AGIO PHARMACEUTICALS LTD, MUMBAI V. DCIT 9(1)(1), MUMBAI

ITA 3542/MUM/2019

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 1568 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 11 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-05-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: A
• Assessment Year: 2013-2014
• Appeal Filed On: 23-05-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Gift; Depreciation; Tax effect; Revenue expenditure; Capital expenditure
• Section: 37; 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BENCH “A”, MUMBAI BEFORE SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER AND SHRI S. RAHUL CHAUDHARY, HON'BLE JUDICIAL MEMBER ITA NOs. 3539, 3540, 3541 & 3542/MUM/2019 (A.Ys: 2012-13, 2014-15, 2015-16 & 2013-14) M/s. AGIO Pharmaceuticals Ltd., A-38, Nandjyot Industrial Estate Andheri Kurla Road, Andheri (E) Mumbai - 400072 PAN: AABCA8426A v. DCIT – 9(1)(1) Room No. 260A, 2 nd Floor Aayakar Bhavan, M.K. Road Mumbai - 400020 (Appellant) (Respondent) ITA NO. 4110/MUM/2019 (A.Y: 2012-13) ACIT – 9(1)(1) Room No. 203, 2 nd Floor Aayakar Bhavan, M.K. Road Mumbai - 400020 v. M/s. AGIO Pharmaceuticals Ltd., A-38, Nandjyot Industrial Estate Andheri Kurla Road, Andheri (E) Mumbai - 400072 PAN: AABCA8426A (Appellant) (Respondent) Assessee by : Shri Yogesh Thar & Shri Chaitanya Joshi Department by : Shri Mehul Jain Date of Hearing : 19.05.2022 Date of Pronouncement : 23.05.2022 2 ITA NOs. 3539, 3540, 3541, 3542 & 4110/MUM/2019 M/s. Agio Pharmaceuticals Ltd., O R D E R PER S. RIFAUR RAHMAN (AM) 1. These appeals are filed by the assessee against different orders of the Learned Commissioner of Income Tax (Appeals)–16, Mumbai [hereinafter in short “Ld.CIT(A)”] dated 29.03.2019 for the A.Ys. 2012-13 to 2015-16. Cross appeal is filed by the Revenue for the A.Y. 2012-13. 2. Since the issues raised in all the appeals of the assessee are identical, therefore, for the sake of convenience, these appeals are clubbed, heard and disposed off by this consolidated order. We are taking Appeal in ITA.No. 3539/MUM/2019 for Assessment Year 2012-13 as a lead case. 3. Assessee filed following grounds of appeal which is common in appeals filed by the assessee for the Assessment Years under consideration i.e. A.Y. 2012-13, 2013-14, 2014-15 and 2015-16. A.Y. 2012-13 “1. On the facts and in the circumstances of the case and in law Ld. Commissioner of Income Tax(Appeals)-16, Mumbai erred in sustaining addition of sales promotion expenses of Rs. 10,78,000/- being payments made to general practitioners. 2. On the facts and in the circumstances of the case and in law Ld. Commissioner of Income Tax(Appeals)-16, Mumbai erred in sustaining addition of sales promotion expenses of Rs. 80,126/-.” 3 ITA NOs. 3539, 3540, 3541, 3542 & 4110/MUM/2019 M/s. Agio Pharmaceuticals Ltd., 4. Assessee filed modified additional ground only in A.Y. 2012-13 which is reproduced below: - “1. Modified Additional Ground No. 1: 1.1. On the facts and in circumstances of the case and in law, the Appellant prays that the expenditure of Rs. 4,80,00,000/incurred for scientific research be allowed u/s. 35 of the Act.” 5. With regard to main grounds of appeal raised by the assessee in grounds of appeal filed for the A.Y. 2012-13 which is common in all the Assessment Years under consideration relating to addition on sales promotion expenses being payments made to general practitioners and other sales promotion expenses. 6. The relevant facts relating to the above ground is taken from the lead A.Y. 2012-13. During the assessment proceedings Assessing Officer observed that in the Assessment Order for the A.Y. 2011-12 addition of ₹.1,71,451768/- was made under Explanation to Section 37(1) of Income- tax Act, 1961 (in short “Act”) by holding that expenses incurred for providing gifts, travel facilities & hospitality to medical practitioners compromises with the professional autonomy of medical practitioners and/ or autonomy or freedom of the medical institutions/ associations and the same are also prohibited by the IMC Regulations. He further observed that the Medical Council of India, in exercise of the powers conferred by 4 ITA NOs. 3539, 3540, 3541, 3542 & 4110/MUM/2019 M/s. Agio Pharmaceuticals Ltd., Section 33 of the Indian Medical Council Act, 1956, with the previous sanction of the Central Government, amended the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 wherein clause 6.8 was inserted w.e.f. 10.12.2009. The Assessing Officer in view of the of the above facts, assessee was asked to explain as to why the expenses of similar nature should not be disallowed this year as well by invoking Explanation to Section 37 of the Act and in view of the Board's Circular on this subject. 