Income Tax Appellate Tribunal - Mumbai
Glenmark Pharmaceuticals Ltd , Mumbai vs Department Of Income Tax on 31 March, 2003
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH 'G' MUMBAI
BEFORE SHRI P.M.JAGTAP, AM &
SMT. P.MADHAVI DEVI, JM
I.T.A.NOS.4781 & 4782/Mum/2007
A.Ys. 1999-2000 & 2001-02
Asst. Commissioner of I.T. Vs. M/s Glenmark Pharmaceuticals Ltd.
Central Circle 33 B/2, Mahalaxmi Chambers-22
Mumbai Bhulabhai Desai Road,
Mumbai 400 026
AAACG 2207 L
(Appellant) (Respondent)
AND
I.T.A.NO.4433/Mum/2007 - A.Y 1999-2000
M/s Glenmark Pharmaceuticals Ltd. Vs. Asst. C.I.T., Central Circle 33
Mumbai Mumbai
[Appellant] [Respondent]
Revenue by : S/Shri Pragati Kumar & Mohd.Usman
Assessee by : Shri Vijay Mehta.
ORDER
Per P.MADHAVI DEVI, JM:
These cross appeals are directed against CIT[A] 's separate orders for A.Ys.1999-2000, 2001-02 & 1999-2000 respectively.
2. I.T.A.No.4781/M/81 - [revenue's appeal] A.Y 99-00: The only grievance of the revenue in this appeal is against the order of the CIT[A] in directing the AO to allow the claim of the assessee company u/s.80IA of the Act without appreciating that there is a huge variation in the profits declared by the assessee company in respect of eligible and non-eligible units u/s.80IA of the Act.
3. Brief facts of the case are that the assessee company is engaged in the business of manufacturing pharmaceuticals. It filed its 2 return of income declaring total income of Rs.11,14,45,672/-. The same was processed u/s.143[1] accepting the income declared by the assessee. However, AO subsequently noted that the income of the assessee has escaped assessment and therefore after recording the reasons for reopening of the assessment and issuing notice u/s.148 of the Income Tax Act, he reopened the assessment u/s.147 of the Act. During the re-assessment proceedings, AO observed that the assessee has claimed deduction amounting to Rs.1,64,81,392/- during the year under consideration. He further observed that there was some discrepancy in the GP ratios of the 80IA and non-80IA units. He also observed that the expenses allocation was not proper which has resulted in a higher profit percentage in the 80IA unit. He therefore asked the assessee to substantiate its claim that the expenditure allocation was done properly. In response to the same, assessee filed its submissions stating that the expenses apportioned amongst the units and the profit declared in Goa unit are true and correct. Assessee also gave comparison of the GP declared of the Goa unit at 47.97% as against GP of other unit at 34.38%. After considering the assessee's submissions, AO held that the assessee's submission is not convincing to accept the ratio of profit shown in Goa unit. He therefore held that the claim of deduction u/s.80IA as made by the assessee on Goa unit is not allowable and restricted the same to Rs.56,65,126/- and computed the income accordingly.
4. Aggrieved, assessee filed an appeal before the CIT[A] reiterating the submissions made before the AO as well as giving 3 detailed reasons for the difference in GP ratio of the units eligible for deduction u/s.80IA and other units. It was submitted that the units are distinct and not comparable as the Goa unit manufactures only tablets and capsules, whereas the other units manufacture various other products like lotions and externals, ointments etc. and tablets and capsules form only 28.15% of the total sales from the non eligible units. The assessee submitted a chart giving the product-wise profit margins for the non eligible units and also that the turnover of the Goa unit was hardly 10% of the total turnover of the assessee company. It was also submitted that Goa unit was established in the year 1996-97 and therefore there were added advantages of latest equipment and modern technology resulting into low repairs and maintenance cost, low material consumption etc. resulting in a higher GP. It was also submitted that separate set of audited books are maintained by the assessee for the eligible as well as non eligible units and that the expenditure has been properly allocated to the units by allocating the direct expenses incurred for a unit to that particular unit only and common expenses are allocated in proportion to sale made by each unit. After considering the detailed submissions made by the assessee justifying the difference in the GP ratio of Goa unit and other units, the CIT[A] has held that the AO has not pointed out any discrepancy in the books of accounts maintained by the assessee and has also not pointed out any particular item of common expenditure, which the assessee has not properly allocated. He held that there is bound to be some variation in profits between the different products manufactured 4 and between the different units due to various factors. He, thus, held that the AO has allocated the profit amount of each unit on the basis that the net profit ratio of all the units is the same by adopting an adhoc method which is not correct. He therefore held that the claim of the assessee for deduction u/s.80IA of the Act is to be allowed. He also made a reference to the order of his predecessor in the assessee's own case for the year 1998-99 wherein similar adjustment was deleted. Aggrieved by the relief given by the CIT[A] , the revenue is in appeal before us.
