M/S CENTAUR PHARMACEUTICALS PVT LTD,MUMBAI vs. ITO 14 (1)(3), MUMBAI

4. Dr. May Pharma Technical consultancy service to identify, 20,97,025 Consult GMBH advise &help in forging license agreement, product registration issue, evaluating offered Technical Dossiers and product etc.

5. The Assessing Officer perused the above details and observed that above expenditure is not capital in nature and assessee was asked why the above amount should not be disallowed. In response assessee vide letter dated 19.02.2016 submitted that except for the disallowance on 4 ITA.NO. 7401/MUM/2019 (A.Ys: 2013-14) M/s. Centaur Pharmaceuticals Pvt. Ltd., account of the payment made to Dr. May Pharma and Ventures Corp Consultants all other disallowances have been deleted by the Ld. CIT(A) so it should 'not be disallowed again. Payment made to Dr. May Pharma which was disallowed by Ld. CIT(A) is allowed by ITAT for A.Y.2008-09 and A.Y. 2009-10 hence it should not be considered for disallowance during this year. Assessing Officer rejected the submissions of the assessee and proceeded to disallow the same and added to the total income by considering the same as capital in nature.

6 ITA.NO. 7401/MUM/2019 (A.Ys: 2013-14) M/s. Centaur Pharmaceuticals Pvt. Ltd., 7. After considering the submissions of the assessee Ld.CIT(A) sustained the additions made by the Assessing Officer on R&D expenditure and with regard to professional fee, he partly allowed with regard to Dr. May Pharma and Ventures Corp Consultants, he sustained the addition with the following observations: - “Next issue in this ground of appeal-3 is the disallowance of expenditure of Rs. 3,70,354/- made to Asian Patent Bureau (APB for short) as fees for product registration. Assessee company is engaged in the business of manufacture and sale of pharmaceuticals and appears to have incurred these expenses for the registration of various products developed by it with patents and registration office under the relevant law.' It means that the reason for the product registration was to make registering authority for the pharma product become aware of the product developed by the company and hence register the same as its owner and become entitled for the patent rights in the product which will endure for the benefit of the company for a period of more than 10/20/30 years as per the provisions of the patent law of the land. Thus, the process of product registration conferred an enduring benefit to the assessee which was to last for more than 10/20/30 years in respect of the product/s. registered. Therefore prima facie the expenditure of Rs3,70,354/ conferred an enduring benefit on the assessee and hence it was capital in nature and was not allowable as a revenue expenditure under section 28 to 44 of the IT Act, 1961. Hence the action of the AO in this regard is upheld and assessee's appeal in respect of the sub ground relating to this item of expenditure of Rs.3,70,354/- is rejected. Next issue in ground of appeal-3 is the allowance of professional fees paid to JOHN Mccarerrie for liasoning with Govt Health Authority for filing of documents and products. This expenditure is also similar to the expenditure of Rs.3,70,354/- referred to earlier and relates to the registration of the products and hence the same is treated as capital expenditure for the same reasons and the action of the AO is upheld.

7 ITA.NO. 7401/MUM/2019 (A.Ys: 2013-14) M/s. Centaur Pharmaceuticals Pvt. Ltd., Next issue in ground of appeal-3 is the allowance of professional fees of Rs.29,37,858/- paid to Dr. DILIP SNAVORDEKAR for technical consultancy services relating to identification, advice and assistance relating to product license registration issues and this expenditure is also similar to the product registration referred to earlier and hence primarily capital in nature and hence action of the AO is upheld and assessee's appeal on this sub issue is rejected.”

8. Aggrieved assessee preferred appeal before us raising following grounds in its appeal: - “1. The learned CIT (A) 22 was not justified in confirming Addition made by the A.O. of Rs.162,32,595/- under section 35 2AB. 2 The learned CIT(A)22 was not justified in not entertaining a claim of Rs.796,85,000/- Under section 35(2AB) claimed by the appellant during the course of assessment based on the decision of the Mumbai ITAT and Karnataka High court decision.

3. The learned CIT (A) was not justified in confirming disallowance of Rs.3,70,354/- being the amount paid to Asean Patent Bureau as capital expenditure.

4. The learned CIT (A) was not justified in confirming disallowance of Rs.5,85,448/- being the amount paid to John A Macrerie as capital expenditure. 5. the Learned CIT(A) was not justified in confirming disallowance of ₹.29,37,858/- being the amount paid to Dr. Dilip Snavordekar as capital expenditure.”

