Deduction u/s.35(2AB) on expenditure in respect of patent filing in foreign countries & on foreign consultancy

IN THE ITAT MUMBAI BENCH ‘I’

USV Ltd.

v/s.

Deputy Commissioner of Income-tax

IT Appeal Nos. 4517 & 5582 (Mum.) of 2010

[Assessment year 2007-08]

Date of pronouncement – July 4, 2012

ORDER

B.R. Mittal, Judicial Member

These cross appeals are directed against the impugned order dated 19th April 2010, passed by the Commissioner (Appeals)-XXXXI, Mumbai, for assessment year 2007-08. Grounds raised by the assessee, read as follows:-

“The Hon’ble Commissioner of Income Tax has erred in confirming the Assessing Officer action on disallowing the weighted deduction under section 35(2AB)(1) in respect of following expenses incurred in connection with the in-house Research & Development labs.

2. In the assessment year under consideration, the assessee is engaged in the business of manufacturing and marketing of pharmaceuticals products and bulk drugs. During the previous year relevant to assessment year 2007- 08, the assessee company had the following units:-

  •  Unit at MIDC Lote Parshuram, Taluka Khed, Ratnagiri District, for manufacture of Formulation;

  •  Unit at MIDC Lote Parshuram, Taluka Khed, Ratnagiri District, for manufacture of Bulk Drugs treated as DTA;

  •  Unit at MIDC Lote Parshuram, Taluka Khed, Ratnagiri District, for manufacture of bulk drugs treated as converted EOU-I, under provision of section 10B of the Income Tax Act, 1961. The allowability of deduction under this section is discussed later in my order;

  •  Unit at OIDC Daman for manufacture of formulations. This unit was set up in December 2001, and is eligible towards deduction under section 80IB claimed. The allowability of deduction under this section is discussed later in my order;

  •  Unit at Plot no.6, HPSIDC Industrial Area, Solan, Baddi, HP, for manufacture of formulations and is eligible towards deduction under section 80IC. This is the first year of assessee claim under section 80IC.

3. The assessee company also markets formulations manufactured using the manufacturing facilities of third parties, either on job work basis under loan license arrangement, or by purchasing the same from such parties on principal-to-principal basis. Sales are affected through dealer/stockiest who are appointed all over India. The assessee company also exports both bulk drugs and formulations to various countries. In the assessment year under consideration, the assessee filed return of income declaring total income of Rs. 46,10,49,381. The Assessing Officer made assessment under section 143(3) of the Income Tax Act, 1961 (for short “the Act”) vide order dated 30th November 2009, assessing the total income at Rs. 50,88,19,386.

4. We first take up the ground taken by the assessee. Further, ground no.3, in Revenue’s appeal is also inter-connected and, accordingly, the same is also considered along with the ground taken by the assessee.

5. Brief facts:- The assessee company is engaged in the manufacturing of drugs and pharmaceuticals. During the course of assessment proceedings, the assessee submitted that it had three R&D facilities at – (i) BSD Marg, Govandi Station Road, Govandi, Mumbai – 400 088; (ii) D-115, Shirvane, TTC Industrial Area, Thane Belapur Road, Navi Mumbai 400 706; and (iii) OIDC, Debhel, Daman. All these R&D facilities are being approved by the Department of Scientific and Industrial Research (for short “DSIR”) for weighted deduction @ 150% under section 35(2AB) of the Act, vide approval (renewal) order in Form no.3CM no.TU/IV-15(119)/35(2AB), order dated 1st July 2007. The assessee has also filed the necessary copy of order of approval Form 3CM, on record. The assessee company satisfies the conditions laid down for availment of weighted deduction of 150% under section 35(2AB) for the above R&D units. The Assessing Officer stated that the assessee has, vide its letter dated 25th November 2009, filed the copy of order in Form 3CL received from the DSIR. He stated that on perusal of the said order, it was found that DSIR has approved following amounts as against the amount claimed by the assessee in the return of income.

Note: 1

As explained by assessee and as evident from the DSIR certificate, the difference in the DSIR claims pertains to –

The assessee has vide its above submissions have also submitted its explanation over the details of the expenses which has been shown separately in the DSIR report.”

