Dr.Reddy's Laboratories Limited, Hyderabad V. Addl.CIT,Circle-1(2), Hyderabad

ITA 85/HYD/2013

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 6262 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 11 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-01-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 03-10-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 29-01-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: G. APARNA RAO
• Assessee Lawyers: K.R. SEKHAR; ITS PARENT COMPANY
• Keywords: Gift; Business income; Revision of order; Depreciation; Transfer pricing; Business expenditure; Residential status; Double taxation relief; International transaction; Retrospective amendment; Wholly owned subsidiary; Right to appeal; Commercial expediency; Revised return; Revenue expenditure; Capital expenditure; TDS; Set aside; CHAPTER IV
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 43B; 271(1)(b); 139; 143(3); 92; 80IB; 37(1); 10B; 143(1); 195; 201; 43; 48; 73; 13; 22; 92CA

Judgement Text

ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 1 OF 61 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD B BENCH, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S.RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NOS.2229/HYD/2011 & 85/HYD/2013 (ASSESSMENT YEAR2 :2007-08 & 2008-09) DR. REDDYS LABORATORIES LIMITED HYDERABAD PAN: AAACD 7999 Q VS ADDL. COMMISSIONER OF INCOME TAX, CIRCLE 1(2) HYDERABAD FOR ASSESSEE : SHRI K.R. SEKHAR & SHRI S.P. CHIDAMBARAM FOR REVENUE : SMT. G. APARNA RAO, CIT (DR) O R D E R PER SMT. P. MADHAVI DEVI, J.M. BOTH ARE ASSESSEES APPEALS FOR THE A.YS 2007-08 AND 2008-09 RESPECTIVELY AGAINST THE FINAL ASSESSMENT O RDER PASSED U/S 143(3) R.W.S.144C(5) & 144C(13) OF THE I.T. ACT . ITA NO.2229/HYD/2011-A.Y 2007-08 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. (I) THE LEARNED TPO/AO ERRED IN IGNORING LIBOR AS A BENCH MARK FOR DETERMINING ARMS LENGTH PRICE FOR DETERMINING ARMS LENGTH INTEREST RATE IN INTERNATIONAL TRANSACTIONS BY ADOPTING INTEREST RATE OF 14% AS APPLICABLE TO CORPORATE BONDS. DATE OF HEARING : 03.10.2016 DATE OF PRO NOUNCEMENT : 02.01.2017 ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 2 OF 61 (II) WITHOUT RESPECTING THE LEGAL DEVELOPMENTS, DRP ERRED IN FOLLOWING ITS EARLIER ORDER WHICH WAS DISPOSED OFF WITHOUT ANY MERIT AND TO KEEP THE ISSUE ALIVE, SINCE DEPARTMENT DOES NOT HAVE RIGHT OF APPEAL AGAINST DRP DIRECTION. 2. THE LEARNED AO/DRP ERRED IN DISALLOWING THE CLAIM FOR TRANSITIONAL LIABILITY OF LEAVE ENCASHMEN T WITHOUT APPRECIATING THE FACT THAT TRANSITIONAL LIABILITY WAS WORKED OUT IN TERMS OF REVISED AS 15 AND HENCE A CRYSTALLIZED LIABILITY WHICH WAS PAID. 3. THE LEARNED AO/DRP ERRED IN DISALLOWING AMORTIZATION OF DEFERRED STOCK COMPENSATION (ESOP COST) ON THE GROUND THAT THE EXPENDITURE IS NOTIONAL AND CAPITAL IN NATURE. 4. THE LEARNED AO/DRP ERRED IN DISALLOWING THE EXPENDITURE INCURRED IN CONNECTION WITH CYTO PROJECT ON THE GROUND THAT THE EXPENDITURE INCURRED IS CAPITAL NATURE. 5. (I)THE LEARNED AO/DRP ERRED IN DISALLOWING THE EXPENDITURE INCURRED IN CONNECTION WITH ADS ISSUE ON THE GROUND THAT THE EXPENDITURE IS INCURRED IN CONNECTION WITH INCREASE IN THE CAPITAL BASE OF THE COMPANY AND CAPITAL IN NATURE. (II) DRP ERRED IN REJECTING THE GROUND AND HOLDING THAT THE ARGUMENT THAT PART OF THE EXPENDITURE IS USED TO MEET THE WORKING CAPITAL REQUIREMENT IS OF NO SIGNIFICANCE. 6. THE LEARNED AO/DRP ERRED IN DISALLOWING THE PAYMENT TO INDIAN LIFE SCIENCE (ILS) ON THE GROUND THAT ILS CANNOT CANVASS OR PRODUCE BUSINESS FOR THE ASSESSEE AND ILS IS ALSO NOT UNDER DR.REDDY'S BRAND. 7. (I)THE LEARNED AO/DRP ERRED IN DISALLOWING DEPRECIATION ON GOODWILL ON THE GROUND THAT SIMILAR MATTER IS PENDING BEFORE DELHI HC IN THE CASE OF ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 3 OF 61 CLC AND SON'S PVT LTD AND THE POSITION OF THE LAW IS NOT SETTLED AND THERE ARE CONFLICTING OPINIONS. (II) THE LEARNED AO/DRP ERRED NOT APPRECIATING THE FACT THAT THE DEPRECIATION ON GOODWILL REPRESENTING BRANDS/TRADEMARKS/ LICENSES IS ELIGIBLE U/S 32. (III) WITHOUT PREJUDICE TO THE ABOVE CONTENTION, IT IS SUBMITTED THAT AO HAS ERRED IN DISALLOWING THE DEPRECIATION ON ENTIRE INTANGIBLE ASSETS IN WHICH GOODWILL REPRESENTS PART OF INTANGIBLE ASSET. DRP ALSO HAS ERRONEOUSLY CONFIRMED THIS DISALLOWANCE. 8. (I) THE LEARNED AO/DRP ERRED IN NOT APPRECIATING THE FACT THAT PERLECAN PHARMA PVT LTD (PERLECAN) HAS BEEN MERGED WITH THE APPELLANT WEF 1/1/2006 AND THE R&D EXPENDITURE REIMBURSED BY PERLECAN RELATE TO THE EXPENDITURE INCURRED BY THE APPELLANT AT ITS APPROVED R&D UNIT ARE ELIGIBLE FOR WEIGHTED DEDUCTION U/S 35(2AB). (II) THE LEARNED AO/DRP ERRED IN STATING THAT PERLECAN HAS NOT OBTAINED 3CK ,3CL AND 3CM AND HENCE NOT ELIGIBLE FOR WEIGHTED DEDUCTION U/S 35(2AB). 9. THE LEARNED AO/DRP ERRED IN NOT ALLOWING THE FOLLOWING EXPENDITURE AS PER SEC.35 (1)(I) [DEALING WITH REVENUE EXPENDITURE] AND SEC.35 (1) (IV) [DEALING WITH CAPITAL EXPENDITURE] . (A) REVENUE EXPENDITURE: RS.77,63,988 (B) CAPITAL EXPENDITURE: RS.95,61,593 10. THE LEARNED AO/DRP HAVE ERRED IN TREATING THE REPAIR AND MAINTENANCE EXPENDITURE ON THE GROUND THAT EXPENDITURE IS CAPITAL IN NATURE. 11. THE LEARNED AO/DRP HAVE ERRED IN DISALLOWING THE EXPENDITURE IN CONNECTION WITH DOCTORS , BUSINESS PROMOTION, GIFTS WITHOUT APPRECIATING THE FACT THE EXPENDITURE IS INCURRED IN CONNECTION WITH THE BUSINESS. ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 4 OF 61 12. THE AO HAS ERRED IN NOT ALLOWING PAYMENTS TOWARDS TECHNICAL SERVICES IN THE FORM OF NOT HAVING DEDUCTED TAX AT SOURCE ,IN TERMS OF SE.195 WITHOUT APPRECIATING FACTS OF EACH CASE IN THE LIGH T OF THE BENEFICIAL TAX PROVISION AND DT AAS. 13. THE LEARNED DRP HAS ERRED IN EXCEEDING ITS SCOPE IN ENHANCING THE ENHANCING VARIATION NOT PROPOSED IN THE DRAFT ASSESSMENT ORDER BY DIRECTING AO TO ALLOCATE CORPORATE OVERHEAD WHILE COMPUTING DEDUCTION U/S 10B FOR PAIDIBHIMAVARAM UNIT. 14. THE LEARNED DRP/A.O ERRED IN NOT APPRECIATING ARTICLE 25 OF INDO-CYPRUS DTAA AND DISALLOWING THE WITHHOLDING TAX CREDIT TAKING INTO CONSIDERATION OF ONLY ARTICLE 11(3) OF SAID TREATY. 15. THE LEARNED DRP HAS EXCEEDED ITS SCOPE IN SUGGESTING THE TAX DEPARTMENT TO PROCEED U/S 263 OR OTHERWISE IN RESPECT OF THE ISSUES IT DOES NOT HAVE JURISDICTION IN TERMS OF SEC.I44C(8). 16. CHARGE OF INTEREST U/S 234 B/ 234C/234D BY VIRTUE OF THE ADDITIONS IS NOT PROPER AND BE MODIFIED OR DELETED IN CONSEQUENT TO THE RELIEF SOUGHT IN THE APPEAL. 3. AS REGARDS THE GROUND OF APPEAL NO.1, BRIEF FACT S ARE THAT THE ASSESSEE COMPANY, WHICH IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND TRADING OF PHARMACEUTICAL PRODUCTS, FILED ITS RETURN OF INCOME ALONG WITH FORM NO.3CEB FOR THE A. Y 2007-08 ON 31.10.2007 DECLARING INCOME OF RS.291,78,19,223 AND THE SAME WAS PROCESSED U/S 143(1) OF THE ACT ON 26.08.2 008 DETERMINING THE TAX DEMAND OF RS.6,07,12,840. THERE AFTER, THE ASSESSEE FILED A REVISED RETURN ON 28.08.2008 DECLA RING INCOME OF RS.285,91,14,861 ON ACCOUNT OF THE FACT THAT THE AD R EXPENSES ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 5 OF 61 WERE AMORTIZED AND A CLAIM OF 20% OF THE SAME I.E. RS.4,13,85,805 WAS MADE IN THE ORIGINAL RETURN, WHE REAS THE ENTIRE EXPENDITURE OF RS.10,42,90,167 WAS CLAIMED A S ALLOWABLE IN THE REVISED RETURN FOLLOWING THE DECISION OF THE IN COME TAX APPELLATE TRIBUNAL IN THE CASE OF ITW SIGNODE INDIA LTD REPORTED IN (2007) 110 TTJ 170. FURTHER, A CLAIM OF TAX CRED IT OF RS.24,58,58,086 WAS ALSO CLAIMED IN CASE OF INCOME FROM USA OF RS.163,90,53,906 FOLLOWING ARTICLE 2 OF INDO-US TRE ATY WHEREIN ROYALTY INCOME OF $21,440,666 IN 2006 WAS SUBJECT T O WHT @ 15%. THE REVISED RETURN WAS PROCESSED ON 29.10.2009 AND A REFUND OF RS.26,62,44,270 (INCLUDING INTEREST OF RS .2,63,84,567) WAS ISSUED ON 30.10.2009. 4. FURTHER, BY VIRTUE OF THE HON'BLE HIGH COURT ORDE R, WHICH WAS RECEIVED ONLY IN 2009, M/S. PERLECAN PHAR MA PVT LTD ALSO GOT MERGED INTO THE ASSESSEE W.E.F. 1.1.2006 A ND THE SAID COMPANY HAD FILED ITS RETURN OF INCOME ON 29.10.200 7 WITH E-FILING ACKNOWLEDGMENT NO.5091550291007 DECLARING LOSS OF RS.(-) RS.46,04,54,630 AFTER DECLARING INTEREST INC OME OF RS.7,37,49,337 AS ITS BUSINESS INCOME. OTHER EXPENS ES IN CASE OF THE COMPANY WERE RS.53,38,18,411 (INCLUDING EXPENDI TURE U/S 35(1)(I) OF RS.52,90,32,374) AND BROUGHT FORWARD LO SS WAS RS.23,43,30,387. THIS RETURN WAS PROCESSED U/S 143( 1) ON 17.03.2009 AND REFUND OF RS.1,85,35,287 (INCLUDING INTEREST OF RS.19,85,928) WAS ISSUED VIDE REFUND ORDER DATED 10 .07.2009. THE ACCOUNTS OF M/S PERLECAN PHARMA PVT LTD WERE AL SO CONSIDERED BY THE AO IN THE ASSESSMENT PROCEEDINGS OF THE MERGED COMPANY I.E. U/S 143(3) R.W.S.144C(1) OF TH E ACT. ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 6 OF 61 5. THE ASSESSEES RETURN WAS SELECTED FOR SCRUTINY UNDER CASS TO EXAMINE THE CLAIM OF DEDUCTION UNDER CHAPTE R VIA; (II) U/S 10A/10B/10BA OF THE ACT; AND (III) CLAIM OF HIG HER RATE OF DEPRECIATION BY A COMPANY. FURTHER, AS THERE WAS IN TERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS AES IN EXCESS OF RS.15.00 CRORES, THE DETERMINATION OF THE ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTION WAS REFERRED TO THE TPO U /S 92CA OF THE ACT. 6. DURING THE TRANSFER PRICING PROCEEDINGS, THE TPO OBSERVED THAT THERE ARE 28 TRANSACTIONS ENTERED INT O BY THE ASSESSEE WITH ITS AES CLASSIFIED UNDER 7 CATEGORIES AND OUT OF THESE 28 TRANSACTIONS, INTEREST RECEIVED ON LOANS G IVEN TO THE SUBSIDIARIES CONSTITUTES 5 TRANSACTIONS WHILE THE I NVESTMENT MADE IN SUBSIDIARIES REPRESENT 4 TRANSACTIONS. 7. THE TPO OBSERVED THAT THE ASSESSEE ADOPTED TNMM AS THE MOST APPROPRIATE METHOD FOR ANALYZING THE TRANS ACTIONS PERTAINING TO OPERATIONS AFTER APPLYING APPROPRIATE FILTERS. THE TPO WAS SATISFIED THAT THE OPERATING MARGIN OF THE ASSESSEE PERTAINING TO OPERATIONS IS WELL WITHIN THE ALP OF COMPARABLE COMPANIES. HOWEVER, AS REGARDS THE INTEREST RECEIVE D ON LOANS ADVANCED BY THE ASSESSEE TO ITS SUBSIDIARIES, THE T PO OBSERVED THAT THE ASSESSEE HAS APPLIED THE CUP METHOD AS THE MOST APPROPRIATE METHOD AND THE APPROVALS RECEIVED FROM THE RBI FOR INVESTMENT IN SUBSIDIARIES ARE TAKEN AS BENCH MARK. HE OBSERVED THAT AS PER 3CEB REPORT, THERE ARE 5 INTERNATIONAL TRANSACTIONS PERTAINING TO RECEIPT OF INTEREST AMOUNTING TO RS.2 1,28,24,581 AND THE ASSESSEE WAS ASKED TO FURNISH THE INFORMATI ON SUCH AS (I) ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 7 OF 61 THE LOAN AGREEMENTS ENTERED INTO BY THE ASSESSEE WI TH ITS AES DURING THE FINANCIAL YEAR 2006-07 AND (II) ALSO LED GER EXTRACTS OF THE ACCOUNTS OF THE AES IN THE ASSESSEES BOOKS FO R THE FINANCIAL YEAR ENDING ON 31.03.2007. 