AGIO PHARMACEUTICALS LTD,MUMBAI vs. DCIT 9(1)(1), MUMBAI

These appeals are filed by the assessee against different orders of the Learned Commissioner of Income Tax (Appeals)–16, Mumbai [hereinafter in short “Ld.CIT(A)”] dated 29.03.2019 for the A.Ys. 2012-13 to 2015-16. Cross appeal is filed by the Revenue for the A.Y. 2012-13.

Since the issues raised in all the appeals of the assessee are identical, therefore, for the sake of convenience, these appeals are clubbed, heard and disposed off by this consolidated order. We are taking Appeal in ITA.No. 3539/MUM/2019 for Assessment Year 2012-13 as a lead case.

Assessee filed following grounds of appeal which is common in appeals filed by the assessee for the Assessment Years under consideration i.e. A.Y. 2012-13, 2013-14, 2014-15 and 2015-16. A.Y. 2012-13 “1. On the facts and in the circumstances of the case and in law Ld. Commissioner of Income Tax(Appeals)-16, Mumbai erred in sustaining addition of sales promotion expenses of Rs. 10,78,000/- being payments made to general practitioners. 2. On the facts and in the circumstances of the case and in law Ld. Commissioner of Income Tax(Appeals)-16, Mumbai erred in sustaining addition of sales promotion expenses of Rs. 80,126/-.”

With regard to main grounds of appeal raised by the assessee in grounds of appeal filed for the A.Y. 2012-13 which is common in all the Assessment Years under consideration relating to addition on sales promotion expenses being payments made to general practitioners and other sales promotion expenses.

The relevant facts relating to the above ground is taken from the lead A.Y. 2012-13. During the assessment proceedings Assessing Officer observed that in the Assessment Order for the A.Y. 2011-12 addition of ₹.1,71,451768/- was made under Explanation to Section 37(1) of Income- tax Act, 1961 (in short “Act”) by holding that expenses incurred for providing gifts, travel facilities & hospitality to medical practitioners compromises with the professional autonomy of medical practitioners and/ or autonomy or freedom of the medical institutions/ associations and the same are also prohibited by the IMC Regulations. He further observed that the Medical Council of India, in exercise of the powers conferred by

After considering the submissions of the assessee, Assessing Officer listed the nature of expenses and benefits given to Doctors/professional associations by way of freebies, which is given below: -

Assessing Officer observed that assessee could not submit any confirmation or receipts given by these medical practitioners, therefore, the same cannot be allowed on this ground as well. Further he observed that during the appellate proceedings for the preceding year, the assessee

Aggrieved assessee preferred an appeal before the Ld.CIT(A) and Ld.CIT(A) after considering the submissions of the assessee sustained the addition with regard to payment made to doctors. With regard to the sales promotion expenses Ld.CIT(A) observed that the expenditure relating to sales promotion expenses incurred are less than 1% of the turnover which is well below the industries standards and the above said payments are not in violation of the IMC Regulations and hence disallowance u/s 37(1) is not warranted. However, he disallowed only certain amounts which is not relatable to selling & distribution expenses. For this assessment year Ld.CIT(A) sustained only to the extent of ₹.80,126/-.

Aggrieved assessee is in appeal before us raising above said grounds of appeal.

He submitted that this expenditure does not fall under freebies and the assessee has made the payment for the services rendered by those Doctors. However, at the time of hearing the Bench asked the Ld. AR to submit any documents which gives the details of the above submissions

On the other hand, Ld. DR submitted that the assessee has made payments to Doctors which is in violation of Explanation to section 37 of the Act and assessee was not able to substantiate these payments before any authority i.e. while assessment proceedings or appellate proceedings. Therefore, he prayed that the plea of the assessee may be dismissed.

Considered the rival submissions and material placed on record, we observe that assessee has incurred certain expenditure on sales promotion by making payments to various doctors. However, assessee claims that these payments were made to those doctors in line of its business. These expenditures were in the nature of advisory services to obtain information regarding the acceptability of medicine and necessity for improvement in them and also to gain information on similar products of other companies which are being sold in the same market. However, assessee has not submitted any technical record or any agreement entered with those doctors to carry out this kind of activities which can

Coming to the appeals for the A.Y. 2013-14, 2014-15 and 2015-16, since ground raised by the assessee as well as facts are exactly similar to the grounds and facts in A.Y. 2012-13, the issue raised in the A.Y. 2013-14, 2014-15 and 2015-16 are mutatis mutandis. Therefore, the decision reached in above Para are applicable to these Assessment Years also. Accordingly, the grounds raised by the assessee in all these Assessment Years are also dismissed.

