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Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD
Before: SMT.ANNAPURNA GUPTA & SHRI SIDDHARTHA NAUTIYAL
PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER These cross-appeals by the assessee and the Revenue are against the orders passed by the Commissioner of Income Tax (Appeals)-10, Ahmedabad (in short referred to as “ld.CIT(A)”) of even dated i.e. 7.11.2019 passed under section 250(6) of the Income Tax Act, 1961 ("the Act" for short) pertaining to Assessment Years 2008- 09 and 2009-10. Since, the issues raised in the appeals are stated
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 2 to be identical and inter-connected, they are disposed of by this common order.
For convenience of adjudication, we take the appeals of the Asst.Year 2008-09 as lead case.
ITA No.51/Ahd/2020 : A. Y 2008-09 (Assessee’s Appeal):
Solitary ground raised by the assessee reads as under:
“On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in partly confirming disallowance under section 40(a)(i) of the Act to the extent of Rs.19,34,368/- in respect of payments to non-resident persons, without appreciating the fact that the Appellant was not liable to withhold any taxes while making the aforesaid payments.”
Grievance raised by the assessee in the above grounds relates to the issue of disallowance made of expenses for non-deduction of tax at source thereon, the payment in relation to the expenses being made to non-residents, in terms of provisions of section 40(a)(i) of the Act. Ld.Counsel for the assessee stated that the disallowance made by the AO was partly allowed by the Ld.CIT(A) and therefore both the assessee and Revenue have raised their respective grievance against the order of the Ld.CIT(A) on the issue.
The facts relating to the issue are that the AO noted the assessee to have not deducted TDS on expenses incurred in relation to non-residents amounting in all to Rs.67,33,167/-, detailed at page no.26 of his order as under:
Payment Amount (In Rs.) Consultancy 17,30,262 Professional Consultancy (Chemical) 15,61,712
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 3 Legal & Professional Expenses(R&D) 3,17,171 Consultancy (Corporate) 1,68,550 Legal Consultancy 29,55,472 Total 67,33,167
He found that the expenses qualified for deduction of tax at source under the domestic law, since the payments qualified as Fees for Technical Services liable to tax in India in terms of section 9(1)(vii) of the Act. Further since the assessee did not give the country to which the impugned payment was made, the AO referred to the typical Article 12 of Double Taxation Avoidance Agreements (DTAA) relating to Royalty and Fees for Technical Services, finding the nature of expenditure incurred by the assessee to qualify as fee for technical services, and found that even in terms of provisions of typical Article 12 of DTAA the impugned amounts were taxable in India and withholding taxes provisions applicable. He therefore disallowed the entire amount as noted by him above, paid to non- residents amounting to Rs.67,33,167/- under section 40(a)(i) of the Act.
The matter was carried in appeal before the ld.CIT(A) who found that the payments made to resident of USA ,amounting in all to Rs.30,68,538/-, detailed out at page no.50 of his order was not liable to tax in India in terms of DTAA with USA, since Article 12 of the said DTAA between India and USA restricted the scope of FTS to such services which “make available” any technical knowledge, skill or know-how etc. and in the present case, noting the fact that the legal professional services incurred by the assessee in the said case was in relation to the registration of products in foreign countries
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 4 which did not involve transfer of technical knowledge, know-how or skill,he held that impugned amounts were not liable to tax in India, and therefore, no disallowance with respect to the same could be made for non-deduction of tax at source under section 40(a)(i) of the Act. Accordingly, the disallowance made by the AO with respect to the payment made to non-resident USA for procuring services relating to the registration of products with foreign regulatory authority in the sale in whose countries amounting to Rs.30,68,538/- was deleted by the Ld.CIT(A).
With respect to the remittance of Rs.19,34,368/-, details of which are reproduced at page no.61 & 63 of the order, the ld.CIT(A) did not find any merit in the contention of the assessee, noting that no supporting documents with respect to the services had been furnished by the assessee. He also noted that these payments were made in different jurisdictions i.e. Russia, Sri Lanka, France and Italy, which did not restrict the definition of FTS to only such services which “make available” technical knowledge. Accordingly, he held that the impugned payments were liable to tax in India in terms of DTAA with such countries, and since the assessee had failed to deduct tax thereon, he confirmed the disallowance made by the AO under section 40(a)(i) of the amount amounting to Rs.19,34,368/-.
Aggrieved by the same, both the assessee and the Revenue has come up in appeal before us.
We shall first deal with the assessee’ grievance qua confirmation of disallowance under section 40(a)(i) of the Act to the tune of Rs.19,34,368/-. The details of the parties to whom the
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 5
payments were made by the assessee is reproduced in the order as under: Sr.No. Party Name Country Name Amount in Rs. 5 Clifford Chance Russia 16,05,388 CIS Limited 6 Esjay Corporate Sri Lanka 11,809 Service P.Ltd. 7 Council of Europe France 56,481 8 AIFA office Italy Italy 2,60,690/- Total 19,34,368/-
The contention of the ld.counsel for the assessee before us was to the effect that these payments were made for legal and professional services, which fact was not disputed and they therefore did not qualify as fee for technical services, but were in the nature of independent personal services, which were dealt with Article 14 of the DTAA; that therefore clause of the DTAA dealing with the FTS would not apply, but on the contrary, the clause dealing with the independent personal services would apply. He made detailed submissions on the applicability of Article 14 with respect to DTAA with Russia and Sri Lanka to the effect that the same was applicable, since the said DTAA applied to the individuals and firms were transparent entities to be treated as individuals. Alternately, he contended that if the impugned services did not qualify as independent personal services, they were to be considered as business services, and their taxability therefore to be determined in terms of the Article 7 of the DTAA; that as per the Article 7, the amounts were taxable in the source country only if the entities had permanent establishment in the said country, and undoubtedly, these independent entities did not have permanent establishment in India.
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 6 11. Briefly put, the contention of the ld.counsel for the assessee before us was to the effect that the payment to Clifford Chance CIS Ltd., Russia of Rs.16,05,388/- and Esjay Corporate Service P.Ltd., Sri Lanka of Rs.11,809/- was – (i) not in the nature of fee for technical services and taxability thereon in India could not be read with reference to the Article in the DTAA dealing with FTS, and (ii) that it qualified as independent personal services and its taxability in India was to be read with respect to Article 14 of the DTAA with respective countries, as per which, it could be taxed in India, only if the person had an permanent presence in India; that alternatively, if it did not qualify for taxation under Article 14 of DTAA its taxability is to be considered in terms of Article 7 of the DTAA with the said countries, as per which again the impugned amounts were taxable only if the entities had permanent establishment in India; that in any case, the impugned amounts were not liable to tax in India. References were made to several decisions in this regard.
