Appeals), the commission payment made to them does not fall into the category of “fees of technical services” and therefore, explanation (2) to Section 9(1)(vii) of the Act, as invoked by the Assessing Officer, has no application to the facts of the assessee’s case.
13. In this case, the commission payments to the non resident agents are not taxable in India, as the agents are remaining outside, services are rendered abroad and payments are also made abroad.
14. The contention of the learned counsel for the Revenue is that the Tribunal ought not to have relied upon the decision G.E. India Technology’s case, cited supra, in view of insertion of Explanation 4 to Section 9(1)(i) of the Act with corresponding introduction of Explanation 2 to Section 195(1) of the Act, both by the Finance Act, 2012, with retrospective effect from 01.04.1962.
15. The issue raised in this case has been the subject matter of the decision, in the recent case, CIT v. Kikani Exports (P.) Ltd. [2014] 369 ITR 96/[2015] 232 Taxman 255/49 com 601 (Mad.) wherein the contention of the Revenue has been rejected and assessee has been upheld and the relevant observation reads as under:—
‘… the services rendered by the non-resident agent could at best be called as a service for completion of the export commitment and would not fall within the definition of “fees for technical services” and, therefore, section 9 was not applicable and, consequently, section 195 did not come into play. Therefore, the disallowance made by the Assessing Officer towards export commission paid by the assessee to the non-resident was rightly deleted.’
16. When the transaction does not attract the provisions of Section 9 of the Act, then there is no question of applying Explanation 4 to Section 9 of the Act. Therefore, the Revenue has no case and the Tax Case Appeal is liable to be dismissed.
6. Clearly, therefore, the payment of commission in the hands of the non-resident agent, as long as such an agent carries out its activities outside India, does not result in taxability in the hands of the agent in India. Accordingly, the provisions of Section 195, and, therefore, 40(a)(i), donot come into play. Learned CIT(A) was thus quite justified in granting the impugned relief. We uphold his order on this issue and decline to interfere in the matter.
7. Ground no. 1 is thus dismissed.
14.1 The issue on hand is squarely covered by the order of the coordinate bench in own case of the assessee as discussed above. Before us, no material has been placed on record by the Revenue to demonstrate that the decision of the Tribunal as discussed above has been set aside / stayed or overruled by the Higher Judicial Authorities. Before us, Revenue has not placed any material on record pointing out any distinguishing feature in the facts of the case for the year under consideration and that of earlier years nor has placed any contrary binding decision in its support. Therefore, respectfully following the same, we uphold the finding of the learned CIT-A. Hence, the ground of appeal raised by the Revenue is hereby dismissed.
15. The next issue raised by the Revenue is that the learned CIT-A erred in accepting the additional claim of the assessee under section 35(2AB) of the Act for Rs. 1,22,29,000/- on account of clinical trial carried out outside approved facility.
16. The assessee in the original return of income in the year under consideration has shown expenditure on scientific research and development for Rs. 2,45,40,866/- only, consisting of capital expenditure of Rs. 62,97,431/- and revenue expenditure of Rs. 1,82,43,435/- only. The assessee accordingly claimed weighted deduction under section 35(2AB) of the Act on the same @ 200% at Rs. 4,90,81,732/- only. Subsequently the assessee revised its return of income wherein shown expenditure on scientific research and development for Rs. 3,57,93,182/-, consisting of capital expenditure of Rs. 62,97,431/- and revenue expenditure of Rs. 2,94,95,751/- only. Accordingly, the assessee claimed weighted deduction under section 35(2AB) of the Act on the same @ 200% for Rs. 7,15,86,364/- only.
16.1 However, the AO from Form 3CL and DSIR report observed that the inhouse expenditure on scientific research and development were of Rs. 235.64 lakh only. Thus, a question was raised to the assessee to justify the claim made by it.
