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2019 (9) TMI 384

..... m) - HELD THAT:- As relying on own case [ 2019 (6) TMI 1252 - ITAT AHMEDABAD] no reason to disallow the R & D expenditure allocated to Sun Pharmaceuticals Industries (Partnership Firm) - Decided in favour of assessee. - ITA No. 2514/Ahd/2015 - 6-9-2019 - SHRI WASEEM AHMED, ACCOUNTANT MEMBER AND Ms. MADHUMITA ROY, JUDICIAL MEMBER For The Appellant : Shri S. N. Soparkar, And Shri Parin Shah A.Rs. For The Respondent : Shri Vinod Tanwani, Sr.D.R. ORDER PER Ms. MADHUMITA ROY - JM: The instant appeal filed by the assessee is directed against the order dated 31.03.2015 passed by the Pr. Commissioner of Income Tax -1, Vadodara-2, under section 263 of the Income Tax Act, 1961 (in short the Act ) for the Assessment Year 2008-09. 2. The assessee, a pharmaceutical company filed its return of income declaring total income of Rs.(-)32,08,64,172/- under normal provisions and book profit u/s.115JB of the Act of ₹ 2,66,89,19,663/- which was finalized u/s.143(3) of the Act dated 19/12/2011 whereby and whereunder the income of the assessee was assessed at ₹ 4,76,42,33,280/- under normal provision and ₹ 3,14,81,31,195/- as book profit u/s.115JB of the Act. Further that Assessment .....

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..... e relevant portion thereof is as follows: 39. The issue raised by the assessee in ground No. 7 is that the Ld.CIT (A) erred in confirming the order of the AO by allocating the research and development expenses incurred by it to the other partnership firms and accordingly made the disallowance of such expenses proportionately. 40. The assessee is a partner in two partnership firms namely Sun Pharma Industries and Sun Pharma Sikkim (for short SPI and SPS). Both the partnership firms were engaged in manufacturing the drugs. However, the assessee was carrying out research and development expenses for the drugs manufactured by both the firms. Accordingly, the assessee claimed the deduction for all the research and development expenses incurred by it in its books of accounts. 41. The AO during the assessment proceeding observed that both the partnership firm are claiming deduction under section 80IC of the Act. As such both the partnership firms were showing a huge amount of profit which was allocated to the partners of the firm. The assessee being a major shareholder in the firms received a huge amount as a share of profit which was claimed as exempted under section 10(2A) of the Act. A .....

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..... 1961. The share of profit received by the appellant from the firm is exempt from the Income Tax. The remuneration is received from the firm is taxable under the head income from business and profession, as per the provision of clause (v) of section 23 of the IT Act 1961. But the proviso to this section says that where such remuneration or part thereof has not been allowed to be deducted under clause (b) of section 40, the income under this clause shall be adjusted to the extent of the amount not so allowed to be deducted. Now as per the provisions of section 40(b)(i), any payment of salary, bonus, commission or remuneration to any partner who is not a working partner is not allowed as a deduction in computation of the total income of the firm. The explanation 4 to clause (b) says that working partner means an individual who is actively engaged in conducting the business or provision of the firm of which he is a partner. Hence, the appellant being a company cannot be a working partner of a firm for the purposes of provisions of Income Tax Act 1961. Accordingly, any remuneration paid to the appellant is not allowable as a deduction in the computation of the total income of the firm a .....

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..... duced above. The first difference pointed out is that the partnership firm is only into production of formulation drugs for the domestic market, whereas appellant incurred R & D expenditure on bulk drug segment and formulation segment both and that too for domestic market as well as international market and regulated market. It has been submitted that the partnership firm has sold its product in domestic market only. In this regard, the appellant has also submitted the copy of Financial statement for FY 2007-08 of Sun Pharmaceutical Industries. As per this, the turnover of this firm is 1086.2 crore, which is the same figure as adopted by the Ad in his order. Besides in Clause 8' of the Notes on Financial Statement, it has been mentioned that the firm operates in one reportable geographical segment i.e. "within India". On the basis of details furnished by the appellant it is seen that the firm is not into bulk drug formulations. Hence, R & D expenditure related to bulk formulation are not to be allocated towards the expenditure for the firm SPI and the AO has also accepted this contention. But the AO has allocated entire R & D expenditure for formulation dr .....

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..... e should be considered for allocation to SPI is not acceptable due to lack of proper details filed by it before the AO or during the current appellate proceedings. The Domestic formulations turnover of SPIL is ₹ 1451.25 crores andthat of SPI is ₹ 1086.2 crores. Hence, the R & D expenditure related to formulation drug fordomestic purposes is to be allocated in the ratio of these two turnovers. Hence, the R & D expenditure related to the formulation production made by the SPI comes to 1086.2/2537.45x 4075.49 =₹ 1744.56 lakhs. 7.5.2 Accordingly, the AO is directed to restrict the disallowance out of - R&D expenses to this figure of ₹ 1744.56 lakhs. The appellant gets part relief accordingly." 12.2. It is noticed that the appellant has furnished similar written submission in this year also and the details of various expenses incurred under different heads submitted before the Assessing Officer are as fellows:- Department Description of department Rs. in Lacs Remarks FDD1 Formulation Development of Oral - Solids/tablets/capsules {for Domestic, US & Rest of the world market) Anriexure 1 1651.48 Mainly Domestic market-mfg at Silvassa, Dadra, Ja .....

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..... Ld.CIT (A) to allocate the expenses excluding export turnover. 44. The Revenue has raised ground no 6 reproduced as under: 2. On the facts and in the circumstances of the case, learned CIT(A) erred in law and facts in restricting the disallowance of R&D expenses after excluding the export turnover of the assessee for the purpose of computing the allocation of R & D expenses without appreciating that the AO had applied the same pro-rata method of allocating the R & D expenditure which the assessee itself was applying for allocation of the R & D expenditure within the assessee itself was applying for allocation of the R & D expenditure within its units in the ratio of their turnover. 45. The Ld. AR before us submitted that in the identical facts and circumstances this ITAT in the own case of the assessee and Revenue bearing ITA Nos. 1666/AHD/2016 and 1663/AHD/2016vide order dated 08-09-2017 deleted the addition made by AO. 46. Both the Ld. AR and the DR before us relied on the order of respective authorities below as favorable to them. 47. We have heard the rival contentions and perused the materials available on records. At the outset, we find that in the identi .....

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..... f this Tribunal in the own case of the assessee in the earlier year as the facts are identical in the impugned issue before us. It is also important to note that the ld. DR has not brought anything on record contrary to the argument advanced by the ld. Counsel for the assessee and the finding of the ld. CIT-A. 49.2 We also place our reliance on the judgment of Hon ble Madras High Court in the case of CIT v. L.G. Ramamurthi 1977 CTR (Mad.) 416 : [1977] 110 ITR 453 (Mad.). The relevant extract has been reproduced in the preceding paragraph. In the light of the ratio decidendi in the above-saidjudgment, we are of the considered opinion that the view adopted by the co-ordinate bench as discussed above shall be applied in the case on hand with full strength.The ld. DR and the ld. AR has not brought any decisions varying from similar or identical facts or circumstances. Therefore, the ratio decidendi rendered by the earlier order of the Tribunal has necessarily to be followed by us in line and tune with the judicial discipline and decorum. In view of the above and respectfully following the ITAT order as discussed above, we allow the ground of appeal of the assessee and dismiss the groun .....

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