TMI Blog2012 (9) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure has to form part of weighted deduction as per section 35(2AB) - in favour of assessee. Denial of weighted deduction on the claim as not reported in DSIR certificate, thus in the absence of any details submitted no point to interfere with the order of the Commissioner for denial - against assessee. Disallowance of weighted deduction in respect of consulting charges and patent filing charges - Held that:- As the consultancy charges had been paid by the assessee in providing technical services regarding the patents, obtaining patent information from innovator companies and obtaining innovator samples for R&D purposes, thus the payments have been accepted towards research and not towards registering the patents. Therefore, these expenditures have been incurred towards research expenses and not towards any patent filing. Explanation to section 35(2AB) specifically provides that the expenditure on scientific research for the purpose of section 35(2AB) shall include filing of application for a patent under The Patent Act, 1970, in relation to drugs and pharmaceuticals. Any application for patent foreign country has to be filed in India as per section 7 of The Patent Act, 197 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, for manufacture of Bulk Drugs treated as DTA; Unit at MIDC Lote Parshuram, Taluka Khed, Ratnagiri District, for manufacture of bulk drugs treated as converted EOU-I, under provision of section 10B of the Income Tax Act, 1961. The allowability of deduction under this section is discussed later in my order; Unit at OIDC Daman for manufacture of formulations. This unit was set up in December 2001, and is eligible towards deduction under section 80IB claimed. The allowability of deduction under this section is discussed later in my order; Unit at Plot no.6, HPSIDC Industrial Area, Solan, Baddi, HP, for manufacture of formulations and is eligible towards deduction under section 80IC. This is the first year of assessee claim under section 80IC. 3. The assessee company also markets formulations manufactured using the manufacturing facilities of third parties, either on job work basis under loan license arrangement, or by purchasing the same from such parties on principal-to-principal basis. Sales are affected through dealer/stockiest who are appointed all over India. The assessee company also exports both bulk drugs and formulations to various countries. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tside laboratory Rs. 4,00,32,682 - Patent filing in various foreign countries foreign consultancy Rs. 1,84,87,038 - Expenses on repairs, rent, rates and taxes pertaining to building Rs. 71,58,991 - Difference between the amount reported in annual report and claimed in ROI Rs. 1,25,17,261 Rs. 7,81,95,972 The assessee has vide its above submissions have also submitted its explanation over the details of the expenses which has been shown separately in the DSIR report." 6. In respect of clinical trials, the assessee submitted that the same is eligible for weighted deduction under section 35(2AB) as the expenditure was, in fact, related to and emanating out of the activities carried out in the approved in-house R D facilities. In this regard, the assessee filed the following reply before the Assessing Officer which has been stated by him at Page-6 of the assessment order, which reads as follows:- "Rs. 4,00,32,682 towards expenses related to clinical trials outside the approved facilities. The company carries out research at its R D facilities, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amounting to Rs. 4,00,32,682. 8. Being aggrieved, the assessee filed appeal before the first appellate authority and submitted that the said expenditure of Rs. 4,00,32,682, was incurred on R D laboratory of clinical trial outside its own recognised R D laboratory. The clinical trials are conducted on the projects undertaken by itself approved in-house R D facilities. It was contended that the clinical trials have to be conducted on various subjects like human patents, volunteers and animals for studies like bio-equivalence, etc. Therefore, by its very nature, this activity is largely dependent on and is to be carried out through various eternal activity is largely dependent on and is to be carried out through various external agencies, hospitals, doctors, institutions, etc. However, the Commissioner (Appeals) did not agree with the above contention of the assessee and stated that similar issue has been considered by the Tribunal in assessee's own case in assessment year 2005-06, and it was held that the expenditure has not been incurred in-house in respect of clinical trials and accordingly, the weighted deduction of 150% is not allowable under section 35(2AB) to the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Commissioner (Appeals), vide Para-3.10, has held that the consultancy charges of Rs. 8,65,131, are purely towards research expenditure and not towards registering the patents. He has stated that the assessee company is engaged in the activities of research activity of new molecules and drugs as well as improvisation of the existing drugs and medicines. For carrying out the research of any existing project, the data/information on the existing drugs/medicine in the market is first required to be gathered. Therefore, these expenditures have been incurred for consultancy are purely towards research expenditure and, hence, weighted deduction is to be allowed. 13. The Commissioner (Appeals) has stated that the above issue has been discussed in assessment year 2006-07 and allowed weighted deduction of the assessee. Accordingly, he has directed the Assessing Officer to allow weighted deduction of Rs. 8,65,131, after verification. 14. In respect of the expenditure pertaining to patent filing of Rs. 74,38,119, it was stated that the payment is covered under The Patent Act, 1970, as per the Explanation of section 35(2AB). It was contended that the said clause provides that the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmissioner (Appeals), vide Ground no.3, disputing the allowance of weighted deduction, consultancy charges and patent filing charges. 18. The Assessing Officer, in respect of the claim of the assessee on expenditure on rent, rates and taxes pertaining to building, has not accepted the claim of the assessee of weighted deduction under section 35(2AB) on the ground that DSIR has not allowed the same. Being aggrieved, the assessee filed appeal before the first appellate authority. 