EISAI PHARMACEUTICALS INDIA P. LTD, MUMBAI V. ASST CIT RG 8(1), MUMBAI

ITA 5665/MUM/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 78928 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 9 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-05-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 20-05-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 08-08-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: GIRISH DEV
• Keywords: Business income
• Section: 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH, MUM BAI , , BEFORE SHRI SANJAY ARORA, AM AND SHRI AMIT SHUKLA, JM ./ I.T.A. NOS. 1058, 5665 & 8275/MUM/2011 ( / ASSESSMENT YEAR: 2006-07, 07-08 & 08-09) EISAI PHARMACEUTICALS INDIA PVT. LTD. 1 ST FLOOR, B-WING, MARWAH CENTRE, KRISHNALAL MARWAH MARG, ANDHERI(E), MUMBAI-400 072 / VS. ASST. CIT, RANGE 8(1), MUMBAI ' ./# ./PAN/GIR NO. AABCE 3924 D ( '$ /APPELLANT ) : ( %&'$ / RESPONDENT ) '$ ' ( / APPELLANT BY : SHRI GIRISH DEV %&'$ ' ( / RESPONDENT BY : SHRI MAURYA PRATAP )* + ' , / DATE OF HEARING : 20.05.2014 -./ ' , / DATE OF ORDER : 30.05.2014 / O R D E R PER SANJAY ARORA, A. M.: THIS IS A SET OF THREE APPEALS BY THE ASSESSEE DIRE CTED AGAINST THE ORDERS BY THE COMMISSIONER OF INCOME TAX (APPEALS)-16, MUMBAI (C IT(A) FOR SHORT), DISMISSING THE ASSESSEES APPEALS CONTESTING ITS ASSESSMENTS U/S.1 43(3) OF THE INCOME TAX ACT, 1961 (THE ACT HEREINAFTER) FOR THE ASSESSMENT YEARS (A .YS.) 2006-07, 2007-08 & 2008- 09. THE ISSUE ARISING FOR CONSIDERATION IN THE PRES ENT CASE BEING COMMON, THE APPEALS WERE TAKEN UP TOGETHER FOR HEARING, AND ARE BEING D ISPOSED OF VIDE A COMMON, CONSOLIDATED ORDER. 2. THE FACTS OF THE CASE ARE SIMPLE AND LARGELY UND ISPUTED. THE APPELLANT-COMPANY, A MANUFACTURER OF DRUGS, IS A RESEARCH-BASED COMPANY. IT SUPPORTS DOCTORS ACTIVITIES IN 2 ITA NOS. 1058, 5665 & 8275/M/11 (A.YS. 2006-07, 07-08 & 08-09) EISAI PHARMACEUTICALS INDIA PVT. LTD. VS. ASS T. CIT EPIDEMIOLOGICAL DATA RESEARCH, TRAINING FOR RESEARC H, INFRASTRUCTURE FOR RESEARCH LIKE MEMORY CLINIC. THE APPELLANT ALSO SUPPORTS ALZHEIM ER AND RELATED DISORDERS SOCIETY OF INDIA [ARDSI], AN NGO DEDICATED TO DEMENTIA ACTIVI TY IN COMMUNITY RESEARCH TO ASCERTAIN INCIDENCE. THE ASSESSEE-APPELLANT ENTERED INTO AN AGREEMENT DATED JANUARY 1, 2005 WITH EISAI CO., LTD., JAPAN (EISAI-JAPAN), W HERE-UNDER THE APPELLANT IS TO PROVIDE EISAI-JAPAN WITH SERVICES TO CONDUCT, SUPERVISE AND MANAGE ACTIVITIES LIKE CLINICAL STUDIES, EPIDEMIOLOGICAL STUDIES, INDICATION EXPANSION STUDI ES, PHASE IV STUDIES, GLOBAL R & D PROJECTS, PHARMACOVIGILANCE/ADR COMPILATION AND REP ORTING FOR INVESTIGATIONAL NEW DRUGS, EXISTING PRODUCTS, AND NEW FORMULATIONS. THE ASSESSEE-COMPANY IS UNDER THE AGREEMENT ENTITLED TO RECEIVE FROM EISAI-JAPAN RESE ARCH FEE COMPRISING: (I) AGREED