TMI Blog2019 (8) TMI 1649X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 - GUJARAT HIGH COURT ] - we direct the ld AO to grant weighted deduction u/s 35(2AB) - Decided in favour of assessee. Disallowing expenses u/s 37(1) - expenses were incurred by the assessee company for providing freebies to medical practitioners and their professional associations in violation of the regulations issued by the Medical Council of India (MCI) which is a regulatory body constituted under the Medical Council Act, 1956 - HELD THAT:- We find that MCI guidelines cannot decide the allowability or otherwise of an expenditure in the hands of drug manufacturing companies or individuals other than doctors under the Act. In any case, we find that the ld AO had only made an adhoc disallowance by applying 1.32% on turnover to have been incurred towards the freebies, gifts. This, in our considered opinion, cannot be sustained in the eyes of law, more particularly when the assessee had given complete details of expenses together with supporting evidences before the ld AO. We find that the ld AO had not identified the fact as to whether any expenses was incurred during the year towards freebies, gifts etc given to medical practitioners. Hence the disallowance of expenses u/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and circumstances of the case. 3. We have heard the rival submissions and perused the materials available on record including the judicial pronouncements that were referred to by both the parties at the time of hearing before us. We find at the outset, the ld AO had not doubted the genuineness of incurrence of this expenditure together with its purpose. This is evident from the fact that the ld AO had granted deduction to the assessee u/s 35 of the Act but had only denied the weighted deduction claimed by the assessee u/s 35(2AB) of the Act on the ground that DSIR is the only authority to approve the expenses made by the assessee company towards scientific research and accordingly the expenses thereon to the extent approved by DSIR shall be eligible for weighted deduction. Therefore, the ld AO observed that the amount which is not approved by DSIR in the sum of ₹ 827.97 lacs shall not be eligible for weighted deduction u/s 35(2AB) of the Act. The ld CITA upheld the action of the ld AO. We find that once the facility is approved by DSIR, the assessee is entitled for weighted deduction u/s 35(2AB) of the Act and there is no requirement as per the Act that the expenses need ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncurred by it on the in-house research and development facility, on the basis of which the Prescribed authority‟ records its approval and submits the details of the expenditure approved to the Director General (Exemptions)‟ in Form 3CL‟. Thus a bare perusal of Sec. 35(2AB) reveals that what is required to be approved by the Prescribed authority‟ is the in-house R D facility‟, and not the amount of expenditure incurred by R D approved unit‟. That for the sake of clarity the relevant extract of Sec. 35(2AB) is reproduced as under:- Sec. 35(2AB). Where a company engaged in the business of .........incurs any expenditure on scientific research............on in-house research and development 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]. Thus in light of the aforesaid clearly worded statutory provision, it stands inescapably gathered beyond any scope of doubt that Sec. 35(2AB) though postulates approval by the prescribed authority of the in-house R D facility , however the same no where provides that the amount of deduction sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurring of the same, ipso facto established beyond any scope of doubt the inextricable nexus of the said expenses and the scientific research activities of the assessee company, as regards which no infirmity had ever been pointed out by the A.O. The Ld. A.R in support of his aforesaid contention placed reliance on the order of a coordinate bench of the Tribunal in the case of :- USV Ltd. Vs. DCIT, Central Circle-32, Mumbai (2012) 24 taxmann.com 218 (Mum) wherein it was held: 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 We thus in light of the aforesaid facts and settled position of law, find ourselves to be in agreement with the Ld. A.R and are of the considered view that as the aforesaid expenses had been incurred by the assessee company on the scientific research pertaining to its b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nouncements that were referred to by both the parties at the time of hearing before us. We find that the ld AO had observed that these expenses were incurred by the assessee company for providing freebies to medical practitioners and their professional