TMI Blog2017 (1) TMI 1390X X X X Extracts X X X X X X X X Extracts X X X X ..... nt to the employees is an allowable expenditure under section 43B(f) of the Act. Admittedly, the assessee has not paid a sum of ₹ 2,74,08,816 and has only debited it to the profit and loss appropriation account. As regards the sum of ₹ 5,42,92,558 which is claimed to have been paid to the employees, we deem it fit and proper to remand the issue to the file of the Assessing Officer for verification of the assessee's claim and if it is found to be correct, then the Assessing Officer shall allow the claim of the assessee. Accordingly ground No. 2 is treated as allowed for statistical purposes. Disallowing amortisation of deferred stock compensation (ESOP cost) on the ground that the expenditure is notional and capital in nature - Held that:- We find that this issue is covered in favour of the assessee by the decision of the Special Bench of the Tribunal in the case of Biocon Ltd. v. Deputy CIT (2013 (8) TMI 629 - ITAT BANGALORE ) wherein it was held that the ESOPs discount is a deductible discount at the time of vesting of the option. Thus the issue is remanded to the file of the Assessing Officer with a direction to work out the deduction keeping in mind the principles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncy of the donation to ILS has not been established by the assessee. In the assessee's own case for the assessment year 2003-04, the Tribunal, without giving elaborate reasons, has held that the donation given to the institutions mentioned therein are incurred in the course of business and allowable under section 37(1) of the Act. For the assessment year 2006-07, the Tribunal has only remanded the issue to examine the allowability of donation to ILS under section 37(1) of the Act. Therefore, there is no finding about the allowability of the same by the Tribunal. In view of the same, we do not see any reason to interfere with the assessment order on this issue and the ground of appeal No. 6 is rejected. Depreciation on goodwill - company by name American Remedies Ltd. had got merged with the assessee - Held that:- Having regard to the rival contentions and the material on record and respectfully following the decision of the Hon’ble Supreme Court in the case of CIT v. Smifs Securities Ltd. (2012 (8) TMI 713 - SUPREME COURT) wherein it has been held that goodwill is also an intangible asset eligible for depreciation thereon, we direct the Assessing Officer to allow depreciation on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isallow only such expenditure which is not incurred for the business purposes of the assessee. This ground is accordingly treated as allowed for statistical purposes. TDS u/s 195 - payments towards technical services - non deduction of TDS - Held that:- Only providing final results to its Indian clients by using highly sophisticated bio-analytical know-how, without providing any access whatsoever to the clients to such know- how, fee received by it is business income and not fee for technical/included services or royalty and applicant having no permanent establishment in India, such income would not be taxable in India by virtue of relevant provisions of the Double Taxation Avoidance Agreement between India and Canada'. The amounts paid by the assessee-company for technical services are not taxable in India. That being so, there is no need for the assessee to deduct tax at source. Allocate corporate overhead while computing deduction under section 10B for Paidibhimavaram unit - Held that:- We find that in the assessee's own case for the assessment year 2006-07, the co-ordinate Bench of this Tribunal at Mumbai has considered this issue at paragraph 12.5 and following the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the assessment years 2007-08 and 2008-09 respectively against the final assessment order passed under section 143(3) read with section 144C(5) and 144C(13) of the Income-tax Act, 1961. I. T. A. No. 2229/Hyd/2011-assessment year 2007-08 2. The assessee has raised the following grounds of appeal : 1. (i) The learned Transfer Pricing Officer/Assessing Officer erred in ignoring LIBOR as a benchmark for determining arm's length price for determining arm's length interest rate in international transactions by adopting interest rate of 14 per cent. as applicable to corporate bonds. (ii) Without respecting the legal developments, the Dispute Resolution Panel erred in following its earlier order which was disposed of without any merit and to keep the issue alive, since Department does not have right of appeal against the Dispute Resolution Panel's direction. 2. The learned Assessing Officer/Dispute Resolution Panel erred in disallowing the claim for transitional liability of leave encashment without appreciating the fact that transitional liability was worked out in terms of revised AS 15 and hence a crystallised liability which was paid. 3. The le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer/Dispute Resolution Panel erred in stating that Perlecan has not obtained 3CK, 3CL and 3CM and hence not eligible for weighted deduction under section 35(2AB). 9. The learned Assessing Officer/Dispute Resolution Panel erred in not allowing the following expenditure as per section 35(1)(i) (dealing with revenue expenditure) and section 35(1)(iv) (dealing with capital expenditure). (a) Revenue expenditure : ₹ 77,63,988 (b) Capital expenditure : ₹ 95,61,593 10. The learned Assessing Officer/Dispute Resolution Panel have erred in treating the repair and maintenance expenditure on the ground that expenditure is capital in nature. 