ACIT (LTU-1), MUMBAI vs. GLENMARK PHARMACEUTICALS LTD, MUMBAI

Brief fact of the case shows that the assessee is a company engaged in the business of manufacturing of pharmaceuticals products and related research and development activities.

Assessee filed a letter on 4 May 2016 reiterating that original return of income filed by assessee may be treated as Return filed in response to notice u/s 148 of The Act.

The learned Assessing Officer disposed of the objection by a separate order dated 10 November 2016 stating that reopening is valid rejecting all the objections.

On the merits,

Assessee aggrieved with Assessment order preferred appeal before the learned CIT (A) contesting that action under Section 147 of the Act is bad in law as [1] it is merely on change of opinion, [2] no fresh tangible material brought on record and [3] as reassessment is beyond 4 years, no material has been brought on record to show failure on part of the assessee for ‘full and true’ disclosure.

Assessee also challenged the disallowance of ₹86,05,000/- with respect to R & D expenditure. The assessee submitted that the learned Assessing Officer should not have reduced the receipt from contract research activities from R & D which are eligible for deduction under Section 35(2AB) of the Act and further, the R & D expenditure on which weighted deduction is claimed is at Sinnar unit whereas the contract research activities is carried out at Mahapae and there is no relation between these two units so far as R & D activities are concerned. The assessee further contended that income from contract research has already been offered for taxation and therefore, reducing it from contract R & D expenditure amounts to double addition.

The learned CIT (A)

Therefore, the assessee is aggrieved with order of the learned CIT (A) in upholding reassessment proceedings in its CO whereas; the learned Assessing Officer in his appeal is aggrieved with deletion of the disallowance of weighted deduction of research and development expenditure.

The learned Departmental Representative on the appeal of the learned Assessing Officer relied upon the order of the learned Assessing Officer.

On the cross objection of the assessee on reopening of the assessment, the learned authorised representative referred to the reasons recorded at page no. 1 of the assessment order and stated that on the reason no. 1 with respect to the slump sale under Section 50B of the Act, no addition has been made, therefore, it is now not matter of contention. He submitted that the reason no. 2 clearly shows that there is no tangible material coming into the knowledge of the learned Assessing Officer for reopening of the assessment. He referred to the reason and stated that it is merely ‘from the perusal of the records’ which already existed. Further reopening of the assessment is made by notice dated 30 March 2016 for A.Y. 2009-10 i.e. after four years and there is no reference that what is the failure on the part of the assessee to fully and truly disclose the material. He referred to the Paper Book containing 174 pages. He also referred to the decision of the Hon'ble Bombay High Court in case of Asian Paints Ltd. vs. DCIT (2009) 308 ITR 195, to contest that mere change of opinion cannot allow the learned Assessing Officer to reopen the concluded assessment. He referred to Para no. 10 of that decision to support his case.

The learned Departmental Representative supported the order of the learned Commissioner of Income tax

We have carefully considered the rival contentions and the orders of the lower authorities. The fact shows that the assessee filed originally its return of income on 25 September 2009, which was assessed under Section 143(3) of the Act on 30 November 2011. In paragraph no. 6 of Assessment Order it is noted that deduction under Section 35(2AB) of the Act has been claimed amounting to Rs. 10,04,36,556/-. In computation of income assessee has claimed the capital expenditure on R&D as well as Revenue expenditure on R&D both allowable as deduction under Section 35(2AB) of the Act. Report under Section 35(2AB) of the Act was also available before the learned Assessing Officer along with details of expenditure incurred on R & D centre as per Appendix-1 to Appendix-4 of auditor certification dated 20 September 2010. Thereafter reopening has been made.

on the basis of above reasons recorded, on the first issue refer to in paragraph no. 2 above no addition was made

With respect to Para no.3, the learned Assessing Officer has noted about the claim of weighted R & D deduction. The claim of the expenditure was Rs. 5,145 lacs. The learned Assessing Officer noted that assessee is also carrying on contract research on behalf of its AE, received a remuneration of Rs. 5,231 lacs, and incurred an expenditure of Rs.3, 600 lacs for rendering the above services. Assessee has reduced Rs.3,600 lacs from R & D expenditure of Rs.5,145 lacs and claimed on the balance sum weighted deduction at the rate of 15% amounting to Rs.2318 lacs. The learned Assessing Officer was of the view that assessee should have reduced Rs. 5,231 lacs being contract research income from R & D expenditure and thereafter, should have claimed deduction on net R & D expenses. Thus, according to learned Assessing Officer assessee has claimed higher weighted deduction at Rs.1,631 lacs (being Rs. 5,231 lacs contract receipt and 3600 lacs contract expenditure). Thus, ₹2,447 lacs were excess claimed by the assessee. The learned Assessing Officer noted that there is a failure on the part of the assessee to disclose fully and truly all-material fact necessary for its assessment. He also noted that considering the new credible information on record, he has reason to belief about the escapement of income.

Further, in assessment year 2012 – 13, on identical issue action u/s 263 of the act was initiated by the CIT (LTU) Mumbai stating that the deduction claimed by the assessee should have been reduced by the contract research income and not by the contract research expenditure. The matter was challenged before the coordinate bench wherein in order dated 30/9/2019 in ITA number 2944/M/2018, relying on the decision of Wockhardt Limited, held that the deduction claimed by the assessee by reducing the R and D expenditure only by the amount of R and D expenditure incurred and not by R&D income is in accordance with the provisions of the act. Hence, the order u/s 263 of the act was quashed.

