Appeal details
Counselvise Citation
[2010] 136 COUNSELVISE.COM (IT) 7363 (ITAT-MUMBAI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
1 year(s) 1 month(s) 29 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
18-03-2010
Appeal Filed By
Department
Order Result
Partly Allowed
Bench Allotted
F
Next Hearing Date
25-02-2010
Assessment Year
2006-2007
Appeal Filed On
20-01-2009
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL 'F' BENCH, MUMBAI BEFORE SHRI R.V. EASWAR, SENIOR VICE PRESIDENT AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO. 453/MUM/2009 (ASSESSMENT YEAR: 2006-07) DCIT, CENTRL CIRCLE 32 M/S. USV LTD. ROOM NO. 32(2), GROUND FLOOR BSD MARG, GOVANDI AAYAKAR BHAVAN, M.K. ROAD VS. MUMBAI 400088 MUMBAI 400020 PAN - AAACU 1366 N APPELLANT RESPONDENT APPELLANT BY: SHRI VIRENDRA OJHA RESPONDENT BY: SHRI KIRIT SHETH O R D E R PER B. RAMAKOTAIAH, A.M. THIS APPEAL BY THE REVENUE IS AGAINST THE ORDER OF THE CIT(A), CENTRAL VIII, MUMBAI DATED 12.11.2008. 2. REVENUE HAS RAISED TWO GROUNDS AS UNDER: - 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A) ERRED IN DIRECTING TO TREAT THE EXPENSES OF RS.1,66,327/- PAID TO TRADE MARK ATTORNEYS AS REVENUE EXPENDITURE . 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) ERRED IN DIRECTING TO ALLOW THE WEIGHTED DEDUCTION U/S. 35(2AB)(1) IN RESPECT OF EXPENSES INCURRED ON CLINI CAL TRIALS OUTSIDE THE APPROVED R&D LABS. 3. WE HAVE HEARD THE LEARNED D.R. AND THE LEARNED COUN SEL. 4. REGARDING GROUND NO. 1 IT IS SUBMITTED THAT THE A.O . ERRED IN DISALLOWING PROFESSIONAL FEES AND REIMBURSEMENT OF EXPENSES AGGREGATING TO RS.1,66,327/- PAID TO TRADE MARK ATTORNEYS BY TREAT ING IT AS CAPITAL EXPENDITURE. IT IS ALSO SUBMITTED THAT THE A.O. HA S FAILED TO APPRECIATE THAT THIS EXPENDITURE IS REVENUE EXPENDITURE AND ALLOWAB LE TO THE ASSESSEE. THE A.O. FOUND THAT THE ASSESSEE HAD INCURRED EXPENDITU RE OF RS.1.66,327/- TOWARDS REGISTRATION OF PRODUCT TRADE MARKS IN VARI OUS FOREIGN COUNTRIES. THE ASSESSEE WAS REQUIRED TO EXPLAIN WHY THE SAME S HOULD NOT BE TREATED AS CAPITAL EXPENDITURE. THE ASSESSEE EXPLAINED THAT TH ESE EXPENSES ARE ITA NO. 453/MUM/2009 M/S. USV LTD . 2 REQUIRED TO BE INCURRED TO MEET THE REGULATORY REQU IREMENT OF FOREIGN GOVERNMENTS, WHICH PROTECT THE ASSESSEE AGAINST ANY INFRINGEMENT CLAIM BY OR AGAINST IT IN RESPECT OF USE OF BRAND NAME AND T HUS AVOID FUTURE COSTS/ LOSSES ON THIS ACCOUNT. IT IS SUBMITTED THAT THIS E XPENDITURE IS ALLOWABLE AS REVENUE EXPENDITURE. THE A.O. DID NOT ACCEPT THE EX PLANATION OF THE ASSESSEE AS SUCH