11. The learned Assessing Officer/Dispute Resolution Panel have erred in disallowing the expenditure in connection with doctors, business promotion, gifts without appreciating the fact the expenditure is incurred in connection with the business. 12. The Assessing Officer has erred in not allowing payments towards technical services in the form of not having deducted tax at source, in terms of section 195 without appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f ₹ 2,63,84,567) was issued on October 30, 2009. 4. Further, by virtue of the Hon ble High Court order, which was received only in 2009, M/s. Perlecan Pharma Pvt. Ltd. also got merged into the assessee with effect from January 1, 2006 and the said company had filed its return of income on October 29, 2007 with e-filing acknowledgment No. 5091550291007 declaring loss of Rs. (-) ₹ 46,04,54,630 after declaring interest income of ₹ 7,37,49,337 as its business income. Other expenses in case of the company were ₹ 53,38,18,411 (including expenditure under section 35(1)(i) of ₹ 52,90,32,374) and brought forward loss was ₹ 23,43,30,387. This return was processed under section 143(1) on March 17, 2009 and refund of ₹ 1,85,35,287 (including interest of ₹ 19,85,928) was issued vide refund order dated July 10, 2009. The accounts of M/s. Perlecan Pharma Pvt. Ltd. were also considered by the Assessing Officer in the assessment proceedings of the merged company i.e. under section143(3) read with section 144C(1) of the Act. 5. The assessee's return was selected for scrutiny under CASS to examine the claim of deduction under Chapter VI-A; (ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest charged are lower as compared to the arm's length price. He also observed that the loans given by the assessee to its associated enterprises are nothing but working capital facility extended as is Associated enterprise Interest charged as per the books (transfer price) (in Rupees) Dr. Reddy s Laboratories Inc. 1,04,66,613 Kunshan Rotam Reddy Pharmaceutical Co. Ltd. 2,35,311 Dr. Reddy s Laboratories (proprietary) Ltd. 23,39,623 Lacok Holding Ltd. 8,13,92,221 Industrial Quimicas Falcon de Maxico S.A. De C.V. 11,83,90,678 Total 21,28,24,447 9. The Transfer Pricing Officer observed that the assessee did not make any specific comments/objections to the proposal of the Transfer Pricing Officer to charge interest at 14 per cent. He observed that the assessee in its transfer pricing documentation has analysed the transaction under the comparable uncontrolled price method and the interest that is char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and that vide its order dated September 30, 2010, the Dispute Resolution Panel had upheld the order of the Transfer Pricing Officer. Therefore, the Dispute Resolution Panel confirmed the order of the Transfer Pricing Officer and in accordance with the directions of the Dispute Resolution Panel, the final assessment order has been passed against which the assessee is in further appeal before us. 11. The learned counsel for the assessee, while reiterating the submissions made by the assessee before the authorities below, submitted that the assessee as well as the Transfer Pricing Officer have adopted the comparable uncontrolled price as the most appropriate method to determine the arm's length price of the interest on the loans and advances by the assessee to its associated enterprise in different jurisdictions at varied interest rates. He agreed that identical issue had arisen in the assessment year 2006-07 and this Tribunal in M. A. No. 217/Hyd/2013 in I. T. A. No. 1605/Hyd/2010 dated November 29, 2013 has held that the LIBOR linked interest rate is to be adopted for benchmarking interest on advances to foreign associated enterprises. He also placed reliance upon the followi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arning rate would have no applicability and the international interest rate fixed being LIBOR linked interest rate comes into play. In the case of Siva Industries Ltd. (supra), the co-ordinate Bench of the Tribunal at Chennai has observed that the average of the LIBOR rate with effect from April 1, 2005 to March 31, 2006 is 4.42 per cent. and that the assessee therein had charged interest at 6 per cent. which was higher than the LIBOR rate and hence no adjustment is called for. In the assessee's own case for the assessment year 2006-07 in M. A. No. 217/Hyd/2013 in I. T. A. No. 1605/Hyd/2010 (supra), the Tribunal has taken note of the LIBOR at 4.42 per cent. rate and has observed that the assessee has accepted 7 per cent. in earlier years which is equivalent to LIBOR+2 per cent. Therefore, the Tribunal has directed the Transfer Pricing Officer to adopt 7 per cent. For the year before us also, the facts and circumstances being similar, we direct that the Transfer Pricing Officer/Assessing Officer to adopt LIBOR +2 per cent. or 7 per cent. whichever is higher as the arm's length price interest. The assessee's ground of appeal No. 1 is therefore, treated as allowed for stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y ₹ 2,74,08,816. He submitted that the assessee is following the mandatory accounting standard AS-15 and as per the same, the provision for leave encashment has to necessarily pass through the profit and loss appropriation account He submitted that both the Assessing Officer as well as the Dispute Resolution Panel have incorrectly held that the payment is made to the fund and not to the employees. He has also drawn our attention to the details of the payment made to employees, the list of which was furnished before the Dispute Resolution Panel and which is placed at pages 249 to 352 of the paper book filed before us. He also placed reliance upon the following decisions in support of his contention that the actual payment of leave encashment is an allowable expenditure under section 43B(f) of the Act : (i) Eimco Elecon (India) Ltd. v. Addl. DIT reported in [2013] 22 ITR (Trib) 380 (Ahd); [2013] 33 taxmann.com 476 (Ahd-Trib.); (ii) Asst. CIT v. Bharti Teletech Ltd. reported in [2014] 46 taxmann.com 26 (Delhi-Trib). 