8. THE ASSESSEE, VIDE ITS LETTER DATED 19.03.2010, FURNISHED THE REQUISITE DETAILS GIVING THE OPENING AND CLOSING BALANCES OF THE LOAN A/C IN RESPECT OF THE TRANSACT IONS WITH ITS AES. THE TPO OBSERVED THAT THE ASSESSEE HAS CHARGED RATES OF INTEREST DIFFERENTLY ON DIFFERENT LOAN ACCOUNTS WIT H ITS AES AND THAT THE RATES OF INTEREST CHARGED ARE LOWER AS COM PARED TO THE ALP. HE ALSO OBSERVED THAT THE LOANS GIVEN BY THE A SSESSEE TO ITS AES ARE NOTHING BUT WORKING CAPITAL FACILITY EXTEND ED AS IS EVIDENT FROM 3CEB REPORT. HE ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE INTEREST RATE @ 14% SHOULD NOT BE CHARGED AT ALP. VI DE ITS REPLY DATED 19.03.2010, THE ASSESSEE ALSO FURNISHED A DET AILED WORKING OF INTEREST CHARGED ON THE LOANS EXTENDED TO ITS AE S AS PER THE BOOKS OF ACCOUNT FOR THE FINANCIAL YEAR 2006-07, DE TAILS OF WHICH ARE AS FOLLOWS: ASSOCIATED ENTERPRISE INTEREST CHARGED AS PER THE BOOKS (TRANSFER PRICE) (IN RUPEES) DR.REDDYS LABORATORIES INC 1,04,66,613 KUNSHAN ROTAM REDDY PHARMACEUTICAL CO. LTD 2,35,311 DR.REDDYS LABORATORIES (PROPRIETARY) LTD 23,39,623 LACOK HOLDING LTD 8,13,92,221 INDUSTRIAL QUIMICAS FALCON DE MAXICO S.A. DE C.V 11,83,90,678 TOTAL 21,28,24,447 ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 8 OF 61 9. THE TPO OBSERVED THAT THE ASSESSEE DID NOT MAKE ANY SPECIFIC COMMENTS/OBJECTIONS TO THE PROPOSAL OF THE TPO TO CHARGE INTEREST @ 14%. HE OBSERVED THAT THE ASSESSEE IN ITS T.P. DOCUMENTATION HAS ANALYZED THE TRANSACTION UNDER TH E CUP METHOD AND THE INTEREST THAT IS CHARGED BETWEEN UNR ELATED PARTIES UNDER SIMILAR CIRCUMSTANCES WOULD BE THE ARMS LENG TH INTEREST. THE TPO WAS NOT CONVINCED WITH THE CONTENTION OF TH E ASSESSEE THAT THE APPROVALS OF THE RBI FOR SUCH LOANS OR ADV ANCES AS WELL AS FOR THE INTEREST CHARGED IS A BENCHMARK FOR DETE RMINATION OF THE ALP. HE FOLLOWED THE DECISION OF THE TRIBUNAL A T DELHI IN THE CASE OF PEROT SYSTEMS TSI (INDIA) LTD VS. DCIT REPO RTED IN (2010- TIOL-ITAT -DEL) TO HOLD THAT THE RBIS APPROVAL DOE S NOT PUT THE SEAL OF APPROVAL ON THE TRUE CHARACTER OF THE TRANS ACTION FROM THE PERSPECTIVE OF T.P. REGULATIONS AS THE SUBSTANCE OF THE TRANSACTION HAS TO BE JUDGED AS TO WHETHER THE TRANSACTION IS A T ARMS LENGTH OR NOT. THEREAFTER, HE PROCEEDED TO CONSIDER THE AR M LENGTH INTEREST RATE TO BE THE INTEREST RATE THAT WOULD HA VE BEEN CHARGED IN SIMILAR CIRCUMSTANCES OR THE INTEREST RATE THAT THE ASSESSEE COULD HAVE GOT BY LENDING SUCH MONEY TO PRIVATE PER SONS IN INDIA OR INTEREST RATE THE COMPANY COULD HAVE GOT FROM IN DEPENDENT THIRD PARTIES IN INDIA BY LENDING SUCH SURPLUS MONE Y UNDER COMPARABLE CIRCUMSTANCES I.E. WITHOUT ANY SECURITY AND MARGIN MONEY. HE OBSERVED THAT FOR THE FINANCIAL YEAR 2006 -07, THE AVERAGE YIELD ON 5 YEARS AAA RATED CORPORATE BONDS WAS 8.9% AND THE BBB RATED BONDS WAS NEARLY 11.40% PER ANNUM. OBS ERVING THAT THE ASSESSEES LOAN/ADVANCES ARE UNRATED AND A FTER CONSIDERING THE CORPORATE BOND MARKET AND THE FINAN CIAL HEALTH OF THE SUBSIDIARY, HE CAME TO THE CONCLUSION THAT THE INTEREST @ 14% PER ANNUM WOULD BE REASONABLE AND REPRESENTATIVE OF THE MARKET. ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 9 OF 61 HE, THEREFORE, DETERMINED THE ARMS LENGTH INTEREST BY ADOPTING THE RATE OF 14% PER ANNUM ON THE NET OUTSTANDING BALANCE AT THE END OF EACH MONTH FOR THE PERIOD FROM 1.4.2006 TO 31.3. 2007 AND COMPUTED THE TOTAL ADJUSTMENT AT RS.28,10,53,472. 10. IN THE DRAFT ASSESSMENT ORDER, THE AO PROPOSED THE SAID ADJUSTMENT, AGAINST WHICH THE ASSESSEE FILED I TS OBJECTIONS BEFORE THE DRP AS OBJECTION NO.1. THE DRP AFTER CON SIDERING THE ASSESSEES ARGUMENTS OBSERVED THAT AN IDENTICAL ISS UE HAD BEEN EXAMINED BY THE DRP IN THE ASSESSEES OWN CASE FOR THE A.Y 2006- 07 AND THAT VIDE ITS ORDER DATED 30.09.2010, DRP HA D UPHELD THE ORDER OF THE TPO. THEREFORE, THE DRP CONFIRMED THE ORDER OF THE TPO AND IN ACCORDANCE WITH THE DIRECTIONS OF THE DR P, THE FINAL ASSESSMENT ORDER HAS BEEN PASSED AGAINST WHICH THE ASSESSEE IS IN FURTHER APPEAL BEFORE US. 11. THE LEARNED COUNSEL FOR THE ASSESSEE, WHILE REI TERATING THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE AUT HORITIES BELOW, SUBMITTED THAT THE ASSESSEE AS WELL AS THE T PO HAVE ADOPTED THE CUP AS THE MOST APPROPRIATE METHOD TO D ETERMINE THE ALP OF THE INTEREST ON THE LOANS AND ADVANCES B Y THE ASSESSEE TO ITS AE IN DIFFERENT JURISDICTIONS AT VARIED INTE REST RATES. HE AGREED THAT IDENTICAL ISSUE HAD ARISEN IN THE A.Y 20 06-07 AND THIS TRIBUNAL IN M.A. NO.217/HYD/2013 IN ITA NO.1605/HYD /2010 DATED 29.11.2013 HAS HELD THAT THE LIBOR LINKED INT EREST RATE IS TO BE ADOPTED FOR BENCHMARKING INTEREST ON ADVANCES TO FOREIGN AES. HE ALSO PLACED RELIANCE UPON THE FOLLOWING DEC ISIONS IN SUPPORT OF HIS CONTENTION THAT LIBOR LINKED INTERES T RATE IS TO BE ADOPTED: ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 10 OF 61 A) SIVA INDUSTRIES LTD. VS. ASSTT. COMMISSIONER OF INC OME TAX, REPORTED IN (2012)145 TTJ 0497 (CHENNAI) B) NORTHGATE TECHNOLOGIES LTD VS. DCIT REPORTED IN (20 14) 148 ITD 433 (HYDERABAD) 12. FURTHER, HE ALSO SUBMITTED THAT FOR THE A.Y 2008- 09 IN ASSESSEES OWN CASE, THE DRP HAS UPHELD THE RATE OF INTEREST AT LIBOR + 2%. 13. THE LEARNED DR, ON THE OTHER HAND, SUPPORTED TH E ORDERS OF THE AUTHORITIES BELOW. FURTHER, HE SUBMIT TED THAT IF THE TRIBUNAL WERE TO HOLD THAT THE LIBOR LINKED INTERES T RATE IS TO BE ADOPTED FOR DETERMINING THE ALP, THEN THE RATE OF I NTEREST APPROVED BY THE TRIBUNAL FOR THE A.Y 2006-07 SHOULD BE ADOPTED I.E. AT 7%. 14. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THERE IS NO DISPUT E AS REGARDS THE MOST APPROPRIATE METHOD BEING THE CUP METHOD FOR DE TERMINING THE ALP OF THE INTEREST ON LOANS ADVANCED BY THE AS SESSEE TO ITS AES. THE ASSESSEE HAS CHARGED DIFFERENT RATES OF IN TEREST FOR DIFFERENT TRANSACTIONS AS THE AES ARE LOCATED IN DI FFERENT JURISDICTIONS. THE TPO/AO HAS ARRIVED AT 14% PER ANN UM AS THE ALP INTEREST BY ADOPTING THE RATE OF INTEREST THAT COULD BE CHARGED ON THE BASIS OF UNRELATED CORPORATE BONDS IN INDIA. THE ASSESSEE IS RELYING ON THE RBI APPROVALS AS A BENCH MARK, BU T WE DO NOT AGREE WITH THE ASSESSEES CONTENTION THEREON. THE R BI APPROVALS ARE ON A DIFFERENT CRITERIA AND ARE FOR DIFFERENT P URPOSES AS HELD BY THE COORDINATE BENCH AT DELHI IN THE CASE CITED SUP RA. THOUGH, IT MAY BE ONE OF THE ASPECTS TO BE CONSIDERED FOR DETE RMINATION OF ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 11 OF 61 THE ALP, IT CANNOT BY ITSELF BE CONSIDERED AS A BEN CH MARK OR ALP. FURTHER, WE HAVE ALSO GONE THROUGH THE DECISIONS CIT ED (SUPRA) AND FIND THAT IN THOSE DECISIONS, THE TRIBUNAL HAS HELD THAT IN CASE OF LOANS/ADVANCES IN FOREIGN CURRENCY AND WHER E THE TRANSACTION IS AN INTERNATIONAL TRANSACTION, THEN, THE TRANSACTIONS WOULD HAVE TO BE CONSIDERED ON THE COMMERCIAL PRINC IPLES IN THE INTERNATIONAL MARKET AND THE DOMESTIC PRIME EARNING RATE WOULD HAVE NO APPLICABILITY AND THE INTERNATIONAL INTERES T RATE FIXED BEING LIBOR LINKED INTEREST RATE COMES INTO PLAY. I N THE CASE OF SHIVA INDUSTRIES LTD (SUPRA), THE COORDINATE BENCH OF THE TRIBUNAL AT CHENNAI HAS OBSERVED THAT THE AVERAGE O F THE LIBOR RATE W.E.F. 1.4.05 TO 31.3.06 IS 4.42% AND THAT THE ASSESSEE THEREIN HAD CHARGED INTEREST @ 6% WHICH WAS HIGHER T HAN THE LIBOR RATE AND HENCE NO ADJUSTMENT IS CALLED FOR. I N THE ASSESSEES OWN CASE FOR THE A.Y 2006-07 IN M.A. NO.217/HYD/2013 IN ITA NO.1605/HYD/2010 (SUPRA), TH E TRIBUNAL HAS TAKEN NOTE OF THE LIBOR AT 4.42% RATE A ND HAS OBSERVED THAT THE ASSESSEE HAS ACCEPTED 7% IN EARLIE R YEARS WHICH IS EQUIVALENT TO LIBOR+2%. THEREFORE, THE TRIBUNAL H AS DIRECTED THE TPO TO ADOPT 7%. FOR THE YEAR BEFORE US ALSO, TH E FACTS AND CIRCUMSTANCES BEING SIMILAR, WE DIRECT THAT THE TPO /AO TO ADOPT LIBOR +2% OR 7% WHICHEVER IS HIGHER AS THE ALP INTER EST. THE ASSESSEES GROUND OF APPEAL NO.1 IS THEREFORE, TREA TED AS ALLOWED FOR STATISTICAL PURPOSES. 15. AS REGARDS GROUND NO.2, BRIEF FACTS ARE THAT IN THE COMPUTATION OF INCOME, THE ASSESSEE MADE A CLAIM OF RS.8,17,10,374 AS TRANSITIONAL LIABILITY FOR LEAVE ENCASHMENT. THE AO OBSERVED THAT THIS WAS NOT DEBITED TO THE P&L A/ C BUT IS ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 12 OF 61 CHARGED TO THE P&L APPROPRIATION A/C AND CLAIMED AS DEDUCTION IN THE COMPUTATION. DURING THE ASSESSMENT PROCEEDINGS U/S 143(3) R.W.S. 144C(1) OF THE ACT, THE ASSESSEE SUBMITTED T HAT THE AMOUNT IS WORKED OUT AS PER THE REVISED AS-15 AND IS ALLOW ABLE AS DEDUCTION U/S 43B(F) OF THE ACT. THE AO HOWEVER, OB SERVED THAT IT IS NOT THE CASE OF THE ASSESSEE THAT THESE AMOUNTS WOULD EVER BE CHARGED TO P&L A/C OR THAT IT IS CLAIMED AS A DEDUC TION ON ACTUAL PAYMENT BASIS U/S 43B OF THE ACT. HE OBSERVED THAT UNDER CHAPTER IV B DEALING WITH COMPUTATION OF BUSINESS I NCOME, AN ITEM MUST BE CLAIMED AS EXPENDITURE BY DEBITING IT TO THE P&L A/C BEFORE DEDUCTION IS CLAIMED U/S 43B OF THE ACT. SIN CE THE SAID AMOUNT WAS NOT CHARGED TO THE P&L A/C, HE HELD THAT IT IS NOT ALLOWABLE AS A DEDUCTION U/S 43B OF THE ACT. HE OBS ERVED THAT SECTION 43B COMES INTO OPERATION ONLY WHEN THE ITEM IS DEBITED TO THE P&L AND THAT IT IS A SAFEGUARD TO PROTECT THE I NTEREST OF THE EMPLOYEES TO ENSURE THAT ACTUAL PAYMENT TO THE FUND IS MADE. FURTHER, HE ALSO OBSERVED THAT AS PER CLAUSE (F) OF SECTION 43B, AMOUNT TOWARDS LEAVE ENCASHMENT IS ALLOWABLE ONLY O N ACTUAL PAYMENT BASIS TO THE EMPLOYEES. HE, THEREFORE, REJE CTED THE ASSESSEES CONTENTION AND PROPOSED THE ADJUSTMENT I N THE DRAFT ASSESSMENT ORDER. AGGRIEVED, THE ASSESSEE PREFERRED OBJECTION BEFORE THE DRP. THE DRP REJECTED THE OBJECTION OF T HE ASSESSEE AND THE AO ACCORDINGLY BROUGHT IT TO TAX IN THE FIN AL ASSESSMENT ORDER AND THE ASSESSEE IS IN APPEAL BEFORE US. 16. AT THE TIME OF HEARING, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THOUGH THE AMOUNT CHARGED T O P&L APPROPRIATION A/C UNDER TRANSITIONAL PROVISION FOR LEAVE ENCASHMENT AS PER AS-15 IS RS.8,17,10,374, THE ASSE SSEE HAS ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 13 OF 61 ACTUALLY PAID A SUM OF RS.5,42,92,558 OUT OF THIS A MOUNT DURING THE RELEVANT FINANCIAL YEAR AND THEREFORE, THE AMOU NT DISALLOWABLE IS ONLY RS.2,74,08,816. HE SUBMITTED THAT THE ASSES SEE IS FOLLOWING THE MANDATORY ACCOUNTING STANDARD AS-15 A ND AS PER THE SAME, THE PROVISION FOR LEAVE ENCASHMENT HAS TO NECESSARILY PASS THROUGH THE P&L APPROPRIATION A/C. HE SUBMITTE D THAT BOTH THE AO AS WELL AS THE DRP HAVE INCORRECTLY HELD THA T THE PAYMENT IS MADE TO THE FUND AND NOT TO THE EMPLOYEES. HE HA S ALSO DRAWN OUR ATTENTION TO THE DETAILS OF THE PAYMENT MADE TO EMPLOYEES, THE LIST OF WHICH WAS FURNISHED BEFORE THE DRP AND WHIC H IS PLACED AT PAGES 249 TO 352 OF THE PAPER BOOK FILED BEFORE US. HE ALSO PLACED RELIANCE UPON THE FOLLOWING DECISIONS IN SUPPORT OF HIS CONTENTION THAT THE ACTUAL PAYMENT OF LEAVE ENCASHMENT IS AN A LLOWABLE EXPENDITURE U/S 43B(F) OF THE ACT: I) ELMCO ELECON INDIA LTD VS. ADIT REPORTED IN (201 3) 33 TAXMANN.COM 476 (AHD.TRIB.) II) ASSTT. COMMISSIONER OF INCOME TAX VS. BHARTI TE LETECH LTD REPORTED IN (2014) 46 TAXMANN.COM 26 (DELHI.TRI B). 17. THE LEARNED DR HOWEVER, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW AND AS REGARDS THE ASSESSEES CLA IM OF ACTUAL PAYMENT TO THE EMPLOYEES, FOR FACTUAL VERIFICATION OF THE ASSESSEES CLAIM, HE SUBMITTED THAT THE ISSUE MAY BE REMITTED TO THE FILE OF THE AO. 18. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THE COORDINATE BENCH OF THE TRIBUNAL AT AHMEDABAD, IN THE CASE OF EIMCO ELECON INDIA LTD VS . ADIT (CITED SUPRA) HAS CONSIDERED THE ALLOWABILITY OF A PROVISI ON MADE FOR ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 14 OF 61 LEAVE ENCASHMENT U/S 43B(F) OF THE ACT AND AT PARAS 4 AND 5 OF ITS ORDER HELD AS UNDER: 4. IT WAS SUBMITTED BY THE LEARNED AUTHORISED REPRESE NTATIVE THAT THE DISALLOWANCE WAS MADE BY THE ASSESSING OFFICER BY I NVOKING THE PROVISIONS OF CLAUSE (F) OF SECTION 43B. HE SUBMITT ED THAT AS PER THE DECISION OF THE HON'BLE APEX COURT RENDERED IN THE CASE OF BHARAT EARTH MOVERS V. CIT [2000] 245 ITR 428/112 TAXMAN 61 AND ALSO AS PER THE JUDGMENT OF THE HON'BLE CALCUTTA HIGH COURT RENDERE D IN THE CASE OF EXIDE INDUSTRIES LTD. V. UNION OF INDIA [2007] 2 92 ITR 470/164 TAXMAN 1 , DISALLOWANCE OF LEAVE ENCASHMENT IS NOT JUSTIFIED . HE SUBMITTED THAT IN THE FIRST CASE, IT WAS HELD BY TH E HON'BLE APEX COURT THAT LEAVE ENCASHMENT IS NOT A CONTINGENT LIABILITY IF T HE PROVISION IS MADE ON SOME SCIENTIFIC BASIS. HE ALSO SUBMITTED THAT IN TH E SECOND CASE, THE HON'BLE CALCUTTA HIGH COURT HAS DULY CONSIDERED THE PROVISIONS OF CLAUSE (F) OF SECTION 43B AND IT WAS HELD THAT THE AMENDMENT AS PER WHICH THIS CLAUSE (F) WAS INSERTED BY THE FINANCE ACT, 20 01 WITH EFFECT FROM APRIL 1, 2002 IS HELD TO BE AS ARBITRARY BY THE HON 'BLE CALCUTTA HIGH COURT AND, THEREFORE, THE SAME WAS STRUCK DOWN BY T HE HON'BLE CALCUTTA HIGH COURT BEING ARBITRARY, UNCONSCIONABLE AND DE H ORS THE HON'BLE SUPREME COURT DECISION. HE SUBMITTED THAT IN VIEW O F THIS JUDGMENT OF THE HON'BLE CALCUTTA HIGH COURT, DISALLOWANCE MADE BY T HE ASSESSING OFFICER IS NOT JUSTIFIED. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL ON RECORD AND HAVE GONE THROUGH THE ORDERS OF THE AUTH ORITIES BELOW AND THE JUDGMENT OF THE HON'BLE CALCUTTA HIGH COURT RENDERE D IN THE CASE OF EXIDE INDUSTRIES LTD. (SUPRA). WE FIND THAT THE ASSESSING OFFICER HAS MADE DISALLOWANCE BY INVOKING THE PROVISIONS OF CLA USE (F) OF SECTION 43B AND THE SAME WAS CONFIRMED BY THE LEARNED COMMISSIO NER OF INCOME-TAX (APPEALS) ALSO ON THE BASIS OF SECTION 43B. AS PER THE JUDGMENT OF THE HON'BLE CALCUTTA HIGH COURT RENDERED IN THE CASE OF EXIDE INDUSTRIES LTD. (SUPRA), IT WAS HELD THAT CLAUSE (F) OF SECTIO N 43B IS ARBITRARY, UNCONSCIONABLE AND DE HORS OF THE HON'BLE SUPREME COURT DECISION AND, THEREFORE, NOT VALID. IN VIEW OF THIS, CLAUSE (F) O F SECTION 43B IS NOT VALID AND, THEREFORE, DISALLOWANCE MADE BY THE ASSESSING OFFICER ON THE BASIS OF CLAUSE (F) OF SECTION 43B CANNOT BE SUSTAINED. W E, THEREFORE, DELETE THE SAME. 19. FURTHER, IN THE CASE OF BHARAT TELETECH (CITED S UPRA), THE COORDINATE BENCH OF THE TRIBUNAL AT DELHI WAS C ONSIDERING WHETHER LEAVE ENCASHMENT IS ALLOWABLE ON ACTUAL PAY MENT AND AT PARA 7.1 HAS HELD AS UNDER: ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 15 OF 61 7.1 APROPOS SECOND ISSUE I.E. LEAVE ENCASHMENT EXPENSE S, THE FACTS HAVE BEEN NARRATED ABOVE. WE FIND MERIT IN THE ARGU MENT OF LD. COUNSEL FOR THE ASSESSEE THAT THE LEAVE ENCASHMENT THOUGH P ERTAINING TO EARLIER YEAR IS ALLOWABLE ON ACTUAL PAYMENT BASIS IN THE YE AR OF PAYMENT I.E. ASSESSMENT YEAR IN QUESTION. IT HAS NOT BEEN DISPUT ED THAT ASSESSEE HAS NOT CLAIMED THIS EXPENDITURE IN EARLIER YEAR. THIS BEING SO, WE HOLD THAT ASSESSEE IS ELIGIBLE FOR DEDUCTION OF LEAVE ENCASHM ENT PAYMENT U/S 43B. THIS GROUND OF THE ASSESSEE IS ALLOWED. 20. WE FIND THAT THE ACTUAL PAYMENT MADE BY THE ASS ESSEE TOWARDS THE LEAVE ENCASHMENT TO THE EMPLOYEES IS AN ALLOWABLE EXPENDITURE U/S 43B(F) OF THE ACT. ADMITTEDLY, THE ASSESSEE HAS NOT PAID A SUM OF RS.2,74,08,816 AND HAS ONLY DEBIT ED IT TO THE P&L APPROPRIATION A/C. AS REGARDS THE SUM OF RS.5,4 2,92,558 WHICH IS CLAIMED TO HAVE BEEN PAID TO THE EMPLOYEES , WE DEEM IT FIT AND PROPER TO REMAND THE ISSUE TO THE FILE OF T HE AO FOR VERIFICATION OF THE ASSESSEES CLAIM AND IF IT IS F OUND TO BE CORRECT, THEN THE AO SHALL ALLOW THE CLAIM OF THE ASSESSEE. ACCORDINGLY GROUND NO.2 IS TREATED AS ALLOWED FOR STATISTICAL P URPOSES. 21. AS REGARDS GROUND NO.3, BRIEF FACTS ARE THAT IN THE SCHEDULE-15 OF ACCOUNTS, THE ASSESSEE HAS CLAIMED A N AMOUNT OF RS.18,16,11,000 AS DEFERRED STOCK COMPENSATION COST WHICH IS A NOTIONAL EXPENDITURE ON ACCOUNT OF ALLOTMENT OF SWE AT EQUITY SHARES (ESOPS). OBSERVING THAT SUCH CAPITAL AND NOT IONAL EXPENDITURE IS NOT ALLOWABLE IN VIEW OF THE DECISIO N OF THE INCOME TAX APPELLATE TRIBUNAL AT MUMBAI IN THE CASE OF VI P INDUSTRIES LTD (2010-TIOL-654-ITAT MUM) AND ALSO THE TRIBUNAL AT DELHI IN THE CASE OF RANBAXY LABORATORIES LTD (124 TTJ (DEL. ) 771), THE AO DISALLOWED THE SAME AND THE ASSESSEES OBJECTIONS W ERE REJECTED BY THE DRP ALSO AND THE ASSESSEE IS IN FURTHER APP EAL BEFORE US. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THIS ISSUE IS NOW ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 16 OF 61 COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION O F THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF BIOCON LTD REP ORTED IN 35 TAXMANN.COM 335. 22. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THIS ISSUE IS COVE RED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE SPECIAL BENCH O F THE TRIBUNAL IN THE CASE OF BIOCON LTD VS. DCIT (CITED SUPRA) WH EREIN IT WAS HELD THAT THE ESOPS DISCOUNT IS A DEDUCTIBLE DISCOU NT AT THE TIME OF VESTING OF THE OPTION. THE COORDINATE BENCH OF T HIS TRIBUNAL AT MUMBAI IN THE ASSESSEES OWN CASE FOR THE A.Y 2006-0 7 HAS CONSIDERED THIS ISSUE AT PARA 9.3 OF ITS ORDER AND HAS HELD AS UNDER: AFTER THE HEARING THE CASE, THE SPECIAL BENCH OF THE INCOME TAX APPELLATE TRIBUNAL BANGALORE IN THE CASE OF BOICON LTD VS DCIT HELD THAT ESOP DISCOUNT (DIFFERENCE BETWEEN MARKET PRICE AND ISSUE PRICE) IS A DEDUCTIBLE EXPENDITURE AT THE TIME OF VESTING OF THE OPTION. AN ADJUSTMENT HAS TO BE MADE IF THE MARKET PRICE IS DIFFERENT AT THE TIME OF EXERCISE OF THE OPTION. IN THAT CASE ALSO ASSESSEE FRAMED AN EMPLOYEE STOCK OPTION PLAN (ESOP) PURSUANT TO WHICH IT GRANTED OPTIONS TO ITS EMPLOYEES TO SUBSCRIBE FOR SHARES AT THE FACE VALUE OF RS. 10. AS THE MARKET PRICE OF EACH SHARE WAS RS. 919, THE ASSESSEE CLAIMED THAT IT HAD GIVEN A DISCOUNT OF RS. 909 WHICH WAS ALLOWABLE AS A DEDUCTION AS 'EMPLOYEE COMPENSATION. THOUGH THE OPTIONS VESTED EQUALLY OVER FOUR YEARS, THE ASSESSEE CLAIMED A LARGER AMOUNT IN THE FIRST YEAR THAN WAS AVAILABLE UNDER THE SEBI GUIDELINES. THE AO & CIT(A) REJECTED THE CLAIM ON THE GROUND THAT THERE WAS NO 'EXPENDITURE'. ON APPEAL TO THE TRIBUNAL, THE ISSUE WAS REFERRED TO THE SPECIAL BENCH. THE ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 17 OF 61 DECISION IN THE CASE OF RANBAXY LABORATORIES 124 IT) 771 (DELHI) WAS REVERSED AND 5.5.1. LTD. V. DCIT 85 IT) 1049 (CHENNAI) APPROVED, PVP VENTURES 211 TAXMAN 554 REFERRED. THE DECISION OF SPRAY ENGINEERING DEVICES LTD 53 SOT 70 (CHD) WAS ALSO APPROVED. THE ABOVE DECISIONS REFERRED BY SPECIAL BENCH WAS RELIED UPON BY ASSESSEE, THEREFORE THERE IS NO NEED TO REFER THEM AGAIN. AO IS DIRECTED TO WORK OUT THE DEDUCTION KEEPING MIND THE PRINCIPLE LAID DOWN BY THE SPECIAL BENCH IN THE ABOVE REFERRED CASE, AFTER GIVING AN OPPORTUNITY TO ASSESSEE. (PARA 9.3) 23. RESPECTFULLY FOLLOWING THE SAME, THE ISSUE IS R EMANDED TO THE FILE OF THE AO WITH A DIRECTION TO WORK OUT THE DEDUCTION KEEPING IN MIND THE PRINCIPLES LAID DOWN BY THE SPE CIAL BENCH IN THE ABOVE CASE AFTER GIVING AN OPPORTUNITY OF HEARI NG TO THE ASSESSEE. GROUND NO.3 IS THUS TREATED AS ALLOWED F OR STATISTICAL PURPOSES. 24. AS REGARDS GROUND NO.4, BRIEF FACTS ARE THAT TH E ASSESSEE INCURRED A SUM OF RS.4,22,61,559 TOWARDS T HE TRIAL RUN EXPENSES PERTAINING TO THE CANCER DRUGS WHICH WAS D EBITED TO THE PRE-OPERATIVE EXPENSES AND TAKEN TO THE BALANCE SHE ET IN THE BOOKS OF ACCOUNT FOR THE A.Y 2007-08. HOWEVER, FOR T AX PURPOSES, THE SAID AMOUNT WAS CLAIMED AS REVENUE EXPENDITURE U/S 37 OF THE ACT. THE AO HOWEVER, OBSERVED THAT THE EXPENDIT URE IS NOT INCURRED FOR IMPROVING THE PRESENT PROJECT, BUT IS INCURRED FOR A NEW PROJECT WHICH DOES NOT SEE THE LIGHT OF THE DAY . HE, THEREFORE, HELD IT TO BE CAPITAL IN NATURE AND NOT ALLOWABLE. THE DRP ALSO REJECTED THE ASSESSEES OBJECTION AND THEREFORE, TH E AO BROUGHT IT TO TAX AND THE ASSESSEE IS IN APPEAL BEFORE US. ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 18 OF 61 25. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATE D THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND S UBMITTED THAT THE ASSESSEE, BEING IN THE BUSINESS OF RESEARC H, DEVELOPMENT AND MANUFACTURE OF PHARMACEUTICALS, DURING THE YEAR , HAD EXPANDED ITS PRODUCT RANGE BY ADDING CANCER DRUG ON WHICH IT UNDERTOOK TRIAL RUN. ACCORDING TO HIM, IT IS ONLY T HE CONTINUATION OF THE EXISTING LINE OF BUSINESS OF RESEARCH AND DE VELOPMENT AND THEREFORE, HAS TO BE ALLOWED AS REVENUE EXPENDITURE . HE SUBMITTED THAT DURING THE A.Y 1999-2000, SIMILAR ISSUE HAD ALS O ARISEN IN THE ASSESSEES OWN CASE IN ITA NO.363/HYD/2003 AND VIDE ORDERS DATED 21.09.2007, THE TRIBUNAL HAS ALLOWED THE SAID EXPENDITURE. HE ALSO RELIED UPON THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL AT CHANDIGARH IN THE CASE OF GLAXO SMITH K LINE CONSUMER HEALTHCARE LTD VS. CIT REPORTED IN 112 TTJ 94 IN SUPPORT OF THE ABOVE CONTENTION. 26. THE LEARNED DR HOWEVER, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 27. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THE ASSESSEE IS IN THE BUSI NESS OF RESEARCH DEVELOPMENT AND MANUFACTURE OF PHARMACEUTICALS. THE PROCESS OF RESEARCH INCLUDES TRIAL RUN OF A NEW DRUG. THEREFOR E, THE ASSESSEES EXPERIMENTS ON A NEW DRUG CANNOT BE SAID TO BE A NEW LINE OF BUSINESS. WE FIND THAT DURING THE A.Y 1999-2 000, THE ASSESSEE HAD INCURRED PRE-OPERATIVE EXPENSES ON BIO TECHNOLOGY DIVISION AND THE AO THEREIN HAD TREATED THIS EXPEND ITURE AS CAPITAL EXPENDITURE. THE COORDINATE BENCH OF THIS T RIBUNAL IN ITA ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 19 OF 61 NO.363/HYD/2003 HAS EXAMINED THE ISSUE AT LENGTH AN D AT PARAS 19 TO 21 HAS HELD AS UNDER: 19. IN A PHARMACEUTICAL INDUSTRY WHEN A NEW PRODUCT IS DEVELOPED, BEFORE LAUNCHING IT IN THE MARKET, A SERIES OF TRIALS ARE CONDUCTED TO EXAMINE ITS EFFICACY, SIDE-EFFECTS ETC. THESE TRIALS MAY INV OLVE LABORATORY TESTS, TESTING THEM ON ANIMALS, AND GIVING THE PRODUCT TO SELECTED DOCTORS TO CARRY OUT WHAT ARE KNOWN AS CLINICAL TRIALS. IT NEEDS TO BE APPRECIATED THAT SUCH TRIALS MAY SPAN OVER AN UNCERTAIN PERIOD SPANNING FROM SIX MONTHS TO FIVE YEARS. THESE TESTS ARE CRUCIAL AS THE PRODUCTS HAVE A DIRECT BEARING ON HUMAN FIFE. THE PRODUCT IS LAUNCHED IN THE MARKET ONLY AFTER THE ABOVE TESTS ARE CARRIED OUT. THUS, WHAT IS DEFERRED IS ONLY THE COMMERCIAL EXPLOITATION OF THE PRODUCT. BUT OTHERWISE THE ACTIVITY IS SAID TO HAVE COMMENCED ONCE THE DEVELOPMENT OF THE PRODUCT STARTS. RIGHT FROM DEVELOPMENT STAGE TO ITS INTRODUCTION IN THE MARKET, IT IS A LONG-DROWN PROCESS. THE COMMERCIAL LAUNCH OF THE PRODUCT IN THE MARKET CANNOT BE EQUATED WITH THE COMMERCIAL PRODUCTION IN AN INDUSTRY OTHER THAN PHARMA INDUSTRY. IT IS ON RECORD, AS MENTIONED EARLIER, THAT FULL-FLEDGED BIO-TECHNOLOG Y FACILITY WAS ESTABLISHED IN FINANCIAL YEAR 1997-98 AND IN THAT YEAR ITSELF THE CLINICAL TRIALS OF HIV DETECTION KITS WERE UNDERTAKEN. THUS, THE BIO TECHNOLOGY DIVISION WAS IN FULL OPERATION RIGHT FRO M THE YEAR 1997-98 AND WAS NOT IN A STARTING POSITION AS OBSERVED BY THE ASSESSING OFFICER. LIKEWISE, IT CANNOT BE SAID THAT THE DIVISION IS SAID TO HAVE STARTED ITS OPERATIONS ONLY WHEN ITS PRODUCTS ARE PUT INTO MARKET. 20. IN THE FINAL ANALYSIS, WE HOLD THAT BIO-TECHNOL OGY IS NOT A BUSINESS. IT IS A PROCESS WITH THE HELP OF WHICH NEW PRODUCTS IN THE EXISTING BUSINESS OF DIAGNOSTICS WERE DEVELOPED AND LATER ON NEW PRODUCTS FOR THERAPEUTIC USE WERE TO BE DEVELOPED IN THE EXISTING BUSINESS OF MANUFACTURING FORMULATIONS . THEREFORE, THE EXPENSES CLAIMED BY THE ASSESSEE ARE INCURRED IN THE COURSE OF RUNNING ITS EXISTING ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 20 OF 61 BUSINESS AND HENCE ALLOWABLE AS REVENUE EXPENDITURE. IT IS RELEVANT TO NOTE THAT EXPENDITUR E INCURRED ON CIVIL WORKS, ELECTRICAL WORKS AND LAB EQUIPMENTS FOR THE BIO-TECHNOLOGY DIVISION HAVE BEEN CAPITALIZED BY THE ASSESSEE AND NOT CLAIMED AS REVENUE EXPENDITURE. 