The ld.DR, on the other hand, pointed out that these arguments were not made by the ld.counsel for the assessee before the lower authorities and were being raised for the first time. That the facts relating to the issue were not clear, whether parties to whom the payments were made were firms, companies, individual etc. Even otherwise, he contradicted all contentions made by the ld.counsel for the assessee before us, with respect to the applicability of Article 14/ Article 7 of the DTAA with respective countries, and non-applicability of FTS clauses of the DTAA to these transactions. 13. We have heard rival contentions and gone through the orders of the Revenue authorities and also material available on record.
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 7
Undeniably the disallowances of expenses u/s 40(a)(i) of the Act have been made for lack of evidences filed by the assessee explaining the nature of expenses. That therefore they were treated as being in the nature of Fees for technical services and held liable to tax in India both as per domestic law and as per DTAA with the respective countries. The Ld.Counsel for the assessee though pointed out that all details were furnished. He drew our attention to page 47 of the order of the Ld.CIT(A) noting the fact of all evidences being filed by the assessee with respect to the impugned expenses. Having noted so we find that the arguments now raised by the assessee before us against the taxability of the impugned expenses in India were never raised before the lower authorities. His contention is to the effect that the impugned expenses do not qualify as Fees for technical services, but are in the nature of Independent personal services, covered under Article 14 of DTAA with the concerned countries or in the alternate they qualify as business income whose taxability in India is to be read as per Article 7 of the DTAA.
Since it is imperative to determine first the nature of the expenses and thereafter determine which Article of the DTAA deals with their taxability in source and residence country, the issue , in our view needs to be sent back to the AO with the direction to first cull out all the relevant facts relating to the impugned expenses and thereafter adjudicate the issue of their taxability in India both as per the domestic law and as per DTAA with the respective countries, considering all arguments/ contentions made by the assessee. The ground of appeal raised by the assessee is therefore allowed for statistical purposes.
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 8
In effect appeal of the assessee is allowed for statistical purposes.
Now we take up the Revenue’s cross appeal, being ITA No.73/Ahd/2020 for Asst.Year 2008-09.
It was common ground that ground no.1 to 4 of the Departmental appeal related to the issue of claim of weighted deduction of expenses incurred, both capital and Revenue in in- house research and development activity in terms of provisions of section 35(2AB) of the Act. The assessee had claimed weighted deduction under section 35(2AB) of the Act of Rs.34,84,27,179/- being 150% of capital and revenue expenses on account of following capital and revenue expenses:
Capital Expenditure : Rs.6,49,23,731/- Revenue Expenditure : Rs.16,73,61,055/- 150% of the above claimed u/s. : Rs.34,84,27,179/- 35(2AB) of the Act
The break-up of the expenses found mention at page no.7 for the assessment order as under:
Capital Expenditure Particulars Revenue Expenditure (In Rs.) (In Rs.) Capital Equipments 64923731 47631202 Salary / wages Material / 46276833 Consumables Any other 73453020 expenditure (Clinical trials etc)
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 9
Total 64923731 167361055
Revenue expenses of Rs.16,73,61,055/- included expenses incurred on R&D which were not approved by the DSIR, prescribed authority under the Act for furnishing requisite certificate specified under the Section, to the tune of Rs.6,49,23,731/-. In the computation of income, therefore, while assessee claimed weighted deduction of the entire revenue expenditure of Rs.16.73 crores amounting to Rs.25.09 crores including in the total claim made by the assessee under section 35(2AB) of the Act of Rs.34.84 crores, the assessee reduced the component of the weighted deduction included therein pertaining to the Revenue expenditure, not approved by the DSIR which being 50% of the Revenue expenditure of Rs.6,42,79,000/- amounted to Rs.3,21,25,867/-. Accordingly, in its computation of income, the assessee claimed deduction under section 35(2AB) of the Act on the entire revenue expenditure, and capital expenditure incurred amounting in all to Rs.34.84 crores. At the same time, it also reduced its claim by adding back to its income, the components of weighted deduction pertaining to the revenue expenditure not approved by the DSIR amounting in all to Rs.3.21 crores. In the assessment framed, the AO disallowed the following claim made by the assessee under section 35(2AB) of the Act.
i) Weighted deduction claimed by the Rs.2,52,45,668/- assessee on revenue expenditure which was found to be not utilized in the approved in-house R&D Development centre of the assessee;
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 10
ii) Weighted deduction at the rate of Rs.6,41,494/- 50% of expenditure incurred on being 50% of clinical trial outside the in-house Rs.12,82,988/- R&D facility iii) Analytical and Testing expenses Rs.2,72,33,452/- found to be incurred i.e. 150% being 150% of claimed by the assessee of expenses 1,81,55,635/-. incurred on analytical and testing activity for lack of evidence of having incurred the same and for lack of evidence that were actually incurred for in-house facility –
The assessee went in appeal before the ld.CIT(A) who deleted all the above disallowance made by the AO.
Before the ld.CIT(A), the assessee also claimed component of weighted deduction on revenue expenses not approved by the DSIR which it had added back in its computation of income to the tune of Rs.3,21,25,867/-. This claim of the assessee was allowed by the ld.CIT(A).
Aggrieved by the above decision of the ld.CIT(A), the Revenue has raised the following four grounds of appeal before us - all pertaining to the issue of disallowance made by the AO under section 35(2AB) of the Act.
“(1) The CIT(A) has erred in law and In facts in directing the AO to allow the claim of Rs.7,26,22,384/- u/s 35(2AB) of the Act ignoring the serious discrepancies brought out by the AO. (2) The CIT(A) has erred in law and in facts in deleting the disallowance of analytical and testing expenses of Rs.2,72,33,452/-without considering that the AO is entitled to verify such expenses and the assessee ought to have produced such evidences. (3) The CIT(A) has erred in law and in facts in deleting the disallowance of clinical trial expenses of Rs.6,41,494/-.