associations in violation of the regulations issued by the Medical Council of India (MCI) which is a regulatory body constituted under the Medical Council Act, 1956. The ld AO accordingly concluded that the said expenditure was incurred for a purpose which is either an offence or prohibited by law. He noted that the regulations issued by the MCI were made effective from 10.12.2009 and subsequently the CBDT had issued a Circular No. 5/2012 dated 1.8.2012 . We find that the ld AO had noted in his order that the assessee had furnished details vide letter dated 7.12.2016 in a tabular form together with the relevant supporting evidences in a separate Box File duly mentioning the page numbers thereon, which are reproduced in pages 23 to 26 vide para 7.7 of his order. It was also pointed out by the assessee before the ld AO that the MCI guidelines are applicable only to doctors / medical practitioners and their professional associations fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... octors but it is regarded as advertisement expenses. As regards sponsoring doctors for conferences and extending hospitality, pharmaceutical companies have been sponsoring practicing doctors to attend prestigious conferences so that they gather contemporary knowledge about management of certain illness / disease and learn about newer therapies. Reliance was placed by the ld AR on the decision of this tribunal in the case of Aristo Pharmaceuticals Pvt Ltd vs ACIT in ITA Nos. 6680/Mum/2012 ; 5553/Mum/2014 ; 5479/Mum/2015 ; 6129/Mum/2014 ; 5167/Mum/2015 5747/Mum/2015 for Asst Years 2005-06 , 2009-10 , 2011-12 and 2012-13 dated 26.7.2018 . We find that the co-ordiante bench of this tribunal in the case of DCIT vs PHL Pharma P Ltd reported in (2017) 49 CCH 124 (Mum Trib) had held that the validity of the circular in the backdrop of enlargement of scope of MCI regulations is not applicable to pharmaceutical companies and moreover there is no enabling provisions either under the Income Tax Act or under the Indian Medical Council Regulations . We find that MCI guidelines cannot decide the allowability or otherwise of an expenditure in the hands of drug manufacturing companies or individu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir working capital requirements and need for short term funds. The AEs sell the receivables upto the guaranteed amount to third party banks for which , it receives the adjusted value of the invoice minus margin minus the structuring fees. In the event of default by the third party customers, the bank will have full recourse to AEs to repurchase the receivables thereby making good the default. In the event that the AEs are not able to repurchase the same, the assessee shall be required to make good the default. The following are the list of factoring facilities guaranteed by assessee on behalf of its various AEs:- Glenmark Russia has taken a facility of USD 36million from Citibank N.A., Bahrain; GFL Brazil has taken a facility of USD 18.5 million from Citibank S.A., Brazil; Glenmark Pharmaceuticals S.R.L., Romania has taken a facility of USD 5 million from Citibank N. A., Bahrain; Glenmark Distributors SP z.o.o., Poland has taken a facility of USD 10.5 million from Citibank N. A., Bahrain; Glenmark SRO, Czech Republic has taken a facility of USD 6 million from Citibank N. A., Bahrain; and Glenmark Pharmaceuticals SK, s.r.o., Slovak Republic has taken a fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO was deleted by the ld CITA. Accordingly, the ld CITA held that since the assessee had charged already guarantee fee at 1% from its AEs which is more than the rate approved by the tribunal in its own case for the Asst Years 2008-09 and 2009-10, no adjustment need to be made on account of guarantee fees. 6.3. We find that the decision of this tribunal in assessee s own case for the Asst Year 2008-09 was approved by the Hon ble Jurisdictional High Court in the case of CIT vs Glenmark Pharmaceuticals Ltd reported in 398 ITR 439 (Bom) wherein the question raised before the Hon ble Court and decision rendered thereon are as under:- Whether on the facts and in the circumstances of the case and in law the Tribunal is justified in deleting the addition of ₹ 11,51,24,333/- to the income of the Assessee Company made by the Assessing Officer on account of guarantee commission chargeable to its Associate Enterprises? 3. Regarding question no.(i):- (a) We note that the impugned order of the Tribunal while allowing the assessee's appeal holding that the Arms Length Price of Corporate Guarantee cannot be determined on the basis of comparison with Bank Guarantee and relied ..... X X X X Extracts X X X X X X X X Extracts X X X X
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