21. SO FAR AS THE DECISION CITED BY THE LEARNED DR ARE CONCERNED, IN THE CASE OF HYDERABAD ALLWYN (SUPRA) AND INDIAN OXYGEN (SUPRA), THE ASSESSEE HAD ENTERED INTO ALTOGETHER A NEW LINE OF BUSINESS AND HENCE THE EXPENSES WERE HELD TO BE OF CAPITAL NATURE. IN THE CASE OF SAURASHTRA CEMENT (SUPRA), THE NATURE OF EXPENDITURE WHICH WAS CLAIMED WAS DIFFERENT THAN THE NATURE OF EXPENDITURE WHICH WAS CLAIMED WAS DIFFERENT THAN THE NATURE OF EXPENSES CLAIMED BY THE ASSESSEE IN THE PRESENT CASE. IN THE CASE OF CIBA OF INDIA (SUPRA), THE EXPENSES CLAIMED WERE INCURRED FOR FREIGHT CUSTOMS ETC. TO IMPORT THE MACHINERY WHICH WAS GIFTED TO THE ASSESSEE BY ITS PARENT COMPANY AND HENCE, THEY WERE HELD TO BE CAPITAL EXPENDITURE. IN THE PRESENT CASE, THE ASSESSEE ITSELF HAS CAPITALIZED THE EXPENSES INCURRED ON LAB EQUIPMENTS. IN THE CASE OF J.K. CHEMICALS (SUPRA), THE EXPENSES WERE INCURRED TO DECIDE WHETHER SOME PROFIT MAKING ASSETS SHOULD BE ACQUIRED OR NOT WHICH WOULD BE OF ENDURING NATURE AND HENCE WERE HELD TO BE OF CAPITAL NATURE. IN THE CASE OF E.I.D. PARRY (SUPRA) THE EXPENSES WERE FOR A NEW PRODUCT WHEREAS IN THE PRESENT CASE, THEY WERE FOR THE EXISTING DIAGNOSTIC AND FORMULATION BUSINESS. IN THE CASE OF TRIVENI ENGINEERING (SUPRA), THERE WAS A CLEAR FINDING THAT THE EXPENSES WERE NOT FOR FACILITATING EXISTING OPERATIONS. ON THE OTHER HAND , IN THE PRESENT CASE, THE EXPENSES ARE INCURRED IN THE COURSE OF OPERATIONS ONLY AND HENCE ALLOWABLE. THUS, EACH DECISION RESTS ON ITS OWN FACTS, SO ALSO THE PRESENT CASE. THE AO IS ACCORDINGLY DIRECTED TO ALLOW THE DEDUCTION OF RS.45,77,139. ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 21 OF 61 28. WE FIND THAT THE FACTS IN THE PRESENT CASE ARE SIMILAR I.E. THE EXPENSES ARE FOR A NEW PRODUCT IN THE EXIS TING DIAGNOSTIC AND FORMULATION BUSINESS AND ARE NOT FOR A NEW BUSI NESS OF THE ASSESSEE. FURTHER, IN THE CASE OF GLAXO SMITH KLINE CONSUMER HEALTHCARE LTD (CITED SUPRA), THE COORDINATE BENCH OF THE TRIBUNAL AT CHANDIGARH AT PARAS 10 & 11 OF ITS ORDE R HELD AS UNDER: 10. NOW WE MAY EXAMINE THE EXPENDITURE UNDER THE HE AD 'PRODUCT DEVELOPMENT EXPENSES'. THE DETAILS OF THE EXPENDITURE SHOW THAT THE SAME HAS BEEN INCURRED FOR INTRODUCIN G AND DEVELOPING NEW PRODUCTS. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF FOOD AND HEALTH CARE PRO DUCTS UNDER A WELL-KNOWN BRAND. THE EXPENSES INCLUDE DEVELOPMENT EXPENSES FOR NEW PRODUCTS NAMELY NUTIRBAR CHOCOLATE, RIBENA SOFT DRINK, HORLICKS RELAUNCH EXPENSES. CERTAINLY SUCH EXPENDIT URE HAS THE POTENTIAL TO IMPROVE THE PROFITABILITY OF THE ASSES SEE. HOWEVER THE ISSUE TO, BE CONSIDERED IS WHETHER THE EXPENDITURE SEEKS TO ENLARGE THE PROFIT-YIELDING CAPACITY OR IT INCREASES THE EF FICIENCY OF THE BUSINESS. THIS ASPECT, IN OUR CONSIDERED OPINION IS TO BE DECIDED IN THE LIGHT OF THE BUSINESS REALITIES UNDER WHICH THE ASSESSEE IS OPERATING. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF FAST MOVING CONSUMER GOODS. ,THE B USINESS OF THE ASSESSEE IS SUBJECTED TO VOLATILITY IN CONSUMER PREFERENCES, TASTES AND WANTS. THE ASSESSEE IS THEREFORE REQUIRE D TO PERENNIALLY STUDY THE MARKET AND LAUNCH NEW VARIETI ES IN ITS PRODUCTS LINE AND MEET THE COMPETITION IN THE MARKE T. IT IS IN THIS BACKGROUND ONE HAS TO EXAMINE AS TO WHETHER THE IMP UGNED EXPENDITURE INCURRED ON DEVELOPMENT, INTRODUCTION A ND LAUNCHING OF NEWER PRODUCTS IS AN ADVANTAGE IN THE REVENUE FIELD OR NOT. IN OUR HUMBLE OPINION THE EXPENDITURE IN QU ESTION HAS MERELY ENABLED THE ASSESSEE TO REMAIN COMPETITIVE I N THE MARKET AND RETAIN THE CUSTOMER PREFERENCES AND/LOYALTY TOW ARDS ITS BRAND OF PRODUCTS. THE SAID ADVANTAGE CERTAINLY IS NOT LIMITED TO THE PERIOD UNDER CONSIDERATION BUT SPILLS OVER TO T HE FUTURE ALSO. SO HOWEVER THIS IS NOT CONCLUSIVE TO HOLD THAT THE EXPENDITURE IN QUESTION IS A CAPITAL EXPENDITURE. THE PARITY OF RE ASONING LAID DOWN BY THE APEX COURT IN THE CASE OF EMPIRE JUTE C O. LTD. (SUPRA) DISCUSSED BY US IN THE EARLIER PARA IS SQUA RELY APPLICABLE WITH RESPECT TO SUCH EXPENDITURE ALSO. 11. WE MAY MENTION HERE THE STAND OF REVENUE THAT T HE DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS CREATE A NEW LINE ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 22 OF 61 OF BUSINESS FOR THE ASSESSEE AND THUS EXPENDITURE R ELATED THEREOF IS TO BE TREATED AS CAPITAL EXPENDITURE. ON THIS ASPEC T WE ARE UNABLE TO APPRECIATE AS TO HOW CAN IT BE SAID THAT MERE DE VELOPMENT AND INTRODUCTION OF NEW VARIETIES OF PRODUCTS RESULT IN CREATION OF A NEW LINE OF BUSINESS. FACTUALLY SPEAKING, PRIOR TO THE DEVELOPMENT AND INTRODUCTION OF THE IMPUGNED NEW PRODUCTS THE A SSESSEE WAS IN THE BUSINESS OF MANUFACTURING AND SALE OF FOOD A ND HEALTH CARE PRODUCTS. EVEN POST DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS, THE BUSINESS OF THE ASSESSEE REMAINS THAT OF MANUFACTURING AND SALE OF FOOD AND HEALTH CARE PROD UCTS. THEREFORE IT IS ERRONEOUS TO CONCLUDE THAT THE ASSE SSEE ACQUIRED A NEW LINE OF BUSINESS BY MERELY DEVELOPING AND INTRO DUCING NEW PRODUCTS IN THE EXISTING LINE OF BUSINESS. THE NEW PRODUCTS CLEARLY RELATE TO THE SAME LINE OF BUSINESS THAT THE ASSESS EE HAS BEEN HITHERTO CARRYING ON. THEREFORE, ON ABOVE CONSIDERA TION ALSO THE PLEA OF THE ASSESSEE THAT THE EXPENDITURE IN QUESTI ON IS A REVENUE EXPENDITURE DESERVES TO BE UPHELD. 29. THEREFORE, RESPECTFULLY FOLLOWING THE ABOVE DEC ISIONS, WE HOLD THAT THE EXPENDITURE INCURRED BY THE ASSESS EE TOWARDS CYTO PRODUCTS IS ALLOWABLE AS REVENUE EXPENDITURE. THIS GROUND OF APPEAL IS THEREFORE, IS ALLOWED. 30. AS REGARDS GROUND NO.5 (I) & (II), BRIEF FACTS ARE THAT THE ASSESSEE CLAIMED DEDUCTION FOR AN AMOUNT OF RS. 10,42,90,167 TOWARDS THE EXPENSES ON ISSUE OF AMERICAN DEPOSITOR Y SHARES (ADS). THE AO WAS OF THE OPINION THAT THE EXPENDITU RE INCURRED ON PUBLIC SUBSCRIPTION OF SHARES IS FOR INCREASE OF ITS SHARE CAPITAL AND AS SUCH, IS NOT ALLOWABLE U/S 37 OF THE ACT. H E HOWEVER, HELD THAT SECTION 35D IS THE SPECIFIC PROVISION UNDER W HICH AMORTIZATION OF THE EXPENDITURE IS ALLOWABLE, IF IT FALLS WITHIN THE DOMAIN OF SECTION 35D(2)(C) AND MEETS THE CONDITIO NS LAID DOWN U/S 35D(3) OF THE ACT. HE OBSERVED THAT IN THE PRES ENT CASE, IT IS NOT CONFIRMED BY THE ASSESSEE THAT CAPITAL FROM TH E ISSUE WAS RAISED FOR A SPECIFIC UNDERTAKING AND FURTHER THAT THE MANNER OF ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 23 OF 61 UTILIZATION OF ADS IS ALSO NOT CLEAR I.E. WHETHER T HE SAME WAS USED FOR EXPANSION OF EXISTING BUSINESS OR NOT. THEREFOR E, HE DID NOT ALLOW THE AMORTIZATION ALSO U/S 35D OF THE ACT. FURT HER, HE ALSO OBSERVED THAT AUDIT FEE PAID TO KPMG IS NOT COVERED BY THE EXPENSES MENTIONED IN SECTION U/S 35D(2)(C) OF THE ACT AND HENCE EVEN IF THE DEDUCTION IS ALLOWABLE, A SUM OF RS.1,4 5,91,200 BEING THE FEE PAID TO KPMG DOES NOT QUALIFY FOR DEDUCTION . ACCORDINGLY, THE AO DISALLOWED THE CLAIM OF DEDUCTION. AGGRIEVED , THE ASSESSEE FILED ITS OBJECTION BEFORE THE DRP STATING THAT THE FUNDS HAVE BEEN UTILIZED FOR THE PURPOSE OF SUPPORTING WORKING CAPI TAL NEEDS OF THE GROUP AND THAT IT WAS FOR EXPANSION OF EXISTING BUS INESS AND FOR MEETING THE WORKING CAPITAL REQUIREMENT. IT WAS SUB MITTED THAT THE EXPANSION IS AN ONGOING PROCESS IN THE COMPANY AND DURING THE YEAR FIXED ASSETS WORTH RS.2,572 MILLION HAVE B EEN ADDED BY THE COMPANY AND A NEW FORMULATION UNIT-VI, AT HIMACH AL PRADESH HAS BEEN SET UP DURING THIS YEAR. IT WAS AL SO SUBMITTED THAT THE TOTAL ISSUE EXPENSES WAS RS.227 MILLION AG AINST WHICH THE ASSESSEE HAD RECOVERED AND ADJUSTED RS.125 MILL ION RESULTING IN THE NET ISSUE EXPENSES OF RS.104 MILLION ONLY AN D THEREFORE, THE ENTIRE EXPENDITURE INCURRED IN CONNECTION WITH THE ADS ISSUE MEANT FOR EXPANSION OF THE EXISTING BUSINESS IS ALL OWABLE U/S 37 OF THE ACT. THE DRP HOWEVER, HELD THAT THE INCREASE IN THE SHARE CAPITAL RESULTS IN EXPANSION OF THE CAPITAL BASE OF THE COMPANY AND INCIDENTALLY THOUGH THAT WOULD HELP IN THE BUSI NESS OF THE COMPANY AND ALSO IN THE PROFIT MAKING, THE EXPENSES INCURRED IN THAT CONNECTION STILL RETAIN THE CHARACTER OF THE C APITAL EXPENDITURE, SINCE THE EXPENDITURE IS DIRECTLY RELA TED TO THE EXPANSION OF THE CAPITAL BASE OF THE COMPANY. THE D RP FOLLOWED THE DECISION OF THE HON'BLE SUPREME COURT IN THE CA SES OF PUNJAB ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 24 OF 61 STATE INDUSTRIAL DEVELOPMENT CORPORATION LTD, REPOR TED IN 225 ITR 792 AND BROOKE BOND INDIA LTD, REPORTED IN 225 ITR 798 FOR COMING TO THIS CONCLUSION. FURTHER, THE DRP HELD TH AT THE CONTENTION OF THE ASSESSEE THAT PART OF CAPITAL RAI SED IS USED TO MEET WORKING CAPITAL REQUIREMENTS IS OF NO SIGNIFIC ANCE AND HENCE IS NOT ALLOWABLE AS REVENUE EXPENDITURE. 31. AS REGARDS AMORTIZATION OF THE EXPENDITURE U/S 35D OF THE ACT, THE DRP HELD THAT THE ASSESSEE HAS NOT FUL FILLED THE CONDITIONS LAID DOWN IN CLAUSE (C) OF SUB SECTION-2 AS WELL AS SUB SECTION 3 OF SECTION 35D OF THE ACT AND HENCE DISAL LOWED THE SAID CLAIM. AGAINST THIS FINDING OF THE DRP AND THE CONS EQUENTIAL ASSESSMENT ORDER, THE ASSESSEE IS IN APPEAL BEFORE US. 32. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE ASSESSEES SUBMISSIONS BEFORE THE AUTHORITIES BELOW AND PLACED RELIANCE UPON THE DECISION OF THE DELHI BENCH OF TH E INCOME TAX APPELLATE TRIBUNAL DELHI IN THE CASE OF CHINATRUST COMMERCIAL BANK VS. AD. DIT, RANGE-1 (INTERNATIONAL TAXATION), NEW DELHI REPORTED IN (2007) 13 SOT 485 (DELHI) AND THE HON'B LE SUPREME COURT IN THE CASE OF INDIA CEMENTS (60 ITR 52 (S.C) . 33. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THE ASSESSEE HAS MADE A PUB LIC OFFERING OF ITS AMERICAN DEPOSITORY SHARES (ADS) SHARES TO INTE RNATIONAL INVESTORS IN NOV.2006. BY VIRTUE OF THE SAID ISSUE, THE SHARE CAPITAL HAS INCREASED AND SECURITIES PREMIUM A/C HA S ALSO INCREASED AND THE EQUITY SHARES REPRESENTED BY THE ADS CARRY EQUIVALENT RIGHTS WITH RESPECT TO VOTING AND DIVIDE ND AS THE ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 25 OF 61 ORDINARY EQUITY SHARES. AS SEEN FROM PAGE 107 OF TH E PB FILED BEFORE US, SUCH CAPITAL RAISED HAS BEEN UTILIZED BY ADVANCING LOANS TO LACO HOLDING LTD AND APR LLC OF A TOTAL AM OUNT OF RS.10,38,984. THUS, IT CAN BE SEEN THAT THE ENTIRE CAPITAL RAISED BY WAY OF ADS HAS NOT BEEN ADVANCED TO THE SUBSIDIA RIES. THEREFORE, THE ASSESSEES CONTENTION THAT THE FUNDS RAISED ON ADS ISSUE HAVE BEEN USED TOWARDS WORKING CAPITAL REQUIR EMENT OF THE SUBSIDIARIES IS NOT ENTIRELY CORRECT. FURTHER, IT IS ALSO SEEN THAT THE ADS ISSUE HAS INCREASED THE SHARE CAPITAL OF THE AS SESSEE AND THEREFORE, THE CAPITAL BASE OF THE ASSESSEE COMPANY HAS INCREASED. WE ARE, THEREFORE, IN AGREEMENT WITH THE FINDINGS O F THE DRP THAT WHERE THE EXPENDITURE HAS BEEN INCURRED FOR INCREAS ING THE CAPITAL BASE OF THE COMPANY, THE SAID EXPENDITURE I S CAPITAL IN NATURE. THE HON'BLE SUPREME COURT IN THE CASE OF PU NJAB STATE INDUSTRIAL DEV. CORPN LTD (CITED SUPRA) HAS CLEARLY HELD THAT THOUGH THE INCREASE IN THE CAPITAL RESULTS IN EXPAN SION OF THE CAPITAL BASE OF THE COMPANY AND INCIDENTALLY THAT W OULD HELP IN THE BUSINESS OF THE ASSESSEE AND MAY ALSO HELP IN T HE PROFIT MAKING, THE EXPENSES INCURRED IN THAT CONNECTION ST ILL RETAIN THE CHARACTER OF THE CAPITAL AND HENCE THE EXPENDITURE IS DIRECTLY RELATED TO THE EXPANSION/CAPITAL BASE OF THE COMPAN Y. THEREFORE, WE SEE NO REASON TO INTERFERE WITH THE ASSESSMENT O RDER ON THIS ISSUE. HOWEVER, AS REGARDS ALTERNATE CONTENTION OF THE ASSESSEE THAT THE SAME SHOULD BE ALLOWED U/S 35D OF THE ACT, WE FIND THAT THE AO AS WELL AS THE DRP HAVE DISALLOWED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT THE ASSESSEE HAS NOT FU RNISHED THE DETAILS OF THE SAID EXPENDITURE AND ALSO AS TO HOW THE ASSESSEE HAS SATISFIED CONDITION OF CL.