7. After considering the submissions of the assessee, Assessing Officer listed the nature of expenses and benefits given to Doctors/professional associations by way of freebies, which is given below: - Sr. No. Nature of expenses Amount (Rs.) Disallowance i. Payments made to Medical practitioners to be disallowed @100%) 10,78,000 10,78,000 ii. Payment made to Medical representatives (to be disallowed @50%) 1,69,69,969 84,84,984 iii. Samples (to' be disallowed @50%) 1,31,36,204 65,68,102 Total 3,11,84,173 1,61,31,086 8. Assessing Officer observed that assessee could not submit any confirmation or receipts given by these medical practitioners, therefore, the same cannot be allowed on this ground as well. Further he observed that during the appellate proceedings for the preceding year, the assessee 5 ITA NOs. 3539, 3540, 3541, 3542 & 4110/MUM/2019 M/s. Agio Pharmaceuticals Ltd., had taken the plea that the said expenses have been incurred for the professional expertise of these doctors but no confirmation of such receipts have been filed, therefore, these expenses cannot be allowed. Accordingly, Assessing Officer proceeded to make the addition as per the above chart and proceeded to make the disallowance ₹.1.61,31,086/-. 9. Aggrieved assessee preferred an appeal before the Ld.CIT(A) and Ld.CIT(A) after considering the submissions of the assessee sustained the addition with regard to payment made to doctors. With regard to the sales promotion expenses Ld.CIT(A) observed that the expenditure relating to sales promotion expenses incurred are less than 1% of the turnover which is well below the industries standards and the above said payments are not in violation of the IMC Regulations and hence disallowance u/s 37(1) is not warranted. However, he disallowed only certain amounts which is not relatable to selling & distribution expenses. For this assessment year Ld.CIT(A) sustained only to the extent of ₹.80,126/-. 10. Aggrieved assessee is in appeal before us raising above said grounds of appeal. 6 ITA NOs. 3539, 3540, 3541, 3542 & 4110/MUM/2019 M/s. Agio Pharmaceuticals Ltd., 11. At the time of hearing Ld. AR of the assessee submitted that no doubt the issue of payment made to Doctors are against the assessee in view of the Hon'ble Supreme Court decision in the case of Apex Laboratories (P.) Ltd., v. DCIT LTU (2022) 135 taxmann.com 286 (SC). However, he submitted that it has to be analysed based on the individual factual matrix of the case accordingly, he brought to our notice Page No. 61 of the Paper Book and brought to our notice Annexure B which is the notes submitted on payment relating to research. In this regard he brought to our notice the submissions made by the assessee before the Ld.CIT(A). He reiterated the same before us. For the sake of clarity, it is reproduced below: - “I. Nature of Transactions: Assessee had incurred expense of Rs. 10,78,010/- for seeking professional advice from GP in the form of consultancy. The expenditure was regarding advisory services to obtain information regarding the acceptability of medicine and necessity for improvement in them and also to gain information on similar products of other companies which are being sold in the same market. Payments were made to MRs as researchers to make notes and collect various kinds of information for the business of the Assessee. Information relating to frequency of the medicines needed by the patients and the side effects of the medicines prescribed were reported to the assessee Company by these GP. This kind of material information based on real reports and feedbacks from the patients helped to decide the efficacy of the medicines and also helped in deciding the scope of making these medicines available to patients. These expenses are necessary for the company to gain insight from 7 ITA NOs. 3539, 3540, 3541, 3542 & 4110/MUM/2019 M/s. Agio Pharmaceuticals Ltd., GP about their products and other similar products in the market. The rationale behind incurring these expenses was pragmatic and ethical with a view to study business of the Assessee in the field of pharmacy. Any prudent man in the world of business would conscientiously incur these expenses, aspiring to benefit from the yield of the research carried out. 2. The above expense does not fall within the restrictions of IMC Regulations: a. This expense of Rs. 10,78,010/- has been incurred for the professional expertise knowledge and hence does not fall under the clause (a), (b), (c), (d) i.e. Gift, travel, hospitality and Cash or Monetary grants of the notification dated 10th December, 2009 by the Medical Council of India. a. Autonomy of GP is not compromised: The Ld. Assessing Officer has stated that autonomy of GP is compromised from accepting the said receipts from Assessee. This statement is inaccurate as the GP have been made payments in consideration of GP expertise feedback on products of the Assessee. 