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 11 (4) The CIT(A) has erred in law and in facts in directing the AO to allow the deduction of Rs.3,27,25,867/- u/s 35(2AB) of the Act despite the fact that no such claim was made in the return of income and does not emanate from the assessment order and also that the expenses were not approved by DSIR in form No.3CL.” 23. Taking up first issue of disallowance of claim of Rs.1,26,22,834/- made by the AO under section 35(2AB) of the Act, orders of the authority below reveal that, the AO found the impugned claim ineligible for the reason he noted that this amount of capital expenditure incurred by the assessee allegedly on in-house R&D activity was not actually incurred in the R&D facility of the assessee. From the bills/invoices of the capital items, pertaining to the same, he noted that they were all delivered at other places of the assessee, and not at its R&D centre at 1389, Trasad Road Dholka, Ahmedabad. The capital items purchased vide invoice totaling to Rs.2,52,45,668/- were delivered at the following places at –
a) At Nanikadi Rs.1,59,34,865/- b) Corporate Office Rs.82,56,471/- c) No location mentioned Rs.10,54,332/- Rs.2,52,45,668/- 24. The assessee contended that items were all used in R&D facility of the assessee at Dholka and explained the reasons for the invoices raised at other places as is being that, the items required testing and clearance, their delivery was taken at the engineering group concern of the assessee at Nanikadi where equipments were delivered and after testing and clearance, they were shifted to R&D facility. Evidences of shifting of the assessee from Kadi to Dholka were also filed. For the rest of the expenses, the assessee contended that it was provided with the break of the invoices, which were pertained to be raised at the corporate or at no-location, and there
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 12 was unable to give an explanation. But at the same time, the assessee contended that merely because delivery of the items was taken elsewhere did not mean that the assets were not used in its R&D facility. The AO, however, was not satisfied with the reply of the assessee and dismissed the same stating that there was no reason, why the capital items meant for R&D facilities were not delivered to R&D centre to other places, and it was beyond comprehension as to why equipments required for R&D was directed to be delivered at the manufacturing premises. The ld.AO, in short, was not satisfied with the explanation of the assessee. Accordingly, he denied weighted deduction claimed by the assessee on the capital expenditure of Rs.2.52 crores at the rate of 50% thereof, amounting to Rs.1,26,22,834/-.
The finding of the AO at para 4 to 4.8 of the order reads as under:
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd.
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd.
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd.
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 16
The ld.CIT(A), however, was convinced with the explanation of the assessee. He noted that the essential condition for claim of deduction under section 35(2AB) is that the asset should be used for the purpose of in-house R&D facility. He further took note of the fact that the assessee had filed the evidence of shifting of these asses to its R&D facility. Further taking note of the fact that this expenditure has been approved by the Auditor in its certificate on
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 17
R&D expenditure, accordingly, he deleted the disallowance made by the AO of weighted deduction claimed on capital expenditure on R&D amounting to Rs.1,26,22,834/-. His findings in this regard are at para-7.4. to 7.5 of his order as under:
“7.4 Decision: I have considered the assessment order & the submission of the appellant and the materials available on record. The AO observed that during the year under consideration, certain items of capital expenditure of Rs.2,52,45,668/- claimed by the appellant under section 35(2AB) were delivered to corporate office or other premises, and not to the approved R&D facility. The AO held that the appellant diverted said capital items from approved R&D centre to other manufacturing units and accordingly, disallowed the 50% weighted deduction of Rs.1,26,22,834/--under section 35(2AB) of the Act. In this regard, the appellant has contended that the alleged capital assets were initially delivered to corporate office/other places only for technical reasons / process, i.e.,for indenting/procuring/ testing/clearance purpose. Upon the completion of the said processes, the Appellant had shifted these capital assets to approved R&D unit. The essential condition for claim of deduction under section 35(2AB) is that the asset should be used for the purpose of in house R&D. It is justifiable that assets may have to go through various technical and testing process, before it is put in use for desired purpose. For this reason, the assets were delivered to other places and later being shifted to R&D facility for actual use. The appellant has also produced evidences in form of copies of LR / challans showing transfer of such assets from other places to Dholka R&D centre. Further, said expenses have been approved by the auditor in its certificate on R&D expenditure. In view of the above, I find substance in the argument of the appellant.
7.5 Furthermore, the appellant has submitted that it did not claim weighed deduction in respect of expenses disapproved by the DSIR amounting to Rs.6,42,79,000/-. It is seen that the DSIR has not provided any break-up or explanation of said disallowance in the Form 3CL. However, the AO, while making disallowance of clinical trial expenditure claimed under section 35(2AB), mistook the amount of clinical trial expenditure at Rs.7,28,46,988/-instead of actual expenditure of Rs.72,84,698/-, which is evident from the auditor's certificate on R&D expenses. It is noted that the amount of expenses disapproved by DSIR (Rs.6,42,79,000/-) is much higher than the capital items disallowed hereinabove (Rs.2,52,45,668/-) and clinical trial expenses disallowed by the AO (Rs.72,84,698/-),both put together. Considering that no weighted deduction is claimed in respect of expenses disapproved by DSIR (Rs.6,42,79,000/-). In view of the same, no further disallowance could have been made. Also on merits, in view of reasons provided in para 7.5 above, I direct the assessing officer to delete the disallowance in respect of capital items delivered elsewhere and later,shifted to R&D centre. The ground no.3 of appeal is therefore allowed.
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 18 27. Before us, the ld.DR relied on the order of the AO, while the ld.counsel for the assessee, besides relying on the finding of the ld.CIT(A) that the assessee had evidenced the shifting of capital items to its R&D units and the entire capital expenditure was approved by the Auditor. He drew our attention to the DSIR certified issued in Form No.3CL placed before us at page No.75-76, pointing out that the DSIR had approved capital expenses of Rs.649.24 lakhs which was the entire amount of capital expenditure claimed by the assessee to have been incurred on in-house R&D activity.
We have heard contentions of both the parties. We have gone through the orders of the Revenue authorities and documents referred to before us.
We have noted that solitary basis for denial of weighted deduction to capital equipment purchased by the assessee for its R&D facility under section 35(2AB) of the Act by the AO was that the invoices were not raised at its R&D facility address, but elsewhere, and the AO was not convinced with the explanation of the assessee that majority of the items delivered elsewhere were for the purpose of testing equipments purchased, which were subsequently shifted to its R&D facility. We have noted that the assessee had furnished evidence of shifting of these items to its R&D facility.