17. The learned Departmental representative however, supported the orders of the authorities below and as regards the assessee's claim of actual payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me was confirmed by the learned Commissioner of Income-tax (Appeals) also on the basis of section 43B. As per the judgment of the Hon ble Calcutta High Court rendered in the case of Exide Industries Ltd. v. Union of India (supra), it was held that clause (f) of section 43B is arbitrary, unconscionable and dehors of the Hon ble Supreme Court decision and, therefore, not valid. In view of this, clause (f) of section 43B is not valid and, therefore, disallowance made by the Assessing Officer on the basis of clause (f) of section 43B cannot be sustained. We, therefore, delete the same. 19. Further, in the case of Asst. CIT v. Bharti Teletech Ltd. [2014] 46 taxmann.com 26 (Delhi), the co-ordinate Bench of the Tribunal at Delhi was considering whether leave encashment is allowable on actual payment and at paragraph 7.1 has held as under : 7.1 Apropos second issue i.e. leave encashment expenses, the facts have been narrated above. We find merit in the argument of learned counsel for the assessee that the leave encashment though pertaining to earlier year is allowable on actual payment basis in the year of payment i.e. assessment year in question. It has not been disputed that as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessment year 2006-07 (Dr. Reddy's Laboratories Ltd. v. Addl. CIT (No. 1) [2014] 30 ITR (Trib) 393 (Hyd)) has considered this issue at paragraph 9.3 of its order and has held as under (pages 415, 417) : After hearing the case, the Special Bench of the Income-tax Appellate Tribunal Bangalore in the case of Biocon Ltd. v. Deputy CIT held that employee stock option plan discount (difference between market price and issue price) is a deductible expenditure at the time of vesting of the option. An adjustment has to be made if the market price is different at the time of exercise of the option. In that case also assessee framed an employee stock option plan (ESOP) pursuant to which it granted options to its employees to subscribe for shares at the face value of ₹ 10. As the market price of each share was ₹ 919, the assessee claimed that it had given a discount of ₹ 909 which was allowable as a deduction as 'employee compensation'. Though the options vested equally over four years, the assessee claimed a larger amount in the first year than was available under the SEBI guidelines. The Assessing Officer and the Commissioner of Income-tax (Appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... existing line of business of research and development and therefore, has to be allowed as revenue expenditure. He submitted that during the assessment year 1999-2000, similar issue had also arisen in the assessee's own case in I. T. A. No. 363/Hyd/2003 and vide orders dated September 21, 2007, the Tribunal has allowed the said expenditure. He also relied upon the decision of the co-ordinate Bench of the Tribunal at Chandigarh in the case of Glaxo Smith Kline Consumer Healthcare Ltd. v. Asst. CIT reported in [2007] 112 TTJ (Chd) 94 in support of the above contention. 26. The learned Departmental representative however, supported the orders of the authorities below. 27. Having regard to the rival contentions and the material on record, we find that the assessee is in the business of research development and manufacture of pharmaceuticals. The process of research includes trial run of a new drug. Therefore, the assessee's experiments on a new drug cannot be said to be a new line of business. We find that during the assessment year 1999-2000, the assessee had incurred pre-operative expenses on Biotechnology Division and the Assessing Officer therein had treated this expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cited by the learned Departmental representative are concerned, in the case of Hyderabad Allwyn (supra) and Indian Oxygen (supra), the assessee had entered into altogether a new line of business and hence the expenses were held to be of capital nature. In the case of Saurashtra Cement (supra), the nature of expenditure which was claimed was different than the nature of expenses claimed by the assessee in the present case. In the case of Ciba of India (supra), the expenses claimed were incurred for freight customs etc. to import the machinery which was gifted to the assessee by its parent company and hence, they were held to be capital expenditure. In the present case, the assessee itself has capitalised the expenses incurred on lab equipment. In the case of J. K. Chemicals (supra), the expenses were incurred to decide whether some profit making assets should be acquired or not which would be of enduring nature and hence were held to be of capital nature. In the case of E.I.D. Parry (supra) the expenses were for a new product whereas in the present case, they were for the existing diagnostic and formulation business. In the case of Triveni Engineering (supra), there was a clear fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder consideration but spills over to the future also. So however this is not