With regard to additional modified ground raised by the assessee, we have considered the submissions of both the parties and we found that the issue raised by the assessee in additional ground and relevant information to dispose of the above additional ground are already

Coming to the relevant facts relating to additional ground are, during the assessment proceedings, Assessing Officer observed that assessee has claimed weighted deduction @ 125% u/s. 35(1)(iia) of the Act amounting to ₹.6,00,00,000/- in respect of the payment for R & D to Calyx Chemicals and Pharmaceuticals (Indian company) engaged in R & D. The assessee was asked to furnish the details / evidences of incurrence of the said expenses. In response assessee filed submissions, for the sake of clarity it is reproduced below: - “M/s. Calyx Chemicals and Pharmaceuticals Ltd is approved Research and development center vide registration No.TU-1V/2496/2010 dated 10.06.2010 having its R & D facilities at its Plant in Dombivali. Company has R & D facilities of over Rs. 100 Crores with use of various modern techniques and technologies. The Company is engaged in research and development activities in pharmaceuticals sectors having its main focus on developing new process, improving process and driving cost efficiencies. The Company has dedicated staff of over 100 people working towards Research and Development. The assessee has entered into Service agreement (copy attached) with M/s. Calyx Chemicals and Pharmaceuticals Ltd for use of its R & D facilities whereby assessee and the company shall jointly conduct research and development activities which shall include chemical process and manufacturing method process. Assessee shall have sole right over any process developed under this agreement. The assessee shall also have all the right to register patents under its

After considering the submissions of the assessee Assessing Officer rejected the same by reference to section u/s. 35(1)(iia) and Rule 5F of the I.T.Rules. Accordingly, he rejected the weighted deduction claimed by the assessee with the following observation: - “5.3.4 The assessee has, till date, not submitted copy of the approval as per Rule 5F of the Rules accorded by the Prescribed Authority to Calyx Chemicals Limited in respect of its facilities for R&D nor has it submitted any explanation in this regard. As regards the claim of depreciation on this capital expenditure incurred, it is important to understand the purpose for which a payment of Rs.4.8 crore is being made. The assessee has incurred this expenditure for product, development and has entered into an agreement on 04.10.2011. That means the services of Calyx Pharma Limited to do R and D will be utilized from that date onwards. Product development is an evolution which includes series of processes of bringing a new pharmaceutical drug to the market through the process of drug discovery. It includes pre-clinical research, clinical trials and further obtaining regulatory approval to market the drug. Since the assessee has. during the year, only entered into Agreement with Calyx Chemicals Limited and it is in the process of product development, which generally takes long time and as of now it has not yielded any knowhow. Therefore, this expense is treated as work-in-progress. As and when product development happens with the help of which the

Aggrieved assessee preferred an appeal before the Ld.CIT(A) and however, before the Ld.CIT(A) assessee has not pressed this ground. Therefore assessee raised this additional ground before us with the prayer that actual expenditure of ₹.4.8 Crores incurred for scientific research maybe allowed u/s. 35 of the Act not u/s. 35(1)(iia) of the Act.

At the time of hearing, Ld. AR submitted that assessee has incurred certain expenditure on scientific development by making payment to M/s.Calyx Chemicals and Pharmaceuticals Ltd. He brought to our notice Page No. 130 of the Paper Book as per which assessee has entered into service agreement entered with M/s. Calyx Chemicals and Pharmaceuticals Ltd., for the purpose of conducting chemical process and manufacturing method development services, for this purpose Calyx shall depute two Calyx FTE Groups per year in accordance with the direction from the assessee in order to carry out a specific service as per the goal set by the assessee (FTE denotes Full Time Equivalent). Further, he brought to our notice the service charges agreed by the assessee to M/s. Calyx Chemicals and Pharmaceuticals Ltd., for ₹.80 Lacs per month. Accordingly, he brought to our notice Page No. 136 in which the details

On the other hand, Ld.DR brought to our notice Page No. 131 of the Paper Book which is service agreement entered by the assessee with M/s.Calyx Chemicals and Pharmaceuticals Ltd., in order to develop chemical process and manufacturing of APIs and intermediates and further he brought to our notice Page No. 132 of the agreement to submit that the outcome of the research is owned by the assessee, all inventions, discoveries etc., are the assets of the assessee. He submitted that this

Considered the rival submissions and material placed on record, we observe that assessee has entered into a scientific research service agreement with M/s. Calyx Chemicals and Pharmaceuticals Ltd., for the purpose of development of certain intermediates which will be useful for the production of the final products owned by the assessee. In this regard Ld. AR brought to our notice the various invoices raised by the M/s. Calyx Chemicals and Pharmaceuticals Ltd., which is nothing but the supply of technical staff for the purpose of research activities. No doubt it involves various research activities and which are agreed by the assessee to avail the services to develop chemical process and manufacturing of API and intermediates. This will help assessee to improve its process and manufacturing activities and improvement in its intermediates. Since it involves lot of labour activities which assessee has utilized from M/s. Calyx Chemicals and Pharmaceuticals Ltd. Since there is no document or any evidence that assessee has created any capital assets by doing of such research activities, however, these activities are carried out for the purpose of business only. Therefore these expenditures can be considered to incur only for the purpose of business and initially assessee

In the result, appeal filed by the assessee is partly allowed.

At the time of hearing, Ld. DR referring to the email dated 18.05.2022 submitted by the Assessing Officer, stated that the tax effect on the issue in the present appeal is ₹.46,24,644/- which is below ₹.50 Lacs and in view of the CBDT Circular No. 17/2019 dated 08.08.2019 in

In the result, appeal filed by the Revenue is dismissed.

In the net result, all the appeals of the assessee are partly allowed and appeal of the revenue is dismissed.