The ld.CIT(A), therefore, we hold has correctly appreciated the facts and found the capital items to have been used in the R&D facility only. We also found that the ld.CIT(A) has noted the fact that the impugned capital expenditure was approved by the authority specified for the said purpose under section 35(2AB) of the Act, being DSIR, which was evidenced in the certificate issued to it in
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 19 Form No.3CL. The said fact was also pointed to us during the course of hearing, wherein the ld.counsel for the assessee had sufficiently demonstrated that the entire capital expenditure claimed by the assessee have been incurred in its R&D facility of Rs.6.49 crores was approved by the DSIR.
In the light of the same, when the specified authority itself had approved the incurrence of the capital expenditure for the purpose of carrying out in-house R&D facility, there was no question for the AO to have doubted the same. We, therefore, agree with the ld.CIT(A) that there was no basis for the AO to arrive at a finding that the capital expenditure to the tune of Rs.2.52 crores was not incurred in the R&D facility of the assessee. We agree with the ld.CIT(A) that the assessee had sufficiently evidenced the said facts to the authorities below. The ld.CIT(A), we hold, as rightly denied the disallowance made by the AO of the weighted deduction claimed by the assessee on the same amounting to Rs.1,26,22,834/-.
Ground no.1 raised by the Revenue is accordingly dismissed.
Ground no.2, it was pointed out, pertained to the disallowance of clinical trial expenses and analytical and testing expenses to the tune of Rs.6,41,494/- and Rs.2,72,33,452/- made by the AO on the ground that these expenses were not incurred in-house facility but testing R&D facility.
As per the AO, for the purpose of claiming weighted deduction under section 35(2AB) of the Act all the expenses needed to be incurred in the in-house R&D facility and any expenditure incurred
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 20 outside the in-house R&D facility was not to be allowed weighted deduction.
With regard to the clinical trial expenses, the AO noted that out of total expenditure incurred by the assessee of Rs.72,85,000/-, the assessee was unable to prove the incurrence of expenses to the tune of Rs.12,82,988/- in the in-house R&D facility. He accordingly denied the assessee’s weighted deduction at the rate of 50% thereof on the same, which amounted to Rs.6,41,494/-.
With respect to the analytical and testing expenses, the AO noted that these were specialized expenses on analysis results requiring specialized scientific equipments and specified persons for conducting the analytical studies. Since the assessee could not produce any evidence to show that these expenses were incurred in- house, he held that the assessee was not entitled to weighted deduction on the same. He further found that the assessee was unable to substantiate with evidence of the incurrence of these expenses. Accordingly, he denied the entire deduction claimed on analytical and testing at the rate of 150% therefor, under section 35(2AB) of the Act amounting to Rs.2,72,33,4552/-. The amount of expenditure incurred on analytical and testing by the assessee was Rs.1,81,55,635/-, the assessee had claimed weighted deduction thereon under section 35(2AB) of the Act at the rate of 150% thereof amounting to Rs.2,72,33,452/-, and this entire amount was disallowed by the AO for lack of evidence and substantiation, and also since the assessee was unable to prove that the assessee was in fact incurred for the in-house R&D facility.
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Before the ld.CIT(A) the assessee filed additional evidence of all the invoices relating to analytical and testing expenses and contended that since the AO had not given any opportunity to the assessee to furnish the same, he requested for admission of these additional evidence. The ld.CIT(A) noted that in the show cause notice, the AO had only sought explanation for weighted deduction claimed by the assessee in respect of these expenses, and not asked production of any vouchers and evidences therefor, accordingly, he agreed with the assessee that the evidence could not be produced due to lack of opportunity given by the AO. Accordingly, he admitted the additional evidence. He further sent these evidences to the AO for seeking remand report, but despite repeated reminders neither any objection nor any remand report was furnished by the AO. The ld.CIT(A) perused the evidence and found that the assessee had substantiated incurrence of analytical and testing expenses in its in-house R&D facility. The finding of the ld.CIT(A) in this regard at para 8.4 of his order are as under:
“8.4 In this regard, the appellant has produced before me the ledger copy of the analytical and testing expenditure along with invoice copies of high value transactions, to support its claim as an additional evidence. It is seen that in the show cause notice, the AO has only sought explanation for weighted deduction under section 35(2AB) in respect of analytical and testing expenses and has not asked to produce voucher / evidences in support thereof. Accordingly, additional evidences produced by the appellant are admitted in view of Rule 46A(d) of the Income-tax Rules. A copy of evidences produced by the appellant was sent to the AO for verification and a remand report was sought by this office. Even after multiple reminders, no objections or remand report are submitted by the AO. till date. However, on perusal of the details furnished by the appellant, it is evident that the alleged analytical and testing expenditure were actually incurred by the appellant.”
Further, the assessee had explained the nature of its expenses to the ld.CIT(A) contending that with respect to the R&D material, which were procured by the assessee, as well as RD results derived
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 22 analytical and testing needed to be carried out. The assessee contended that the R&D facility in the form trial batch, pivot project, scale up batch exhibit batch necessarily needed to be to go through analytical and testing batch to achieve complete R&D result. The assessee contended that all the desired properties of a medicine/formulation needs to be analysised, tested and documented; that the R&D activity could not be carried out without incurring analytical and testing expenses, and his explanation in this regard is reproduced at para 10.2 (page no.19( of the CIT(A)’s order. The ld.CIT(A) appreciated the contentions of the assessee, and held that the considering the nature of the activity and taking note of the fact that the assessee had adduced relevant evidences of incurring the same, the claim of the assessee to the weighted deduction on the analytical and testing expenditure to the tune of Rs.2,72,33,452/- was allowable in law. His finding in this regard at para 8.5 of his order are as under:
“8.5 Further, with respect to allowability of weighted deduction under section 35(2AB), the appellant has submitted that the expenditure is incurred for analysis and testing activities, which is an integral part of R&D function. In respect of R&D material procured, the properties/ desired properties are analysed and tested in the form of trial batch, pilot batch, scale up batch, exhibit batch etc. to achieve the complete R&D result. Considering the nature of the activity, it is clear that the analytical and testing expenditure are in form of research and development expenditure and are hence eligible for weighted deduction under section 35(2AB). Accordingly, I direct the assessing officer to delete the disallowance of Rs.2,72,33,452/- made in this regard. The ground no.4 of appeal is therefore allowed.”
Before us, the ld.DR though relied on the order of the AO, he was unable to challenge in any way the admission of additional evidences on the incurrence of analytical and testing expenses by the ld.CIT(A). He was unable to controvert the fact noted by the
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 23 ld.CIT(A) that the AO had given no opportunity to the assessee to produce the same before the him.