9. At the time of hearing, Ld. AR brought to our notice Page No 4 and 5 of the Paper Book which is the revised claim of the assessee which assessee has claimed before the Ld.CIT(A) relying upon the decision of the Hon'ble Karnataka High Court in the case of CIT v. Micro Lab Ltd. [383 ITR 0490] and he submitted the revised claim as under: -

8 ITA.NO. 7401/MUM/2019 (A.Ys: 2013-14) M/s. Centaur Pharmaceuticals Pvt. Ltd., Asstt.Year- 2013-14 4 Comparative Working of Claim u/s 35(2AB) (Rupees in Crores)

Original AO & CIT-A Auditors DSIR- Revised Claim Calculation Certificate Certificate Claim 3CL before AO / CIT- A & ITAT A A B C D E Capital Expenditure i Capital Expenditure - Note # 1 - 109.63 109.63 109.63 109.63 109.63 B Revenue Expenditure Total Revenue Expenditure as per 1,145.42 1,145.42 1,145.42 1,145.42 1,145.42 Audited Accounts. - Note # 2 Note #3 (2) 1,145.42 918.63 1,145.42 918.63 918.63 ii Less : Revenue Income from R&D 861.33 857.75 857.75 857.75 - -. Note #4 Net Revenue Expenditure –(3) 284.09 60.88 287.67 60.88 918.63 Total Eligible Expenditure (1) + (3) 393.72 170.51 397.30 170.51 1,028.26

C CALCULATION OF DEDUCTION 200% of the Total Eligible 341.02 341.02 Expenditure D Appellants' Calculation - [(A-1) * 503.35 506.93 1,137.89 2] + (A-2) Note #5

Amount Mentioned in CIT-A Order 1,364.68 - Page 3 initial Paragraph.- [(A-1) * 2] + (A-2) - Note #6 E Disallowance by AO 162.33

F Revised / Additional claim – 796.87 Note # 7

NOTES : #1 There is no Dispute regarding the Capital Expenditure of Rs.109.63 lacs.

9 ITA.NO. 7401/MUM/2019 (A.Ys: 2013-14) M/s. Centaur Pharmaceuticals Pvt. Ltd., #2 Appellants' Computation of Income has quantified the Amount of Gross Revenue Expenditure. #3 DSIR has reduced the eligible revenue expenditure by Rs.226.79 lacs. Therefore, the certified gross expenditure is Rs.918.63 lacs #4 The Auditors have reduced the Product Sales Turnover of Rs.857.75 Lacs from the Gross Eligible Expenditure. ln the Original Computation, appellants had erroneously reduced Rs.861.33 lacs. The said deduction has been accepted by DSIR also. #5 While calculating the deduction amount, appellants have taken the Capital Expenditure @ 200% and Revenue Expenditure @ 100% as the Revenue Expenditure already forms part of the Profit & Loss Account. Therefore already claimed as deduction for one time. The amount of Rs.1,137.89 is the Correct amount of Deduction as the Expenditure of Rs.226.79 lacs has been disqualified by DSIR. Accordingly, the additional claim should be Rs.796.85 lacs only. #6 For the reasons stated in Note 5 above, the amount of claim before Hon.CIT-A stands corrected at Rs. 1,137.89 lacs instead of Rs.1,364.68 lacs as mentioned in CIT-A Order. #7 Appellants seek relief of Rs.796.87 lacs which has been worked out on the basis of the Decision of lion Karnataka HC in case of Microlabs Ltd. 383 ITR 490. and Hon. Bangalore ITAT in case of Bosch I id [2017] 87 taxmann.com 351

13. The CIT(A) in his order passed u/s. 154 of the Act has not quoted the first sentence of the guideline 5(vii) (given above in bold letters), which in our opinion, is very material. The above guideline only means that in the process of carrying out the R&D work, if the assessee acquires any assets or products that should not be disposed of without the approval of Secretary, DSIR. If such assets are sold, the sales realization arising therefrom are to be setoff against the R&D expenditure of the R&D centre which is claimed as deduction u/s. 35(2AB). It is evident from the above guideline that it is only sales realization arising out of the assets sold that should be offset against R&D expenditure. In respect of sale of products acquired emanating out of R&D work done in an approved facility, the sale proceeds need not be reduced from the R&D expenditure. In our view, the reason for not including sales realization arising out of products emanating out of R&D work done and sold is because such sales would be reflected as receipts by the assessee in its books of account and income from business would be computed treating such sale as part of business receipts. The receipts arising out of sale of 12 ITA.NO. 7401/MUM/2019 (A.Ys: 2013-14) M/s. Centaur Pharmaceuticals Pvt. Ltd., products will not go to reduce the expenditure on R&D, whereas the assets acquired in the process of carrying out the R&D if they are sold, such sales realization would go to reduce the expenditure on scientific research and that is why sales realization arising out of assets sold is required to be offset against R&D expenditure. The above explanation will be sufficient to hold that the order passed by the CIT(A) u/s. 154 of the Act is unsustainable. Nevertheless, we will also examine as to what is the exact nature of receipts from sale of products.