EXPENSES CERTAINLY ADDS TO THE VAL UE OF TRADEMARK AND WOULD HAVE RESULTED IN BENEFIT OF ENDURING NATURE T O THE ASSESSEE BY WAY OF LONG TERM BUSINESS POTENTIAL UNDER THE REGISTERED T RADEMARK. HE TREATED THIS AMOUNT AS CAPITAL EXPENDITURE UNDER THE HEAD TRADE MARKS AND ALLOWED DEPRECIATION. IN APPEAL BEFORE THE CIT(A) THE ASSES SEE REITERATED THE STAND TAKEN BEFORE THE A.O. HE FURTHER SUBMITTED THAT THE TEST OF ENDURING BENEFIT CANNOT BE APPLIED IN ISOLATION DISREGARDING THE OTH ER FACTORS LIKE CREATION OF NEW/ ADDITIONAL ASSETS AND/OR CREATION OF NEW/ADDIT IONAL SOURCES OF INCOME. THIS VIEW WAS SUPPORTED BY THE HON'BLE SUPREME COUR T IN THE CASE OF EMPIRE JUTE CO. LTD. VS. CIT 124 ITR 1. EXPENDITURE FOR REGISTERING TRADEMARKS IN INDIA IS ALLOWED AS REVENUE EXPENDITU RE BY THE A.O. IN EARLIER YEARS IN SCRUTINY ASSESSMENT. HE ALSO RELIED ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF FINLAY MILLS VS. CIT 2 0 ITR 475. AFTER CONSIDERING THE REPLY OF THE ASSESSEE AND PERUSING THE ASSESSMENT ORDER THE CIT(A) HAS DIRECTED THE A.O. TO WITHDRAW DEPRECIATI ON AND ALLOW THE PROFESSIONAL FEES AND REIMBURSEMENT OF EXPENSES ON ACCOUNT OF TRADEMARK AS BUSINESS EXPENDITURE FOLLOWING THE ITAT ORDERS IN THE EARLIER YEARS,BY HOLDING AS UNDER: - 1.5 I HAVE CAREFULLY CONSIDERED THE REPLY GIVEN BY THE APPELLANT AND PERUSED THE ASSESSMENT ORDER. THIS ISSUE HAS COME U P BEFORE THE HON'BLE ITAT IN ASSESSMENT YEAR 1999-2000, 2000-01 AND 2002-03 AND THE HON'BLE ITAT HAS ALLOWED PROFESSIONAL FEES PAID FOR ATTORNEYS IN CONNECTION WITH APPLICATION FOR REGISTRATION OF THE ASSESSEES TRADEMARK IN FOREIGN COUNTRIES AS REVENUE EXPENDITURE. THE HO N'BLE ITAT WHILE DELIVERING THE JUDGEMENT HA RELIED ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF FINLAY MILLS LTD. 20 I TR 475 IN WHICH THE SUPREME COURT HAS HELD AS UNDER: - THE RESULT HOWEVER OF THE TRADE MARKS ACT IS ONLY TWO FOLD. BY REGISTRATION, THE OWNER IS ABSOLVED FROM THE OBLIGATION TO PROVE HIS OWNERSHIP OF THE TRADEMARK. IT IS TREATED AS PRIMA FACIE PROVED ON P RODUCTION OF THE REGISTRATION CERTIFICATE. IT THUS MERELY SAVES HIM THE TROUBLE O F LEADING EVIDENCE, IN THE EVENT OF A SUIT, IN A COURT OF LAW, TO PROVE HIS TI TLE TO THE TRADE MARK. IT HAS BEEN SAID THAT REGISTRATION IS IN THE NATURE OF COL LATERAL SECURITY FURNISHING THE TRADER WITH A CHEAPER AND MORE DIRECT REMEDY AGAINS T INFRINGERS. CANCEL THE ITA NO. 453/MUM/2009 M/S. USV LTD . 3 REGISTRATION AND HE HAS STILL HIS RIGHT ENFORCEABLE AT COMMON LAW TO RESTRAIN THE PIRACY OF HIS TRADE MARK. IN OUR OPINION, THIS IS NEITHER SUCH AN ASSET NOR AN ADVANTAGE SO AS TO MAKE PAYMENT FOR ITS REGISTRA TION A CAPITAL EXPENDITURE. 