(C) OF SUB SECTION 2 OF 35D OF THE ACT. WE FIND THAT AT PAGE NO.390 OF THE PAPER BOOK, THE ASSESSEE HAS ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 26 OF 61 GIVEN THE DETAILS OF THE ADS ISSUE EXPENDITURE AND AT PAGE 107 OF THE PAPER BOOK IN SCHEDULE-9 TO THE NOTES TO THE A/ C,WHEREIN THE EXPLANATION AS TO HOW THE FUNDS HAVE BEEN UTILIZED IS GIVEN. THEREFORE, WE ARE OF THE OPINION THAT THE AO AND TH E DRP OUGHT TO HAVE VERIFIED THE SAID EXPENDITURE BEFORE MAKING TH E DISALLOWANCE. IN VIEW OF THE SAME, WE DEEM IT FIT AND PROPER TO R EMAND THE ISSUE TO THE FILE OF THE AO FOR DENOVO CONSIDERATION IN A CCORDANCE WITH THE LAW, MORE PARTICULARLY IN VIEW OF THE DECISION OF THE DELHI BENCH OF THE INCOME TAX APPELLATE TRIBUNAL IN THE C ASE OF CHINATRUST COMMERCIAL BANK VS. ADIT REPORTED IN (20 07) 13 SOT 485 (DEL.) AND ALSO THE DECISION OF THE HON'BLE SUP REME COURT IN THE CASE OF INDIA CEMENTS, REPORTED IN 60 ITR 52 (S .C). THEREFORE, THE GROUND OF APPEAL NO.5 IS PARTLY ALLOWED FOR STA TISTICAL PURPOSES. 34. AS REGARDS GROUND NO.6, BRIEF FACTS ARE THAT DU RING THE YEAR, THE ASSESSEE MADE A PAYMENT OF RS.4.00 CRORES TO INSTITUTE OF LIFE SCIENCES (ILS) FOR RESEARCH PROJECT AND C LAIMED DEDUCTION OF THIS AMOUNT U/S 35(1)(II) OF THE ACT. THE AO OBS ERVED THAT FOR ALLOWING A DEDUCTION U/S 35(1)(II) OF THE ACT, THE PAYMENT MUST BE TO AN INSTITUTION APPROVED UNDER THE SECTION AND SI NCE THERE IS NO SUCH APPROVAL FOR ILS, THE CLAIM WAS PROPOSED TO BE DISALLOWED. THE ASSESSEES OBJECTIONS BEFORE THE DRP WERE ALSO REJECTED AND HENCE THE AO MADE THE ADDITION. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT ILS IS A RESEARCH INSTITUTI ON ENGAGED IN RESEARCH OF PHARMACEUTICALS AND SINCE THE ASSESSEE IS ALSO IN THE SAME LINE OF BUSINESS, THE RESEARCH COULD BENEFIT T HE ASSESSEE AND THEREFORE, THE PAYMENT WAS MADE FOR THE PURPOSE OF BUSINESS. THE ASSESSEE SUBMITTED THAT SIMILAR PAYMENT TO HINDUJA HOSPITAL FOR ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 27 OF 61 THE A.Y 2003-04 WAS CONSIDERED BY THE INCOME TAX APP ELLATE TRIBUNAL IN ITA NO.739/HYD/2009 DATED 29.10.2010 AN D THE TRIBUNAL HAS HELD THAT THE PAYMENT IS ALLOWABLE AS DEDUCTION. HE ALSO SUBMITTED THAT THIS ISSUE IS ALSO COVERED BY T HE DECISION OF THE INCOME TAX APPELLATE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE A.Y 2006-07 WHEREIN THE HON'BLE INCOME TAX APPEL LATE TRIBUNAL HAS HELD THAT THOUGH THE DEDUCTION U/S 35A C WAS NOT ALLOWABLE, THE AO WAS DIRECTED TO EXAMINE WHETHER T HE PAYMENT IS ALLOWABLE AS REVENUE EXPENDITURE U/S 37(1) OF THE I .T. ACT. THE LEARNED DR HOWEVER, SUPPORTED THE ORDERS OF THE AUT HORITIES BELOW. 35. WE FIND THAT THE DRP HAS CONSIDERED THE ASSESSE ES OBJECTION AT LENGTH AND HAS HELD THAT THE CLAIM OF DEDUCTION U/S 35 (1)(II) IS NOT ALLOWABLE AS ILS IS NOT AN INSTIT UTION APPROVED BY THE NOTIFICATION IN THE OFFICIAL GAZETTE BY THE CEN TRAL GOVT. WE ALSO FIND THAT THE DRP HAS ALSO CONSIDERED THE ALLOWABIL ITY OF THE SAME AS AN EXPENDITURE U/S 37(1) OF THE ACT ON THE GROUN DS OF COMMERCIAL EXPEDIENCY. THE DRP HAS OBSERVED THAT TH E PAYMENT MADE BY THE ASSESSEE IS MORE IN THE NATURE OF A DON ATION AND NOT A BUSINESS EXPENDITURE. IT WAS HELD THAT THE ASSESS EE HAS NOT MADE THE PAYMENT FOR BUILDING UP ANY BUSINESS THROU GH PROMOTION OF A GOODWILL BECAUSE BY ITS VERY NATURE, ILS CANNOT CANVASS OR PROCURE BUSINESS FOR THE ASSESSEE AS ILS IS A RESEARCH INSTITUTION AFFILIATED TO THE OSMANIA UNIVERSITY, H YDERABAD AND IT IS NOT UNDER THE DR. REDDYS LABORATORIES BRAND TO ACQUIRE GOODWILL FOR THE ASSESSEE THROUGH ITS RESEARCH AND ACADEMIC WORK. THE DRP ALSO HELD THAT THE PAYMENT MADE TO THE HIND UJA HOSPITAL CANNOT BE COMPARED WITH THE PAYMENT MADE BY THE ASS ESSEE TO ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 28 OF 61 ILS. THE ASSESSEE HAS RELIED UPON THE DECISION OF T HE COORDINATE BENCH OF THIS TRIBUNAL AT DELHI IN THE CASE OF CHIN ATRUST COMMERCIAL BANK VS. ADIT (CITED SUPRA) FOR THE PROP OSITION THAT THE EXPENDITURE WHICH IS VOLUNTARILY INCURRED IS FO R COMMERCIAL EXPEDIENCY, THEN IT IS TO BE ALLOWED AS REVENUE EXP ENDITURE. WE FIND THAT IN THE ASSESSEES OWN CASE FOR THE A.Y 200 3-04, THE COORDINATE BENCH OF THIS TRIBUNAL WAS CONSIDERING T HE ALLOWABILITY OF A DONATION OF RS.17,67,442 MADE BY THE ASSESSEE TO INSTITUTION RELATING TO MEDICAL PROFESSION LIKE GUJ ARAT CANCER RESEARCH INSTITUTE, CHEMISTS & DRUGGISTS ASSOCIATIO N, ALLIAR INTERNATIONAL INSTITUTION FOR HEARING IMPAIRED AND HINDUJA HOSPITALS ETC., AND THE TRIBUNAL HAS HELD THAT THES E EXPENDITURE ARE INCURRED IN THE COURSE OF BUSINESS AND CANNOT B E SAID THAT IT IS NOT WHOLLY AND EXCLUSIVELY LAID OUT FOR THE PURP OSE OF BUSINESS AND IS TO BE ALLOWED U/S 37 OF THE ACT. WE FIND THA T FOR THE A.Y 2006-07, THE TRIBUNAL HAS ONLY RESTORED THE MATTER BACK TO THE FILE OF THE AO TO EXAMINE THE SAME AFRESH KEEPING I N MIND THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL FOR THE A.Y 2003-04 AND OTHER CASES RELIED UPON BY THE ASSESSEE AS TO W HETHER THE CLAIM IS ALLOWABLE U/S 37(1) OF THE I.T. ACT. 36. WE HAVE PERUSED THE MATERIAL FILED BEFORE US AN D WE FIND THAT EXCEPT FOR STATING THAT THE PAYMENT TO IL S IS FOR BUSINESS PURPOSES, THE ASSESSEE HAS NOT FURNISHED ANY OTHER DOCUMENTS IN SUPPORT OF ITS CLAIM. UNDISPUTEDLY, THE ILS IS INTO THE RESEARCH, BUT HOW SUCH RESEARCH IS HELPING THE ASSESSEE IN IT S BUSINESS ACTIVITIES AND ALSO AS TO WHETHER THE RESULTS OF SU CH RESEARCH ARE TO BE UTILIZED BY THE ASSESSEE IN ANY WAY AND THE P URPOSE OF THE RESEARCH ARE NOT BROUGHT ON RECORD. THE LEARNED DRP HAS HELD ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 29 OF 61 THAT THE ILS CANNOT ACQUIRE GOODWILL FOR THE ASSESS EE OR PROCURE BUSINESS FOR THE ASSESSEE. THE ASSESSEE HAS NOT BRO UGHT ON RECORD EITHER BEFORE THE DRP OR BEFORE THIS TRIBUNA L AS TO HOW THE ASSESSEE IS BEING BENEFITED IN ANY WAY BY THE RESUL TS OF THE RESEARCH CARRIED ON BY THE ILS. THEREFORE, THE COMM ERCIAL EXPEDIENCY OF THE DONATION TO ILS HAS NOT BEEN ESTA BLISHED BY THE ASSESSEE. IN THE ASSESSEES OWN CASE FOR A.Y 2003-04 , THE TRIBUNAL, WITHOUT GIVING ELABORATE REASONS, HAS HEL D THAT THE DONATION GIVEN TO THE INSTITUTIONS MENTIONED THEREI N ARE INCURRED IN THE COURSE OF BUSINESS AND ALLOWABLE U/S 37(1) O F THE ACT. FOR THE A.Y 2006-07, THE TRIBUNAL HAS ONLY REMANDED THE ISSUE TO EXAMINE THE ALLOWABILITY OF DONATION TO ILS U/S 37( 1) OF THE ACT. THEREFORE, THERE IS NO FINDING ABOUT THE ALLOWABILI TY OF THE SAME BY THE TRIBUNAL. IN VIEW OF THE SAME, WE DO NOT SEE AN Y REASON TO INTERFERE WITH THE ASSESSMENT ORDER ON THIS ISSUE A ND THE GROUND OF APPEAL NO. 6 IS REJECTED. 37. AS REGARDS GROUND NO.7, IT IS SUBMITTED BY THE ASSESSEE THAT A COMPANY BY NAME AMERICAN REMEDIES L TD HAD GOT MERGED WITH THE ASSESSEE W.E.F 1.4.99 AND UPON THE MERGER, THE DIFFERENCE BETWEEN THE CONSIDERATION AND THE NET WO RTH WAS CONSIDERED AS GOODWILL AND FROM THE FIRST YEAR OF M ERGER, THE ASSESSEE CLAIMED DEPRECIATION ON GOODWILL. IT IS SU BMITTED THAT THE AO HAS DISALLOWED THE CLAIM OF DEPRECIATION ON THE GROUND THAT IT IS NOT AN INTANGIBLE ASSET. 38. THE LEARNED COUNSEL FOR THE ASSESSEE PLACED REL IANCE UPON THE DECISION OF THE HON'BLE SUPREME COURT IN T HE CASE OF CIT VS. SMIFS SECURITY LTD (348 ITR 302) (S.C) WHEREIN IT HAS BEEN ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 30 OF 61 HELD THAT GOODWILL IS ALSO AN INTANGIBLE ASSET ELIG IBLE FOR DEPRECIATION THEREON. 39. THE LEARNED DR HOWEVER, ON THE OTHER HAND, SUPP ORTED THE ORDERS OF THE AUTHORITIES BELOW. 40. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD AND RESPECTFULLY FOLLOWING THE DECISION O F THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. SMIFS SECURITY LTD (SUPRA), WE DIRECT THE AO TO ALLOW DEPRECIATION ON GOODWILL. ACCORDINGLY, GROUND NOS. 7 TO 7.2 ARE ALLOWED WHEREAS GROUND NO. 7.3 BEING ALTERNATIVE GROUND IS REJECTED. 41. AS REGARDS GROUND NO.8, BRIEF FACTS ARE THAT A COMPANY BY NAME PERLECAN PHARMA PRIVATE LTD MERGED WITH THE ASSESSEE W.E.F. 1.1.2006. THE ASSESSEE CLAIMED WEIG HTED DEDUCTION OF 150% U/S 35(2AB) IN RESPECT OF EXPENDIT URE ON SCIENTIFIC RESEARCH INCURRED BY PERLECAN PHARMA P L TD. THE AO OBSERVED THAT BEFORE MERGER, PERLECAN WAS A SEPARAT E UNDERTAKING AND EACH R&D UNDERTAKING NEEDS TO BE APPROVED BY TH E DSIR IN 3CL FORMAT FOR GETTING THE BENEFIT FOR WEIGHTED DED UCTION. OBSERVING THAT M/S PERLECAN PHARMA P LTD DID NOT HA VE SUCH APPROVAL, WEIGHTED DEDUCTION CLAIM ON R&D EXPENDITU RE OF PERLECAN IS NOT TO BE ALLOWED. HE THEREFORE, DISALL OWED THE CLAIM OF RS.18,63,20,735 AND PROPOSED TO BRING IT TO TAX IN THE DRAFT ASSESSMENT ORDER. THE ASSESSEE FILED ITS OBJECTION BEFORE THE DRP, BUT THE DRP UPHELD THE DISALLOWANCE PROPOSAL AND TH E ASSESSEE IS IN APPEAL BEFORE US. ACCORDING TO THE LEARNED COUNS EL FOR THE ASSESSEE, PERLECAN PHARMA HAD ENGAGED THE ASSESSEE TO ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 31 OF 61 UNDERTAKE CONTRACT RESEARCH AND THE ASSESSEE WHILE CLAIMING DEDUCTION U/S 35(2AB), DULY REDUCED THE AMOUNT RECE IVED FROM PERLECAN. HE SUBMITTED THAT POST MERGER WITH THE AS SESSEE W.E.F. 1.1.2006, THE ABOVE TRANSACTION STOOD NULLIFIED AND PERLECAN BECAME PART OF THE ASSESSEE AND THEREFORE, THE ASSE SSEE CLAIMED WEIGHTED DEDUCTION ON THE WHOLE AMOUNT OF R&D EXPEN DITURE INCURRED (WITHOUT REDUCING THE AMOUNT RECEIVED FROM PERLECAN) SINCE THE ASSESSEE WAS UNDERTAKING THE RESEARCH IN ITS DSIR APPROVED FACILITY U/S 35(2AB) OF THE ACT. ACCORDING TO THE ASSESSEE, THE SUBSTANCE OF THE ACTIVITY/TRANSACTION SHOULD BE CONSIDERED AND WEIGHTED DEDUCTION SHOULD BE ALLOWED AS PERLECAN PHARMA PVT LTD WAS SET UP AS AN INTEGRATED DRUG DEV ELOPMENT COMPANY JOINTLY OWNED BY DR. REDDYS LABORATORIES L TD AND THE VENTURE CAPITAL FINANCIAL INSTITUTION AFTER THE DIS COVERY RESEARCH ACTIVITIES CARRIED OUT AT APPROVED IN-HOUSE R&D UNI TS OF DR. REDDYS LAB LTD. HE SUBMITTED THAT IN THE ORIGINAL RETURN OF INCOME FILED, THE ASSESSEE COMPUTED THE R&D CLAIM U /S 35(2AB) AFTER REDUCING THE AMOUNT RECOVERED FROM PERLECAN A ND BASED ON THE HIGH COURT ORDER AMALGAMATING PERLECAN PHARMA L TD WITH THE ASSESSEE HEREIN WITH RETROSPECTIVE EFFECT FROM 1.1. 2006, THE ASSESSEE REVISED ITS RETURN OF INCOME, DULY REVERSI NG THE PERLECAN CREDIT CONSIDERED IN THE ORIGINAL RETURN AND DULY C LAIMED THE WEIGHTED DEDUCTION U/S 35(2AB) OF THE ACT. IT IS SU BMITTED THAT BOTH THE AO AS WELL AS THE DRP HAVE NOT APPRECIATED THE FACT THAT THE R&D EXPENDITURE REPRESENTING THE FUNDS RECEIVED FROM PERLECAN PHARMA PVT LTD HAVE NOW BECOME THE FUNDS O F THE ASSESSEE AND CREDIT IN THE R&D A/C SHALL BE DELETED ACCORDINGLY. IT IS FURTHER SUBMITTED THAT THE RESEARCH ACTIVITIES A RE CARRIED OUT AT THE APPROVED IN HOUSE R&D FACILITY IN THE NAME OF D R. REDDYS ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 32 OF 61 LABORATORIES & PERLECAN HAVING MERGED WITH DR. REDD YS LABORATORIES, IT IMPLIES THAT THE SAID COMPANY IS N OW NONE OTHER THAN DR. REDDYS LABORATORIES AND SINCE THE ASSESSE E ALREADY HAS THE APPROVED R&D FACILITY, NO SEPARATE APPROVAL IS REQUIRED FOR THE SAME LOCATION. R&D EXPENDITURE APPROVED BY THE DSI R IN FORM NO.3CL ALREADY INCLUDED THE PERLECAN CREDIT AND HEN CE THERE IS NO REQUIREMENT TO OBTAIN A SEPARATE 3CL IN RESPECT OF THE SAID R&D EXPENDITURE FOR THE SAID EXPENDITURE. IT IS SUBMITT ED THAT BY VIRTUE OF THE ORDER OF THE HON'BLE HIGH COURT OF A. P, THE AMOUNT SPENT BY PERLECAN ON R&D HAS NOW BECOME THE PART OF THE ELIGIBLE R&D EXPENDITURE OF THE ASSESSEE U/S 35(2AB) OF THE ACT. IT IS FURTHER SUBMITTED THAT SECTION 35(2AB) ALLOWS THE D EDUCTION IN RESPECT OF THE EXPENDITURE INCURRED ON R&D IN THE H ANDS OF THE PERSONS WHO INCURS IT AND IT IS ONLY THAT THE RELEV ANT RULES AND REGULATIONS REQUIRE THAT ANY INCOME ARISING FROM R& D IS TO BE DEDUCTED FROM THE AMOUNT OF EXPENDITURE. IT IS FURT HER SUBMITTED THAT DSIR IS EMPOWERED TO EXAMINE THE EXPENDITURE A ND APPROVE THE SAME AND THE DSIR IN ITS CERTIFICATE HAS APPROV ED THE TOTAL EXPENDITURE INCLUDING THE EXPENDITURE WHICH WAS REI MBURSED BY PERLECAN AND HAS NOT EXPRESSLY DISALLOWED PERLECAN REIMBURSEMENT AS INELIGIBLE EXPENDITURE. IT WAS FU RTHER SUBMITTED THAT THE CERTIFICATE DULY REFLECTED THE G ROSS EXPENDITURE AND ALSO THE REIMBURSEMENT FROM PERLECAN AS A SEPAR ATE LINE IN THE CERTIFICATE. THEREFORE, ACCORDING TO HIM, IT DO ES NOT MEAN THAT THE DSIR HAS NOT APPROVED THE EXPENDITURE INCURRED BY DRL TO THAT EXTENT. IN SUPPORT OF THESE CONTENTIONS, THE L EARNED COUNSEL FOR THE ASSESSEE HAS DRAWN OUR ATTENTION TO THE FOR M NO.3CL FOR THE FINANCIAL YEAR 2005-06, 2006-07 AND 2007-08 RES PECTIVELY WHICH IS PLACED AT PAGE 485 OF THE PAPER BOOK FILED BEFORE US. ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 33 OF 61 42. THE LEARNED DR, ON THE OTHER HAND, SUPPORTED TH E ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE APPROVAL GIVEN BY DSIR IS FOR THE R&D FACILITY OF THE ASSESS EE AND NOT THE R&D OF PERLECAN PHARMA P LTD. THUS, ACCORDING TO HI M, THE EXPENDITURE INCURRED BY PERLECAN TOWARDS RESEARCH & DEVELOPMENT ALBEIT IN ASSESSEES FACILITY IS NOT EL IGIBLE FOR DEDUCTION U/S 35(2AB) OF THE ACT. 43. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT U/S 35(2AB), SUB-SECTION 1, A COMPANY WHICH IS ENGAGED IN THE BUSINESS OF BIOTECHNOLOGY O R IN ANY BUSINESS OF MANUFACTURE OR PRODUCTION OF ANY ARTICL E OR THING INCURS ANY EXPENDITURE ON SCIENTIFIC RESEARCH (NOT BEING EXPENDITURE IN THE NATURE OF THE COST OF LAND OR BU ILDING) ON IN HOUSE RESEARCH AND DEVELOPMENT FACILITY AS APPROVED BY THE PRESCRIBED AUTHORITY, THEN THEY SHALL BE ALLOWED A DEDUCTION OF A SUM EQUAL TO ONE AND TH TIME OF THE EXPENDITURE SO INCURRED. THE ONLY DISPUTE BEFORE US IS WHETHER THE EXPENDITU RE INCURRED BY PERLECAN TOWARDS RESEARCH AND DEVELOPMENT IN THE AS SESSEES FACILITY IS ELIGIBLE FOR DEDUCTION U/S 35(2AB) OF T HE ACT. AS POINTED OUT BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE IN HOUSE R&D FACILITY OF THE ASSESSEE IS APPROVED BY THE DSIR AS PROVIDED U/S 35(2AB). FROM PAGE NO.485 OF THE PAPER BOOK, IT IS S EEN THAT THE EXPENDITURE APPROVED BY THE DSIR INCLUDES A SUM OF RS.1054.314 LAKHS ON ACCOUNT OF PERLECAN PHARMA PVT LTD. COPY O F FORM NO.3CL IS PLACED ON RECORD. BY VIRTUE OF MERGER W.E .F. 1.6.2006, ALL THE ACTIVITIES OF THE PERLECAN ARE ALSO THE ACT IVITIES OF THE ASSESSEE. AS THE FACILITY AND ALSO THE EXPENDITURE HAS ALREADY ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 34 OF 61 BEEN APPROVED BY THE RELEVANT AUTHORITY, WE ARE OF THE OPINION THAT POST MERGER, THE SAID EXPENDITURE CANNOT BE RE DUCED WHILE ALLOWING THE DEDUCTION U/S 35(2AB) OF THE ACT. THER EFORE, IN OUR OPINION, THE DEDUCTION U/S 35(2AB) IS ALLOWABLE EVE N ON THE EXPENDITURE INCURRED ON PERLECAN PHARMA AFTER 1.1.2 006 I.E. THE DATE OF ITS MERGER. 44. IN THE RESULT, ASSESSEES GROUND OF APPEAL NO.8 IS ALLOWED. 45. AS REGARDS GROUND NO.9, BRIEF FACTS ARE THAT DU RING THE COURSE OF THE ASSESSMENT PROCEEDINGS, THE ASSESSEE FILED FORM 3CL AND 3CM PERTAINING TO THE 8 R&D UNITS. IN THE 3 CL CERTIFICATE DATED 22.11.2010, THE PRESCRIBED AUTHOR ITY DETERMINED THE ELIGIBLE CAPITAL AND REVENUE EXPENDITURES AT RS .6298.23 LAKHS AND RS.12780.38 LAKHS. THE AO OBSERVED THAT AS PER EXPLANATION TO SECTION 35(2AB), EXPENDITURE ON CLINICAL TRIAL I S ALLOWABLE. HE OBSERVED THAT THE TOTAL AMOUNT ALLOWABLE AS A DEDUC TION IS RS.31,458.23 LAKHS AND 150% OF THIS AMOUNT IS RS.47, 187.345 LAKHS, BUT THE ASSESSEE HAS CLAIMED WEIGHTED DEDUCT ION OF RS.47,707.11244 LAKHS. THEREFORE, THE AO SOUGHT TO DISALLOW THE EXCESS CLAIM OF RS.5,19,76,744 WHICH WAS CONFIRMED BY THE DRP. WITH REGARD TO CLINICAL TRIAL EXPENDITURE ALSO, THE DRP REFUSED TO GRANT ANY RELIEF IN THE LIGHT OF THE DECISION OF TH E HON'BLE KARNATAKA HIGH COURT IN THE CASE OF G.E. INDIA TECH NOLOGY CENTRE (P) LTD (CITED SUPRA). AGAINST THE CONSEQUENTIAL A SSESSMENT ORDER PASSED DISALLOWING THE ABOVE EXPENDITURE, THE ASSES SEE IS IN APPEAL BEFORE US. ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 35 OF 61 46. THE LEARNED COUNSEL FOR THE ASSESSEE FAIRLY ADM ITTED THAT AS THE EXPENDITURE WAS NOT APPROVED BY THE DSI R, THE DEDUCTION CLAIMED @ 150% OF EXPENDITURE WAS NOT GRAN TED. HE PRAYED THAT AT LEAST 100% OF THE DEDUCTION OF RS.3,4 6,51,162 SHOULD BE ALLOWED AS PER SECTION 35 (D)(I) ) AND 3 5 (1)(IV) OF THE ACT. IN SUPPORT OF THIS CONTENTION, THE LEARNED COU NSEL FOR THE ASSESSEE PLACED RELIANCE UPON THE FOLLOWING DECISIO NS: I) DCIT VS. RELIANCE CELLULOSE PRODUCTS LTD REPORTE D IN (2013) 36 CCH 269 II) ADIT VS. BHAGIRADHA CHEMICALS & INDUSTRIES LTD (ITA NO.906/HYD/2009, DATED 9.5.2012). III) DCIT VS. INDIAN IMMUNOLOGICALS LTD REPORTED IN (2014) 42 CCH 65 47. THE LEARNED DR HOWEVER, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 48. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THE EXPENDITURE AS ADMITTED , HAS NOT BEEN APPROVED BY THE DSIR AND THEREFORE, THE WEIGHT ED DEDUCTION U/S 35(2AB) ON THESE AMOUNTS ARE NOT CLEA RLY ALLOWABLE. WE FIND THAT THE COORDINATE BENCH OF THI S TRIBUNAL IN THE CASES RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE, HAS HELD THAT WHERE THE ASSESSEE WAS HAVI NG R&D CENTRES WHICH WERE NOT DULY RECOGNIZED BY DSIR, THE N THE ASSESSEE WAS ENTITLED FOR DEDUCTION U/S 35(1) IN RE SPECT OF EXPENDITURE ON SCIENTIFIC RESEARCH AND 100% DEDUCTI ON U/S 35(1)(IV) ON CAPITAL EXPENDITURE INCURRED ON R& D E XPENDITURE AND THE BALANCE OF THE EXPENDITURE, IF ANY, NOT APP ROVED BY DSIR WILL HAVE TO BE CONSIDERED FOR DEDUCTION U/S 3 5(1) OR UNDER NORMAL PROVISIONS, IF THE ASSESSEE FURNISHES FORM 3CL TO ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 36 OF 61 SUBSTANTIATE SUCH CLAIM. THEREFORE, WE ARE OF THE O PINION THAT THE ASSESSEE IS ELIGIBLE FOR DEDUCTION U/S 35(1)(I) AND 35(1)(IV) OF THE ACT OF 100% OF THE EXPENDITURE INCURRED BY T HE ASSESSEE ON R&D CENTRES NOT APPROVED BY DSIR. IN VIEW OF THE SAME, WE SET ASIDE THE ISSUE TO THE FILE OF THE AO TO RECONS IDER THE SAME IN ACCORDANCE WITH LAW. IT HAS ALSO BEEN BROUGHT TO OUR NOTICE BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT FOR TH E A.Y 2003- 04 AND 2004-05, THE CIT (A) HAS ALLOWED DEDUCTION O N CLINICAL TRIALS BY ORDERS DATED 18.11.2013 IN THE APPEALS FI LED BY THE ASSESSEE AGAINST THE ORDER U/S 154 OF THE ACT DATED 26.3.2005. THE AO SHALL ALSO CONSIDER THESE ORDERS ALSO WHILE ALLOWING THE EXPENDITURE INCURRED BY THE ASSESSEE ON CLINICAL TR IALS. GROUND OF APPEAL NO.9 IS ACCORDINGLY TREATED AS ALLOWED FO R STATISTICAL PURPOSES. 49. AS REGARDS GROUND NO.10 TREATING THE REPAIRS AN D MAINTENANCE AS CAPITAL EXPENDITURE, THE LEARNED COU NSEL FOR THE ASSESSEE SUBMITTED THAT THESE ARE FOR SMALL/MIN OR ASSETS SUCH AS PLASTIC CRATES, FURNITURE, ALKON MODULAR SY STEMS, TABLE STAND, PH METER, TRACTOR, CALCULATOR STORAGE CUPBOA RD, ETC., AND THE DEPRECIATION HAS BEEN ALLOWED BY THE AO. IT IS SUBMITTED THAT DUE TO SMALLNESS OF THE AMOUNT, THE ASSESSEE I S NOT PRESSING THIS GROUND BEFORE US. THEREFORE, THIS GRO UND OF APPEAL IS REJECTED AS NOT PRESSED. 50. AS REGARDS GROUND NO.11, BRIEF FACTS ARE THAT O N EXAMINATION OF BOOKS OF ACCOUNT OF THE ASSESSEE, TH E AO NOTICED THAT THE ASSESSEE HAS DEBITED EXPENDITURE W HICH IS PURELY PERSONAL IN NATURE INCURRED ON DOCTORS/GOVT. SERVANTS ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 37 OF 61 AND OTHER GUESTS AND OBSERVED THAT THIS EXPENDITURE IS IN THE NATURE OF TRAVEL, CONVEYANCE, LUNCH/DINNER, GIFTS A ND COMPLIMENTS, AND THAT THE ASSESSEE HAS CLAIMED IT A S BUSINESS PROMOTION EXPENDITURE. HE OBSERVED THAT THIS EXPEND ITURE IS NOT ON ACCOUNT OF ANY SPONSORSHIP FOR BUSINESS AND AS ALREADY OBSERVED, IT IS PERSONAL IN NATURE. HE, THEREFORE, DISALLOWED THE SAME AND BROUGHT IT TO TAX. THE DRP CONFIRMED THE A SSESSMENT ORDER AND THE ASSESSEE IS IN APPEAL BEFORE US. 51. THE LEARNED COUNSEL FOR THE ASSESSEE, WHILE REI TERATING THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW, SUBMITTED THAT DOCTORS ARE THE BACKBONE OF THE MEDICAL WORLD AND THEY SPREAD AWARENESS ABOUT THE LATEST MOLECULES IN THE MEDICINAL FIELD IN THE CONFERENCES THEY ATTEND. THEREFORE, AC CORDING TO HIM, THE TRAVEL AND OTHER EXPENDITURE ON ACCOUNT OF THE PARTICIPATION OF DOCTORS IS FOR BONAFIDE BUSINESS P URPOSES OF THE ASSESSEE. THUS, ACCORDING TO HIM, THE SAID EXPE NDITURE IS ALLOWABLE AS BUSINESS EXPENDITURE. HE ALSO PLACED R ELIANCE UPON THE FOLLOWING DECISIONS TO SUPPORTS OF ASSESSE ES CLAIM OF BUSINESS EXPENDITURE: I) ACIT VS. GENO PHARMACEUTICALS LTD (ITA NO.12/PNJ/2014) FOR A.Y 2010-11 DT. 30.05.2014. II) SYNCOM FORMULATIONS (I) LTD VS. DCIT (ITA NO.6429& 6428/MUM/2012) FOR A.Y 2010-11 & 2011-12 DATED 23.12.2015. III) ELI LILY & CO. (INDIA) PVT LTD VS. ASSTT. COMMISSIO NER OF INCOME TAX, (ITA NO.788/DEL/2015 FOR A.Y 2010-11 DAT ED 24.11.2015 IV) M/S. LIVA HEALTH CARE LTD VS. ACIT (ITA NO.847/M/12 & ITA NO.388/M/12 (MUMBAI ITAT). ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 38 OF 61 52. WE FIND THAT THIS ISSUE HAD ARISEN IN THE ASSES SEES OWN CASE FOR THE EARLIER A.YS AND THE TRIBUNAL HAS C ONSIDERED THIS ISSUE AT PARA 11 TO 11.5 AS UNDER: 11. GROUND NO.9 READS AS UNDER : '9. AO AND THE LD. DRP HAS ERRED IN DISALLOWING VAR IOUS PAYMENTS AS FOLLOWS: I) BUSINESS PROMOTION EXPENDITURE RS.8,25,910/- II) GIFTS & COMPLIMENTS RS.68 ,62,136/- III) LOCAL DOCTORS MEET EXPENSES RS.1, 03,29,388/- IV) INDIVIDUAL DOCTOR SERVICE RS.8, 84,41,258/- THE ABOVE EXPENDITURE HAVE BEEN DISALLOWED ERRONEOU SLY BY ASSESSING OFFICER ON THE GROUND THAT THE SAME IS NOT INCURRED WHOLLY AND EXCLUSIVELY FOR BUSINESS.' 11.1 THIS GROUND PERTAINS TO DISALLOWANCE OF VARIOU S PAYMENTS TOWARDS: I) BUSINESS PROMOTION EXPENDITURE: RS. 8,25,910 II) GIFTS & COMPLIMENTS: RS. 68,62,136 III) LOCAL DOCTORS MEET EXPENSES: RS. 1,03,29,388 A .Y.06-07 DR. REDDY'S LABORATORIES LTD. IV) INDIVIDUAL DOCTOR SERVICES: RS. 8,84,41,258 DUR ING THE YEAR THE ASSESSEE HAS INCURRED EXPENDITURE TOWARDS SALES PRO MOTION WHICH COMPRISE OF BUSINESS PROMOTION EXPENDITURE, GIFTS A ND COMPLIMENTS, LOCAL DOCTORS MEET EXPENSES, INDIVIDUAL DOCTOR SERV ICE. IT WAS SUBMITTED THAT THE EXPENDITURE WERE INCURRED IN THE COURSE OF BUSINESS AND WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THE AO /DRP DISALLOWED THE EXPENDITURE STATING THAT THE EXPENDITURE IS NOT INC URRED IN THE COURSE OF THE BUSINESS OF THE ASSESSEE. 11.2 THIS ISSUE WAS A RECURRING ONE HAVING BEEN CON SIDERED BY ITAT IN ASSESSMENT YEAR 2003-04 IN ITA NO.655/HYD/07 DATED 29/10/2010 IN AY 2003-04. BUSINESS PROMOTION EXPENDITURE WAS STAT ED TO BE PAYMENTS TO THE DOCTORS, HOSPITALS IN CASH AMOUNT AND ALSO L IKE GIFTS. THE CONTENTION OF THE ASSESSEE WAS THAT THIS EXPENDITUR E WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS, WHEREA S AO/DRP WAS OF THE OPINION THAT THE ASSESSEE CANNOT EXPLAIN SAID PAYME NTS AS RELATED TO BUSINESS. SIMILAR ISSUE WAS EXAMINED BY ASSESSING OF FICER AND CIT(A) IN ASSESSMENT YEAR 2003-04 IN THE ABOVE ORDER (SUPRA). ITAT ALSO UPHELD THE DISALLOWANCE OF THESE ITEMS VIDE PARA-39 OF THE ORDER. ACCORDINGLY, THE ADDITION ON THIS ACCOUNT STANDS CONFIRMED. LIKE WISE THE EXPENDITURE OF GIFTS AND COMPLIMENTS AND OTHER EXPENDITURE OF S IMILAR NATURE WAS ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 39 OF 61 ALSO NOT ALLOWED IN THE ORDER OF ITAT (SUPRA). RESP ECTFULLY FOLLOWING, WE UPHOLD THE ORDER OF AO/DRP ON VARIOUS EXPENDITURES. 