16.2 The assessee explained that there were certain expenditures being product development expenditure, patent registration outside India and general charges which were incurred outside India and were eligible expenditures but due to inadvertent mistake the same remained to be debited in the profit and loss account. The assessee further explained that the product development expenditures were in relation to bio-equivalent study and clinical trial which in accordance with the recent order of Ahmadabad Tribunal in case of Cadila Healthcare Pvt. Ltd. bearing ITA No. 2909/Ahd/2011 are allowable expenditure under section 35(2AB) of the Act. Likewise, the patent registration expense incurred outside India has already been allowed in its own case for A.Y. 2012-13 by the AO under section 37(1) of the Act.
16.3 However, the AO rejected the explanation of the assessee by observing that the weighted deduction under section 35(2AB) of the Act is allowable only with respect to expenditure incurred on scientific research in house facility approved by DSIR. As per the Form 3CL and DSIR report, in-house expenditure on scientific research was of Rs. 235.64 lakh only on which assessee is eligible for weighted deduction of Rs. 4,71,28,000/- only whereas assessee claimed excess deduction of Rs. 2,44,58,364/- only. The AO further held that the expenditure incurred on patent registration, general charges and product development are eligible for deduction under section 37(1) of the Act. Thus, the AO accordingly made an addition of Rs. 1,22,29,000/- to the total income of the assessee.
17. Aggrieved assessee preferred an appeal before the learned CIT-A, who by following the order of his predecessor in the own case of the assessee for AY 2011-12 and 2012-13 and following the judgment of Hon’ble Gujarat High Court in case of CIT vs. Cadila Healthcare Ltd reported in 31 taxmann.com 300, held that the expenditure incurred on scientific research outside the in-house approved facility are eligible for weighted deduction under section 35(2AB) of the Act.
18. Being aggrieved by the order of the learned CIT-A, the Revenue is in appeal before us.
18.1 The learned DR before us reiterated the finding contained in the assessment order by placing his reliance therein.
18.2 On the other hand, learned AR before us submitted that issue has been covered in favour of the assessee by the order of this tribunal in its own case for the A.Y. 2010-11 in ITA No. 1325/Ahd/2017.
19. We have heard the Rival contention of both the parties and perused the material available on record. At the outset, we find that the issue of allowability of weighted deduction under 35(2AB) of the Act on clinical trial expenses incurred outside approved facility came before this tribunal in own case of the assessee in ITA No. 1325/Ahd/2017 with CO No. 31/Ahd/2018 corresponding to A.Y. 2010-11 where the coordinate bench vide order dated 04-03-2020 decided the issue in the favour the assessee by observing as under:
10. We have heard the rival parties and have gone through the material placed on record.
11. We find that the first issue raised by Revenue is regarding the deduction under s.35(2AB) of the Act which the AO had disallowed as the assessee had carried out certain expenditures outside the in-house R&D center. The learned CIT(A) has however allowed relief to the assessee keeping in view the judgment of Hon’ble Gujarat High Court in the case of Cadila Healthcare Ltd. (supra) where the Hon’ble Court had held that clinical trials conducted outside approved facility were eligible for exemption under s.35(2AB) of the Act. The judgment of Hon ’ble Gujarat High Court as reproduced by the CIT(A) along with his finding is reproduced below:
“5.3 As the facts and circumstances of the present caase of the appellant are covered by the judgment of Hon’ble High Court of Gujarat in the case of Cadila healthcare Ltd. (supra), the relevant portion of the order of Hon’ble High Court is quoted as under:
” HELD
-Section 35(2AB) provides for deduction to a company engaged in business of biotechnology or in the business of manufacture or production of any article or thing notified by the Board towards expenditure of scientific research development facility approved by the prescribed authority. [Para 14]
-The Explanation to section 35(2AB)(1) provides that for the purpose of said clause, i.e. clause (I) of section 35(2AD), expenditure on scientific research in relation to drugs and pharmaceutical shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under the Central State or Provincial Act and filing an application for a patent under the Patents Act, 1970. [Para 15]
-The whole idea appears to be to give encouragement to scientific research. By the very nature of things, clinical trials may not always be possible to be conducted in closed laboratory or in similar in-house facility provided by the assessee and approved by the prescribed authority. Before a pharmaceutical drug could he put in the market, the regulatory authorities would insist on strict tests and research on all possible aspects, such as possible reactions, effect of the drug and so on.