5. The ld. DR placed strong reliance upon the order of the AO while the ld. counsel for the assessee placed reliance upon the order of the CIT[A] and drew our particular attention to the relevant portion of the order of the CIT[A] wherein the assessee's submissions have been recorded.
6. After hearing both the parties and having considered the relevant material placed on record, we find that the assessee is eligible for deduction u/s.80IA of the Act with regard to its Goa unit. The reasons for the disallowance made by the AO is that the Goa unit had shown higher GP rate as compared to the other non eligible units. The assessee has given detailed reasoning as to why the difference in the GP ratio of eligible as well as non eligible units has arisen. As rightly pointed out by the CIT[A] , the AO has not pointed out any specific items of expenditure which has not been properly allocated by the assessee to all the units. The reasoning given by the assessee for the difference in the GP ratio is also acceptable and the ld. DR has not 5 been able to point out any evidence rebutting the finding of the CIT[A]. In view of the same, we do not see any reason to interfere with the order of the CIT[A] and the revenue's appeal in I.T.A.No.4781/M/07 for A.Y 1999-2000 is dismissed.
7. I.T.A.No.4433/M/07 [assessee's appeal] A.Y 99-00: The assessee as raised the following grounds of appeal-
1) The Hon'ble Commissioner of Income-tax [Appeals] has erred in law and in facts in upholding the impugned assessment order passed by the learned Assessing Officer, which was illegal and bad in law.
2) The Hon'ble Commissioner of Income-tax [Appeals] has erred in law and in facts in passing the order u/s.250 of the Act in gross violations of principles of natural justice.
3) The Hon'ble Commissioner of Income-tax [Appeals] has erred in law and in facts in holding that the Assessing Officer has validly assumed the jurisdiction under section 147 and re-
opened the case for issue covering excess deduction claimed u/s.80IA and for issue covering including of excise duty and modvat receivable in valuation of closing stock of finished goods and raw materials.
4) The Hon'ble Commissioner of Income-tax [Appeals] has erred in law and in facts in confirming the action of the Assessing Officer in holding that while computing "profits of the business"
for the purpose of section 80HHC, deduction allowable u/s.80IA should be reduced.
5) The Hon'ble Commissioner of Income-tax [Appeals] has erred in law and in facts in confirming the action of the Assessing Officer in charging interest u/s.234B & 234C of the Act.
6) The Hon'ble Commissioner of Income-tax [Appeals] has erred in law and in facts in initiating penalty proceedings u/s.271[1][c] of the Act.
8. As regards grounds of appeal Nos.1 & 2, the ld. counsel for the assessee submitted that they are general in nature and hence needs no adjudication. They are accordingly rejected.
9. As regards ground No.3 relating to the validity of the reopening of the assessment u/s.147 of the Act for the excess deduction claimed u/s.80IA of the Act, we find that this ground also needs no adjudication in view of our upholding the finding of the CIT[A] that the assessee is eligible for deduction u/s.80IA as claimed by the 6 assessee that no disallowance is to be made therefrom. This ground is accordingly rejected.
10. As regards ground No.4, the ld. counsel for the assessee fairly admitted that this issue is covered against the assessee by the decision of the Special Bench of the Tribunal in the case of Hindustan Mint reported in 119 ITD 107. This ground is accordingly rejected.
11. As regards ground No.5, we find that this is consequential in nature and the AO is directed to give consequential relief to the assessee accordingly.
12. Ground No.6 is premature and is accordingly rejected.
13. In the result, assessee's appeal in I.T.A.No.4433/M/07 is partly allowed.
14. I.T.A.No.4782/M/07 - [revenue's appeal] A.Y 2001-02:
In this appeal, the only grievance of the revenue is against the order of the CIT[A] in directing the AO to allow the claim of the assessee u/s.35[1][iv] of the Income Tax Act amounting to Rs.8,93,64,936/- in respect of capital expenditure incurred for the construction of building for the purpose of research without appreciating that the AO has rightly invoked the provisions of sec.35[2AB] of the Income Tax Act for disallowing the claim of the assessee.
15. Brief facts of the case are that the assessee company filed its return of income declaring loss of Rs.27,53,75,569/- for the relevant assessment year on 31-10-2001. Subsequently on 31-3-2003, a revised return was filed declaring a loss of Rs.35,76,96,435/-. The assessment was completed u/s.143[3] by determining the loss of Rs.22,73,72,726/- 7 under the normal provisions of the Act and income at Rs.18,56,37,310/- u/s.115JB of the Act. The assessee carried the matter in appeal to the CIT[A] and after giving effect to the order of the CIT[A], the total income of the assessee was revised to [-] Rs.25,73,35,535/-. After perusal of the records, AO observed that the assessee has claimed deduction amounting to Rs.8,93,64,936/- being expenditure incurred in respect of building, which does not fall in the ambit of eligible expenditure for deduction under sec.35 of the Act. In view of the same, he reopened the assessment by issuance of notice u/s.148 dated 31-3-2003. The assessee's explanation was called for as to why the expenditure on building should not be disallowed in view of the provisions of sec.35[2AB] of the Act. The assessee submitted that the claim was made u/s.35[1][iv] as the expenditure is incurred for the purposes of construction of building at Mahape for the research activities of the assessee company. However, AO held that the same is not allowable u/s.32[AB] of the Act and accordingly computed the income of the assessee by adding the said amount in the total income of the assessee.