In view of the same, the admission of the additional evidence by the ld.CIT(A) is upheld.
Further, the ld.DR was unable to controvert in any way the finding of the ld.CIT(A) that the AO neither objected to the evidence filed by the assessee nor filed any remand report, despite repeated reminders given to him. In view of the same, we hold that the AO has no case before us to plead that these evidences did not support the case of the assessee.
The ld.DR was unable to controvert the finding of the ld.CIT(A) that these additional evidence sufficiently prove the incurrence of analytical and testing expenses by the assessee; nor was he able to pointed out any infirmity in the explanation of the assessee regarding the incurrence of these expenses for the purpose of R&D activity carried out by it.
In view of the same, we see no reason to disagree with the ld.CIT(A) allowing the assessee’s claim of weighted deduction on analytical and testing expenditure amounting to Rs.2,72,33,452/-.
Ground no.2 raised by the Revenue, is therefore, dismissed.
With respect to the denial of weighted deduction on the clinical trial expenses by the AO for the reason that they were allegedly incurred outside the R&D facility of the assessee. The ld.CIT(A) allowed the same, following the order of the ITAT in the case for
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 24 Asst.Year. 2006-07 and 2011-12 in ITA No.1146/Ahd/2011 and ITA No.848/Ahd/2016 and 918/Ahd/2016 for Asst.Year.2011-12.
Before us, the ld.counsel for the assessee pointed out that the Hon’ble jurisdictional High Court had confirmed the order of the ITAT in Asst.Year 2006-07 in its order in Tax Appeal No.39 of 2015 dated 23.1.2015. Copy of the order was placed before us. The ld.DR was unable to controvert the above.
In view of the same, deletion of disallowance of 6,41,494/- by the ld.CIT(A) is upheld. Ground no.3 is dismissed.
Ground No.4 of the Revenue challenges admission of claim of deduction under section 35(2AB) made by the assessee during the appellate proceedings before the ld.CIT(A) and allowance of the same by me. The amount of deduction was allowed by the ld.CIT(A) amounting to Rs.3,21,25,867/-.
Facts of the matter being that the assessee had incurred total expenses on in-house R&D facility including both capital and revenue expenditure to the tune of Rs.23.22 crores comprising of Rs.6.49 crores capital expenditure and Rs.16.73 crores revenue expenditure. The authority specified for approval under section 35(2AB) of the Act i.e. DSIR furnished a certificate in Form No.3CL mentioning the capital expenditure approved to the tune of Rs.6.49 crores and revenue expenditure to the tune of Rs.10.0 crores. Since DSIR had not approved revenue expenditure to the tune of Rs.6.42 crores, the assessee in its return of income filed, did not claim weighted deduction of 150% on the same i.e. to the tune of Rs.3,21,25,867/- . In the appellate proceedings, the assessee asked
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 25
deduction of the same, pleading that identical expenses disapproved by the DSIR in the case of the assessee for Asst.Year 2011-12 had been allowed by the ITAT. The ld.CIT(A), admitting additional ground raised by the assessee and allowed claim of deduction under section 35(2AB) of the Act on being 50% of the revenue expenditure disapproved by the DSIR amounting in all to Rs.3,21,25,867/-. His finding in this regard at para-9.6 and 9.7 of the order are as under:
“9.6 Decision: I have considered the appellant's submissions and perused the material available on record. It is well settled that the powers of the commissioner of income-tax (appeals) are co-terminus with the assessing officer and therefore, the appellate authority can admit an additional ground, even if not raised before the assessing officer. In the present case, additional ground of appeal seeking allowance of expenses disapproved by DSIR is purely legal and does not require any fresh investigation or additional evidence. Hence, the same is admitted. 9.7 Further, I find that the issue of deduction in respect of expenses approved by the auditor but disapproved by DSIR is already decided in favour of the assessee in the order of the ITAT in ITA No. 848/Ahd/2016 and 918/Ahd/2016 in Appellant's own case for AY 2011-12. Respectfully following the decision of Hon'ble ITAT in assessee's own case, the assessee is allowed to claim weighted deduction under section 35(2AB) in respect of expenses approved by the auditors but not approved by DSIR in Form No. 3CL. The assessing officer is directed to give proper effect in this regard. The additional ground no.18 of appeal raised by the appellant is therefore allowed.
The ld.DR objected to the entertainment of additional claim made by the assessee during the appellate proceedings and also to the allowance of the same.
We have gone through the order of ld.CIT(A), and we have noted that the ld.CIT(A) has admitted the assessee’s additional claim during the appellate proceedings, taking note of the various decisions in this regard, as also CBDT Circular No.14(XL-35) dated 11-4-1955 instructing the AO to grant eligible refund/benefit to the assessee even when the said benefit is not claimed by the assessee.
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 26 Before the ld.CIT(A), the assessee has cited decision of the ITAT, Ahmedabad Bench in the case of ACIT Vs. Amrapali Capital and Financial Services Ltd., ITA No.1836/Ahd/2011 wherein it was that taking note of Hon’ble Gujarat High Court decision in the case of S.R. Koshit Vs. CIT, 276 ITR 165 (Gj), which had held that the authority under the Act are under an obligation to act in accordance with law, and if a taxpayer under a mistake, misconception or on not being properly instructed, is over-assessed, the authorities under the Act are required to assist him and ensure that only legitimate taxes due are collected. Based on this order of the Hon’ble Gujarat High Court, the ITAT in the said case had upheld the CIT(A)’s entertaining of claim made for the first before the ld.CIT(A). The assessee had also cited decision in this regard of the ITAT, Mumbai Bench in the case of Chicago Pneumatic India Ltd. Vs. DCIT, (2007) 15 SOT 252 (Mum)(ITAT), and the decision of ITAT, Delhi Bench in the case of ADIT Vs. Global Geophyiscal Services Ltd., 68 SOT 86 (Del.ITAT).
The ld.DR was unable to distinguish decisions relied upon by the ld.CIT(A) while admitting the assessee’s claim of deduction under section 35(2AB) of the Act to the tune of Rs.3.21 crores.
Therefore, we see no reason to interfere the ld.DR objection to the admission of the said claim of the assessee by the ld.CIT(A).
As for the allowance of the said claim by the ld.CIT(A), we have noted that the ld.CIT(A) allowed the same noting the allowance of identical claim by the ITAT in the case of the assessee itself in Asst.Year 2011-12.
