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TMI Blog2022 (8) TMI 1127X X X X Extracts X X X X X X X X Extracts X X X X ..... ytical and Bio equivalence studies. During assessment proceedings, Assessing Officer observing that assessee had claimed R&D expenditure u/s. 35(2AB) of the Act to the extent of Rs.5,03,34,595/-, whereas total R & D expenditure u/s. 35(2AB) of the Act approved by DSIR as per Form 3CL submitted by the assessee for Rs.3,41,02,000/- i.e. 200% of Rs.1,70,50,643/- (capital expenditure of Rs.1,09,62,643 and revenue expenditure of Rs.60,88,000) when the assessee was asked to explain the excess claim by the assessee; assessee vide letter dated 19.02.2016 submitted that this amount is net of income received from R&D work. 4. Assessing Officer rejected the submissions and explanation of the assessee and accordingly, disallowed the excess claim made by the assessee to the extent of Rs.1,62,32,595/ (Rs.5,03,34,592 - Rs.3,41,02,000). Further, Assessing Officer observed that assessee had debited to the Profit and Loss Account of Rs.4,21,34,719/- being legal and professional fee paid, when the assessee was asked to give the details of the same, assessee has submitted as under: - S.No. Name of the party Nature Amount In Rs. 1. Asian Patent Bureau Professional fees towards various product r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he full text of which is enclosed for your reference. In this judgement also it has been held that sales realisation is not to be deducted while calculating the deduction under section 35(2AB) In fact the appellant has made an error in claiming the deduction under section 35(2AB) and has claimed a lesser deduction by mistake while filing the return of income. However at the time of scrutiny assessment the proper claim was made by way of a letter the copy of which is also enclosed. Even the Mumbai Tribunal judgement was also enclosed with the submission. We therefore submit that there should be no disallowance at all but we pray for enhancement of the claim for the deduction as we made at the time of assessment. As per the revised calculations the claim should be Rs. 136467313/- which is the difference between arising out of the exclusion of income from sale of products Rs. 86132717 and this claim should be allowed as per the revised computation given by the appellant and there should not be any disallowance at all." 5.2 Appellant's Submission: Ground 3: Disallowance of Prof. Fees Rs: 67,40,685/-. Facts of the case: Prof Fees paid to following persons disallowed by A.O. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held and assessee's appeal in respect of the sub ground relating to this item of expenditure of Rs.3,70,354/- is rejected. Next issue in ground of appeal-3 is the allowance of professional fees paid to JOHN Mccarerrie for liasoning with Govt Health Authority for filing of documents and products. This expenditure is also similar to the expenditure of Rs.3,70,354/- referred to earlier and relates to the registration of the products and hence the same is treated as capital expenditure for the same reasons and the action of the AO is upheld. Next issue in ground of appeal-3 is the allowance of professional fees of Rs.29,37,858/- paid to Dr. DILIP SNAVORDEKAR for technical consultancy services relating to identification, advice and assistance relating to product license registration issues and this expenditure is also similar to the product registration referred to earlier and hence primarily capital in nature and hence action of the AO is upheld and assessee's appeal on this sub issue is rejected." 8. Aggrieved assessee preferred appeal before us raising following grounds in its appeal: - "1. The learned CIT (A) 22 was not justified in confirming Addition made by the A.O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 397.30 170.51 1,028.26 C CALCULATION OF DEDUCTION 200% of the Total Eligible Expenditure 341.02 341.02 D Appellants' Calculation - [(A-1) * 2] + (A-2) Note #5 503.35 506.93 1,137.89 Amount Mentioned in CIT-A Order - Page 3 initial Paragraph.- [(A-1) * 2] + (A-2) - Note #6 1,364.68 E Disallowance by AO 162.33 F Revised / Additional claim - Note # 7 796.87 NOTES : #1 There is no Dispute regarding the Capital Expenditure of Rs.109.63 lacs. #2 Appellants' Computation of Income has quantified the Amount of Gross Revenue Expenditure. #3 DSIR has reduced the eligible revenue expenditure by Rs.226.79 lacs. Therefore, the certified gross expenditure is Rs.918.63 lacs #4 The Auditors have reduced the Product Sales Turnover of Rs.857.75 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... going through the decision of above said case; the Hon'ble Karnataka High Court held as under: - "3. On the first question, the observations made by the Tribunal in the impugned order from