DIRECT RESEARCH COSTS, (II) AGREED OPERATION COSTS AND (II I) PROFIT MARK UP OF 10 PER CENT ON THE AGREED OPERATION COSTS. THE OWNERSHIP OF THE DISCOV ERY, IF ANY, RESULTING FROM THE ABOVE RESEARCH ACTIVITIES IS TO REMAIN WITH EISAI-JAPAN. THE ASSESSEE COULD UNDER THE AGREEMENT ALSO SUPPORT NGOS DEDICATED TO DEMENTIA ACTIVITY, E XPENDITURE ON WHICH, THOUGH SUBJECT TO REIMBURSEMENT BY EISAI-JAPAN, IS WITHOUT THE MAR K-UP OF 10%. THE ASSESSEE CLAIMED EXPENSES TO THE EXTENT OF RS.5 8.70 LACS, RS.79.12 LACS AND RS.73.35 LACS FOR EACH OF THE THREE CONSECUTIVE YEA RS UNDER REFERENCE RESPECTIVELY UNDER THE SAID AGREEMENT THROUGH ITS PROFIT AND LOSS ACCO UNT FOR THE RELEVANT YEARS. THE CLAIM WAS FOUND INADMISSIBLE. FURTHER, THE ASSESSEE HAD C OMMENCED ITS BUSINESS OF MANUFACTURING AND SELLING DRUGS ONLY IN SEPTEMBER, 2005, SO THAT ANY EXPENDITURE PRIOR THERETO HAD TO BE CAPITALIZED AS PRE-OPERATIVE EXPE NDITURE. THE ASSESSEE HAD NOT ACTUALLY CONDUCTED ANY SCIENTIFIC RESEARCH RELATING TO ITS B USINESS, AND FOR WHICH REFERENCE WAS MADE TO THE DEFINITION OF THE TERM AS PROVIDED U/S. 43(4). IT IS THIS THAT WOULD HOLD, REGARDLESS OF THE NOMENCLATURE EMPLOYED TO DESCRIBE IT UNDER THE AGREEMENT. THE ASSESSEE HAD ACTUALLY ONLY CONDUCTED MARKET SURVEY/S TO FIND OUT THE NUMBER OF PATIENTS SUFFERING FROM ALZHEIMERS DISEASE IN INDIA. THAT APART, THE ASSESSEES ACTIVITY, IN THE CONTEXT OF THE PRESENT CASE, WOULD ONLY MEAN THAT IT HAD TO KEEP T RYING VARIOUS PERMUTATIONS AND COMBINATIONS TILL THE DESIRED RESULT IS ACHIEVED AN D THE FORMULA SO DEVELOPED ACCORDS WITH 3 ITA NOS. 1058, 5665 & 8275/M/11 (A.YS. 2006-07, 07-08 & 08-09) EISAI PHARMACEUTICALS INDIA PVT. LTD. VS. ASS T. CIT THE REQUIREMENTS OF THE PARENT COMPANY. THE SAME CO ULD NOT BE CONSIDERED AS SCIENTIFIC RESEARCH FOR THE PURPOSE OF ITS OWN BUSINESS, DEDUC TIBLE U/S. 35(1). THE ASSESSEES CLAIM COULD NOT ALTERNATIVELY BE CONSIDERED U/S. 37(1) IN -AS-MUCH AS IT HAS TOWARD THE SAME FAILED TO PROVE THE IMPUGNED EXPENDITURE AS HAVING BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF ITS BUSINESS, WHICH IS MANUFACT URE AND SALE OF MEDICINES AND, IN FACT, COMMENCED ONLY AFTER SEPTEMBER 1, 2005. 3. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD, INCLUDING THE AGREEMENT DATED 01.01.2005 (SUPRA) (PB PGS.21-29), GIVING OUR CAREFUL CONSIDERATION TO THE MATTER. WE ARE WHOLLY UNABLE TO APPRECIATE THE REVENUES CASE. TRUE, THE ASSESSEE CANNOT BE CONSIDERED AS ENGAGED IN SCIENTIFIC RESEA RCH RELATED TO ITS BUSINESS IN-AS-MUCH AS THE SAME IS BEING UNDERTAKEN IN PURSUANCE TO AN AGREEMENT WITH ANOTHER, EISAI-JAPAN, WHICH SPONSORS THE SAME, SO THAT THE DISCOVERY, IF ANY, RESULTING THERE-FROM, WOULD VEST WITH THE LATTER. HOWEVER, WHY IS THE SAME NOT ADMIS SIBLE U/S. 37(1), WE FAIL TO FATHOM. RATHER, AS