1.6 I RESPECTFULLY FOLLOW THE DECISION OF THE ITAT TO DIRECT THE ASSESSING OFFICER TO ALLOW THE PROFESSIONAL FEES AN D REIMBURSEMENT OF EXPENSES ON ACCOUNT OF TRADE MARK AS BUSINESS EXPEN DITURE. THE APPELLANT WOULD GET RELIEF OF RS.1,66,327/-. THE AS SESSING OFFICER IS DIRECTED TO WITHDRAW THE DEPRECIATION ALLOWED AMOUN TING TO RS.17,806/- WHICH HAS BEEN ALLOWED IN ASSESSMENT ORDER. 5. SINCE THE CIT(A) HAS FOLLOWED THE ITAT ORDER IN EAR LIER YEARS, WE DO NOT SEE ANY REASON TO INTERFERE WITH SUCH ORDER. ACCORD INGLY GROUND NO. 1 IS REJECTED. 6. GROUND NO. 2 IS AGAINST ALLOWING OF WEIGHTED DEDUCT ION UNDER SECTION 35(2AB)(1) IN RESPECT OF EXPENSES INCURRED ON CLINI CAL TRIALS OUTSIDE THE APPROVAL OF R&D LABS. BRIEFLY STATED THE FACTS OF T HIS GROUND ARE THAT THE ASSESSEE COMPANY WAS ENGAGED IN THE MANUFACTURING A ND MARKETING OF PHARMACEUTICAL PRODUCTS AND BULK DRUGS. IT CLAIMED WEIGHTED DEDUCTION OF 150% UNDER SECTION 35(2AB)(1) OF THE EXPENDITURE IN CURRED TO THE TUNE OF RS.2,50,35,826/-. THE ASSESSING OFFICER OBSERVED TH AT THE DEPARTMENT OF SCIENTIFIC AND INDUSTRIAL RESEARCH, MINISTRY OF SCI ENCE AND TECHNOLOGY, GOVERNMENT OF INDIA, IN FORM NO. 3 CM HAS CATEGORIC ALLY MENTIONED THAT SUCH EXPENSES RELATED TO CLINICAL TRIALS OUTSIDE T HE APPROVED FACILITIES. SINCE THE EXPENSES WERE NOT INCURRED INSIDE THE APP ROVED LABORATORIES, THE A.O., CONSIDERING THE LANGUAGE OF THE PROVISION, HE LD THAT THE WEIGHTED DEDUCTION WAS NOT ALLOWABLE. HE, THEREFORE, ALLOWED 100% DEDUCTION AND DISALLOWED THE REMAINING 50% (BEING WEIGHTED PART A MOUNTING TO RS.1,60,58,000/-). THE LEARNED CIT(A) OVERTURNED TH E ASSESSMENT ORDER ON THIS POINT AND ACCEPTED ASSESSEES CLAIM. 7. SIMILAR ISSUE IS CONSIDERED BY THE ITAT MUMBAI F BENCH IN ASSESSEES OWN CASE IN ITA NO. 2179/MUM/2009 FOR A. Y. 2005-06 AND HELD AS UNDER: - 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE RELEVANT MATERIAL ON RECORD. THE ONLY CONTROVERSY BEFORE US IN THIS GROUND IS ABOUT THE AVAILABILITY OR OTHERWISE OF THE WEIGHTED PART OF DEDUCTION TOWARDS EXPENSES ON CLINICAL DRUG TRIAL INCURRED OUTSIDE TH E APPROVED FACILITIES. THERE IS NO DISPUTE THAT SUCH EXPENDITURE WAS, IN F ACT, NOT INCURRED ON IN- ITA NO. 453/MUM/2009 M/S. USV LTD . 