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 27 49. Before us, the ld.counsel for the assessee pointed out that in several decisions, the ITAT has laid down that the allowance of claim under section 35(2AB) of the Act cannot be made merely on the basis of disapproval of DSIR in Form No.3CL. Our attention was drawn to the decision of the ITAT, Ahmedabad Bench in the case of Schaeffler India Ltd., (2023) 150 taxamnn.com 528 (Ahd-Trib) and Provimi Animal Nutrition India P.Ltd., (2021) 124 taxmann.com 73 (Bang), and DCIT Vs. STP Ltd. (2021) 125 taxmann.com 97 (Kol).
The ld.DR was unable to point any contrary decision, either of the ITAT or of any higher judicial authority in this regard.
In view of the above, we see no reason to interfere in the order of the ld.CIT(A) allowing the assessee’s claim of weighted deduction on expenses, though not approved by the DSIR to the tune of Rs.3,21,25,867/-.
Ground No.4 of the Revenue is dismissed.
Ground No.5 reads as under:
“5. The CIT(A) has erred in law and in facts in deleting the disallowance of Rs.30,68,538/- towards foreign remittances u/s.40(a)(i) of the Act.”
Taking up now the Revenue’s challenge to the deletion of disallowance of expenses made u/s 40(a)(i) of the Act to the tune of Rs.30,68,538/- raised in Ground No.5 of its appeal in ITA No.73/Ahd/2020 for A.Y.2008-09. Though similar issue has already been discussed and decided in favour of the assessee, while we were dealing with the assessee’s appeal for Asst.Year 2008-09 in ground
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 28
no.1, still we would briefly discuss the facts in the present case as under.
The decision of the ld.CIT(A) at para 10.3 in his impugned order while deleting the impugned disallowance is as under:
“10.3 Decision: I have considered the assessment order & the submission of the appellant and the materials available on record. With respect to various remittances made by the appellant, I hold as under:
Sr No. Party Name Country Name Amount in Rs. 1 CPL Inc USA 10,66,763 2 CPL Inc USA 4,94,950/- 3 Morrison & Foester USA 13,50,084 LLP 4 Morisson & USA 1,56,741/- Foerster LLP Total 1,56,741/-
The appellant has submitted that it has obtained legal and professional services from the non-residents in respect of registration of its products with e foreign regulatory authorities for sales in those countries. In this regard, e appellant has contended that in view of the sub-clause (b) of section 1)(vii) of the Act, the amount payable by the resident to non-resident towards fees for technical services is not taxable in India, if the said services are railed for earning income from any source outside India. The said provisions section 9(i)(vii) are reproduced below:
"(2) The following incomes shall be deemed to accrue or arise in India :—
(vii) “income by way of fees for technical services payable by-
(a) the Government; or
(b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or
(c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India.
Explanation 2.—For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 29
consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries". The appellant has further contended that such services availed by the appellant did not 'make available' any technical knowledge, skills or know- how to it and therefore, the said services do not constitute FTS as per the India-US DTAA. The appellant has also provided supporting documents substantiating that these expenses were primarily in the nature of legal and professional expenditure. I agree with the contentions of the appellant. Article 12 of the DTAA between India and USA restricts scope of FTS to such services which "make available" any technical knowledge, skill or know- how etc. In the present case, the appellant has obtained legal and professional services towards registration of products in the foreign countries, which does not involve any transfer of technical knowledge, skills or know-how. Considering above, income of non-residents from such remittance is not taxable in India. Further, it is well settled principle that in the absence of taxable income, withholding tax provisions under section 195 do not apply. In view of the above, disallowance in respect of above remittances to USA towards legal and professional services is deleted.”
A bare perusal of the above would reveal that the disallowance was deleted by the ld.CIT(A), noting that the services rendered by the afore-noted entities all based in USA were characterised by the AO to be in the nature of fee for technical services, and further noting that the DTAA with USA restricted the scope of taxability of FTS in the source country only with respect to such services, which made available “any technical knowledge, skill or know-how”. The ld.CIT(A) noted that the assessee having obtained legal or professional services towards registration of products in foreign country, it did not involve any technical knowledge, skill or know- how, and therefore, the same is not liable to tax in India. The ld.DR was unable controvert any of the findings of the ld.CIT(A) as above, both with respect to the fact of services rendered not involving any transfer of technical knowledge, skill or know-how etc. as also with respect to Article 12 of the DTAA between India and USA restricting
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 30 the scope of FTS such services which made available technical knowledge, skill or know-how etc.
In view of the same, we see no reason to interfere in the order of the ld.CIT(A) deleting the disallowance made under section 40(a)(i) of the Act to the tune of Rs.30,68,538/- pertaining to legal and professional services rendered from entities based in USA.
Ground no.5 of appeal is accordingly dismissed.
Ground No.6 reads as under:
(6) The CIT(A) has erred in law and in facts in deleting the product registration expenses of Rs.1,03,29,379/- which are capital in nature.
The issue relates to product registration of expenses of Rs.1,03,29,319/- claimed as revenue expenses by the assessee, and which were expenditure to have been incurred for filing of the company’s products in various health departments, jurisdiction of different countries where the company’s products were sold. The AO treated them as has been capital in nature holding that since benefit of enduring nature accrued to the assessee on account of incurrence of such expenses, they resulted in creation of intangible asset in the form of market right. The ld.CIT(A) however deleted the disallowances noting that this issue had been decided in favour of the assessee by the Hon’ble jurisdictional High Court in Asst.Year 2006-07 and also by the ITAT in assessee’s own case for Asst.Year 2011-12. The appeal filed by the Revenue against this decision was noted to be dismissed by the Hon’ble High Court in its order in Tax Appeal No.200-201 of 2018 vide order dated 4.4.2018. The ld.CIT(A) noted that its facts were identical, therefore, he applied the said
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 31 decisions to the issue in the present case and deleted the disallowance of product registration expenses made by the AO.
The ld.DR was unable to rebut the finding of the ld.CIT(A) that the issue stood decided in favour of the assessee both by the ITAT and by the Hon’ble High Court in preceding and succeeding year.
In view of the same, we see no reason to interfere in the order of the ld.CIT(A) deleting the disallowance of product registration expenses to the tune of Rs.1,03,29,319/-.
Ground No.6 is dismissed.
Ground No.7 reads as under:
“7. The CIT(A) has erred in law and in facts in deleting the interest disallowance of Rs. 134,22,838/- u/s 36(1)(iii) of the Act.”