-Extensive clinical trials, therefore, would be an intrinsic part of development of any such new pharmaceutical drug. It cannot be imagined that such clinical trial can be carried out only in the laboratory of the pharmaceutical company. If one gives such restricted meaning to the term expenditure incurred on in house research and development facility, one would on one hand be completely diluting the deduction envisaged under sub-section (2AB) of section 35 and on the other, making the Explanation quite meaningless.
-As noticed earlier that for the purpose of the said clause in relation to drug and pharmaceutical, the expenditure on scientific research has lo include the expenditure incurred on clinical trials in obtaining approvals from any regulatory authority or in filing an application for grant of patent. The activities of obtaining approval of the authority and filing of an application for patent necessarily shall have to be outside the inhouse research facility. Thus the restricted meaning suggested by the revenue would completely make the Explanation quite meaningless. For the scientific research in relation to drugs and pharmaceutical made for its own peculiar requirements, the Legislature appears to have added such an Explanation. [Para 16]
-Therefore, the Tribunal committed no error. Merely because the prescribed authority segregated the expenditure into two parts, namely, those incurred within the in-house facility and those were incurred outside, by itself would not be, sufficient lo deny the benefit to the assessee under section 35(2AB). It is not as if that the said authority was addressing the issue for deduction under section 35(2AB) in relation to the question on hand. The certificate issued was only for the purpose of listing the total expenditure under the Rules. Therefore, no question of law arises. “
5.4 In view of the above discussion and the ratio laid down by the Hon’ble High Court of Gujarat, the AO is directed to allow the weighted deduction of Rs.74,50,738/- incurred by the appellant outside the approved facility. Accordingly, Ground No.1 of the appeal is allowed.”
12. The Revenue was not able to controvert the findings of learned CIT(A) who had relied on the judgment of Gujarat High Court and allowed relief to the assessee. Therefore, finding no infirmity in the order of learned CIT(A), ground no.1 of Revenue’s appeal is dismissed.
19.1 The issue on hand is squarely covered by the order of the coordinate bench in the own case of the assessee in its favour. Before us, no material has been placed on record by the Revenue to demonstrate that the decision of the Tribunal as discussed above has been set aside / stayed or overruled by the higher Judicial Authorities. Before us, Revenue has not placed any material on its record pointing out any distinguishing feature in the facts of the case for the year under consideration and that of earlier year nor has placed any contrary binding decision in its support. Therefore, respectfully following the same, we uphold the finding of the learned CIT-A. Hence, the ground of appeal raised by the Revenue is hereby dismissed.
20. The next issue raised by the Revenue is that the learned CIT-A erred in allowing the deduction under section 80IC of the Act for Rs. 37,44,802/- only.
21. During the year under reference, the assessee has two manufacturing units located at Thol and Dehradun. The Dehradun unit was eligible unit for deduction under section 80IC of the Act. The AO found that the assessee was claiming deduction under section 35(2AB) on account of expenditure incurred with respect to research and development activity. However, no amount of research and development expenditure was allocated to the Dehradun unit while computing deduction under section 80IC of the Act. On question, the assessee submitted that research and development expenditures were neither attributable to Thol unit nor to Dehradun unit. As such the expenditures, constitute separate unit being R & D unit and claimed at business level but only for presentation purpose, the same has been shown in HO and Thol Unit. The assessee also submitted that the research and development activities are connected to the future products to be manufactured but in which unit the same would be manufactured is not known. Therefore, for this reason also research and development expenditure cannot be attributed to any of the manufacturing units, and accordingly, the same are allowable separately at business level and not at individual unit level.