6. In respect of clinical trials, the assessee submitted that the same is eligible for weighted deduction under section 35(2AB) as the expenditure was, in fact, related to and emanating out of the activities carried out in the approved in-house R&D facilities. In this regard, the assessee filed the following reply before the Assessing Officer which has been stated by him at Page-6 of the assessment order, which reads as follows:-

“Rs. 4,00,32,682 towards expenses related to clinical trials outside the approved facilities.

The company carries out research at its R&D facilities, which are approved by DSIR. The research is conducted basically on pharmaceutical products for which clinical trials are mandatory. Trials on humans for bio-equivalence etc., are done on volunteers who are patients of the disease for which the medicine under research applies. For such clinical trials, the company has to tie up with various hospitals, doctors and institutions for sustained study on patients over the treatment period. It is very obvious that such clinical studies cannot be done at the premises of the company. But nevertheless, the product being tried is developed in the in-house R&D facility of the company. Section 35, specifically provides for deduction of expenditure incurred on clinical trials at 150% in the case of approved laboratories. It is very obvious that such expenditure pertains to in-house research facility as it deals with the product developed in the facility, even though the trial is conducted on patients outside the laboratory, which in any case is inevitable given the very nature of the activity. Hence, we submit that expenditure on clinical trials qualify for deduction under section 35(2AB) notwithstanding the fact that these are physically conducted on patients outside the approved laboratory.

Section 35, specifically provides for deduction of expenditure incurred on clinical trials at 150%. It is very obvious that such expenditure pertain to in-house research facility as it deals with the product developed in the facility, even though the trial is conducted on patients outside the laboratory, which in any case is inevitable given the very nature of the activity. Hence, expenditure on clinical trials qualify for deduction under section 35(2AB) notwithstanding the fact that these are physically conducted on patients outside the approved laboratory.”

7. The Assessing Officer, however, did not agree with the contentions of the assessee and stated that if the said expenditure on clinical trial, though conducted outside the laboratory, are indeed for the purpose of research activity carried out in the recognised R&D unit projects and if so, the DSIR, which is the reckoned body would have also considered all the facts while certifying the expenditure in Form 3CL. The Assessing Officer has stated that considering the DSIR report, it is seen that the assessee is not entitled to weighted deduction in respect of clinical trials amounting to Rs. 4,00,32,682.

8. Being aggrieved, the assessee filed appeal before the first appellate authority and submitted that the said expenditure of Rs. 4,00,32,682, was incurred on R&D laboratory of clinical trial outside its own recognised R&D laboratory. The clinical trials are conducted on the projects undertaken by itself approved in-house R&D facilities. It was contended that the clinical trials have to be conducted on various subjects like human patents, volunteers and animals for studies like bio-equivalence, etc. Therefore, by its very nature, this activity is largely dependent on and is to be carried out through various eternal activity is largely dependent on and is to be carried out through various external agencies, hospitals, doctors, institutions, etc. However, the Commissioner (Appeals) did not agree with the above contention of the assessee and stated that similar issue has been considered by the Tribunal in assessee’s own case in assessment year 2005-06, and it was held that the expenditure has not been incurred in-house in respect of clinical trials and accordingly, the weighted deduction of 150% is not allowable under section 35(2AB) to the assessee. Therefore, the Commissioner (Appeals) has confirmed addition made by the Assessing Officer amounting to Rs. 4,00,32,682. Hence, the assessee is in appeal raising ground no.1(a).

9. In respect of the expenditure of Rs. 1,84,87,038, under the head “patient filing” in various foreign countries and foreign consultancy, the details of the amount spent and accounted under the above head have been stated by the Commissioner (Appeals), vide Para-3.9/Page-8 of his order, which reads as follows:-

10. In respect of the amount disputed before us is Rs. 8,65,131, towards consultancy charges, Rs. 74,38,119, towards patent filing charges as ground no.3, in the appeal filed by the Revenue.

