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2023 (10) TMI 1128 - AT - Income TaxDisallowance of sales and marketing expenses u/s. 37(1) - Assessee has incurred sale promotion expenses in relation to brand reminders, Medical Camp expenses, Professional fees-Medical Advisory, Market Research / Survey and Travel & Accommodation relating to advisors attending conferences - assessee has declared certain percentage of disallowance of respective expenses incurred for marketing expenses before ITSC in order settle the disputes raised during the search proceedings - CIT(A) accepted the Assessee's contention that in view of orders passed by ITAT in Assessee's own case for Brand Reminders and there being assessment order for other heads where in the AO has himself applied a lower rate the same rate of disallowance could not be applied for the three (3) months and on an adhoc basis, made additional disallowance in the range of 2-5% for different heads - HELD THAT:- The offer before ITSC to settle the dispute amicably cannot be the basis of making any regular assessment without their being any proper material on record to substantiate the relevant disallowances. In the given case, the assessing officer merely followed the percentage of disallowance adopted by the ITSC without their being any material to support the disallowances for the impugned assessment year. Similarly, the Ld.CIT(A) even though agreed that the percentage declared before ITSC cannot be adopted but proceeded to adopt percentage on adhoc basis. Therefore, in our considered view, the reasons given by the Ld CIT(A) to adopt the respective percentage are mere assumptions and there is no basis. Assessee adopted the relevant percentage of disallowance based on the findings of appellate authorities particularly the ITAT. Therefore, we are inclined to direct AO to verify the percentage proposed by the assessee and the relevant findings of the coordinate bench in each and every expense. Before we depart, for the distribution of Brand Reminder, being less than ₹ 1,000/- (below the threshold provided by MCI), this particular marketing expenses are within the threshold limit prescribed by the MCI and the coordinate benches have allowed this expense and also the revenue allowed the same in the subsequent assessment years. Therefore, in over all the disallowance proposed by the Ld CIT(A) is without basis and mere assumptions. With regard to DR submissions regarding applicability of decision in Apex Laboratories [2022 (2) TMI 1114 - SUPREME COURT], we observe that this is not case of either AO nor CIT(A). We cannot stretch the issues beyond assessment order. Accordingly, we direct the Assessing Officer to delete the additions sustained by the Ld CIT(A) and verify the percentage offered by the assessee with the subsequent orders of appellate proceedings. Accordingly, the grounds raised by the assessee are allowed and revenue is dismissed. Weighted deduction u/s. 35(2AB) - AO rejected the submission made by the Assessee, based on amount quantified by the DSIR in the certificates for previous year made disallowance of weighted deduction claimed u/s. 35(2AB) thereby granting only 100% deduction and rejected additional 50% of following R&D expenses - HELD THAT:- With regard to Clinical Trials we observe that in assessee’s own case the Coordinate Bench for AY 2008-2009 & 2009-2010 [2015 (2) TMI 1348 - ITAT MUMBAI] relying upon decision in CIT v. Cadila Healthcare [2013 (3) TMI 539 - GUJARAT HIGH COURT] held that expenses incurred for clinical trials were eligible for deduction u/s. 35(2AB) though incurred outside the R & D facility and thus the view of DSIR came to be rejected. Consultancy and professional fees - As in own case the Coordinate Bench for the A.Y. 2007-08 [2012 (9) TMI 43 - ITAT MUMBAI] these expenditures have been incurred towards research expenses and not towards any patent filing. Further, 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 u/s 35(2AB). Rent taxes and repairs to building - As decided in assessee’s own case [2012 (9) TMI 43 - ITAT MUMBAI] held that 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 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 orders of the authorities below, hold that the assessee is entitled to weighted deduction on the said amount @ 150% as per section 35(2AB) of the Act. Netting off of sale proceeds of fixed assets against the expenses - As issue has diverse views. We are inclined to remit this issue back to the file of Assessing Officer to follow the decision of Wockhardt Ltd [2012 (5) TMI 823 - ITAT MUMBAI] Accordingly, the grounds raised by the revenue are dismissed except the issue of netting of sales proceeds, which we are inclined to allow for statistical purpose. Analysis and testing charges - Merely because the prescribed authority segregated the expenditure into two parts, namely, those incurred within the inhouse facility and those can were incurred outside, in our opinion, by itself would not be sufficient to deny the benefit to the assessee under section35(2AB) of the Act. It is not as if that the said authority was addressing the issue for deduction under section 35(2AB) of the Act in relation to the question on hand. The certificate issued was only for the purpose of listing the total expenditure under the Rules. See Cadila Healthcare [2013 (3) TMI 539 - GUJARAT HIGH COURT]. Also decided in assessee own case A.Y. 2014-15 [2022 (10) TMI 214 - ITAT MUMBAI] held no infirmity in the order passed by the CIT(A) in allowing weighted deduction at the rate of 200% in respect of Quality Control/Testing Expenses. Set-off of brought forward business loss and unabsorbed depreciation of Bharavi Laboratories - HELD THAT:- We observe that the company Bharavi Laboratories was merged with the assessee company and as per the provisions and in line with the NCLT directions, the assessee is eligible to set off the losses carried forward by the Bharavi Laboratories at the appointed date. Therefore, we direct AO to verify the claim of the assessee alongwith the order of NCLT dated 06.07.2017. It is directed to allow the claim as per law. Accordingly, the additional ground raised by the assessee is allowed for statistical purpose. Inclusion of surcharge and cess while computing MAT Credit - HELD THAT:- We observe that the issue of giving MAT credit in the subsequent assessment years are already well settled that the tax paid as per provisions of sec.115JB always includes surcharge and cess. Similarly, while giving credit in the subsequent year shall include the surcharge and cess. One cannot separate the tax liability differently while calculating tax due and tax credit. Therefore, we are inclined to dismiss the grounds raised by the revenue. Education Cess claim u/s 37(1) - HELD THAT:- We note that by way of Finance Act 2022 Explanation 3 has been inserted in Section 40(a)(ii) of the Act with retrospective effect from 01.04.2005 which clearly provides that the term "tax' includes and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax. Therefore, in view of the same no deduction is allowable in respect of Education Cess for the Assessment Year 2014-15 in terms of Section 40(a)(ii) of the Act read with Explanation 3 thereto - we observe that this issue of claim on account of education cess is held to be against the assessee. Accordingly, the ground raised by the revenue is allowed.
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