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Income Tax Appellate Tribunal, HYDERABAD BENCHES “B”, HYDERABAD
Before: SHRI MANJUNATHA G. & SHRI K.NARASIMHA CHARY
धििााररती द्वारा/Assessee by: Shri Mohd Afzal, AR राजस्व द्वारा/Revenue by: Shri Sheetal Sarin, LD.DR Appeared for Shri Kumar Pranav, CIT, DR सुिवाई की तारीख/Date of hearing: 14/10/2024 घोर्णा की तारीख/Pronouncement on: 05/11/2024 आदेश / ORDER PER K. NARASIMHA CHARY, J.M: Aggrieved by the order dated 13/12/2023 and 28/12/2023 passed by the learned Commissioner of Income Tax (Appeals)-National Faceless Appeal Centre (NFAC), Delhi (“Ld. CIT(A)”), in the case of Laurus Labs Limited (“the assessee”) for the assessment year 2016-17, 2017-18 and 2018-19 Revenue preferred these appeals and aggrieved by order dated 13/12/2023 for the assessment year 2016-17, assessee preferred this appeal. Since the grounds raised in these appeals are identical in nature, these appeals are clubbed, heard together and a common order is being passed for the sake of convenience as under :
Brief facts of the case are that the assessee is engaged in the business of manufacturing and trading of pharmaceutical products in India and overseas customers. During the assessment year 2016-17, it set up a new manufacturing unit at Atchutapuram Village of Visakhapatnam District. It filed the return of income for assessment year 2016-17 on 30/03/2018, admitting ‘Nil’ income after set off of brought forward unabsorbed depreciation. Assessee claimed investment allowance under section 32AD of the Income Tax Act, 1961 (“the Act”). Assessee further claimed weighted deduction in respect of clinical trials at 200% under section 35(2AB) of the Act also.
During the assessment proceedings, learned Assessing Officer observed that the assessee set up the new manufacturing unit at Atchutapuram during the Assessment Year 2016-17, whereas, the notification under section 32AD was issued by the Central Board of Direct Taxes (CBDT) on 28/09/2016 stating that it shall come into force with effect from the date of its publication in the official gazette; that even if the date of publication is taken to be 28/09/2016, it brings into force the provisions under section 32AD from the Financial Year 2016-17, relevant assessment year being 2017-18. On this premise, learned Assessing Officer disallowed the investment allowance claimed by the assessee under section 32AD of the Act.
Learned Assessing Officer opined that in respect of the expenditure incurred by the assessee towards clinical trials, the assessee is entitled to the 100% deduction, but not at 200% as claimed by the assessee under section 35(2AB) of the Act.
Apart from this, the learned Assessing Officer noticed that the assessee incurred expenditure for making investments in its subsidiaries, and therefore, the disallowance under section 14 read with Rule 8D of the Income Tax Rules, 1962 (The Rules) has to be computed and disallowed.
Aggrieved assessee preferred appeal before the learned CIT(A). Learned CIT(A) concurred with the learned Assessing Officer on the aspect of disallowance of investment allowance under section 32AD of the Act on the same lines holding that since the notification notifying the backward areas of Andhra Pradesh area was issued by the CBDT on 28/09/2016, it shall bring into force the provisions under section 32AD of the Act from the assessment year 2017-18 and therefore, it was rightly disallowed by the learned Assessing Officer for the assessment year 2016-17.
Learned CIT(A), however, while following the decision of the Hon'ble Gujarat Hight Court in the case of CIT Vs. Cadila Healthcare, 31 Taxman.com 300 and the decision of Hyderabad Tribunal in the case of Bharat Biotech International P. Ltd. in held that even if the expenditure incurred outside the R&D facility, the expenditure on clinical trials is allowable at weighted deduction under section 35(2AB) of the Act. So also, while following the decisions in various cases including the case of PCIT Vs.IL & FS Energy Development P. Ltd (399 ITR 483)(Delhi), learned CIT(A) held that when there is no earning of exempt income, no question of disallowance under section 14A of the Act read with Rule 8D of the Rules.
Aggrieved by the disallowance of investment allowance under section 32AD of the Act, assessee preferred ITA 121/Hyd/2024; whereas, challenging the deletion of the disallowance made on account of clinical trials and section 14A of the Act read with Rule 8D of the Rules, Revenue preferred ITA 201/Hyd/2024.
In so far as the disallowance of investment allowance is concerned, Revenue contends that section 32AD of the Act speaks of allowing such claim for investment allowance in the backward areas in the state of Andhra Pradesh, CBDT notified such areas by way of Notification dated 28/09/2016 and, therefore, going by the date of such notification, the units set up in such backward areas are eligible to claim deduction under section 32AD from the financial year 2016-17, relevant to the assessment year 2017-18. On this premise, both the authorities disallowed the investment allowance under section 32AD of the Act.
We have perused the decision in the case of Maheshwari Mining and Energy Private Limited Vs. DCIT in by order dated 06/05/2024. We have gone through this order. The learned third member agreed with the learned Judicial Member and returned a finding that the notification issued by CBDT does not keep the operation of the provisions under section 32AD of the Act in abeyance till the date of such notification and the statement in the notification to the effect that it shall come into force as on the date of its publication in the official gazette cannot overwrite the provisions of section 32AD(1) of the Act. This decision in the case of Maheswari Mining (supra) is holding the field as on the date and binds this Bench.