4 HOUSE RESEARCH AND DEVELOPMENT FACILITY. BUT FOR TH IS FACT THE AO HAS NOT POINTED OUT ANY OTHER CONDITION WHICH THE ASSESSEE FAILED TO FULFILL SO AS TO BE ENTITLED TO THE WEIGHTED DEDUCTION UNDER SECTIO N 35(2AB). CLAUSE (1) OF SUB-SECTION (2AB) ALLOWS WEIGHTED DEDUCTION TO A CO MPANY ENGAGED IN THE BUSINESS OF BIOTECHNOLOGY OR PRODUCTION OF ANY DRUG S OR PHARMACEUTICALS ETC. AS NOTIFIED BY THE BOARD IN RESPECT OF EXPENDI TURE ON SCIENTIFIC RESEARCH ON IN-HOUSE RESEARCH DEVELOPMENT FACILITY AS APPROVED BY THE PRESCRIBED AUTHORITY. BEFORE PROCEEDING FURTHER IT WOULD BE RELEVANT TO NOTE THE LANGUAGE OF SECTION 35(2AB)(1), WHICH IS A S UNDER:- (2AB)(1) WHERE A COMPANY ENGAGED IN THE BUSINESS OF [BIO-TECHNOLOGY OR IN THE BUSINESS OF] MANUFACTURE OR PRODUCTION OF AN Y DRUGS, PHARMACEUTICALS, ELECTRONIC EQUIPMENTS, COMPUTERS, TELECOMMUNICATION EQUIPMENTS, CHEMICALS, OR ANY OTHER ARTICLE OR THIN G NOTIFIED BY THE BOARD 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, THERE SHALL BE ALLOWED A DEDUCTION OF [A SUM EQUAL TO ONE AND ON-HALF TIMES OF THE EXPENDITURE] SO INCURRED. [EXPLANATION. FOR THE PURPOSE OF THIS CLAUSE, E XPENDITURE ON SCIENTIFIC RESEARCH, IN RELATION TO DRUGS AND PHARMACEUTICALS , SHALL INCLUDE EXPENDITURE INCURRED ON CLINICAL DRUG TRIAL, OBTAIN ING APPROVAL FROM ANY REGULATORY AUTHORITY UNDER ANY CENTRAL, STATE OR PR OVINCIAL ACT AND FILING AN APPLICATION FOR A PATENT UNDER THE PATENTS ACT, 197 0 (39 OF 1970).] 6. FROM THE LANGUAGE OF THIS SECTION IT IS CRYSTAL CLEAR THAT THE WEIGHTED DEDUCTION IS AVAILABLE IN RESPECT OF EXPEN DITURE ON SCIENTIFIC NATURE ON IN-HOUSE RESEARCH AND DEVELOPMENT FACILIT Y AS APPROVED BY THE PRESCRIBED AUTHORITY. IT IS AN UNDISPUTED POSITION THAT THE EXPENSES WERE NOT INCURRED BY THE ASSESSEE ON CLINICAL DRUGS TRIA L IN-HOUSE. THE LETTER OF SCIENTIST-G FOR AND ON BEHALF OF THE SECRETARY, DSI R, GOVERNMENT OF INDIA, IN FORM NO.3CL CATEGORICALLY STATES THAT THE SUM OF RS.54.28 LAKHS REPRESENTS EXPENSES RELATED TO CLINICAL TRIA LS OUTSIDE THE APPROVED FACILITIES. THUS IT BECOMES CRYSTAL CLEAR THAT TH E EXPENDITURE WAS INCURRED IN RESPECT OF THE CLINICAL DRUG TRIALS OUT SIDE THE APPROVED FACILITIES. NOW THE QUESTION BEFORE US IS WHETHER T HE ASSESSEE IS ENTITLED TO DEDUCTION IN RESPECT OF EXPENSES INCURRED ON CLI NICAL TRIALS OUTSIDE THE APPROVED FACILITIES. THE LEARNED A.R. HAS RELIED ON EXPLANATION TO SECTION 35(2AB)(1) FOR CONTENDING THAT ANY EXPENDITURE ON C LINICAL DRUG TRIALS WHETHER INCURRED IN-HOUSE OR OUTSIDE THE APPROVED F ACILITIES IS ENTITLED TO THE WEIGHTED DEDUCTION. HE ALSO REFERRED TO THE SPE ECH OF THE FINANCE MINISTER ON THE FINANCE BILL 2001, EXTENDING THE SC OPE OF SECTION BY WAY OF THE INSERTION OF THE EXPLANATION. 