11. The Assessing Officer, while dealing with the above claim of the assessee stated that the patent cooperation treaty lays down the guidelines for a patent registration in cases where the same patent was registered in various countries. The Assessing Officer did not accept the contention of the assessee that the consultancy expenditure incurred by the assessee regarding technical services of the competitor patents obtained patent information from innovator company an obtaining innovator samples for R&D purpose are the payments towards research expenditure which are to be incurred at the beginning of the R&D project. The Assessing Officer has stated that without any details on record, he is unable to accept the facts of the assessee and the fact that the DSIR has made disallowance to the said amount in its certificate, the Assessing Officer disallowed the weighted deduction of 150% claimed by the assessee on the consultancy charges and patent filing charges.

12. The assessee filed appeal before the first appellate authority, wherein the Commissioner (Appeals), vide Para-3.10, has held that the consultancy charges of Rs. 8,65,131, are purely towards research expenditure and not towards registering the patents. He has stated that the assessee company is engaged in the activities of research activity of new molecules and drugs as well as improvisation of the existing drugs and medicines. For carrying out the research of any existing project, the data/information on the existing drugs/medicine in the market is first required to be gathered. Therefore, these expenditures have been incurred for consultancy are purely towards research expenditure and, hence, weighted deduction is to be allowed.

13. The Commissioner (Appeals) has stated that the above issue has been discussed in assessment year 2006-07 and allowed weighted deduction of the assessee. Accordingly, he has directed the Assessing Officer to allow weighted deduction of Rs. 8,65,131, after verification.

14. In respect of the expenditure pertaining to patent filing of Rs. 74,38,119, it was stated that the payment is covered under The Patent Act, 1970, as per the Explanation of section 35(2AB). It was contended that the said clause provides that the 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 any Central or State Provincial Act and filing an application for a patent under The Patents Act, 1970. Therefore, the eligibility for claiming 150% under section 35(2AB), the criteria laid down under the Act are obtaining approval from any regulatory authority under any Central or State Provincial Act and filing an application for a patent under The Patents Act, 1970. Hence, the amount of expenditure is covered on account of patent cooperation treaty done at Washington on 19th June 1970, and the same is eligible for weighted deduction. However, the Assessing Officer did not agree with the assessee and allowed the said expenditure as 100% revenue expenditure incurred for R&D purpose under section 35 of the Act.

15. Aggrieved, the assessee filed appeal before the first appellate authority and contended that the DSIR has, as part of certification requirements, classified the expenditure put up for certification as between those incurred in the approved in-house and R&D facility and thus incurred outside the same, even though the same may have actually been incurred in relation to the activities carried out by such R&D facilities. Hence, the information provided by the DSIR in Form 3CL is, to that extent, clarificatory in nature. The allowability or otherwise of such expenditure is dealt with under section 35(2AB) r/w Explanation thereto. It was contended that the assessee company has claimed expenditure of patent filing fee of only such items which are developed from the approved research units. Therefore, the patent filing charges amounting to Rs. 74,38,119, in respect of patent international application as per section 7(1A) of The Patents Act, 1970, and the weighted deduction is allowable on the registration of patent fee.

16. The Commissioner (Appeals) considered the above contentions of the assessee and following his order for the assessment year 2006-07, allowed weighted deduction on patent filing charges filed under The Patent Act, 1970, subject to the direction to the Assessing Officer of tax verification vide Para-3.14 of the impugned order.

17. In view of the above, the Revenue has filed appeal before the Tribunal against the impugned order passed by the Commissioner (Appeals), vide Ground no.3, disputing the allowance of weighted deduction, consultancy charges and patent filing charges.

18. The Assessing Officer, in respect of the claim of the assessee on expenditure on rent, rates and taxes pertaining to building, has not accepted the claim of the assessee of weighted deduction under section 35(2AB) on the ground that DSIR has not allowed the same. Being aggrieved, the assessee filed appeal before the first appellate authority.

19. On behalf of the assessee, it was contended that the Assessing Officer has not allowed this deduction in respect of building used for research R&D units merely because DSIR has not approved the expenditure for the purpose of deduction. It was contended that the legislature as per section 35(2AB), only excluded from weighted deduction, cost of land or building and not any charges and expenses related to land or building. However, the Commissioner (Appeals) did not accept the contention of the assessee and stated that since DSIR has not allowed weighted deduction, rent, rates and taxes on repairs on the R&D unit, the Assessing Officer is justified in not allowing deduction on these expenses. Hence, the assessee is in appeal before the Tribunal raising ground no.1(b).