16. Aggrieved, assessee filed an appeal before the CIT[A] reiterating the submissions made before the AO stating that the claim was made u/s.35[1][iv] which does not prohibit allowance of deduction of expenditure incurred for the purpose of construction of building used for the scientific research related to the business carried on by the assessee. The CIT[A] held that the provisions of sec.35[1][iv] do not restrict the purview of deduction and as a consequence allows the 8 expenses incurred for construction of building unlike the provisions of sec.35[2AB] which restricts the deduction to be allowed, by making a condition that deduction should not be allowed under that section in respect of expenditure incurred for the purpose of land or construction of building. He observed that sec.35[2AB] allows deduction of 1.5 times of the expenses incurred by the assessee for research and development, [except for the expenditure in the nature of cost of any land or building] whereas sec.35[1][iv] allows deduction of 100% of any expenditure of a capital nature on scientific research and therefore the scope of both the sections is different. He further held that the expenditure claimed u/s.35[2AB] requires approval of the prescribed authority, which is not the case u/s.35[1][iv] and that the AO has not disputed the fact that the building is used for research and development purpose. He, therefore, allowed the assessee's appeal. Against the relief given by the CIT[A] , the revenue is in appeal before us.
17. The ld. DR supported the order of the AO and drew our particular attention to the provisions of sec.35[2AB] wherein deduction is not allowable on the expenditure incurred on land and building. Thus according to him, the assessee is not entitled to deduction u/s.35 of the Act.
18. The ld. counsel for the assessee, on the other hand, supported the order of the CIT[A] and submitted that the assessee has claimed deduction u/s.35[1][iv] where there is no exception to the capital expenditure and there is no restriction on the expenditure incurred on 9 building. He submitted that the claim u/s.35[2AB] allows deduction @ of 1½ times of expenditure incurred by the assessee and as the assessee's claim is not u/s.35[2AB], the same cannot be considered under the provisions of law and the CIT[A] has rightly distinguished the requirement under both the provisions of law and has accordingly allowed assessee's claim of deduction.
19. Having heard both the parties and having considered their rival contentions, we find that sec.35 of the Income Tax Act provides for deduction of expenditure incurred on scientific research. Cl.[iv] of sub- sec.[1] of sec.35 relates to deduction of any expenditure of capital nature on scientific research related to the business carried on by the assessee, and such deduction as may be admissible under the provisions of sub-sec.[2]. Sub-sec[2AB] of sec.35 provides that where a company engaged in the business of pharmaceuticals etc. incurs any expenditure on scientific research [not being expenditure in the nature of cost of any land or building] on in-house research and development facility as approved by the prescribed authority, then deduction of a sum equal to 1½ time of the expenditure so incurred shall be allowed. Thus, it can be seen that the exception to the claim of deduction of the expenditure incurred on cost of any land or building is provided for only under sub-sec.[2AB] of sec.35 and not under clause [iv] of sub- sec.[1] of sec.35 of the Act. The assessee's claim is undisputedly u/s.35[1][iv] of the Act and as rightly held by the Ld. CIT[A] 100% of the capital expenditure on scientific research relating to the business carried on by the assessee is admissible as provided under sub-sec[2] 10 thereof. In view of the same, we do not see any reason to interfere with the order of the CIT[A] and the revenue's appeal is dismissed.
20. In the result, revenue's appeal in I.T.A.No.4782/M/07 is dismissed.
Order pronounced on this 7th day of December, 2009.
Sd/- Sd/-
(P.M.JAGTAP) (P.MADHAVI DEVI)
Accountant Member Judicial Member
Mumbai:7th December, 2009.
P/-*
Copy to-
1) Appellant
2) Respondent
3) CITA Mumbai.
4) CIT City Mumbai
5) DR Bench Mumbai
True Copy By Order
Dy/Asst.Registrar,ITAT MUMBAI.
11
Sr.No. Particulars Date Initials
1 Draft dictated on 27-11-09 P
2 Draft placed before author 2-12-09 P
3 Draft proposed & placed before the
second Member
4 Draft discussed/approved by second
Member
5 Approved draft comes to Sr.PS/PS
6 Order kept for pronouncement
7 File sent to Bench Clerk
8 Date on which file goes to the Head
Clerk
9 Date of dispatch of order