conclusive to hold that the expenditure in question is a capital expenditure. The parity of reasoning laid down by the apex court in the case of Empire Jute Co. Ltd. [1980] 124 ITR 1 (SC) discussed by us in the earlier para is squarely applicable with respect to such expenditure also. 11. We may mention here the stand of Revenue that the development and introduction of new products create a new line of business for the assessee and thus expenditure related thereof is to be treated as capital expenditure. On this aspect we are unable to appreciate as to how can it be said that mere development and introduction of new varieties of products result in creation of a new line of business. Factually speaking, prior to the development and introduction of the impugned new products the assessee was in the business of manufacturing and sale of food and health care products. Even post development and introduction of new products, the business of the assessee remains that of manufacturing and sale of food and health care products. Therefore it is erroneous to conclude that the assessee acquired a new line of busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adesh has been set up during this year. It was also submitted that the total issue expenses was ₹ 227 million against which the assessee had recovered and adjusted ₹ 125 million resulting in the net issue expenses of ₹ 104 million only and therefore, the entire expenditure incurred in connection with the ADS issue meant for expansion of the existing business is allowable under section 37 of the Act. The Dispute Resolution Panel however, held that the increase in the share capital results in expansion of the capital base of the company and incidentally though that would help in the business of the company and also in the profit making, the expenses incurred in that connection still retain the character of the capital expenditure, since the expenditure is directly related to the expansion of the capital base of the company. The Dispute Resolution Panel followed the decision of the Hon ble Supreme Court in the cases of Punjab State Industrial Development Corporation Ltd. v. CIT reported in [1997] 225 ITR 792 (SC) and Brooke Bond India Ltd. v. CIT reported in [1997] 225 ITR 798 (SC) for coming to this conclusion. Further, the Dispute Resolution Panel held that the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial Development Corporation Ltd. v. CIT (cited supra) has clearly held that though the increase in the capital results in expansion of the capital base of the company and incidentally that would help in the business of the assessee and may also help in the profit making, the expenses incurred in that connection still retain the character of the capital and hence the expenditure is directly related to the expansion/capital base of the company. Therefore, we see no reason to interfere with the assessment order on this issue. However, as regards alternate contention of the assessee that the same should be allowed under section 35D of the Act, we find that the Assessing Officer as well as the Dispute Resolution Panel have disallowed the claim of the assessee on the ground that the assessee has not furnished the details of the said expenditure and also as to how the assessee has satisfied condition of clause (c) of sub-section (2) of section 35D of the Act. We find that at page 390 of the paper book, the assessee has given the details of the ADS issue expenditure and at page 107 of the paper book in Schedule 9 to the notes to the accounts, wherein the explanation as to how the funds ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 37(1) of the Income-tax Act. The learned Departmental representative however, supported the orders of the authorities below. 35. We find that the Dispute Resolution Panel has considered the assessee's objection at length and has held that the claim of deduction under section 35(1)(ii) is not allowable as ILS is not an institution approved by the notification in the Official Gazette by the Central Government. We also find that the Dispute Resolution Panel has also considered the allowability of the same as an expenditure under section 37(1) of the Act on the grounds of commercial expediency. The Dispute Resolution Panel has observed that the payment made by the assessee is more in the nature of a donation and not a business expenditure. It was held that the assessee has not made the payment for building up any business through promotion of a goodwill because by its very nature, ILS cannot canvass or procure business for the assessee as ILS is a research institution affiliated to the Osmania University, Hyderabad and it is not under the Dr. Reddy's Laboratories brand to acquire goodwill for the assessee through its research and academic work. The Dispute Resolution Panel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee. In the assessee's own case for the assessment year 2003-04, the Tribunal, without giving elaborate reasons, has held that the donation given to the institutions mentioned therein are incurred in the course of business and allowable under section 37(1) of the Act. For the assessment year 2006-07, the Tribunal has only remanded the issue to examine the allowability of donation to ILS under section 37(1) of the Act. Therefore, there is no finding about the allowability of the same by the Tribunal. In view of the same, we do not see any reason to interfere with the assessment order on this issue and the ground of appeal No. 6 is rejected. 