Section 32AD(1) of the Act clearly says that where an assessee sets up an undertaking for manufacture or production of any article or thing, on or after the 1st day of April, 2015, in any backward area notified by the Central Government in this behalf in the state of Andhra Pradesh or in the state of Bihar etc. and acquires and installs any asset for the purpose of the said undertaking or enterprise during the period beginning on the 01/04/2015 and ending before 01/04/2020 in the said backward area, then, there shall be allowed a deduction of a sum equal to 15% of the actual cost of such new asset for the assessment year relevant to the previous year in which such new asset is installed. It is not in dispute that in the case on hand, the assessee set up an undertaking in the financial year 2015-16 relevant for the assessment year 2016-17 and, therefore, in terms of section 32AD of the Act as held by the Tribunal in the case of Maheswari Mining (supra), the assessee is entitled to claim the investment allowance at 15% of the Capitalized amount as deduction.
Respectfully following the same, we hold that the assessee is entitled to claim investment allowance at 15% of the capitalized amount as deduction under section 32AD of the Act in the assessment year 2016-17 also. Grounds of appeal in ITA 121/Hyd/2024 are allowed accordingly.
13. Now coming to the Revenue appeal, as stated above, two issues are involved. First one is the disallowance of claim under section 35(2AB) of the Act in respect of clinical trials. This issue also covered by the decision of the Hon'ble Gujarat High Court in the case of Cadila Healthcare (supra). While respectfully following the said decision, a coordinate Bench of this Tribunal held in the case of Aurobindo Pharma Limited in Assessment Year: 2017-18 that,- 36. On a careful perusal of the record we find that the Hon’ble Gujarat High Court rendered the decision in Cadila healthcare Ltd (supra) holding that the clinical trials are not always possible to be conducted in the closed laboratory or in house like facilities and are required to be conducted outside the approved facility and if we go by the restricted interpretation resorted to by the Revenue, such an interpretation renders the explanation meaningless where the expenses for obtaining approvals from the regulatory authorities are also included in the clinical trials, because such expenses for obtaining approvals from the regulatory authorities normally happen outside the approved R&D facility. Subsequently the SLP was preferred by the Department and three issues were remanded for consideration by the Hon’ble Gujarat High Court by order dated 13/10/2015. Hon’ble Gujarat High Court, by order dated 25/2/2020 in PCIT vs. M/s Sun pharmaceuticals industries Ltd in R/Tax Appeal No. 92 of 2020, observed that in view of the decision in Cadila healthcare Ltd (supra) the issue relating to and, on that ground, of weighted deduction under section 35(2AB) of the Act in respect of clinical trials expenses incurred outside the approved facility stood covered and on that ground did not admit such an issue for consideration.
37. From the above it is clear that the issue has clearly been covered by the decision of the Hon’ble Gujarat Court High Court in the case of Cadila healthcare Ltd (supra), referred to and followed in the case of M/s Sun Pharmaceuticals Industries Limited (supra). A coordinate Bench of this Tribunal in assessee’s own case for the assessment year 2018-19 having noticed the judicial review on this aspect, including the argument advanced in that case, and basing on CIT vs. Vegetable Products Ltd 88 ITR 192 (SC) reached a conclusion that when once the clinical trial expenses incurred outside the approved R&D facilities, were approved by the prescribed authority the assessee is entitled to claim deduction under section 35(2AB) of the Act. Respectfully following the same we hold the issue in favour of the assessee and allow weighted deduction in respect of the expenses incurred on clinical trials.
14. In view of this consistent view taken in respect of clinical trial expenses incurred outside the approved R&D facilities, we find it difficult to hold that the findings of the learned CIT(A) in the impugned order allowing the claim of the assessee for deduction under section 35(2AB) of the Act in respect of clinical trials is perfectly legal. We therefore, uphold the same. Ground No.2 of Revenue appeal is found to be devoid of merits and accordingly dismissed.
15. Second aspect of Revenue’s appeal is in respect of disallowance under section 14A of the Act read with Rule 8D of the Rules. Factual finding returned by the learned CIT(A) is that during the assessment year 2016-17, the assessee did not earn any exempt income. He, therefore, held that in view of the binding precedent in the case of PCIT Vs. IL&FS Energy Development Private Limited, 399 ITR 483 (Delhi) and Chettinad Logistics (P.Ltd.) (2017) 80 Taxman.com 221 (Madras) and CBDT Circular No.5/2014 dated 11/05/2014, no disallowance under 14A of the Act read with Rule 8D of the Rules could be made when no exempt income has been claimed. No decision to the contrary is brought to our notice. On the other hand, the SLP against the decision of Hon'ble Madras High Court in the case of Chettinad Logistis (supra) was dismissed by the Hon'ble Apex Court. Hence, the learned CIT(A) rightly deleted the disallowance made by invoking section 14A of the Act read with Rule 8D of the Rules. We, therefore, while upholding the findings of the learned CIT(A), dismiss Ground No.3 of Revenue appeal.
16. Grounds No.1 and 4 are general in nature and do not require any adjudication.
17. In these two appeals, Revenue challenged the direction of the learned CIT(A) to delete the disallowance made by the learned Assessing Officer on account of the clinical trials and section 14A of the Act read with Rule 8D of the Rules, for the assessment years 2017-18 and 2018-19. These two issues are identical to the issues covered by the Grounds No.2 and 3 of Revenue’s appeal for the assessment year 2016-17 in ITA No.201/Hyd/2024. Hence, following our view taken on those grounds, we hold these two issues for the assessment years 2017-18 and 2018-19 also in favour of the assessee and consequently dismiss such grounds.