21.1 However, the AO held that research and development activities are related to several products which are already in the manufacturing process at both the units i.e. Thol and Dehradun. The future product based on research and development will also be produced at both the units. Therefore, it is necessary to allocate the expenditure to both the manufacturing units. The AO also found that the contention of the assessee was only acceptable to the extent expenditure incurred in relation to discovery of new drugs. However, neither such detail was furnished, nor contention raised by the assessee. Accordingly, the AO attributed an amount of 37,44,802/- to the Dehradun unit which has resulted in a reduction in the profit of Deharadun unit and increase the profit of Thol unit by an amount of Rs. 37,44,802/- only.
22. Aggrieved assessee preferred to appeal before learned CIT-A who by following the order of his predecessor in own case of the assessee for A.Y. 201213 held that the expenditure incurred on scientific research constitute sperate unit of R & D and the deduction under section 35(2AB) of the Act is allowable at business level and not the unit level.
23. Being aggrieved by the order of the learned CIT-A, the Revenue is in
appeal before us.
23.1 The learned DR before us reiterated the finding contained in the assessment order by placing his reliance therein.
23.2 On the other hand, the learned AR before us reiterated the finding contained in the CIT-A order by placing his reliance therein.
24. We have heard the Rival contentions of both the parties and perused the materials available on record. At the outset, we find that the issue of expenditure incurred on scientific research constitute separate unit and deduction under section 35(2AB) of the Act is allowable at business level and not manufacturing unit level came before this tribunal in own case of the assessee in revenue’s appeal in ITA No. 939 & 1129/Ahd/2019 corresponding to A.Y. 2011-12 and 201213 where the coordinate bench vide order dated 29-07-2022 decided the issue in favour of the assessee by observing as under:
22. We have heard the rival contentions of both the parties and perused the materials available on record. The controversy in the present case relates whether the research and development expenses incurred by the assessee should be allocated to eligible unit while working out the deduction under section 80-IC of the Act. This question has been answered by the judgment of the Hon’ble Gujarat High Court in the case of the CIT Vs. Torrent Pharmaceuticals Ltd. reported in 88 taxmann.com 530 wherein it was held that the R and D expenses should not be allocated to the units eligible for deduction under section 80-IA of the Act. The relevant extract of the judgment is reproduced as under:
8.1 It is not in dispute that research centre is an independent centre and that its main object is to conduct research for the business of the assessee. The research centre, therefore, in our opinion, is not directly linked with the eligible undertaking. Thus, for the purpose of computing deduction u/s.80HH and 80I, profit from eligible undertaking is to be computed on the basis of gross income by reducing expenditure which has been incurred for the eligible undertaking out of the gross income derived from the industrial undertaking. In view of the aforesaid, question no.(A) is answered in favour of the assessee and against the Revenue.
22.1 In addition to the above, we also note that the Revenue in the own case of the assessee for the assessment year 2010-11 in the assessment framed under section 143(3) of the Act has not allocated the research and development expenses to the eligible unit for the purpose of computing the deduction under section 80-IC of the Act. Admittedly, there is no change in the facts and circumstances of the year under consideration viz a viz the earlier assessment year i.e. 2010-11, thus we are of the view that the principles of consistency should be adopted.
22.2 We also draw support and guidance from the judgment of Hon’ble Delhi High Court in the case of CIT Vs. Muthoot M. George Bankers reported in 159 taxman 22 wherein it was held as under:
“7. This Court has time and again taken the view that there must be some consistency in the stand of the revenue and they cannot pick and choose cases in which to file an appeal in respect of some assessee and not to file an appeal in respect of identical orders in respect of another assessee. This view has also been expressed by the Supreme Court on several occasions and despite that we find that the revenue insists upon taking such arbitrary decisions for which there is no iota of justification. If the revenue puts forward some reason for its differential treatment, that will, of course, be considered on merits but in this particular case there is no such reason except to say there is no res judicata or estoppel. The rule of consistency must be followed by the revenue, which they have failed to do in this particular case.”
23.3 In view of the above facts and after taking into consideration all the relevant details, we hold that the research and development expenses are not to be allocated to the eligible undertaking while calculating the deduction of the assessee under the provisions of section 80 IC of the Act. Hence, we do not find any infirmity in the order of the learned CIT-A.