37. As regards ground No. 7, it is submitted by the assessee that a company by name American Remedies Ltd. had got merged with the assessee with effect from April 1, 1999 and upon the merger, the difference between the consideration and the net worth was considered as goodwill and from the first year of merger, the assessee claimed depreciation on goodwill. It is submitted that the Assessing Officer has disallowed the claim of depreciation on the ground that it is not an intangible asset. 38. The learned counsel for the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 35(2AB) of the Act. According to the assessee, the substance of the activity/transaction should be considered and weighted deduction should be allowed as Perlecan Pharma Pvt. Ltd. was set up as an integrated drug development company jointly owned by 41. Dr.Reddy's Laboratories Ltd. and the venture capital financial institution after the discovery research activities carried out at approved in-house research and development units of Dr. Reddy's Lab Ltd. He submitted that in the original return of income filed, the assessee computed the research and development claim under section 35(2AB) after reducing the amount recovered from Perlecan and based on the High Court order amalgamating Perlecan Pharma Ltd. with the assessee herein with retrospective effect from January 1, 2006, the assessee revised its return of income, duly reversing the Perlecan credit considered in the original return and duly claimed the weighted deduction under section 35(2AB) of the Act. It is submitted that both the Assessing Officer as well as the Dispute Resolution Panel have not appreciated the fact that the research and development expenditure representing the funds received from Perle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es below and submitted that the approval given by DSIR is for the research and development facility of the assessee and not the research and development of Perlecan Pharma P. Ltd. Thus, according to him, the expenditure incurred by Perlecan towards research and development albeit in assessee's facility is not eligible for deduction under section 35(2AB) of the Act. 43. Having regard to the rival contentions and the material on record, we find that under section 35(2AB), sub-section (1), a company which is engaged in the business of bio-technology or in any business of manufacture or production of any article or thing incurs any expenditure on scientific research (not being expenditure in the nature of the cost of land or building) on in-house research and development facility as approved by the prescribed authority, then they shall be allowed a deduction of a sum equal to one and th time of the expenditure so incurred. The only dispute before us is whether the expenditure incurred by Perlecan towards research and development in the assessee's facility is eligible for deduction under section 35(2AB) of the Act. As pointed out by the learned counsel for the assessee, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the deduction of ₹ 3,46,51,162 should be allowed as per section 35(1)(i) and 35(1)(iv) of the Act. In support of this contention, the learned counsel for the assessee placed reliance upon the following decisions : (i) Deputy CIT v. Reliance Cellulose Products Ltd. reported in [2013] 36 CCH 269; (ii) Addl. DIT v. Bhagiradha Chemicals and Industries Ltd. (I. T. A. No. 906/Hyd/2009, dated May 9, 2012); and (iii) Deputy CIT v. Indian Immunologicals Ltd. reported in [2014] 42 CCH 65. 47. The learned Departmental representative however, supported the orders of the authorities below. 48. Having regard to the rival contentions and the material on record, we find that the expenditure as admitted, has not been approved by the DSIR and therefore, the weighted deduction under section 35(2AB) on these amounts are not clearly allowable. We find that the co-ordinate Bench of this Tribunal in the cases relied upon by the learned counsel for the assessee, has held that where the assessee was having research and development centres which were not duly recognised by DSIR, then the assessee was entitled for deduction under section 35(1) in respect of expenditure on scientific re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al in nature. He, therefore, disallowed the same and brought it to tax. The Dispute Resolution Panel confirmed the assessment order and the assessee is in appeal before us. 51. The learned counsel for the assessee, while reiterating the submissions made before the authorities below, submitted that doctors are the backbone of the medical world and they spread awareness about the latest molecules in the medicinal field in the conferences they attend. Therefore, according to him, the travel and other expenditure on account of the participation of doctors is for bona fide business purposes of the assessee. Thus, according to him, the said expenditure is allowable as business expenditure. He also placed reliance upon the following decisions to supports the assessee's claim of business expenditure : (i) Asst. CIT v. Geno Pharmaceuticals Ltd. (I. T. A. No. 12/PNJ/2014) for the assessment year 2010-11 dated May 30, 2014. (ii) Syncom Formulations (I) Ltd v. Deputy CIT (I. T. A. Nos. 6429 and 6428/Mum/2012) for the assessment years 2010-11 and 2011-12 dated December 23, 2015. (iii) Eli Lilly and Co. (India) Pvt Ltd. v. Asst. CIT, (I. T. A. No. 788/Del/2015 for the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payments to the doctors, hospitals in cash amount and also like gifts. The contention of the assessee was that this expenditure was incurred wholly and exclusively for the purpose of business, whereas the Assessing Officer/Dispute Resolution Panel was of the opinion that the assessee cannot explain said