11.2 WITH REGARD TO LOCAL DOCTOR MEET EXPENDITURE I T WAS SUBMITTED THAT EXPENDITURE WAS INCURRED ON DOCTORS FOR PROVISION O F VARIOUS GIFTS IN INDIVIDUAL CAPACITY INCLUDING GIFTS, TICKETS, SPONS ORSHIP ETC. IT WAS CONTENDED THAT THIS WAS FOR BUSINESS PROMOTIONAL EX PENSES WHICH ARE TO BE ALLOWED AS REVENUE EXPENDITURE. IN ASSESSMENT YE AR A.Y.2003-04, THIS ISSUE WAS SET ASIDE TO THE FILE OF ASSESSING OFFICE R FOR FRESH CONSIDERATION WITH THE DIRECTION TO ASSESSEE TO SUBSTANTIATE THE BUSINESS EXPEDIENCY TO INCUR THIS EXPENDITURE. RESPECTFULLY FOLLOWING THE ABOVE, IN THIS YEAR ALSO, WE MODIFY THE ORDER OF AO/DRP TO THAT EFFECT AND DI RECT ASSESSING OFFICER TO EXAMINE THE NATURE OF EXPENDITURE AND WH ETHER THE SAME CAN BE ALLOWED AS INCURRED FOR THE PURPOSE OF BUSINESS. ACCORDINGLY, ISSUE WAS SET ASIDE TO THE FILE OF ASSESSING OFFICER TO E XAMINE AND DECIDE AFRESH. TO THAT EXTENT, ASSESSEE'S GROUND IS ALLOWE D FOR STATISTICAL PURPOSES. 11.3 INDIVIDUAL DOCTORS SERVICES: ON THE REASON THA T ASSESSEE INCURRED THESE EXPENSES TOWARDS INDIVIDUAL DOCTORS AND PAYME NT WERE MADE IN CASH OR KIND BOTH TRAVEL EXPENSES, SPONSORSHIP ETC. THE ASSESSEE WAS ASKED TO JUSTIFY THE EXPENDITURE. THE AO WAS OF THE VIEW THAT DOCTOR WOULD NOT ADMIT THE BENEFIT AS A RECEIPT AND MOST O F THE EXPENDITURE WAS SELF VOUCHED AND ARE UNVERIFIABLE IN NATURE AND DIS ALLOWANCE MADE WAS TO THE EXTENT OF RS.8,84,41,258/-. THIS ISSUE WAS C ONSIDERED BY ITAT IN THE ORDER SUPRA AS UNDER : '42 THE NEXT IS WITH REGARD TO DISALLOWANCE OF INDI VIDUAL DOCTOR'S MEET EXPENSES AT RS.3,20,97,763/-. THIS EXPENDITURE INCL UDES SPONSORSHIP OF DOCTORS' TRAVEL FROM STATES TO ATTEND THE CONFERENC E ORGANIZED BY THE 3RD PARTY TO VARIOUS PARTS OF THE COUNTRY FOR WHICH NO DETAILS HAVE BEEN GIVEN. IT ALSO INCLUDES EXPENDITURE LIKE SPONSORING VACATIONS DOCTORS AND HIS FAMILY AND GIFTS INCLUDING HOSPITAL EQUIPMENTS LIKE LASER MACHINES ETC. SINCE NO SATISFACTORY EXPLANATION WAS GIVEN BY THE ASSESSEE DURING THE ASSESSMENT PROCEEDINGS, ASSESSING OFFICER DISAL LOWED THE SAME. THE CIT(A) SET ASIDE THE ISSUE TO THE FILE OF ASSESSING OFFICER WITH A DIRECTION TO A.Y.06-07 VERIFY THE NATURE OF EXPENDITURE AND D ISALLOW ONLY THAT EXPENDITURE WHICH ARE NOT INCURRED FOR THE PURPOSE OF BUSINESS. WE DO NOT FIND ANY INFIRMITY IN THE DIRECTION OF THE CIT( A) AND THE ASSESSEE IS DIRECTED TO SUBSTANTIATE ITS CLAIM BEFORE ASSESSING OFFICER. ACCORDINGLY THIS GROUND OF THE ASSESSEE IS DISMISSED.' SINCE THE ISSUE WAS SET ASIDE BY CIT(A) TO THE FILE OF THE ASSESSING OFFICER TO VERIFY THE NATURE OF EXPENDITURE AND DISALLOW ON LY THAT EXPENDITURE WHICH IS NOT INCURRED FOR THE PURPOSE OF BUSINESS, WE ALSO MODIFY THE ORDER OF AO/DRP AND DIRECT THE ASSESSING OFFICER TO EXAMINE THE NATURE OF EXPENDITURE AND CONSIDER DISALLOWANCE OF EXPENDI TURE WHICH IS NOT ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 40 OF 61 INCURRED FOR THE PURPOSE OF BUSINESS. THE ISSUE IS RESTORED TO THE FILE OF ASSESSING OFFICER. 11.4 THE CIRCULAR ISSUED BY THE BOARD IN 5/2012 AND CODE OF ETHICS REGULATIONS 2002 ISSUED BY MEDICAL COUNCIL OF INDIA WAS APPLICABLE FROM 2003-04 AND FOR THE RELEVANT ASSESSMENT YEAR, THE C ODE OF ETHICS IS APPLICABLE AND SO EXPENDITURE INCURRED ON THE DOCTO RS CAN BE CONSIDERED AS UNETHICAL. THE ASSESSING OFFICER IS ALSO DIRECTE D TO EXAMINE THIS ASPECT ALSO IN ADDITION TO THE DIRECTIONS GIVEN BY THE ITA NO.655/HYD./07 DATED 29.10.2010. WITH THESE DIRECTIONS THE GROUND IS CON SIDERED PARTLY ALLOWED FOR STATISTICAL PURPOSES. 53. RESPECTFULLY FOLLOWING THE SAME, WE SET ASIDE T HE ISSUE TO THE FILE OF THE AO WITH A SIMILAR DIRECTION TO V ERIFY THE NATURE OF THE EXPENDITURE AND DISALLOW ONLY SUCH EXPENDITURE WHICH IS NOT INCURRED FOR THE BUSINESS PURPOSES OF THE ASSESSEE. THIS GROUND IS ACCORDINGLY TREATED AS ALLOWED FOR STATISTICAL PURP OSES. 54. AS REGARDS GROUND NO.12, BRIEF FACTS ARE THAT O N EXAMINATION OF PAYMENTS MADE BY THE ASSESSEE FOR TH E TECHNICAL SERVICES RECEIVED BY IT, THE AO NOTICED THAT SOME P AYMENTS ARE BEING MADE TO FOREIGN COMPANIES WITHOUT MAKING TDS U/S 195 OF THE ACT. HE OBSERVED THAT UNDER ARTICLES 12 &15 OF THE DTAA WITH USA, PAYMENTS MADE TO COMPANIES UNDER THE ABOVE HEA D ARE TAXABLE IN THE SOURCE COUNTRY AND THEREFORE, TDS U/ S 195 WAS TO BE DONE. HE THEREFORE, PROPOSED TO DISALLOW THE SAM E U/S 40(A)(I) OF THE ACT. THE ASSESSEE RAISED ITS OBJECTION BEFOR E THE DRP AND THE DRP EXAMINED THE DTAAS WITH RESPECTIVE COUNTRI ES FOR THE REASONS FOR NON DEDUCTION OF TDS AND DIRECTED THE A O TO VERIFY THE NATURE OF THE PAYMENTS IN THE CASES OF M/S. ABL ON LTD PHARMA LLC, INDUSTRIAL QUIONICAS FALCON & M/S. SQUIRE & M/S HECTOR, WHILE IN THE CASE OF ACLARIO PHARMA DEVELOPMENT, US A, THE DRP OBSERVED THAT THE EXPENDITURE IS NOT FOR CLINICAL T RIALS AND ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 41 OF 61 THEREFORE, ACCORDING TO HIM, THERE IS A CLEAR SHARI NG OF EXPERIENCES OR SKILL AS REVEALED FROM THE INVOICE WHICH MENTION S REVIEW BACKGROUND, IMMUNOTOXICITY AND RAT AND DOG SERVICES AD ACCORDING TO PARA 2 OF ARTICLE 12 OF INDO-US DTAA FEES FOR INCLUDED SERVICES ARE TAXABLE IN THE SOURCE COUNTRY . THUS, THE CONTENTION OF THE ASSESSEE WAS REJECTED BY THE DRP. CONSEQUENTLY, THE AO DISALLOWED THE SAME. 55. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE PAYMENT TO M/S. ACLARIO PHARMA DEVELOPMENT, USA IS ONLY A SUM OF RS.1,36,583 AND IS MADE FOR CLINICAL TRIALS AND THERE IS NO MAKING AVAILABLE OF SUCH SERVICES TO THE ASSESSEE A ND THEREFORE, THERE IS NO REQUIREMENT TO WITHHOLD TAX. IT IS SUBM ITTED THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE D ECISION OF THE ITAT IN ASSESSEES OWN CASE REPORTED IN (2013) 35 T AXMANN.COM 339. 56. THE LEARNED DR, HOWEVER, SUPPORTED THE ORDERS O F THE AUTHORITIES BELOW. 57. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT IN THE ASSESSEES OWN CASE FOR THE A.YS 2003-04 & 2004-05 AND THE TRIBUNAL AT PARAS 11 & 12 HAS HELD AS UNDER: 11. WE HAVE CONSIDERED THE ISSUE. KEEPING IN MIND THE DETAILED ORDER OF THE CIT(A), WHICH IS EXTRACTED ABOVE AND T HE PROVISIONS OF THE INCOME-TAX ACT READ WITH DTAA WITH USA AND C ANADA, WHICH ARE ALMOST SIMILAR, WE HAVE NO REASON TO DIFF ER FROM THE ORDER OF THE CIT(A). EVEN THOUGH THE ASSESSING OFFI CER CONSIDERED THAT THE PAYMENTS WERE MADE BY WAY OF 'F EE FOR TECHNICAL SERVICES' AS PER ARTICLE 12 OF THE DTAA, THE SAME IS TAXABLE IN THE SOURCE COUNTRY ONLY IF SUCH SERVICES MAKE ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 42 OF 61 AVAILABLE ANY TECHNICAL KNOWLEDGE, EXPERTISE, ETC. OR THERE IS TRANSFER OF TECHNICAL PLAN OR DESIGN. IN THIS CASE, AS RIGHTLY CONSIDERED BY THE LEARNED CIT(A), THE ASSESSEE WAS CONDUCTING CLINICAL TRIALS THROUGH THE CROS IN USA TO COMPLY W ITH THE REGULATIONS THEREIN AND THE CROS WHO ARE EXPERTS IN THIS FIELD WERE ONLY CONDUCTING STUDIES AND SUBMITTING THE REP ORTS IN RELATION THERETO. THEY ARE NEITHER TRANSFER OF TECH NICAL PLAN OR TECHNICAL DESIGN NOR MAKING AVAILABLE OF TECHNICAL KNOWLEDGE, EXPERIENCE OR KNOW-HOW BY THE CROS TO THE ASSESSEE COMPANY. IN FACT, THE ASSESSEE COMPANY DID NOT GET ANY BENEF IT OUT OF THE SAID SERVICES IN USA AND ASSESSEE WAS ONLY GETTING A REPORT IN RESPECT OF FIELD STUDY ON ITS BEHALF, WHICH WOULD H ELP IT IN GETTING REGISTERED WITH THE REGULATORY AUTHORITY. S INCE THERE IS NO MAKING AVAILABLE OF TECHNICAL SKILL, KNOWLEDGE O R EXPERTISE OR PLANS OR DESIGNS IN THE PRESENT CASE, THE AMOUNT S PAID BY THE ASSESSEE DO NOT FALL UNDER ARTICLE 12, BUT COME WIT HIN THE PURVIEW OF ARTICLE 7 OF THE DTAA. THEREFORE, THE AM OUNTS PAID ARE TO BE CONSIDERED AS BUSINESS RECEIPTS OF THE SA ID CROS AND SINCE THEY DO NOT HAVE ANY PE IN INDIA ON WHICH ASP ECT THERE IS NO DISPUTE, THERE IS NO NEED TO DEDUCT TAX AT SOURC E. SIMILAR ISSUE WAS ANALYSED AND CONSIDERED BY THE AAR IN THE CASE OF ANAPHARM INC (SUPRA), WHICH IS ONE OF THE RECIPI ENTS IN THE ASSESSEE'S CASE ALSO. THE AAR IN THAT CASE HELD AS UNDER- ' MERE PROVISION OF TECHNICAL SERVICES IS NOT ENOUGH TO ATTRACT ART. 12(4)(B). IT ADDITIONALLY REQUIRES THAT THE SE RVICE PROVIDER SHOULD ALSO MAKE HIS TECHNICAL KNOWLEDGE, EXPERIENC E, SKILL, KNOW-HOW ETC., KNOWN TO THE RECIPIENT OF THE SERVIC E SO AS TO EQUIP HIM TO, INDEPENDENTLY PERFORM THE TECHNICAL F UNCTION HIMSELF IN FUTURE, WITHOUT THE HELP OF THE SERVICE PROVIDER. IN OTHER WORDS, PAYMENT OF CONSIDERATION WOULD BE REGA RDED AS 'FEE FOR TECHNICAL/INCLUDED SERVICES' ONLY IF THE TWIN T EST OF RENDERING SERVICES AND MAKING TECHNICAL KNOWLEDGE AVAILABLE A T THE SAME TIME IS SATISFIED. IN THE PRESENT CASE, THE APPLICA NT RENDERS BIOANALYTICAL SERVICES WHICH, NO DOUBT, ARE VERY SO PHISTICATED IN NATURE, BUT THE APPLICANT DOES NOT REVEAL TO ITS CL IENTS AS TO HOW IT CONDUCTS THOSE TESTS OR THE INPUTS THAT HAVE GON E INTO IT, SO AS TO ENABLE THEM TO CARRY OUT THOSE TESTS THEMSELVES IN FUTURE. A BROAD DESCRIPTION OR INDICATION OF THE TYPE OF TEST CARRIED OUT TO REACH THIS CONCLUSION DOES NOT ENABLE THE APPLICANT 'S CLIENT TO DERIVE REQUISITE KNOWLEDGE TO CONDUCT THE TESTS OR TO DEVELOP THE TECHNIQUE BY ITSELF. THE MERE FACT THAT THE TESTS I N QUESTION ARE HIGHLY TECHNICAL IN NATURE WILL NOT MAKE A DIFFEREN CE. IN ITS AFFIDAVIT THE APPLICANT AFFIRMS THAT ONLY FINAL RES ULTS, CONCLUSION OF DATA OF BIOEQUIVALENCE TESTS ARE PROVIDED TO THE RECIPIENT. CLINICAL PROCEDURE, ANALYTICAL METHODS, ETC., WHICH ARE PROPRIETARY ITEMS OF THE APPLICANT, HAVE NEITHER BE EN NOR WILL THEY EVER BE TRANSFERRED, ASSIGNED OR HANDED OVER T O 5 OR ANY ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 43 OF 61 OTHER INDIAN CLIENT. FROM THE PERUSAL OF THE RELEVA NT AGREEMENTS, NO PROVISION IS FOUND WHICH WOULD ENTITLE THE CLIEN TS TO KNOW THE DETAILS OF THE ANALYTICAL METHODS AND PROCEDURE S EMPLOYED BY THE APPLICANT IN CARRYING OUT THE BIOEQUIVALENCE TESTS. THE ONLY DOUBT CAST BY C1. 15 OF THE AGREEMENT WITH 5 I S CLEARED BY S'S STATEMENT THAT THE SAID CLAUSE WHICH WAS PART O F STANDARD FORMAT WAS NEVER GIVEN EFFECT TO. IT SEEMS TO BE IN APPLICABLE ALSO HAVING REGARD TO THE ACTUAL MODALITIES OF THE TRANSACTION AS SET OUT IN THE APPLICATION. THEN AGREEMENT WITH R S AYS THAT R SHALL BE THE OWNER OF THE TESTED SAMPLES AND TEST C OMPOUNDS. FURTHER, THE APPLICANT WILL STORE TESTED SAMPLES AN D TEST COMPOUNDS FOR THREE MONTHS AND MAKE THESE AVAILABLE TO THE CLIENT AT THE EXPIRY OF THAT PERIOD. HANDING OVER T ESTED SAMPLES AND TEST COMPOUNDS CANNOT BE EQUATED WITH MAKING TE CHNOLOGY, KNOW-HOW, ETC., AVAILABLE TO R. THE AGREEMENT ALSO STATES THAT R SHALL BE THE OWNER OF ALL INTELLECTUAL PROPERTY RIG HTS RESULTING FROM THE SERVICES. THIS WOULD MEAN THAT, IF ON THE BASIS OF THESE RESULTS, THE CLIENT IS ABLE TO ACQUIRE PATENT OR OT HER INTELLECTUAL PROPERTY RIGHTS IN RESPECT OF NEW GENERIC DRUGS DEV ELOPED BY IT, THEN THE APPLICANT SHALL NOT CLAIM ANY INTEREST WHA TSOEVER IN SUCH RIGHT. IT IS ALTOGETHER A DIFFERENT ASPECT. BY AGREEING TO THIS PROVISION, THE APPLICANT HAS NOT MADE ITS TECHNICAL EXPERTISE, KNOW-HOW, ETC., AVAILABLE TO R. IT IS ONLY NATURAL THAT R WHICH HAS DEVELOPED THE GENERIC DRUG SHOULD ENJOY THE INT ELLECTUAL PROPERTY RIGHTS IN RELATION THERETO. THE ANALYTICAL TEST HAS NOT CONTRIBUTED TO THE DEVELOPMENT OF NEW GENERIC DRUG. THE TEST HAS ONLY SHOWN WHETHER THAT DRUG IS AS EFFICACIOUS AS THE REFERENCE DRUG. DEVELOPMENT OF NEW DRUG AND TESTING ITS EFFICACY ARE NOT ONE AND THE SAME THING. BY MERELY ACQUIRING KNOWLEDGE OF THE TESTING METHODS ONE DOES NOT GET A NY INSIGHT AS TO HOW A NEW DRUG COULD BE DEVELOPED. IN THE LIG HT OF THE ABOVE DISCUSSION INTERPRETING THE EXPRESSION 'MAKE AVAILABLE', IT FOLLOWS THAT C1. (B) OF ART. 12(4) RELIED UPON BY T HE REVENUE DOES NOT COME INTO PLAY AND THE SERVICES IN QUESTIO N CANNOT BE CONSIDERED TO BE 'FEES FOR INCLUDED SERVICE' WITHIN THE MEANING OF THIS PROVISION. THE SECOND LIMB OF CL. (B) REFER S TO 'DEVELOPMENT AND TRANSFER OF A TECHNICAL PLAN OR TE CHNICAL