The issue relates to the disallowance of interest found to be not incurred for the business purpose in terms of provisions of section 36(1)(iii) of the Act in all to Rs.1,34,22,838/-.
The impugned disallowance was made with respect to loans & advances given by the assessee to one M/s.Casil Health Products Ltd. (“CHPL” for short) found to be sister concerns of the assessee, and on account of share application money to Apollo Hospitals Ltd. The AO found that no business purpose was demonstrated by the assessee for making aforesaid advances and accordingly noting that the assessee had incurred huge interest expenditure on loans taken, and following decisions of the Hon’ble Punjab Haryana High Court’s decision in the case of Abhishek Industries Vs. CIT, 286 ITR 1 (P&H), he disallowed interest in relation to this advance calculated at the
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 32 rate of 9.5% on the same amounting to Rs.1,34,22,838/-. The ld.CIT(A) noted that identical disallowance of interest made on advances made to CHPL had been deleted by the ITAT in the case of the assessee for Asst.Year 2006-07 in ITA No.1146/Ahd/2011 & ITA No.1518/Ahd/2011 finding the advance to have been made for business purpose.
He also noted, the Revenue’s appeal against the said decision of the ITAT have been dismissed by the Hon’ble jurisdictional High Court in Tax Appeal Tax Appeal No.200-201 of 2018 vide order dated 4.4.2018. Further, he noted from the facts demonstrated by the assessee that it had sufficient owned funds by way of shareholders’ fund to the tune of Rs.162.61 crores for making impugned advances both the CHPL and Apollo Hospitals Ltd. which amounted in all to Rs.19.12 crores, and therefore, following the ratio laid down by various Hon’ble High Courts including the decision of Hon’ble Bombay High Court in the case of CIT Vs. Reliance Utilities, 313 ITR 340, Ashok Commercial Enterprises, ITA(L) No.2985 of 2009, Hotel Savera, 239 ITR 795, he deleted the disallowance of interest made by the AO in entirety.
The ld.DR was unable to controvert any of the factual finding of the ld.CIT(A).
In view of the above, we see no reason to interfere in the order of the ld.CIT(A) deleting the disallowance of interest under section 36(1)(iii) of the Act amounting to Rs.1,34,22,838/-.
Ground of appeal No.7 is dismissed.
Ground no.8 and 9 of the Revenue’s appeal read as under:
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 33 (8) The CIT(A) has erred in law and in facts in restricting the addition of Rs.7,70,73,679/- made by the AO u/s 14A to Rs.29,926/-. (9) The CIT(A) has erred in law and in facts in directing the AO to allow additional claim of withdrawal of suo-moto disallowance of Rs.1,00,86,493/- notwithstanding that no such claim was made in the return of income and does not emanate from the assessment order.
The issue relates to disallowance of interest expenditure incurred for the purpose of earning exempt income under section 14A of the Act.
The assessee had shown exempt income of dividend income of Rs.2,436/- and suo-moto disallowed interest under section 14A amounting to Rs.1,00,86,493/- on the amounts borrowed from banks for investment made in Apollo International. The AO however computed the disallowance to be made by applying Rule 8D and worked the same to Rs.2,71,00,172/- comprising of interest disallowance of Rs.2,44,87,314/- and administrative expenses disallowance of Rs.26,12,858/-, reducing suo-moto disallowance made by the assessee of Rs.1,00,86,493/- there from, he disallowed an amount of Rs.1,70,13,679/- under section 14A of the Act.
During the appellate proceedings, the assessee contended that the disallowance deniable under section 14A of the Act, as per the law, is only to the extent of exempt income earned by the assessee. He drew our the attention of the ld.CIT(A) to the decision of the ITAT in its own case for Asst.Year 2007-08 and 2011-12 holding so. He therefore made a plea before the ld.CIT(A) to restrict the disallowance under section 14A to the extent of exempt income earned, and further requested suo moto disallowance made by the assessee under section 14A of the Act to the tune of Rs.1,00,86,493/- to be reduced accordingly. The ld.CIT(A)
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 34 entertained this prayer of the assessee, noting an identical prayer of the assessee in its own case for Asst.Year 2007-08 and 2011-12 being entertained by the ITAT, and following the decision of the ITAT in the said year, he restricted the disallowance under section 14A to the extent of exempt income earned amounting to Rs.29,926/-.
Before us, the ld.DR was unable to rebut the finding of the ld.CIT(A).
In view of the above, we see no reason to interfere in the order of the ld.CIT(A) in restricting the disallowance under section 14A to the extent of exempt income earned by the assessee and thus allowing he assessee to withdraw suo moto disallowance made by it to the tune of Rs.1,00,86,493/-.
Ground nos.8 and 9 raised by the Revenue are dismissed.
Ground Nos.10 and 11 relate to the issue of adjustment made to book profits of the assessee under section 115JB of the Act on account of provision for bad and doubtful debts and provision for diminution in value of investments as per Explanation 1(1) to Section 115JB of the Act. The grounds read as under: (10) The CIT(A) has erred in law and in facts in deleting the adjustment of Rs.36,53,255/- made u/s 115JB of the Act in respect of provision for doubtful debts which are clearly not allowable as per law. (11) The CIT(A) has erred in law and in facts in deleting the adjustment of Rs.7,45,146/- made u/s 115JB of the Act in respect of provision for dimunition in value of investment.
The ld.CIT(A) deleted the adjustment so made taking note of the proposition of law laid down by the Hon’ble jurisdictional High Court in the case of CIT Vs. Vodafone Essar Gujarat Ltd., (2017) 397 ITR 55 (Guj), Karnataka High Court decision in the case of CIT Vs.
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 35 Yokogwa India Ltd. (2012) 17 taxmann.com 15 (Kar) holding that were provisions have been created by reducing the value of the respective assets, adjustment specified in Explanation (1)(i) to the book profits of the assessee by adding to the same, are not to be done. The ld.CIT(A) held that the Hon’ble High Court had interpreted the Explanation 1(1) of section 115JB of the Act stating that only, when provisions were debited to P&L account by creating provisions and not by obliterating the value of assets that Explanation 1(1) of the section 115JB was attracted. In view of the above proposition of law, he found that in the facts of the present case, the provision on account of bad and doubtful debts and on account of diminution in the value of assets, had been created by correspondingly reducing the value of the respective assets. Accordingly, following the proposition of law laid down by the Hon’ble High Court, as above, held that no adjustment in terms of Explanation 1(1) to section 115JB was warranted on account of these provisions. He accordingly deleted the adjustment so made by the AO to the tune of the book profits of the assessee.