'Autonomy' is the capacity of a rational individual to make an informed, un- coerced decision. In moral and political philosophy, autonomy is often used as the basis for determining moral responsibility and accountability for one's actions. Your Honour Autonomy- of GP does not get affected when expenses were incurred upon the professionals without any job carried out by them. Therefore, the professional autonomy of the GPs is not compromised when they are paid fees for their medical knowledge.” 12. He submitted that this expenditure does not fall under freebies and the assessee has made the payment for the services rendered by those Doctors. However, at the time of hearing the Bench asked the Ld. AR to submit any documents which gives the details of the above submissions 8 ITA NOs. 3539, 3540, 3541, 3542 & 4110/MUM/2019 M/s. Agio Pharmaceuticals Ltd., made by the assessee in terms of any agreement with those Doctors or any other relevant papers to support the contention of the assessee. In this regard Ld. AR submitted that no such documents available with the assessee. However, he relied on the submissions made by him. 13. On the other hand, Ld. DR submitted that the assessee has made payments to Doctors which is in violation of Explanation to section 37 of the Act and assessee was not able to substantiate these payments before any authority i.e. while assessment proceedings or appellate proceedings. Therefore, he prayed that the plea of the assessee may be dismissed. 14. Considered the rival submissions and material placed on record, we observe that assessee has incurred certain expenditure on sales promotion by making payments to various doctors. However, assessee claims that these payments were made to those doctors in line of its business. These expenditures were in the nature of advisory services to obtain information regarding the acceptability of medicine and necessity for improvement in them and also to gain information on similar products of other companies which are being sold in the same market. However, assessee has not submitted any technical record or any agreement entered with those doctors to carry out this kind of activities which can 9 ITA NOs. 3539, 3540, 3541, 3542 & 4110/MUM/2019 M/s. Agio Pharmaceuticals Ltd., prove that these doctors have done or carried out certain services to the assessee. In the absence of any documentary evidences or cogent material in support of the assessee’s claim, we are inclined to reject the same. Since this issue is already considered by the Hon'ble Supreme Court in the case of Apex Laboratories (P.) Ltd., v. DCIT LTU (supra) which is against the assessee. Respectfully following the decision of the Hon'ble Supreme Court, we are inclined to dismiss the grounds raised by the assessee. 15. Coming to the appeals for the A.Y. 2013-14, 2014-15 and 2015-16, since ground raised by the assessee as well as facts are exactly similar to the grounds and facts in A.Y. 2012-13, the issue raised in the A.Y. 2013-14, 2014-15 and 2015-16 are mutatis mutandis. Therefore, the decision reached in above Para are applicable to these Assessment Years also. Accordingly, the grounds raised by the assessee in all these Assessment Years are also dismissed. 16. With regard to additional modified ground raised by the assessee, we have considered the submissions of both the parties and we found that the issue raised by the assessee in additional ground and relevant information to dispose of the above additional ground are already 10 ITA NOs. 3539, 3540, 3541, 3542 & 4110/MUM/2019 M/s. Agio Pharmaceuticals Ltd., available on record, therefore the additional ground of appeal is admitted for adjudication. 17. Coming to the relevant facts relating to additional ground are, during the assessment proceedings, Assessing Officer observed that assessee has claimed weighted deduction @ 125% u/s. 35(1)(iia) of the Act amounting to ₹.6,00,00,000/- in respect of the payment for R & D to Calyx Chemicals and Pharmaceuticals (Indian company) engaged in R & D. The assessee was asked to furnish the details / evidences of incurrence of the said expenses. In response assessee filed submissions, for the sake of clarity it is reproduced below: - “M/s. Calyx Chemicals and Pharmaceuticals Ltd is approved Research and development center vide registration No.TU-1V/2496/2010 dated 10.06.2010 having its R & D facilities at its Plant in Dombivali. Company has R & D facilities of over Rs. 100 Crores with use