TMI Blog2019 (9) TMI 384X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 Order was finalized u/s.143(3) r.w.s 147 of the Act on 14.02.2014 determining total income at ₹ 5,59,68,08,333/- and u/s.115JB of the Act at ₹ 3,14,81,31,195/- 3. The Ld.ACIT disallowed ₹ 2,50,44,500/- towards R D expenses. Subsequently Ld. Pr. CIT, u/s.263 of the Act held the assessment order dated 14.02.2014 is erroneous in so far as prejudicial to the interest of Revenue to the extent of non disallowance of R D expenditure allocated to Sun Pharmaceutical Industries (partnership firm). The said expenditure has been enhanced at ₹ 5,23,16,934/- and added to the total income of the assessee . Hence, the instant appeal before us. 4. At time of hearing of the instant ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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. Accordingly, the AO was of the view that the research and development expenses incurred by the assessee on the drugs manufactured by the partnership firms should be allocated to these partnership firms. Thus the AO worked out the research and development expenses pertaining to the firms for ₹ 58,07,48,088/- on the basis of the turnover of the formulations and disallowed the same by adding to the total income of the assessee. 42. The aggrieved assessee, preferred an appeal to the Ld. CIT (A) who partly confirmed the order of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and at the same time such remuneration will not form part of total income of the appellant. Thus, both the share of profit and remuneration received by the appellant from the firm will not form part of its total income and accordingly any expenditure incurred by the appellant for earning such share of profit or remuneration cannot be allowed as a deduction in computation of its total income. Hence it is held that the AO has rightly disallowed the R D expenditure incurred by the appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 drugs in the ratio of total turnover of the appellant and of the firm M/s. SPI. The appellant's claim that R D expenditure Incurred for export formulations should not be allocated to SPI is found to be correct as SPI has not exported any drug during the FY 2007-08. But at the same time if this method is adopted, then the export turnover of the appellant will have to be reduced from its total turnover for the purposes of computing the allocation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b) 500.89 Expenses on accounts Clinical Trails for Domestic market. R D Professional Fees a) 4751.79 Expenses for Professional Charges for products for overseas market. b) 167.71 Expenses for Professional Charges for products for Domestic market. Other.- Miscellaneou s expenditure 62.90 Grand Total R D Expenditure 13104.19 Thus, the total expenses for formulation drug for domestic market is 1651.48,+ 2193.40 + 167.61 +.62.90 = 4075.49 lakhs. The balance exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic Synthesis Process Organic synthesis (basic) for bulk drugs Organic synthesis (process) for bulk drugs Total R D Expenditure dept. wise Annexure 4 Annexure 5 873.62 1065.83 7402.95 Only for Bulk Drug/API Only for Bulk Drug/API Regulatory/O verseas Expenses Annexure 6 a) 217.96 Expenses on accounts of Products Registration, Clinical Trails, Subscription etc. for product for overseas market. b) 500.89 Expenses on accounts Clinical Trails for Domestic market. R D Professional Fees a) 4751.79 Expenses for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied 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 identical facts and circumstances in the own case of the assessee s (supra), the ITAT deleted the addition made by the TPO/AO. The relevant extract of the order is reproduced as under: We have given a thoughtful consideration to the facts in issue before us. There is no dispute that the assessee did incurred expenditure under the head ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ground of appeal of the Revenue. Taking into consideration the order passed by the Co-ordinate Bench in identical issue in assessee s own case as discussed above, we fi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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