20. In respect of difference between the amount reported in the annual report and claimed in the return of income of Rs. 1,25,17,261, which is the subject matter of the appeal as ground no.1(c) of the assessee, the Assessing Officer has given a break up at Page-10, as follows:-

21. During the course of assessment proceedings, the assessee stated that the DSIR has restricted the claim of R&D expenditure to the amount disclosed under annual report, however, the total R&D expenditure as claimed and certified by the tax auditor need to be considered for the same. It was also contended that all the requisite documents viz. copy of appendix submitted to DSIR duly authorised by the Managing Director of the company being a report submitted to DSIR for the purpose of certification of claim under section 35(2AB), copy of certificate given by the statutory auditor to the DSIR giving detailed re-conciliation of amount disclosed in the annual report and as claimed in the return of income, mentioned that the amount disclosed at annual report does not include certain expenses which pertained to R&D. However, the Assessing Officer did not accept the contentions of the assessee that the assessee is eligible for weighted deduction of Rs. 1,25,17,261, on the ground that the DSIR has restricted the claim to the extent of amount certified and reported in the annual report. The Assessing Officer has stated that in the absence of any details/clarification on the DSIR certificate under Form 3CL, it need to be considered that the DSIR has intentionally not allowed such expenses. Therefore, the Assessing Officer disallowed the weighted deduction @ 50% of such difference amount of Rs. 1,25,17,261 and added the same to be total income. However, the Assessing Officer restricted the deduction to 100% only as per section 35(1)(i) and section 35(1)(iv) as against 150% claimed by the assessee.

22. Being aggrieved, the assessee filed appeal before the first appellate authority, wherein the Commissioner (Appeals), vide Para-3.17 of his order, has confirmed the action of the Assessing Officer on the ground that DSIR has not certified that the said amount of Rs. 1,25,17,261, is eligible for weighted deduction under section 35(2AB) of the Act. Therefore, the assessee is in further appeal before the Tribunal as ground no.1(c).

23. Before us, during the course of hearing, the learned Counsel for the assessee, in respect of the addition of Rs. 4,00,32,682, relating to the expenditure incurred on clinical trials admitted that same very issue which was considered by the Tribunal in assessee’s own case for assessment year 2006-07, in ITA no.453/Mum./2009, order dated 18th March 2010, a copy of which is placed at Pages-209 to 213 of the paper book and the Tribunal, by following assessee’s own case for assessment year 2005-06 in ITA no.2179/ Mum./2009, held that the expenditure on scientific research eligible for weighted deduction under section 35(2AB), should be the expenditure on scientific research on in-house research and development facilities and, therefore, the action of the Assessing Officer to disallow weighted deduction of 50% was confirmed. The learned Counsel for the assessee, at the time of hearing, admitted that the facts in the assessment year under consideration are identical to the facts of the assessment year 2006-07 and the Tribunal has decided this issue against the assessee. However, he submitted that the assessee has filed an appeal before the Hon’ble High Court and the said appeal is pending.

24. Learned Departmental Representative submitted that in view of the above facts, the issue is covered against the assessee by order of the Tribunal in assessee’s own case for preceding assessment year and, therefore, the order of the Commissioner (Appeals) be upheld.

25. In view of the above submissions of the learned Representatives of the parties and after considering the order of the Tribunal dated 18th March 2010 (supra), we respectfully following the said order, uphold the action of the Assessing Officer by rejecting the ground no.1(a) of the appeal taken by the assessee holding that the assessee is not entitled for weighted deduction on the expenditure of Rs. 4,00,33,682, incurred on clinical trials as per section 35(2AB) of the Act.

26. In respect of ground no.1(b) of the assessee’s appeal to disallow weighted deduction of Rs. 66,00,682, relating to expenditure incurred on rent, rate and taxes.