payments as related to business. Similar issue was examined by the Assessing Officer and the Commissioner of Income-tax (Appeals) in the assessment year 2003- 04 in the above order (supra). The Income-tax Appellate Tribunal also upheld the disallowance of these items vide paragraph 39 of the order. Accordingly, the addition on this account stands confirmed. Likewise the expenditure of gifts and compliments and other expenditure of similar nature was also not allowed in the order of the Income-tax Appellate Tribunal (supra). Respectfully following, we uphold the order of the Assessing Officer/Dispute Resolution Panel on various expenditures. With regard to local doctor meet expenditure it was submitted that expenditure was incurred on doctors for provision of various gifts in individual capacity including gifts, tickets, sponsorship etc. It was contended that this was for busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the issue was set aside by the Commissioner of Income-tax (Appeals) to the file of the Assessing Officer to verify the nature of expenditure and disallow only that expenditure which is not incurred for the purpose of business, we also modify the order of the Assessing Officer/Dispute Resolution Panel and direct the Assessing Officer to examine the nature of expenditure and consider disallowance of expenditure which is not incurred for the purpose of business. The issue is restored to the file of the Assessing Officer. The circular issued by the Board in 5 of 2012 and code of ethics regulations 2002 issued by Medical Council of India was applicable from 2003-04 and for the relevant assessment year, the code of ethics is applicable and so expenditure incurred on the doctors can be considered as unethical. The Assessing Officer is also directed to examine this aspect also in addition to the directions given by the I. T. A. No. 655/Hyd./07, dated October 29, 2010. With these directions the ground is considered partly allowed for statistical purposes. 53. Respectfully following the same, we set aside the issue to the file of the Assessing Officer with a similar direction to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve, however, supported the orders of the authorities below. 57. Having regard to the rival contentions and the material on record, we find that in the assessee's own case for the assessment years 2003-04 and 2004-05 and the Tribunal at paragraphs 11 and 12 has held as under : 11. We have considered the issue. Keeping in mind the detailed order of the Commissioner of Income-tax (Appeals), which is extracted above and the provisions of the Income-tax Act read with Double Taxation Avoidance Agreement with USA and Canada, which are almost similar, we have no reason to differ from the order of the Commissioner of Income-tax (Appeals). Even though the Assessing Officer considered that the payments were made by way of 'fee for technical services' as per article 12 of the Double Taxation Avoidance Agreement, the same is taxable in the source country only if such services make available any technical knowledge, expertise, etc. or there is transfer of technical plan or design. In this case, as rightly considered by the learned Commissioner of Income-tax (Appeals), the assessee was conducting clinical trials through the CROs in USA to comply with the regulations therein an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the technique by itself. The mere fact that the tests in question are highly technical in nature will not make a difference. In its affidavit the applicant affirms that only final results, conclusion of data of bioequivalence tests are provided to the recipient. Clinical procedure, analytical methods, etc., which are proprietary items of the applicant, have neither been nor will they ever be transferred, assigned or handed over to 5 or any other Indian client. From the perusal of the relevant agreements, no provision is found which would entitle the clients to know the details of the analytical methods and procedures employed by the applicant in carrying out the bioequivalence tests. The only doubt cast by c1ause 15 of the agreement with 5 is cleared by S's statement that the said clause which was part of standard format was never given effect to. It seems to be inapplicable also having regard to the actual modalities of the transaction as set out in the application. Then agreement with R says that R shall be the owner of the tested samples and test compounds. Further, the applicant will store tested samples and test compounds for three months and make these available to the cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elopment of new drugs as contended by the Revenue. As such, the fees received by the applicant are to be treated as business income and not royalty income. Since the applicant is in the business of providing bio-analytical services to various pharmaceutical companies, the consideration received by it from them would be its business income. In view of article 7 read with article 5, such income can be taxed in India only if the applicant has a permanent establishment in this country. The applicant has denied the existence of any permanent establishment here and there is nothing on record to indicate anything to the contrary. On the facts stated, the existence of permanent establishment in India cannot be inferred also. It is, therefore, ruled that the fee paid by S and R to the applicant in respect of bioequivalence tests conducted by it is in the nature of business profits under article 7 and the same is not taxable in India as the applicant does not have a permanent establishment situated in this