of various modern techniques and technologies. The Company is engaged in research and development activities in pharmaceuticals sectors having its main focus on developing new process, improving process and driving cost efficiencies. The Company has dedicated staff of over 100 people working towards Research and Development. The assessee has entered into Service agreement (copy attached) with M/s. Calyx Chemicals and Pharmaceuticals Ltd for use of its R & D facilities whereby assessee and the company shall jointly conduct research and development activities which shall include chemical process and manufacturing method process. Assessee shall have sole right over any process developed under this agreement. The assessee shall also have all the right to register patents under its 11 ITA NOs. 3539, 3540, 3541, 3542 & 4110/MUM/2019 M/s. Agio Pharmaceuticals Ltd., name for the result of the said research work carried out under this agreement. The assessee has paid Rs.4,80,00,000/under this agreement towards Research and Development facilities and technical knowhow provided by Calyx. Hence, assessee has rightfully claimed deduction for payment made under this agreement under section 35(1)(iia). Documents attached: 1. Agreement entered into with Calyx Chemicals and Pharmaceuticals Ltd. 2. Invoices of Calyx Chemicals and Pharmaceuticals Ltd. 3. Project Development Report of six formulations." 18. After considering the submissions of the assessee Assessing Officer rejected the same by reference to section u/s. 35(1)(iia) and Rule 5F of the I.T.Rules. Accordingly, he rejected the weighted deduction claimed by the assessee with the following observation: - “5.3.4 The assessee has, till date, not submitted copy of the approval as per Rule 5F of the Rules accorded by the Prescribed Authority to Calyx Chemicals Limited in respect of its facilities for R&D nor has it submitted any explanation in this regard. As regards the claim of depreciation on this capital expenditure incurred, it is important to understand the purpose for which a payment of Rs.4.8 crore is being made. The assessee has incurred this expenditure for product, development and has entered into an agreement on 04.10.2011. That means the services of Calyx Pharma Limited to do R and D will be utilized from that date onwards. Product development is an evolution which includes series of processes of bringing a new pharmaceutical drug to the market through the process of drug discovery. It includes pre-clinical research, clinical trials and further obtaining regulatory approval to market the drug. Since the assessee has. during the year, only entered into Agreement with Calyx Chemicals Limited and it is in the process of product development, which generally takes long time and as of now it has not yielded any knowhow. Therefore, this expense is treated as work-in-progress. As and when product development happens with the help of which the 12 ITA NOs. 3539, 3540, 3541, 3542 & 4110/MUM/2019 M/s. Agio Pharmaceuticals Ltd., assessee earns income, the same may be granted depreciation by transferring it from WIP to the 25% block.” 19. Aggrieved assessee preferred an appeal before the Ld.CIT(A) and however, before the Ld.CIT(A) assessee has not pressed this ground. Therefore assessee raised this additional ground before us with the prayer that actual expenditure of ₹.4.8 Crores incurred for scientific research maybe allowed u/s. 35 of the Act not u/s. 35(1)(iia) of the Act. 20. At the time of hearing, Ld. AR submitted that assessee has incurred certain expenditure on scientific development by making payment to M/s.Calyx Chemicals and Pharmaceuticals Ltd. He brought to our notice Page No. 130 of the Paper Book as per which assessee has entered into service agreement entered with M/s. Calyx Chemicals and Pharmaceuticals Ltd., for the purpose of conducting chemical process and manufacturing method development services, for this purpose Calyx shall depute two Calyx FTE Groups per year in accordance with the direction from the assessee in order to carry out a specific service as per the goal set by the assessee (FTE denotes Full Time Equivalent). Further, he brought to our notice the service charges agreed by the assessee to M/s. Calyx Chemicals and Pharmaceuticals Ltd., for ₹.80 Lacs per month. Accordingly, he brought to our notice Page No. 136 in which the details 13 ITA NOs. 3539, 3540, 3541, 3542 & 4110/MUM/2019 M/s. Agio Pharmaceuticals Ltd., of FTE Group and their services chart are annexed. Further, he brought to our notice Page No. 137 to 142 which is the invoices raised by the M/s.Calyx Chemicals and Pharmaceuticals Ltd., and he brought to our notice the description of the invoices to submit that the charges were paid in each month for the deputation of certain technical officers for the purpose of research work. He submitted that this constitutes clearly revenue expenditure and it does not give rise to any creation of capital asset. Therefore, he submitted that there is no approval granted by any authority to carry out scientific research. However, this expenditure incurred for the purpose of research development activities and he prayed that the expenditure may be allowed u/s. 35 of the Act without any weighted deduction. He further, submitted that the research work carried for intermediaries only not to the product manufactured by the assessee. 