27. Learned Counsel for the assessee submitted before us that section 35(2AB) only excludes cost of land or building from weighted deduction and not any charges and expenses relating to land or building. He submitted that the expenditure such as repairs, rent and rates cannot be treated as cost of land and building. He submitted that such expenses are revenue in nature. He submitted that when the expenditure are incurred for renting the R&D premises and for incurring expenditure on normal repairs on R&D facilities have to be allowed in full weighted deduction. To substantiate his submissions the learned Counsel for the assessee referred the decision of the Hon’ble Delhi High Court in the case of CIT v. Sandan Vikas (India) Ltd. [2012] 207 Taxman 216 a copy of which is placed at Page-167 of the paper book. He also referred to the decision of the Hon’ble Madras High Court in the case of CIT v. Wheel’s India Ltd.[2012] 20 taxmann.com 682 and submitted that DSIR certificate is only to certify the facilities of research and development activity undertaken by the assessee and not a certificate for expenditure incurred by the assessee. He further submitted that the details mentioned in DSIR certificate should be treated as a mere clarification and not an indication for disallowance of the expenditure incurred by the assessee. The learned Counsel submitted that merely because in the certificate issued by the DSIR certain amounts were not approved, it does not mean that the assessee has not incurred expenditure on research and development activity and, therefore, the disallowance of weighted deduction @ 150% as per section 35(2AB) of the Act is not justified.

28. On the other hand, the learned Departmental Representative justified the order of the Commissioner (Appeals) and submitted that the DSIR certificate is pre-requisite for any expenditure to be allowed under section 35(2AB) of the Act has weighted deduction @ 150%. He submitted that since DSIR did not approve the said expenditure in certificate issued by it, the Assessing Officer rightly disallowed the same on the basis of certificate of DSIR as he is to follow the said certificate of DSIR for considering as to whether the assessee is entitled for weighted deduction under section 34(2AB) or not and he is not to apply his mind for that purpose. He submitted that the order of the Commissioner (Appeals) should be confirmed.

29. In the rejoinder, the learned Counsel for the assessee to his submissions referred to Rule-6(7A) of the I.T. Rules, 1962, and submitted that this rule lays down the condition subject to which the expenditure incurred on in-house research and development facilities is to be allowed under section 35(2AB) of the Act and the said rule does not provide that the expenditure incurred in connection with building of R&D facilities should not be allowed. He submitted that there is no authority given under section 35(2AB) to make any rule laying down additional condition(s) for grant of weighted deduction under section 35(2AB). He submitted that if the quantification of eligible expenditure, as determined by the prescribed authority i.e., DSIR is considered as final, then an important right of appeal to the assessee against such quantification will be lost as the quantification so laid down and treated by the prescribed authority will be treated as binding on the appellate authority as well. The learned Counsel for the assessee submitted that the assessee is entitled for weighted deduction of the expenditure incurred on rent, rate and taxes.

30. We have carefully considered the submissions of the learned Representatives of the parties and the orders of the authorities below as also the provisions of section 35(2AB) r/w Rule-6(7A) of the Rules. On perusal of the provisions of section 35(2AB) of the Act, we do agree with the learned Counsel for the assessee that the said section excludes the expenditure in the nature of cost of any land or building from weighted deduction to be allowed under section 35(2AB). The said section 35(2AB) as applicable to the assessment year under consideration along with the explanation reads as under:-

“Section 35(2AB) provides that

(2AB)(1) where a company engaged in the business of [bio-technology or in the business of] manufacture or production of any drugs, pharmaceuticals, electronic equipments, computers, telecommunication equipments, chemicals or any other article or thing notified by the Board incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority, then, there shall be allowed a deduction of [a sum equal to one and one-half times of the expenditure] so incurred.

Explanation – For the purposes of this clause, “expenditure on scientific research”, in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the Patents Act, 1970 (39 of 1970).]”

31. Therefore, it is evident that this section excludes from weighted deduction only cost of land and building and not any charges and expenses related to land or building. The repairs, rent, etc., the expenditure incurred relating to R&D premises cannot form part of cost of land or building. In the absence of any fact that the said claim of the assessee aggregating to Rs. 62,00,689, is not the expenditure on rents, rates and taxes relating to R&D premises, we are of the considered view that the said expenditure has to form part of weighted deduction as per section 35(2AB) of the Act. Therefore, we, by reversing the orders of the authorities below, hold that the assessee is entitled to weighted deduction on the said amount @ 150% as per section 35(2AB) of the Act. Hence, ground no.1(b) of the appeal taken by the assessee is allowed.