14. A copy of license and supply agreement which was filed by the assessee before the AO as well as CIT(A) is at pages 5 to 26 of the assessee's paperbook. The sale of products is nothing but the sale of Dossiers by the assessee to persons not associated with the assessee or its directors. In the course of carrying out the scientific research, the assessee prepares elaborate documents regarding the products that would emanate from carrying out scientific research. This would also include the requirement of health authorities for grant of license to approve the products for human use. The assessee gives the Dossiers so prepared to entities outside India, who are interested in getting the marketing authorization for the product in a particular territory. They pay to the assessee the Dossier charges and apply for license to market the products for human use in their respective territories. On getting the license, they get marketing authorization from the assessee. The person who takes the Dossier (knowhow) takes it for the limited purpose of registration of product in other countries and after registration sale of the products in their country. If they get any order M/s. Micro Labs will manufacture and sell them at agreed price. So the knowhow given to them is only for limited purpose of registering with the drug control authorities for approval for human consumption. The foreign entities who get the dossiers will get rights to market the assessee's products in their territory and the actual manufacture in course of time will be done by M/s. Micro Labs Limited i.e., the Assessee.

15. All intellectual property rights, title and interest of any kind whatsoever in and/or to the Dossier and the Products shall be the exclusive property of MICRO LABS (the Assessee). MICRO LABS i.e., the Assessee may sell the Dossier to any third party, including its clients without the consent of foreign entity buying the dossier. However, MICRO LABS (the Assessee) shall notify the person acquiring the dossier of the transfer or sale of the Dossier to such third party and shall undertake that 13 ITA.NO. 7401/MUM/2019 (A.Ys: 2013-14) M/s. Centaur Pharmaceuticals Pvt. Ltd., such third party respect the terms and conditions of the agreement with the other third party who buys dossier from the Assessee.

16. DSIR guidelines no. vii has specifically provided that assets acquired if any out of R & D work shall be disposed with approval of DSIR. The assessee has been submitting yearly audit reports & accounts of approved R & D sanction to DSIR. The R & D accounts have been separately maintained and separate P & L Account prepared and the dossier sales have been credited to P & L Account of R & D because these sales are part of normal sales.

17. It is clear from the sample copy of the license and supply agreement filed before us that the product development charges received by the assessee will not be covered under clause 5(vii) of the DSIR guidelines. As we have already seen, these receipts are credited to profit & loss account are part of normal sales. They are, therefore, not to be reduced from the expenditure incurred by the assessee on carrying out scientific research on which deduction u/s. 35(2AB) has to be allowed. We are, therefore, of the view that there is no merit in ground No.2 raised by the revenue and that the order passed by the CIT(A) DATED 9.4.2014 U/S. 154 of the Act cannot be sustained and the same is hereby reversed. Thus, by the assessee is allowed, while ground No.2 raised by the revenue is dismissed." The aforesaid paragraphs show that the Tribunal has proceeded on the premise that when the regular work is in the nature of R&D work done and sold, it becomes a business income and chargeable as business income. It is only when the assets acquired in the process of carrying on R&D work, if they are sold, such realization would go to reduce the expenditure of scientific research.

17 ITA.NO. 7401/MUM/2019 (A.Ys: 2013-14) M/s. Centaur Pharmaceuticals Pvt. Ltd., 18. With regard to Ground No. 3, which is in respect of confirming disallowance of ₹.3,70,354/- being the amount paid to Asean Patent Bureau as capital expenditure, we observe from the record that the ITAT in assessee’s own case in particular A.Y. 2011-12 has decided in favour of the assessee and against the revenue, and the relevant findings are given below: - “6. We have heard both the parties and their contentions have carefully been considered. The relevant portion of the assessment order vide which impugned disallowance has been made are reproduced in the above part of this order. It is seen that order passed by AO is cryptic and no reasons have been given by AO to make disallowance. In respect of professional fees paid to Asian Patent Bureau and Dr. Dilip Snavordekar, Ld. CIT(A) has deleted the addition on the ground that assessee has placed on record evidence according to which the payments made by the assessee were allowable as expenditure. These findings of Ld. CIT(A) have not been assailed by the Revenue by bringing on record any material vide which it could be observed that such findings recorded by Ld. CIT(A) are either incorrect or are without any material. Therefore, keeping in view these facts we are of the opinion that no interference is called for in the deletion made by Ld. CIT(A) in respect of payments made by the assessee to Asian Patent Bureau, Dr. Dilip Snavordekar and also to SwormTechnologies. Therefore, we declines to interfere in the relief granted by Ld.CIT(A).

Order pronounced in the open court on 04th August, 2022