country. Raymond Ltd. v. Deputy CIT [2003] 80 TTJ (Mumbai) 120; [2003] 86 ITD 791 (Mumbai), McKinsey and Co., Inc. (Philip pines) v. Asst. DIT (International Taxation) [2006] 284 ITR (AT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of the Tribunal at Delhi in the case of Deputy CIT v. Valliant Communications Ltd. in ITA No. 2706/Delhi/2008, dated June 27, 2014. Further, the assessee also filed a letter dated June 10, 2011 from the Assistant Development Commissioner VSEZ stating that the Board of approvals rectified the approval dated February 21, 2003 vide letter No. 14/1/2011- EOU, dated January 18, 2011. The Dispute Resolution Panel taking the note of the approval/rectification by the Board of Industries held that the assessee is entitled for the deduction under section 10B of the Act with regard to Paidi Bhimavaram project, but however, directed the reduction of the corporate overhead before allowing the deduction under section 10B of the Act. The assessee is challenging the allocation of the overhead before us. 60. The learned counsel for the assessee stated that the Dispute Resolution Panel by allocating the corporate overheads to the eligible units, has enhanced the draft assessment, though it does not have the power to consider the issues which are not proposed in the draft assessment order. In support of this contention, he placed reliance upon the decision of the Hon ble Karnataka High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he corporate overhead, has considered corporate expenditure including finance charges, but has failed to consider interest income and gain on foreign exchange fluctuations which are also attributable to corporate activities only. Hence while computing corporate overhead allocable to the said units, he has to necessarily net-off the corporate income from the corporate expenditure and net only should be considered as corporate overhead allocable. We have considered the issue. This issue was discussed by the Income-tax Appellate Tribunal in the assessment year 2003-04 in the assessee's own case from paragraph 14 to paragraph 18 onwards. The issue was set aside to the Assessing Officer observing as under : '18. We have carefully gone through the order of the Tribunal in the case of Wipro GE Medical System Ltd. cited supra and wherein it was held that the assessee is rightly having allocated indirect expenses to the two units according to the wages and other expenses on the basis of sales for arriving respective profits of its two units. The Assessing Officer is directed to accept assessee's working in relation to deduction under section 80-IA. In view of the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y any tax and therefore, the provisions of section 11(2) of the Act does not apply and therefore, the claim for credit of tax payable in Cyprus was rejected. With regard to the credit of TDS deducted by Canara Bank, the Dispute Resolution Panel directed the Assessing Officer to allow the same in part subject to verification as whether the bank has remitted it to the Government account. 66. The learned counsel for the assessee, while reiterating the above submissions, submitted that this issue is covered in favour of the assessee as the Dispute Resolution Panel for the assessment year 2008-09 has issued directions that the tax credit is to be allowed, if the interest was taxed in India and prayed for similar directions during this year. 67. Having regard to the rival contentions and the material on record and having verified the Dispute Resolution Panel's order for the assessment year 2008-09, we find that the Dispute Resolution Panel for the assessment year 2008-09 at paragraphs 59 to 61 has held as under : 59. The Panel has considered the submissions of the taxpayer. There is no doubt that article 11 of the Double Taxation Avoidance Agreement between India and Cypru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and paragraph 3 of this article shall be deemed to include the tax which would have been payable but for the tax incentives granted under the laws of the Contracting State and which are designed to promote economic development. For the purpose of paragraph 2 of article 10, the amount of tax shall be deemed to be 10 per cent. or 15 per cent., as the case may be, of the gross amount of dividend, for the purposes of paragraph 2 of article 11, the amount of tax shall be deemed to be 10 per cent. of the gross amount of interest and for the purpose of paragraph 2 of article 12, the amount of tax shall be deemed to be 15 per cent. of the gross amount of royalties and fees for included services and for the purpose of paragraph 2 of article 13, the amount of tax shall be deemed to be 10 per cent. of the gross amount of technical fees. 60. Under the Double Taxation Avoidance Agreement, India shall allow as a deduction from the tax on the income of the resident, an amount equal to the Income-tax paid in Cyprus whether directly or indirectly by way of deduction. Such deduction, however, shall not exceed that part of Income-tax which is attributable to the income which may be taxed in Cyp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ential relief, if any to the assessee in view of our order above. 71. As regards ground No. 17, it is general in nature and needs no adjudication. 72. In the result, the assessee's appeal is partly allowed for statistical purposes. I. T. A. No. 85/Hyd/2013-assessment year 2008-09 73. The assessee has raised the following grounds of appeal : 1.0 The appellant submits that the learned Assessing Officer and the Hon ble Dispute Resolution Panel have erred in disallowing the expenditure of ₹ 20,71,25,000 incurred by the assessee on ESOP on the ground that the expenditure on ESOP is notional and capital in nature and hence cannot be allowed as a revenue expenditure. 