21. On the other hand, Ld.DR brought to our notice Page No. 131 of the Paper Book which is service agreement entered by the assessee with M/s.Calyx Chemicals and Pharmaceuticals Ltd., in order to develop chemical process and manufacturing of APIs and intermediates and further he brought to our notice Page No. 132 of the agreement to submit that the outcome of the research is owned by the assessee, all inventions, discoveries etc., are the assets of the assessee. He submitted that this 14 ITA NOs. 3539, 3540, 3541, 3542 & 4110/MUM/2019 M/s. Agio Pharmaceuticals Ltd., amounts to development of capital assets only and he relied on the orders passed by the Assessing Officer. 22. Considered the rival submissions and material placed on record, we observe that assessee has entered into a scientific research service agreement with M/s. Calyx Chemicals and Pharmaceuticals Ltd., for the purpose of development of certain intermediates which will be useful for the production of the final products owned by the assessee. In this regard Ld. AR brought to our notice the various invoices raised by the M/s. Calyx Chemicals and Pharmaceuticals Ltd., which is nothing but the supply of technical staff for the purpose of research activities. No doubt it involves various research activities and which are agreed by the assessee to avail the services to develop chemical process and manufacturing of API and intermediates. This will help assessee to improve its process and manufacturing activities and improvement in its intermediates. Since it involves lot of labour activities which assessee has utilized from M/s. Calyx Chemicals and Pharmaceuticals Ltd. Since there is no document or any evidence that assessee has created any capital assets by doing of such research activities, however, these activities are carried out for the purpose of business only. Therefore these expenditures can be considered to incur only for the purpose of business and initially assessee 15 ITA NOs. 3539, 3540, 3541, 3542 & 4110/MUM/2019 M/s. Agio Pharmaceuticals Ltd., claimed weighted deduction u/s. 35(1)(iia) of the Act and since there is no proper documents submitted by the assessee to claim any benefit u/s.35(1)(iia), the Assessing Officer has rejected the claim of the assessee. However, we find that assessee has incurred these expenditures for the purpose of business and in relation to development activities in order to improve the process and manufacturing activities. There is no evidence of creation of any capital assets anywhere in the financial records. Therefore, these expenditures can be treated as development expenditure allowable u/s.35 of the Act without any weighted deduction. Accordingly, we direct the Assessing Officer to allow this expenditure u/s. 35 of the Act. Accordingly, the additional ground raised by the assessee in A.Y. 2012-13 is allowed. 23. In the result, appeal filed by the assessee is partly allowed. ITA.No. 4110/MUM/2019 (A.Y. 2012-13) (Revenue Appeal) 24. At the time of hearing, Ld. DR referring to the email dated 18.05.2022 submitted by the Assessing Officer, stated that the tax effect on the issue in the present appeal is ₹.46,24,644/- which is below ₹.50 Lacs and in view of the CBDT Circular No. 17/2019 dated 08.08.2019 in 16 ITA NOs. 3539, 3540, 3541, 3542 & 4110/MUM/2019 M/s. Agio Pharmaceuticals Ltd., F.No.279/Misc.142/2007-ITJ (Pt), the appeal of the Revenue is not maintainable. In view of the above submissions, we dismiss the appeal of the Revenue on account of low tax effect. 25. In the result, appeal filed by the Revenue is dismissed. 26. In the net result, all the appeals of the assessee are partly allowed and appeal of the revenue is dismissed. Order pronounced in the open court on 23 rd May, 2022 Sd/- Sd/- (RAHUL CHAUDHARY) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai / Dated 23/05/2022 Giridhar, Sr.PS Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. The CIT(A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. //True Copy// BY ORDER (Asstt. Registrar) ITAT, Mum