19. On behalf of the assessee, it was contended that the Assessing Officer has not allowed this deduction in respect of building used for research R D units merely because DSIR has not approved the expenditure for the purpose of deduction. It was contended that the legislature as per section 35(2AB), only excluded from weighted deduction, cost of land or building and not any charges and expenses related to land or building. However, the Commissioner (Appeals) did not accept the contention of the assessee and stated that since DSIR has not allowed weighted deduction, rent, rates and taxes on repairs on the R D unit, the Assessing Officer is justified in not allowing deduction on these expenses. Hence, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g aggrieved, the assessee filed appeal before the first appellate authority, wherein the Commissioner (Appeals), vide Para-3.17 of his order, has confirmed the action of the Assessing Officer on the ground that DSIR has not certified that the said amount of Rs. 1,25,17,261, is eligible for weighted deduction under section 35(2AB) of the Act. Therefore, the assessee is in further appeal before the Tribunal as ground no.1(c). 23. Before us, during the course of hearing, the learned Counsel for the assessee, in respect of the addition of Rs. 4,00,32,682, relating to the expenditure incurred on clinical trials admitted that same very issue which was considered by the Tribunal in assessee's own case for assessment year 2006-07, in ITA no.453/Mum./2009, order dated 18th March 2010, a copy of which is placed at Pages-209 to 213 of the paper book and the Tribunal, by following assessee's own case for assessment year 2005-06 in ITA no.2179/ Mum./2009, held that the expenditure on scientific research eligible for weighted deduction under section 35(2AB), should be the expenditure on scientific research on in-house research and development facilities and, therefore, the action of the Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fy the facilities of research and development activity undertaken by the assessee and not a certificate for expenditure incurred by the assessee. He further submitted that the details mentioned in DSIR certificate should be treated as a mere clarification and not an indication for disallowance of the expenditure incurred by the assessee. The learned Counsel submitted that merely because in the certificate issued by the DSIR certain amounts were not approved, it does not mean that the assessee has not incurred expenditure on research and development activity and, therefore, the disallowance of weighted deduction @ 150% as per section 35(2AB) of the Act is not justified. 28. On the other hand, the learned Departmental Representative justified the order of the Commissioner (Appeals) and submitted that the DSIR certificate is pre-requisite for any expenditure to be allowed under section 35(2AB) of the Act has weighted deduction @ 150%. He submitted that since DSIR did not approve the said expenditure in certificate issued by it, the Assessing Officer rightly disallowed the same on the basis of certificate of DSIR as he is to follow the said certificate of DSIR for considering as to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in-house research and development facility as approved by the prescribed authority, then, there shall be allowed a deduction of [a sum equal to one and one-half times of the expenditure] so incurred. Explanation - For the purposes of this clause, "expenditure on scientific research", in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the Patents Act, 1970 (39 of 1970).]" 31 . Therefore, it is evident that this section excludes from weighted deduction only cost of land and building and not any charges and expenses related to land or building. The repairs, rent, etc., the expenditure incurred relating to R D premises cannot form part of cost of land or building. In the absence of any fact that the said claim of the assessee aggregating to Rs. 62,00,689, is not the expenditure on rents, rates and taxes relating to R D premises, we are of the considered view that the said expenditure has to form part of weighted deduction as per section 35(2AB) of the Act. Therefore, we, by reversing the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, it is also observed that the expenditure incurred in respect of patent application filed under The Patent Act, 1970. Explanation to section 35(2AB), as reproduced herein above, specifically provides that the expenditure on scientific research for the purpose of section 35(2AB) of the Act shall include filing of application for a patent under The Patent Act, 1970, in relation to drugs and pharmaceuticals. Any application for patent foreign country has to be filed in India as per section 7 of The Patent Act, 1970, according to patent cooperation treaty. Therefore, we hold that the Commissioner (Appeals) has rightly held that the said expenditure incurred by the assessee towards patent filing charges is eligible for weighted deduction under section 35(2AB) r/w Explanation thereto. In view of the above, we uphold the order of the Commissioner (Appeals) by rejecting ground no.3 of the appeal taken by the Department. 35. Now we take up ground no.1 of the appeal taken by the Department which reads as under:- "On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in directing to treat the expenses of Rs. 3,97,373, paid to Trade Mark Attorneys by tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd treated it as capital expenditure in nature and added back to the total income of the assessee. It is relevant to state that the Assessing Officer has allowed deprecation thereon of Rs. 87,991. 43. Being aggrieved, the assessee filed appeal before the first appellate authority. On behalf of the assessee, it was contended that the said expenditure has been incurred as statutory obligation and no benefit of enduring nature has been obtained. It was stated that ANDA registration authorisation to the product of the company to sell in the specified country. ANDA authorisation is a formality to track the product and manufacturer from the quality point of view. It was stated that these expenditures are to take ANDA authorisation of generic products which means there would be many such authorisation of similar products being taken. Therefore, the expenditures incurred is allowable as revenue expenditure. The Commissioner (Appeals) considered the above submissions of the assessee vide Para-2.3 of the impugned order and held that it is a business expenses. The said para reads as follows:- "2.3 I have considered the reply of the appellant and perused the assessment order. Anti Nation ..... X X X X Extracts X X X X X X X X Extracts X X X X
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