2.0 The appellant respectfully submits that the learned Assessing Officer and the Hon ble Dispute Resolution Panel have erred in disallowing the claim for depreciation on goodwill amounting to ₹ 2,63,51,132. The learned Assessing Officer erred in not considering the fact that the treatment of goodwill is in tune with AS-14 and various business and commercial rights in the form of business contracts, products, brands, new formulations, new technologies and licences are acquired by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the Hon ble Dispute Resolution Panel have erred in not considering the fact that the loan to wholly owned subsidiary lacks risk exposure and hence should not have ruled that LIBOR+2 per cent. is an arm's length interest rate. 74. We find that ground No. 1 is similar to ground of appeal No. 3 in the assessee's appeal for the assessment year 2007-08 and for the detailed reasons given therein by the above order of even dated, this ground of appeal is allowed. 75. Ground No. 2 is similar to ground of appeal No. 7 in the assessee's appeal for the assessment year 2007-08 and for the detailed reasons given thereby the order of even dated, this ground of appeal is allowed. 76. Ground of Appeal No. 3 is similar to the assessee's ground of appeal No. 9 in the assessee's appeal for the assessment year 2007-08 and for the detailed reasons given therein, this ground of appeal is allowed for statistical purposes. 77. Ground of Appeal No. 4 is similar to the assessee's ground of appeal No. 12 for the assessment year 2007-08 and except that the payee herein is in UK and the India-UK Double Taxation Avoidance Agreement does not include make available clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity of heads of expenses are relating to salaries, employees' travelling cost, other routine business expenditure like postage, stationery, employees' training seminars, consultancy expenses etc. The first aspect is that the expenditures in question by itself do not result in acquisition of any asset in the hands of the assessee. The impugned expenditure also is not related to the actual acquisition of the ERP package and on this count, even the Assessing Officer does not dispute the factual situation. The stand of the Assessing Officer for treating the expenditure, as capital is that the said expenditure has brought enduring benefits to the assessee. 44. We have considered the nature of the expenditure incurred and the resultant benefits to the assessee. Evidently the business of the assessee is to carry on manufacture and sale of food and healthcare products. The activity pertaining to accounting, finance, recording of transactions relating to sales/purchases, inventories etc. are all secondary and assist in the furtherance of the main business objective of the assessee i.e. manufacturing. These secondary activities are necessary as 'aids' or 'tools' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xcept in relation to the expenditure voice telecom circuit ₹ 19,86,581 and data/telecom circuit usage ₹ 69,16,888. With respect to the aforesaid two expenses there is no specific discussion either in the orders of the lower authorities or even before us; to gauge its nature. Therefore, while in principle, we uphold the stand of the assessee that the expenditures of the nature which have been incurred in the implementation of the new ERP package, are revenue expenditures, insofar as it relates to the aforesaid two expenditures, we deem it fit and proper to direct the Assessing Officer to ascertain their nature and thereafter decide the issue. For this limited purpose, we hereby set aside the order of the Commissioner of Income-tax (Appeals) and restore the matter to the Assessing Officer to carry out the aforesaid exercise. The assessee shall provide the necessary details to the Assessing Officer and also justify that the same was of revenue nature in consonance with our discussion in the aforesaid paras. 46. Before parting we may also make a mention that the Assessing Officer himself has accepted similar expenditure in the immediately preceding assessment year as r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced on record and therefore, it is not possible to give any finding on the nature of such expenditure. Further, the break-up of expenditure of roads as well as furniture is also not given. Therefore, with a finding that the ERP implementation charges and the laying of road be treated as revenue expenditure, the issue of the nature of expenditure on furniture only is set aside to the file of the Assessing Officer for de novo consideration. 83. This ground is therefore, treated as partly allowed for statistical purposes. 84. Ground of Appeal No. 6 is similar to the assessee's ground of appeal No.11 for the assessment year 2007-08 and for the detailed reasons given therein, this ground of appeal is remitted to the file of the Assessing Officer with similar directions. 85. Ground of Appeal No. 7 is similar to the assessee's ground of appeal No.13 for the assessment year 2007-08. In view of the reasons given therein, this ground of appeal is also treated as allowed for statistical purposes with similar direction. 86. Ground of appeal No. 8 is similar to the assessee's ground of appeal No.1 for the assessment year 2007-08 for the detailed reasons given therein, th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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