paragraph Nos. 12 to 17 are as under: "12. We have heard the submissions of the Id. DR and the Id. counsel for the assessee and also perused the documents filed in paperbook. As we have already seen, the assessee carries on scientific research. It is in the business of manufacture of drugs and pharmaceuticals. It incurred expenditure on scientific research and the quantum of such expenditure on scientific research, which is a sum of Rs.7,80,52,805, is not in dispute. The weighted deduction u/s. 35(2AB) at 150% was claimed by the assessee at a sum of Rs.12,57,00,920. What is now to be examined is the guidelines of DSIR, which the prescribed authority u/s.35(2AB) (3) & (4) of the Act, has to follow before granting approval of the scientific research carried out by the assessee as eligible for deduction u/s.35 (2AB). A copy of the guidelines of DSIR is at pages 27 to 33 of assessee's paperbook. Guidelines 5(vii) is relevant for the present case and it reads as follows: "(vii) Assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ook. The sale of products is nothing but the sale of Dossiers by the assessee to persons not associated with the assessee or its directors. In the course of carrying out the scientific research, the assessee prepares elaborate documents regarding the products that would emanate from carrying out scientific research. This would also include the requirement of health authorities for grant of license to approve the products for human use. The assessee gives the Dossiers so prepared to entities outside India, who are interested in getting the marketing authorization for the product in a particular territory. They pay to the assessee the Dossier charges and apply for license to market the products for human use in their respective territories. On getting the license, they get marketing authorization from the assessee. The person who takes the Dossier (knowhow) takes it for the limited purpose of registration of product in other countries and after registration sale of the products in their country. If they get any order M/s. Micro Labs will manufacture and sell them at agreed price. So the knowhow given to them is only for limited purpose of registering with the drug control authorities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the process of carrying on R&D work, if they are sold, such realization would go to reduce the expenditure of scientific research. 4. In our view, the approach to the issue considered by the Tribunal is appropriate. In any case, no substantial question of law would arise for consideration as canvassed." 14. On a careful reading of the above decision, we observe that Hon'ble Karnataka High Court reviewed the DSIR Guidelines 5(vii) and observing that according to them in the process of carrying out R & D work, if the assessee acquires any assets or products that should not be disposed of without the approval of Secretary, DSIR. If such assets are sold, the sales realization arising there from are to be set off against the R&D expenditure of the R&D centre which is claimed as deduction u/s. 35(2AB) of the Act. They observe that it is evident from the above guidelines that it is only sales realization arising out of the assets sold that should be added against the R&D expenditure. It is relevant to observe the following observation of the Hon'ble High Court that "in respect of sale of products acquires emanating out of R & D work done in approved facility, the sale procee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee has only submitted the R&D services earned by the assessee and they were not submitted any details of the income earned by the assessee. 17. From the records, we observe that assessee is in R&D work for its business purposes as well as undertaking contract research. The income earned by the assessee may include income earned by the assessee for the mere services on contract research as well as certain products which is considered by the DSIR and excluded the same while approving the project and R & D expenditure for the purpose of claiming deduction u/s. 35(2AB) of the Act. Therefore, in our considered view this may needs detailed verification on the income earned by the assessee and it has to be segregated based on the products made by the assessee and the products emanating out of R & D services like Dossier etc., and accordingly, Assessing Officer is directed to exclude only those incomes which are in the category of dossier etc., not the product/assets and contract income. Accordingly, Ground No. 2 raised by the assessee is allowed for statistical purpose. 18. With regard to Ground No. 3, which is in respect of confirming disallowance of Rs.3,70,354/- being the amount p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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