The ld.DR was unable to rebut the finding of the ld.CIT(A). He was unable to distinguish the decisions relied upon by the ld.counsel of the assessee, either on law or on the facts, and in view of the same, we see no reason to interfere in the order of the ld.CIT(A) deleting adjustment made to the book profits of the assessee on account of provision for bad and doubtful debts and provision for diminution in the value of the assessee.
The ground nos.10 and 11 are accordingly dismissed.
The ground no.12 reads as under:
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 36
(12) The CIT(A) has erred in law and in facts in deleting the adjustment of Rs.2,71,00,172/- made u/s 115JB of the Act in respect of disallowance u/s 14A of the Act.
The issue relates to the adjustment made to the book profits of the assessee on account of expenses disallowed under section 14A of the Act by adding the same to the book profits of the assessee.
The AO had made adjustment to the book profits of the assessee of all the disallowance made under section 14A of the Act. The disallowance computed by him under section 14A of the Act to the tune of Rs.2,71,00,172/-, and the ld.CIT(A) restricted the disallowance made under section 14A to the extent of exempt income amounting to Rs.29,926/, which has been confirmed by us in the grounds no.8 & 9 of appeal raised by the Revenue. Therefore, the adjustment, if any, under section 115JB of the Act is to be restricted to this extent.
Even otherwise, we have noted that the ld.CIT(A) deleted the entire adjustment made, finding the issue to be covered by the decision of Hon’ble jurisdictional High Court in the case of CIT Vs. Gujarat State Fertilizers & Chemicals Ltd., and also noting that the ITAT had ruled in favour of the assessee on an identical issue in Asst.Year 2006-07.
Since the ld.DR was unable to controvert the submissions of the assessee, no interference in his order on the issue is warranted.
Ground No.12 is rejected.
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 37
In the result, the appeal of the Revenue for Asst.Year 2008-09 in ITA No.73/Ahd/2020 is dismissed.
ITA No.52/Ahd/2020 (Assessee’s Appeal) for Asst.Year 2009-10.
In this appeal, the assessee has raised following two grounds:
“1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in partly confirming disallowance under section 40(a)(i) of the Act to the extent of Rs.4,13,932/- in respect of payments to non-resident persons, without appreciating the fact that the Appellant was not liable to withhold any taxes while making the aforesaid payments. 2. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in not allowing the additional claim of Rs.54,50,034 made by the Appellant for claiming weighted deduction under section 35(2AB) on gross research and development (R&D) expenditure, without reducing contract research income amounting to Rs.1,09,00,069 from the eligible R&D expenditure.”
A perusal of the above Grounds, it is apparent that the same is similar to the ground no.1 raised by the assessee in 2008-09. While ground no.2 is similar to ground no.1 & 2 of the department’s appeal for Asst.Year 2008-09. In that year, we have restored the issue back to the AO to the extent of disallowance made u/s 40(a)(i) of the Act confirmed by the ld.CIT(A). Thus, ground no.1 is allowed for statistical purpose.
Also, we have confirmed the finding of the ld.CIT(A) that the assessee had sufficiently evidenced the claim of the assessee that the assessee had incurred expenses in the R&D facility of the assessee. Therefore, given the similarities of the issues and facts on hand with that of the year 2008-09, and in the absence of any distinctive factors being pointed out by the ld.DR to enable us to
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 38 have a relook on the issue, we delete the impugned addition and allow the ground no.2 of the assessee’s appeal.
In the result, the appeal of the assessee in ITA No.52/Ahd/2020 is allowed for statistical purposes.
Now we take up the Revenue’s appeal in ITA No.76/Ahd/2020 for Asst.Year 2009-10.
The following grounds are raised in this appeal: (1) The CIT(A) has erred In law and in facts in directing the AO to allow the claim of Rs.1116,36,897/- u/s 35(2ABj of the Act. (2) The CIT(A) has erred in law and in facts in allowing the additional claim of Rs.7,31,05,594/- which had been disallowed by the assessee suo-moto in the return of income and which had never been examined by the AO. (3) The CIT(A) has erred in law and in facts in deleting the disallowance of Rs.61,42,607/- (Rs.58,23,895/- + Rs.3,18,712/-) towards foreign remittances u/s 40(a) (i) of the Act. (4) The CIT(A) has erred in law and in facts in deleting the product registration expenses of Rs.1,40,43,154/- which are capital in nature. (5) The CIT(A) has erred in law and in facts in deleting the interest disallowance of Rs.1,47,97,350/-- u/s 36(1) (iii) of the Act. (6) The CIT(A) has erred in law and in facts in-restricting the addition of Rs.1,86,24,986/- made by the AO u/s 14A to Rs.29,926/-.”
A perusal of the above grounds would emerge the following scenario - o Ground No.1 and 2 are similar to ground no.1 and 2 of the Department’s appeal for Asst.Year 2008-09; o Ground No.3 is similar to ground no.1 of the assessee’s appeal and ground no.5 of Department’s appeal for Asst.Year 2008-09; o Ground No.4 is similar to ground no.6 of Department’s appeal for Asst.Year 2008-09;
ITA No.73 & 76/Ahd/2020, and ITA No.51 & 52/Ahd/2020 DCIT Vs. Cadila Pharmaceuticals Ltd. 39 o Ground No.5 is similar to ground no.7 of the Department’s appeal for Asst.Year 2008-09; o Ground No.6 is similar to ground no.8 of the Department’s appeal for Asst.Year 2008-09; o Ground no.7 is similar to ground no.9 of the Department’s appeal for Asst.Year 2008-09; o Ground no.8 is similar to ground no.12 of the Department’s appeal for Asst.Year 2008-09.
All the issues were dealt with by us in the appeal for Asst.Year 2008-09, and decided against the department and in favour of the assessee with no material disparity in circumstances between the present and previous assessment year as being pointed out by the ld.DR. Consequently, we uphold decision of the ld.CIT(A) on these issues and reject all grounds of appeal, dismissing the Revenue's appeal accordingly.
In effect, the appeal of the Revenue is dismissed.
In the result, appeals of the Revenue are dismissed and that of the assessee are allowed for statistical purposes.
Order pronounced in the Court on 17th April, 2024 at Ahmedabad.
Sd/- Sd/- (ANNAPURNA GUPTA) (SIDDHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad,dated 17/04/2024
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