7. WE ARE UNABLE TO ACCEPT THE VIEW POINT OF T HE LEARNED A.R. FOR THE REASON THAT EXPLANATION SIMPLY REFERS TO AND EXPLAI NS EXPENDITURE ON SCIENTIFIC RESEARCH AS ALSO INCLUDING ANY EXPENDIT URE INCURRED ON CLINICAL DRUG TRIALS ETC. WHEN THE SAID EXPLANATION IS READ IN JUXTAPOSITION TO THE MAIN PROVISION, IT BECOMES PATENT THAT EXPENDITURE ON SCIENTIFIC RESEARCH MUST BE ON IN-HOUSE RESEARCH AND DEVELOPMENT FACILI TY. IT IS ONLY THE EXPRESSION EXPENDITURE ON SCIENTIFIC RESEARCH WHI CH HAS BEEN EXPLAINED IN THE EXPLANATION. SUCH EXPRESSION CANNOT BE READ DE HORS THE MAIN PROVISION WHICH CONTAINS THE CONDITION PRECEDENT FO R ALLOWING WEIGHTED ITA NO. 453/MUM/2009 M/S. USV LTD . 5 DEDUCTION, BEING ON IN-HOUSE RESEARCH AND DEVELOPM ENT FACILITY. IF THE INTENTION OF THE LEGISLATURE HAD BEEN TO ALLOW WEIG HTED DEDUCTION IN RESPECT OF EXPENDITURE ON SCIENTIFIC RESEARCH WHETH ER IN-HOUSE OR OUTSIDE THE RESEARCH AND DEVELOPMENT FACILITY AS HAS BEEN C ONTENDED BY THE LD. AR, THEN INSTEAD OF INSERTING THE EXPLANATION IT WO ULD HAVE REMOVED THE WORDS IN-HOUSE FROM THE SUB-SECTION (2AB) ITSELF. FURTHER WE ARE UNABLE TO FIND ANYTHING IN THE SPEECH OF THE FINANCE MINIS TER ENTITLING THE ASSESSEE TO CLAIM WEIGHTED DEDUCTION IN RESPECT OF THE EXPENDITURE INCURRED ON SCIENTIFIC RESEARCH OUTSIDE THE APPROVE D FACILITY. IN FACT THE EXPLANATION HAS BEEN ADDED TO INCREASE THE SCOPE OF `EXPENDITURE ON SCIENTIFIC RESEARCH BY ALSO ALLOWING DEDUCTION IN RESPECT OF EXPENSES ON CLINICAL TRIALS ETC. WHICH WERE HITHERTO NOT COVERE D WITHIN THE AMBIT OF SUB- SECTION (2AB). IT IS IMPERMISSIBLE TO CONSTRUE THE EXPLANATION AS OVERRIDING THE EFFECT OF MAIN PROVISION FOR ALLOWING WEIGHTED DEDUCTION IN RESPECT OF IN-HOUSE RESEARCH AND DEVELOPMENT FACILITY. WE, T HEREFORE, HOLD THAT THE LEARNED CIT(A) WAS NOT JUSTIFIED IN GRANTING THE AD DITIONAL DEDUCTION AT THE RATE OF 50%. THIS GROUND IS ALLOWED. 8. THIS ISSUE WAS CRYSTALLISED IN A.Y. 2005-06 IN WHIC H THE ITAT HAS DIFFERED FROM THE ORDER OF THE CIT(A) AND UPHELD TH E CONTENTIONS OF THE A.O. SINCE IN THIS YEAR THE CIT(A) ALLOWED THE DEDUCTION ON THE BASIS OF HIS ORDER FOR A.Y. 2005-06, WE REVERSE THE ORDER AND UPHOLD T HE ORDER OF THE A.O. 9. IN THE RESULT, APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 18 TH MARCH 2010. SD/- SD/- (R.V. EASWAR) (B. RAMAKOTAIAH) SENIOR VICE PRESIDENT ACCOUNTANT MEMBER MUMBAI, DATED: 18 TH MARCH 2010 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) CENTRAL VIII, MUMBAI 4. THE CIT CENTRAL III, MUMBAI CITY 5. THE DR, F BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.
