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Eris Lifesciences Ltd. vs. DCIT Asst. Years-2018-19 & 2020-21 to 2022-23

- 3- reallocated such expenses in the ratio of overall unit-wise sales, resulting in an upward adjustment of ₹9,35,31,350/- to the Guwahati Unit and a corresponding reduction in 80-IE deduction. The AO then examined channel partner/retail promotion expenses and conference related expenses under section 37(1) of the Act. The AO held that documentary evidence furnished by the assessee was inadequate to substantiate that the entire expenditure pertained exclusively to business purposes. The AO further held that part of these expenditures could relate to doctors or medical professionals, which would be in contravention of MCI Regulations read with CBDT Circular No. 5/2012. Applying the same methodology followed in earlier years, the AO disallowed 7.5% of channel partner/retail promotion expenses amounting to ₹69,39,723/- and 7.5% of conference related expenses amounting to ₹33,59,890/-. The AO further disallowed employees' contribution to provident fund amounting to ₹3,84,012/- under section 36(1)(va) of the Act since the same was deposited beyond the statutory due date, relying on the jurisdictional Gujarat High Court ruling in Gujarat State Road Transport Corporation and subsequent amendments brought by Finance Act 2021 which clarified that section 43B relief is not available for employees' contribution deposited beyond due date. The AO also dealt with the assessee's claim that long-term capital gains formed part of eligible profits for the purpose of deduction under section 80-IE of the Act. Relying on the Supreme Court judgment in CIT v. Reliance Energy Ltd (2021), the AO accepted that capital gains must be considered as part of eligible income and recomputed the deduction under section 80-IE accordingly. Further, the assessee made additional claims during assessment ITA Nos. 847to850/Ahd/2025 & 912to915/Ahd/2025 DCIT vs. Eris Lifesciences Ltd.

ITA Nos. 847to850/Ahd/2025 & 912to915/Ahd/2025 DCIT vs. Eris Lifesciences Ltd.

Eris Lifesciences Ltd. vs. DCIT Asst. Years-2018-19 & 2020-21 to 2022-23

- 5- However, with respect to MAT computation, the CIT(A) relied on Gujarat High Court in Gujarat Fluorochemicals Ltd (2023), Bombay High Court in Bengal Finance & Investment Pvt Ltd, and ITAT Mumbai decisions to hold that notional disallowances under section 14A cannot be added to book profits, and accordingly deleted the 14A adjustment to section 115JB. Regarding the issue of allocation of employee benefit expenses, the CIT(A) examined the assessee's division-based allocation methodology in detail. The CIT(A) noted that the assessee had established that each division had separate identifiable workforce and separate brands, that division-wise sales were supported by auditor certificates, and that the allocation was consistent with Cost Accounting Standard CAS-7. The CIT(A) observed that the AO accepted specificity of certain expenses yet rejected the more refined division-based allocation without pointing out any factual defect or inconsistency in the methodology adopted by the assessee. The CIT(Appeals) held that more scientific allocation methods should prevail over generalised ones, and therefore the AO could not arbitrarily impose unit-wise sales ratio merely because that method was used for other expenses. The CIT(A) found the assessee's methodology to be consistent, rational, and in line with principles for computing correct eligible profits under section 80-IE. Accordingly, the addition of ₹9,35,31,350 was deleted in full. With respect to the disallowance of channel partner/retail promotion expenses and conference expenses, the CIT(A) observed that although the assessee furnished invoices and supporting documents, the AO had reason to conclude that a part of the expenditure may have benefitted medical practitioners. The CIT(A) placed reliance on the Supreme Court judgment in Apex Laboratories ITA Nos. 847to850/Ahd/2025 & 912to915/Ahd/2025 DCIT vs. Eris Lifesciences Ltd.

21. In view of the above discussion, we reverse the finding of the learned CIT(A) and restore the adjustment made by the Assessing Officer. Accordingly, Ground No. 2 raised by the Revenue is allowed.

Now we shall come to the assessee's appeal for assessment year 2018-19 (ITA No. 912/Ahd/2025):

22. The assessee has raised the following Grounds of Appeal:

"1. In law and in the facts and circumstances of the appellant's case, the Ld. CIT (A) ought to have deleted the ad-hoc disallowance invoked by the Ld. AO u/s 37(1) of the Income Tax Act 1961 (Act) for Rs. 69,39,723/- out of Channel partner and Retail promotion Expense' and Rs. 33,59,890/- out of Conference related Expenses'. The lower authorities have failed in appreciating the basic fact that said costs were business expedient costs which were inextricably linked with the business operations of the appellant company and incurred to promote and expand the business & brand of the appellant. It has been settled position of law that no disallowance shall be made on ad-hoc basis without any cogent basis. The lower authorities may be directed to delete the impugned ad-hoc disallowances made.

4. The appellant craves leave to add, alter, amend and/or withdraw any ground or grounds of appeal either before or during the course of hearing of the appeal."

Ground Number 1 and 2: channel partner/retail promotion expenses and conference related expenses

23. We have heard the rival contentions and perused the material available on record. The issue for determination is whether the assessee is entitled to deduction of the disallowance confirmed by the learned CIT(A) in respect of channel partner/retail promotion expenses and conference related expenses, which the Assessing Officer had disallowed on an estimated basis @7.5%, holding that a portion of these expenses was in the nature of benefits, freebies or conference-related incentives to medical practitioners, prohibited under the Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, and consequently hit by Explanation 1 to section 37(1) of the Act.