STATED BY THE LD. CIT(A), THE ASSESSEE C AN ONLY BE CONSIDERED AS ENGAGED IN THE BUSINESS OF CARRYING ON SCIENTIFIC RESEARCH ITSELF (REFER PARA 3.3.3 OF HIS ORDER), MAKING AVAILABLE ITS RESOURCES, EQUIPMENT AND SERVICES TO ANOTHER/S FOR A CONSIDERATION. THE REVENUE HAS IN FACT ITSELF ASSESSED THE RECEIPT BY WAY OF SERVICE CHARGES, AT RS.64.15 LACS, RS.96.85 LACS AND RS.90.52 LACS RESPECTIVELY FOR TH E THREE YEARS UNDER REFERENCE, CLAIMED TO BE FROM EISAI-JAPAN, AS BUSINESS INCOME U/S. 28. HOW COULD THEN THE EXPENDITURE ON A PRINCIPAL ACTIVITY CARRIED OUT BE CONSIDERED, EVEN IN PART (AS IT WOULD ONLY BE FOR THAT INCURRED AND CLAIMED FOR A.Y. 2006-07), AS TOWARD P RE-OPERATIVE EXPENDITURE ? IN-AS- MUCH AS THE EXPENDITURE BY WAY OF SPONSORING THE AC TIVITY OF THE NGOS (AS ARDSI) ALSO FORMS PART OF THE AGREEMENT DATED 01.01.2005, THOUG H, AS EXPLAINED BY THE LD. AR, NOT SUBJECT TO A MARK-UP OF 10%, AS IS THE EXPENDITURE INCURRED DIRECTLY BY THE ASSESSEE, THE SAME CANNOT BE CONSIDERED AS DONATION, AS CONSIDERE D BY THE REVENUE. AT BEST, IT IS AN EXPENDITURE ON A RELATED ACTIVITY AND, FURTHER, BEI NG REIMBURSABLE IN FULL UNDER THE AGREEMENT, NO EXPENDITURE IN FACT CAN BE SAID TO HA VE BEEN AT ALL INCURRED OR CLAIMED BY THE ASSESSEE. 4 ITA NOS. 1058, 5665 & 8275/M/11 (A.YS. 2006-07, 07-08 & 08-09) EISAI PHARMACEUTICALS INDIA PVT. LTD. VS. ASS T. CIT SO, HOWEVER, EVEN AS OBSERVED DURING THE HEARING, T HERE BEING NO FINDING BY THE AUTHORITIES BELOW WITH REGARD TO A DIRECT NEXUS OF THE IMPUGNED EXPENDITURE WITH THE RECEIPT AFORE-NOTED, WE ONLY CONSIDER IT FIT AND PR OPER THAT THE MATTER IS RESTORED BACK TO THE FILE OF THE ASSESSING OFFICER (A.O.) TO VERIFY THE ASSESSEES CLAIM OF HAVING IN FACT RECEIVED THE AMOUNTS IN THE STATED SUM FROM EISAI-J APAN IN PURSUANCE TO THE AGREEMENT, IN CONSIDERATION OF OR AGAINST THE IMPUGNED EXPENDI TURE, WHETHER INCURRED DIRECTLY OR INDIRECTLY BY THE ASSESSEE. IF SO, WHICH ASPECT THE A.O. SHALL DECIDE UPON VERIFICATION, IN OUR CLEAR VIEW, NO CASE FOR ANY DISALLOWANCE IS MAD E OUT. THE A.O. SHALL DETERMINE THE ISSUE REFERRED BY ISSUING DEFINITE FINDINGS OF FACT AFTER ALLOWING PROPER OPPORTUNITY OF HEARING TO THE ASSESSEE. WE DECIDE ACCORDINGLY. 4. IN THE RESULT, THE ASSESSEES APPEALS ARE ALLOWE D FOR STATISTICAL PURPOSES, WHICH RESULT WAS PRONOUNCED AT THE CONCLUSION OF THE HEAR ING ON MAY 20, 2014 ITSELF. SD/- SD/- (AMIT SHUKLA) (SANJAY ARORA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER 0+ MUMBAI; 1) DATED : 30.05.2014 *.)../ ROSHANI , SR. PS ! ' #$%& ' &$ / COPY OF THE ORDER FORWARDED TO : 1. '$ / THE APPELLANT 2. %&'$ / THE RESPONDENT 3. ( ) / THE CIT(A) 4. / CIT - CONCERNED 5. 4*5 6 %)78 , , 78/ , 0+ / DR, ITAT, MUMBAI 6. 6 9: ; + / GUARD FILE ! ( / BY ORDER, )/(* + (DY./ASSTT. REGISTRAR) , 0+ / ITAT, MUMBAI