32. In respect of ground no.1(c) of the appeal taken by the assessee relating to denial of weighted deduction on the claim of Rs. 1,25,17,261, not reported in DSIR certificate, we, in the absence of any details before us, do not find any reason to interfere with the order of the Commissioner (Appeals). Hence, we uphold the order of the Commissioner (Appeals) to deny weighted deduction on the above claim of the assessee under section 35(2AB) of the Act. Therefore, ground no.1(c), taken by the assessee is rejected.

33. In respect of ground no.3, of the appeal of the Department to allow weighted deduction in respect of consulting charges of Rs. 8,65,131, and patent filing charges of Rs. 74,38,119, the learned Departmental Representative, during the course of hearing, relied on the order of the Assessing Officer and whereas the learned Counsel for the assessee submitted that the same very issue was considered by the first appellate authority in assessee’s own case for assessment year 2006-07 and he has followed the same for the assessment year under consideration. The learned Counsel for the assessee submitted that when the Department filed appeal for assessment year 2006-07 before the Tribunal, the Department accepted the said order of the Commissioner (Appeals) to allow consulting charges and patent filing charges for weighted deduction under section 35(2AB) of the Act and did not dispute the same before the Tribunal.

34. We have considered the orders of the authorities below and submissions of the learned Representatives and we have also carefully considered the Commissioner (Appeals)’s order for assessment year 2006-07, a copy of which is placed at Pages-197 to 208 of the paper book (relevant pages 206-208. We observe that the consultancy charges had been paid by the assessee in providing technical services regarding the patents, obtaining patent information from innovator companies and obtaining innovator samples for R&D purposes. The payments have been accepted towards research and not towards registering the patents. Therefore, these expenditures have been incurred towards research expenses and not towards any patent filing. Further, it is also observed that the expenditure incurred in respect of patent application filed under The Patent Act, 1970. Explanation to section 35(2AB), as reproduced herein above, specifically provides that the expenditure on scientific research for the purpose of section 35(2AB) of the Act shall include filing of application for a patent under The Patent Act, 1970, in relation to drugs and pharmaceuticals. Any application for patent foreign country has to be filed in India as per section 7 of The Patent Act, 1970, according to patent cooperation treaty. Therefore, we hold that the Commissioner (Appeals) has rightly held that the said expenditure incurred by the assessee towards patent filing charges is eligible for weighted deduction under section 35(2AB) r/w Explanation thereto. In view of the above, we uphold the order of the Commissioner (Appeals) by rejecting ground no.3 of the appeal taken by the Department.

35. Now we take up ground no.1 of the appeal taken by the Department which reads as under:-

“On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in directing to treat the expenses of Rs. 3,97,373, paid to Trade Mark Attorneys by treating as revenue expenditure.”

36. At the time of hearing, the learned Counsel for the assessee submitted that the same very issue has been considered by the Tribunal in assessee’s own case for assessment year 2006-07 in the appeal filed by the Department being ITA no.453/Mum./2009, order dated 18th March 2010, and the Tribunal, by following its earlier order for assessment year 2005-06 in assessee’s own case, held that the expenditure for registering trade mark in India is a revenue expenditure and not capital expenditure.

37. Learned Departmental Representative has not disputed the above contentions of the learned Counsel for the assessee.

38. We also observe that the Commissioner (Appeals), while deciding the issue also followed earlier order of the Tribunal. Therefore, we do not find any reason to interfere with the order of the Commissioner (Appeals) as he has decided the issue by following the Tribunal order for assessment year 2006-07 in assessee’s own case. Accordingly, ground no.1, of the appeal taken by the Department is rejected.

39. Ground no.2, of the appeal, is as follows:-

“On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in directing to treat the expenses of Rs. 14,66,514 paid to the Associated Enterprises of the assessee v. Indicas Pharma LLC into international transaction for registration of ANDA in USA by treating as revenue expenditure.”