We have also been shown that honourable Karnataka High Court in CIT versus micro labs Ltd 383 ITR 490, the guidelines of DSIR are extracted in paragraph number 3 which speaks that only when certain assets are used for research and development activities, which have been sold, the R&D expenditure should be reduced from the sales realization or arising out of asset sold. Therefore, it

In the reasons recorded, the learned Assessing Officer in paragraph no. 3.3 has categorically stated that on the perusal of the records he is of the opinion that assessee has claimed higher deduction. The learned Assessing Officer was also of the view that assessee has failed to disclose fully and truly all material facts necessary for its assessment. The disclosure made by the assessee has already been extracted above in earlier paragraphs. However, reasons recorded did not say that what is the information other than those already disclosed should have further been disclosed by the assessee to make it full and true. Merely, saying that assessee failed to dispose of its obligation does not prove that the failure of disclosure is on part of the assessee. Further, as the reassessment proceedings were initiated after the period of four years, it is mandatory for the learned Assessing Officer to show that what are the facts assessee has failed to disclose ‘fully and truly’. Even the paragraph no. 3.1 of the reasons recorded, the learned Assessing Officer has taken all the material only from the audited accounts, computation, and reports furnished by the assessee before him, which were available during the course of original

Further, the learned Assessing Officer has stated that based on this ‘new credible information’ on record, he has a reason to believe about escapement of income. The learned Assessing Officer has not referred to any new tangible material, which is mandatory condition for reopening of the assessment. We find that there is no new tangible material available with the learned Assessing Officer for reopening of the assessment. The learned Assessing Officer has merely perused the existing material available on record and has reopened the assessment. Therefore, on careful perusal of the reasons recorded it clearly shows that now the learned Assessing Officer would like to change his opinion that for granting of weighted deduction under Section 35(2AB) of the Act whether the expenditure incurred by the assessee on contract research services should have been reduced or the remuneration generated by incurring those expenditure should be reduced. Thus, now the learned Assessing Officer want to reduce the R & D expenditure by the cost incurred as well as the profit margin earned on this expenditure. It is an established principle of law that reopening merely on change of the opinion is not permitted. Further to reopen the case, the learned Assessing Officer should have a tangible material and it

Hon'ble Bombay High Court in case of Asian Paints Ltd. (supra) has categorically held that the power under Section 147 cannot be used to review the order. Here the learned Assessing Officer is clearly making an attempt to review his decision whether excluding the cost of R & D contract or the gross receipt earned by the assessee should be reduced from such expenditure. He merely applies his mind afresh to information already available on record.

Accordingly, we are of the view that learned CIT(A) has erred in upholding the action of the learned Assessing Officer of reopening of the assessment. The learned CIT(A) has held that a partial disclosure may very often be a misleading one. There cannot be any quarrel on this but how the disclosure made by the assessee is partial has not been demonstrated by him. It may also be true that it is not necessary that tangible material should always be from outside record of the assessee. However, what are the new material that Assessing Officer has seen which were not available or could not be seen by him in the original assessment is required be demonstrated by learned Assessing Officer. This is missing in the reasons recorded by the learned Assessing Officer as well as in the order of the learned CIT(A) upholding such reasons.

In view of our decision in the cross objection filed by the assessee which goes to root of the matter. We do not find it necessary to decide the issue involved in the appeal of the learned Assessing Officer. . However, for sake of completeness, whether the claim of the assessee under Section 35(2AB) of the Act is correct or not. In paragraph no. 6.3 of the order, the learned CIT(A) noted that the income from contract research has been offered for taxation, the cost of contract research has not been claimed by the assessee for weighted deduction. The expenditure incurred by the assessee for mahapae unit were properly used by the above expenditure on contract research work, the Sinnar unit has nothing to do with the same. The learned Assessing Officer is incorrect in reducing the income of contract research activity from the eligible claim. Certain judicial precedent including the decision of Hon'ble Karnataka High Court was followed. He has also dealt with the issue that after the income and expenditure are adjusted it would amount to double taxation of income. In the result, we do not find any infirmity in the order of the learned CIT(A) in deleting the

For assessment year 2009 – 10, accordingly, the appeal of the learned Assessing Officer is dismissed and the CO of the assessee for A.Y. 2009-10 is allowed.

Now coming to the appeals of assessment year 2010 – 11, the learned assessing officer has filed ITA number 7582/M/2019 against the order of the Commissioner of income tax (appeals) – 1, Mumbai dated 28/10/2019 challenging the deletion of the disallowance of weighted deduction claimed u/s 35 (2AB) of the act in the reopened assessment proceedings u/s 147 of the act. The assessee has filed appeal challenging the reopening of the assessment upheld by the learned CIT – A.

The facts in the case of the assessee for A.Y. 2010-11 are identical. The brief facts shows that assessee filed its return of income on 30th September, 2010 at Rs. Nil and book profit at Rs. 122,67,14,960/-. Assessment under Section 143(3) read with section 144C (3) of the Act was made on 7th March, 2014 at Rs.18,26,47,390/- as per normal computation and at a book profit of Rs.129,91,06,538/-. The case of the assessee was reopened by issue of notice under Section 148 of the Act on 21st March, 2017. The assessee requested for accepting the original return filed in response to that notice . The reasons were given to the assessee on 23rd May, 2017, the

On appeal before the learned CIT(A), the action under Section 147 of the Act was upheld and deduction under Section 35(2AB) of the Act was allowed.

Identically, the learned Assessing Officer is aggrieved with the allowance deduction under Section 35(2AB) of the Act and assessee is aggrieved where reopening of the assessment is upheld.

Both the parties confirmed that there is no change in the facts of the case are identical for this year compared to that assessment year 2009-10. Therefore, as per the reason given by us in cross objection of the assessee for A.Y. 2009-10, whether reverse the orders of the lower authorities on the issue of reopening of the assessment

Accordingly, the appeal of the learned Assessing Officer is dismissed and cross objection of the assessee is allowed.

Accordingly, all these four appeals are disposed off.