24.1 The issue on hand is squarely covered by the order of the coordinate bench in own case of the assessee in its favour. Before us, no material has been placed on record by the Revenue to demonstrate that the decision of the Tribunal as discussed above has been set aside / stayed or overruled by the higher Judicial Authorities. Before us, Revenue has not placed any material on record pointing out any distinguishing feature in the facts of the case for the year under consideration and that of earlier years nor has placed any contrary binding decision in its support. Therefore, respectfully following the same we uphold the finding of the learned CIT-A. Hence, the ground of appeal raised by the Revenue is hereby dismissed.
25. In the result, the appeal of the Revenue is hereby partly allowed for the statistical purposes.
Coming to CO No. 71/AHD/2020 in (ITA No. 107/AHD/2020) by the assessee for A.Y. 2013-14.
26. At the outset, we note that the assessee in the CO filed by it has supported the order of the Ld. CIT-A. Accordingly, we hold that no separate adjudication is required for the CO filed by the assessee. Hence, we dismiss the same as Infructuous.
27. In the result, the CO filed by the assessee is dismissed as infructuous.
Coming to ITA No. 78/AHD/2020 by the assessee for A.Y. 2013-14
28. The assessee has raised the following grounds of appeal:
1. The disallowance of u/s.37(1) of the Act of Rs.2,89,18,509/- confirmed by the Ld. CIT(A) may kindly be deleted.
2. The disallowance of Rs.1,06,925/- on account of business convention expenses confirmed by the Ld. CIT(A) may kindly be deleted.
3. The addition under section 2(24)(x) r.w.s 36(1) of the Act of Rs.1,73,538/- on account of late deposit of employees contribution to ESIC may kindly be deleted.
4. Such and further relief as the nature and circumstances of the case mayjustify
29. At the outset we note that the issues raised by the assessee in its grounds of appeal Nos. 1 & 2 have been dealt with Revenue’s appeal in ITA No. 107/AHD/2020. The issues have been dealt with in detail vide paragraph no. 5 of this order where we have decided the issue in favor of the assessee for statistical purposes. For detailed discussion, please refer to the relevant paragraph of this order. Hence, the grounds of appeals filed by the assessee are hereby allowed for statistical purposes.
30. The next issue raised by the assessee is that the learned CIT-A erred in confirming the addition of Rs. 1,73,538/- on account of late deposit of employees’ contribution towards PF/ESIC.
31. It was found by the AO during the assessment proceedings that the assessee during the year deposited employees’ contribution towards PF/ESIC of Rs. 1,73,538/- in the relevant account after the due date as provided under respective Act. Therefore, the AO added the same to the total income of the assessee by invoking the provisions of section 36(1)(va) read with section 2(24)(x) of the Act. The impugned addition was subsequently confirmed by the learned CIT-A.
32. Being aggrieved by the order of the learned CIT-A, the assessee in is appeal before us.
32.1 The ld. AR before us did not dispute the disallowance to be made on account of delayed deposit of employee’s contribution towards PF/ESIC.
32.2 On the contrary, the ld. DR vehemently supported the order of the authorities below.
33. We have heard the rival contentions of both the parties and perused the materials available on record. At the outset we note that the issue on hand is squarely covered against the assessee by the order of the Hon’ble Jurisdictional High Court of Gujarat in case of CIT vs. Gujarat State Road Transport Corporation India Limited reported in 366 ITR 170. The view of the Hon’ble Court was also affirmed by the Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd. Vs CIT reported in 143 com 178. Accordingly, we don’t find any infirmity in the order of the authorities below. Hence, the ground of appeal of the assessee is hereby dismissed.
34. In the result, the appeal filed by the assessee is hereby partly allowed for statistical purposes.
35. In the combined Results, the appeal of the Revenue and the assessee are partly allowed for statistical purposes whereas CO filed by the assessee is dismissed being infructuous.
Order pronounced in the Court on 13/09/2023 at Ahmedabad.
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