40. The amount of Rs. 14,66,514, is wrongly mentioned in the above ground and the correct amount is Rs. 7,03,927.

41. The relevant facts are that the assessee had shown an expenditure of Rs. 14,66,514, paid to its associated enterprises M/s. Indicus Pharma LLC. The assessee entered into international transaction for registration of Anti National Drug Application (ANDA) in USA for arranging product registration.

42. The Assessing Officer stated that the nature of expenditure incurred in USA for filing of ANDA are not limited to just one year, they are transcendental in nature. Accordingly, the Assessing Officer considered the said expenditure as capital in nature. Since the said expenditure has been incurred in relation to taxable units and also for units which are eligible for deduction under section 80IC, 80IB and 10B of the Act, the Assessing Officer considered the sum of Rs. 7,03,927, being the amount pertaining to taxable units and treated it as capital expenditure in nature and added back to the total income of the assessee. It is relevant to state that the Assessing Officer has allowed deprecation thereon of Rs. 87,991.

43. Being aggrieved, the assessee filed appeal before the first appellate authority. On behalf of the assessee, it was contended that the said expenditure has been incurred as statutory obligation and no benefit of enduring nature has been obtained. It was stated that ANDA registration authorisation to the product of the company to sell in the specified country. ANDA authorisation is a formality to track the product and manufacturer from the quality point of view. It was stated that these expenditures are to take ANDA authorisation of generic products which means there would be many such authorisation of similar products being taken. Therefore, the expenditures incurred is allowable as revenue expenditure. The Commissioner (Appeals) considered the above submissions of the assessee vide Para-2.3 of the impugned order and held that it is a business expenses. The said para reads as follows:-

“2.3 I have considered the reply of the appellant and perused the assessment order. Anti National Drug Application registration is required for marketing of the product of the appellant company in USA. Thus, the regulatory requirement to sell the product in the market. In the absence of registration of ANDA, the appellant may not be able to sell his product without hindrance. The appellant has not acquired any benefit of enduring nature, therefore, the expenditure of professional fees for registration of ANDA is allowable as revenue expenditure. Hon’ble Calcutta High Court in the case of CIT v. Varas International, 225 ITR 831, has held that the payment made to Excise Department for obtaining license is allowable as business expenditure. In view of this fact, the Assessing Officer is directed to delete the addition of Rs. 7,03,927, and also withdraw the depreciation allowed to the appellant amounting to Rs. 87,991. Ground of appeal no.2, is allowed.”

Hence, the Department is in appeal before the Tribunal.

44. During the course of hearing, the learned Departmental Representative relied on the order of the Assessing Officer and whereas the learned Counsel for the assessee reiterated the submissions made before the authorities below. He submitted that the assessee has incurred the expenditure to meet regulatory requirements of the foreign Government (USA). He submitted that by incurring the said expenditure, the assessee has not acquired any IPR namely trade mark/patent or a ward-off any competition. The said expenditure is also not incurred for completing the ownership process. The expenditure has been incurred for ANDA registration which gives authorisation for the holder to market and sell the registered ANDA in the USA market. He submitted that such registration is compulsory and statutory obligation required in order to increase export business in USA. Therefore, the said expenditure is a revenue expenditure incurred for the purpose of business.

45. We have considered the submissions of the learned Representatives of the parties and the orders of the authority below. The Department has not disputed the fact that by ANDA registration, the assessee has completed the statutory requirement to sell the product in USA market and in the absence of such registration, the assessee may not be able to sell its product without hindrance. Considering the above facts, we agree with the Commissioner (Appeals) that such expenditure has been incurred by the assessee for the purpose of its business which is to be allowed as revenue expenditure. Hence, the Commissioner (Appeals) has correctly held that the expenditure of Rs. 7,03,927, be allowed as revenue expenditure. The Commissioner (Appeals) has rightly directed the Assessing Officer to withdraw the depreciation allowed of Rs. 87,991. Therefore, ground no.2, of the appeal taken by the Revenue is dismissed.

46. In the result, assessee’s appeal is partly allowed and Revenue’s appeal is dismissed.