DESIGN'. OBVIOUSLY, THAT HAS NO APPLICATION HERE. THE APPLICANT USES ITS EXPERIENCE AND SKILL ITSELF IN CONDUCTING THE BIOEQUIVALENCE TESTS, AND PROVIDES ONLY THE FIN AL REPORT CONTAINING CONCLUSIONS, TO THE CLIENT. THE INFORMAT ION CONCERNING SCIENTIFIC OR COMMERCIAL EXPERIENCE OF T HE APPLICANT OR RELATING TO THE METHOD, PROCEDURE OR PROTOCOL US ED IN CONDUCTING BIOEQUIVALENCE TESTS IS NOT BEING IMPART ED TO THE PHARMACEUTICAL COMPANIES AND THE CONSIDERATION IS N OT PAID FOR THAT PURPOSE. ON THE BASIS OF THE FINAL REPORT, THE PHARMACEUTICAL COMPANIES WILL NOT BE ABLE TO FIND OUT WHAT METHOD, PROCEDURE ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 44 OF 61 OR PROTOCOL WAS USED IN CONDUCTING THE TESTS. MOREO VER, THE TEST REPORTS ARE DRUG SPECIFIC. HENCE THE MATERIAL FURNI SHED BY THE APPLICANT WILL NOT IN ANY WAY HELP THE CUSTOMERS TO FACILITATE FURTHER RESEARCH AND DEVELOPMENT OF NEW DRUGS AS CO NTENDED BY THE REVENUE. AS SUCH, THE FEES RECEIVED BY THE APPL ICANT ARE TO BE TREATED AS BUSINESS INCOME AND NOT ROYALTY INCOM E. SINCE THE APPLICANT IS IN THE BUSINESS OF PROVIDING BIO-ANALY TICAL SERVICES TO VARIOUS PHARMACEUTICAL COMPANIES, THE CONSIDERAT ION RECEIVED BY IT FROM THEM WOULD BE ITS BUSINESS INCOME. IN VI EW OF ART. 7 R/W ART. 5, SUCH INCOME CAN BE TAXED IN INDIA ONLY IF THE APPLICANT HAS A PE IN THIS COUNTRY. THE APPLICANT H AS DENIED THE EXISTENCE OF ANY PE HERE AND THERE IS NOTHING ON RE CORD TO INDICATE ANYTHING TO THE CONTRARY. ON THE FACTS STA TED, THE EXISTENCE OF PE IN INDIA CANNOT BE INFERRED ALSO. I T IS, THEREFORE, RULED THAT THE FEE PAID BY S AND R TO THE APPLICANT IN RESPECT OF BIOEQUIVALENCE TESTS CONDUCTED BY IT IS IN THE NATU RE OF 'BUSINESS PROFITS' UNDER ART. 7 AND THE SAME IS NOT TAXABLE I N INDIA AS THE APPLICANT DOES NOT HAVE A PE SITUATED IN THIS COUNT RY.-RAYMOND LTD. V. DY. CIT [2003] 80 IT] (MUMBAI) 120 : [2003] 86 ITD 791 (MUMBAI) , MCKINSEY & CO. INC. (PHILLIPPINES) & ORS. V. ASSTT. DIRECTOR OF IT [2006] 99 IT] (MUMBAI ) 857 CONCURRED WITH; DIAMOND SERVICES INTERNATIONAL (P) LTD. V. UNION OF INDIA [2008] 216 CTR (BOM) 120 : [ 2008] 169 TAXMAN 201 (BOM) RELIED ON. CONCLUSION: APPLICANT, TAX RESIDENT OF CANADA, ONLY PROVIDING F INAL RESULTS TO ITS INDIAN CLIENTS BY USING HIGHLY SOPHISTICATED BI O-ANALYTICAL KNOW-HOW, WITHOUT PROVIDING ANY ACCESS WHATSOEVER T O THE CLIENTS TO SUCH KNOW-HOW, FEE RECEIVED BY IT IS BUS INESS INCOME AND NOT FEE FOR TECHNICAL/INCLUDED SERVICES OR ROYA LTY AND APPLICANT HAVING NO PE IN INDIA, SUCH INCOME WOULD NOT BE TAXABLE IN INDIA BY VIRTUE OF RELEVANT PROVISIONS O F DTAA BETWEEN INDIA AND CANADA'. 12. WE AGREE WITH THE ABOVE OPINION EXPRESSED BY THE A AR AND ACCORDINGLY, WE UPHOLD THAT THE AMOUNTS PAID BY THE ASSESSEE COMPANY TO THE CROS ARE NOT TAXABLE IN INDIA. THAT BEING SO, THERE IS NO NEED FOR THE ASSESSEE TO DEDUCT TAX AT SOURCE. CONSEQUENTLY, THE IMPUGNED ORDER OF THE CIT(A) IS C ONFIRMED AND THE GROUNDS RAISED BY THE REVENUE IN THESE APPE ALS ARE REJECTED. 58. FACTS AND CIRCUMSTANCES IN THE CASE BEFORE US BE ING SIMILAR, RESPECTFULLY FOLLOWING THE DECISION OF THE COORDINATE BENCH IN THE ASSESSEES OWN CASE, WE ALLOW THIS GRO UND OF APPEAL. ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 45 OF 61 59. AS REGARDS GROUND NO.13, BRIEF FACTS ARE THAT T HE ASSESSEE CLAIMED DEDUCTION U/S 10B OF THE ACT FOR O NE UNIT AT BAJPALLY AND ANOTHER UNIT AT PAIDI BHIMAVARAM. DURI NG THE ASSESSMENT PROCEEDINGS, ASSESSEE FILED THE COPY OF THE BOARD OF INDUSTRIES ONLY IN THE CASE OF BAJPALLY UNIT AND FO R THE OTHER UNIT, NO SUCH RATIFICATION LETTER WAS FILED. THEREFORE, T HE AO ALLOWED DEDUCTION U/S 10B FOR BAJPALLI UNIT ONLY. THE ASSE SSEE RAISED OBJECTION BEFORE THE DRP ALONG WITH A LETTER DATED 15.07.2011 STATING ALSO THAT THE CORPORATE OVERHEADS WERE NOT ALLOCATED TO VARIOUS UNITS BEFORE GRANTING/DISALLOWANCE U/S 10B OF THE ACT. THE ASSESSEE ARGUED BEFORE THE DRP THAT IT HAS BEEN CLAIMING DEDUCTION U/S 10B AS PER THE APPROVAL GIVEN BY THE DEVELOPMENT COMMISSIONER OF VSEZ AND THAT THIS CERTIFICATE WAS I SSUED BY THE COMMISSIONER UNDER THE DELEGATED AUTHORITY OF BOARD OF INDUSTRIES. THE ASSESSEE PLACED RELIANCE UPON THE D ECISION OF THE TRIBUNAL AT DELHI IN THE CASE OF DCIT VS. VALLIANT COMMUNICATION LTD IN ITA NO.2706/DEL/2008. FURTHER, THE ASSESSEE A LSO FILED A LETTER DATED 10.06.2011 FROM THE ASSTT. .DEVELOPMEN T COMMISSIONER VSEZ STATING THAT THE BOARD OF APPROVAL S RECTIFIED THE APPROVAL DATED 21.02.2003 VIDE LETTER NO.14/1/2 011-EOU DATED 18.1.2011. THE DRP TAKING THE NOTE OF THE APPROVAL/RECTIFICATION BY THE BOARD OF INDUSTRIES H ELD THAT THE ASSESSEE IS ENTITLED FOR THE DEDUCTION U/S 10B OF T HE ACT WITH REGARD TO PAIDI BHIMAVARAM PROJECT, BUT HOWEVER, DI RECTED THE REDUCTION OF THE CORPORATE OVERHEAD BEFORE ALLOWING THE DEDUCTION U/S 10B OF THE ACT. THE ASSESSEE IS CHALLENGING THE ALLOCATION OF THE OVERHEAD BEFORE US. ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 46 OF 61 60. THE LEARNED COUNSEL FOR THE ASSESSEE STATED THA T THE DRP BY ALLOCATING THE CORPORATE OVERHEADS TO THE EL IGIBLE UNITS, HAS ENHANCED THE DRAFT ASSESSMENT, THOUGH IT DOES N OT HAVE THE POWER TO CONSIDER THE ISSUES WHICH ARE NOT PROPOSED IN THE DRAFT ASSESSMENT ORDER. IN SUPPORT OF THIS CONTENTION, H E PLACED RELIANCE UPON THE DECISION OF THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTRE P LTD VS. DR P (338 ITR 416 (KAR.). HE ALSO DREW OUR ATTENTION TO THE PROVI SIONS OF SECTION 114C(6) OF THE ACT IN SUPPORT OF THIS CONTENTION. W ITHOUT PREJUDICE TO THE ABOVE TECHNICAL GROUND, THE ASSESSEE PRAYED THAT THE CORPORATE OVERHEAD SHOULD NOT BE ALLOCATED BECAUSE SECTION 10B CONTEMPLATES THAT ONLY PROFITS AND GAINS DERIVED FR OM UNDERTAKING IS ELIGIBLE FOR DEDUCTION AND THE 10B UNIT IS INDEP ENDENTLY FUNCTIONAL WITH SEPARATE/IDENTIFIED SET OF EMPLOYEE S AND THEREFORE, EXPENSES WHICH ARE NOT DIRECTLY RELATED TO THE UNDE RTAKING SHOULD NOT BE ALLOCATED ON ADHOC BASIS. IN SUPPORT OF THIS CONTENTION HE PLACED RELIANCE UPON THE FOLLOWING DECISIONS: A) AAR IN NATIONAL FERTILIZERS LTD., IN RE (145 TAXMAN 5) B) CIT VS. KANMANI METALS & ALLOYS LTD (183 ITR 327(BO M.) C) TIDE WATER OIL CO. (INDIA) LTD VS. CIT (353 ITR 300 (CAL.) D) INCOME TAX APPELLATE TRIBUNALS ORDER IN ASSESSEES OWN CASE REPORTED IN (2014) 30 ITR (TRIB.) 434. E) CIT VS. HINDUSTAN UNILEVER LTD (2014) 42 TAXMANN.CO M 132 (MAD). 61. WITHOUT PREJUDICE TO THE ABOVE CONTENTION, THE ASSESSEE PRAYED THAT THE EXPENSES ARE TO BE ALLOCAT ED TO THE RESPECTIVE UNITS BY TAKING THE NOTE OF THE EXPENDIT URE FOR ALLOCATION. ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 47 OF 61 62. THE LEARNED DR HOWEVER, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE CORPORATE ENTITY ALSO HAS INVESTED THE TIME OF ITS EMPLOYEES ON THE EFFECTIVE FUNCTIONING OF THE 10B UNIT AND THEREFORE, THE CORPORATE OVERHEADS ARE TO BE ALLOCATED AMONGST ALL THE UNITS PROPORTIONATE TO TH EIR TURNOVER. 63. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT IN THE ASSESSEES OWN CASE FOR THE A.Y 2006-07, THE COORDINATE BENCH OF THIS TRIBUNAL AT M UMBAI HAS CONSIDERED THIS ISSUE AT PARA 12.5 AND FOLLOWING TH E DECISION OF THE ASSESSEES OWN CASE FOR A.Y 2003-04, THIS ISSUE IS SET ASIDE TO THE FILE OF THE AO FOR RE-EXAMINATION OF THE CLAIM ON SIMILAR LINES. FOR THE SAKE OF READY REFERENCE AND CLARITY, THE REL EVANT PARAGRAPHS ARE REPRODUCED HEREUNDER: 12.4 WITHOUT PREJUDICE TO THE ABOVE, IT WAS FURTHER CONTENDED THAT, THE A.O WHILE COMPUTING THE CORPORATE OVERHEA D, HAS CONSIDERED CORPORATE EXPENDITURE INCLUDING FINANCE CHARGES, BUT HAS FAILED TO CONSIDER INTEREST INCOME AND GAIN ON FOREIGN EXCHANGE FLUCTUATIONS WHICH ARE ALSO ATTRIBUTABLE T O CORPORATE ACTIVITIES ONLY. HENCE WHILE COMPUTING CORPORATE OV ERHEAD ALLOCABLE TO THE SAID UNITS, HE HAS TO NECESSARILY NET-OFF THE CORPORATE INCOME FROM THE CORPORATE EXPENDITURE AND NET ONLY SHOULD BE CONSIDERED AS CORPORATE OVERHEAD ALLOCABL E. 12.5 WE HAVE CONSIDERED THE ISSUE. THIS ISSUE WAS D ISCUSSED BY ITAT IN ASSESSMENT YEAR 2003-04 IN ASSESSEE'S OWN C ASE FROM PARA 14 TO PARA 18 ONWARDS. THE ISSUE WAS SET ASIDE TO THE ASSESSING OFFICER OBSERVING AS UNDER: '18. WE HAVE CAREFULLY GONE THROUGH THE ORDER OF TH E TRIBUNAL IN THE CASE OF WIPRO GE MEDICAL SYSTEM LTD. CITED SUPRA AN D WHEREIN IT WAS HELD THAT THE ASSESSEE IS RIGHTLY HAVING ALLOCATED INDIRECT EXPENSES TO THE TWO UNITS ACCORDING TO THE WAGES AND OTHER EXPE NSES ON THE BASIS OF SALES FOR ARRIVING RESPECTIVE PROFITS OF ITS TWO UNITS. THE ASSESSING OFFICER IS DIRECTED TO ACCEPT ASSESSEE'S WORKING IN RELATION TO DEDUCTION U/S.80IA. IN VIEW OF THE ABOVE JUDGMENT, IN OUR OPI NION, IN THE ABSENCE OF IDENTIFYING THE EXPENDITURE OF THE EXPOR T DIVISION, THERE IS NO BASIS OTHER THAN ALLOCATING THE TOTAL INDIRECT C OST ON THE BASIS OF ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 48 OF 61 TURNOVER. ACCORDINGLY, WE DIRECT ASSESSING OFFICER TO APPORTION THE EXPENDITURE ON THE BASIS OF TURNOVER OF VARIOUS UNI TS. THE ISSUE IS SET ASIDE TO THE FILE OF ASSESSING OFFICER FOR FRESH CO NSIDERATION.' 12.6 RESPECTFULLY FOLLOWING THE ABOVE, IN THIS YEAR ALSO THE MATTER IS SET ASIDE TO AO TO RE-EXAMINE THE CLAIM O N SIMILAR LINES. ACCORDINGLY, GROUND IS ALLOWED FOR STATISTIC AL PURPOSES. 64. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT IT IS ONLY THE NET EXPENDITURE AND NOT THE GROSS EXPEN DITURE WHICH SHOULD BE ALLOCATED AMONGST ALL THE UNITS. WE AGREE WITH THE CONTENTION OF THE ASSESSEE AND DIRECT THE AO TO ALL OCATE THE ONLY NET EXPENDITURE OF THE CORPORATE ENTITY AMONGST ALL THE UNITS ON THE BASIS OF THE TURNOVER. THUS, THE ALTERNATE CONT ENTION OF THE ASSESSEE IS ALLOWED. 65. AS REGARDS GROUND NO.14, BRIEF FACTS ARE THAT T HE ASSESSEE GRANTED A LOAN TO ITS SUBSIDIARY IN CYPRUS AND THE SUBSIDIARY PAID INTEREST AMOUNT OF RS.81,39,222 TO THE ASSESSEE AND AS PER ARTICLE 11 OF THE DTAA WITH CYPRUS, 10% ON A GROSS AMOUNT OF INTEREST IS CHARGEABLE TO TAX IN CYPRUS. IT IS SUBMITTED THAT THE DOMESTIC LAW AT CYPRUS PROVIDES THE TAX IN CENTIVES FOR THE PROMOTION OF ECONOMIC DEVELOPMENT IN CYPRUS AND THEREFORE, THERE WAS NO WITHHOLDING OF TAX ON INTEREST AMOUNT REMITTED TO THE ASSESSEE IN INDIA. THE DTAA BETWEEN INDIA AND C YPRUS VIDE ARTICLE 25, PROVIDES FOR TAX CREDIT IN INDIA WITH R ESPECT TO TAXES WITHHELD/LEVIED IN CYPRUS ON THE INTEREST AMOUNT AN D NOT WITHSTANDING THAT NO TAX HAS IN FACT, BEEN WITHHELD AS MENTIONED ABOVE, ARTICLE 25(4) SPECIFICALLY PROVIDES THAT WIT H RESPECT TO INTEREST, TAXES THAT ARE LEVIABLE IN ACCORDANCE WIT H ARTICLE 11(2) SHALL BE DEEMED TO BE THE TAX ELIGIBLE FOR TAX CRED IT IN ACCORDANCE WITH THE ARTICLE 25. BASED ON THE ABOVE ARTICLE, TH E ASSESSEE ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 49 OF 61 CLAIMED TAX CREDIT @ 10% ON GROSS AMOUNT ON TAX RECE IVED FROM CYPRUS AMOUNTING TO RS.8,13,92,220. THE ASSESSEE AL SO FILED A COPY OF THE TDS CERTIFICATE ISSUED BY THE CANARA BA NK TO THIS EFFECT. THE DRP OBSERVED THAT THE CONTRACTING STATE IN CYPRUS DID NOT LEVY ANY TAX AND THEREFORE, THE PROVISIONS OF S ECTION 11(2) OF THE ACT DOES NOT APPLY AND THEREFORE, THE CLAIM FOR CREDIT OF TAX PAYABLE IN CYPRUS WAS REJECTED. WITH REGARD TO THE CREDIT OF TDS DEDUCTED BY CANARA BANK, THE DRP DIRECTED THE AO TO ALLOW THE SAME IN PART SUBJECT TO VERIFICATION AS WHETHER THE BANK HAS REMITTED IT TO THE GOVT. A/C. 66. THE LEARNED COUNSEL FOR THE ASSESSEE, WHILE REI TERATING THE ABOVE SUBMISSIONS, SUBMITTED THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE AS THE DRP FOR THE A.Y 2008-0 9 HAS ISSUED DIRECTIONS THAT THE TAX CREDIT IS TO BE ALLOWED, IF THE INTEREST WAS TAXED IN INDIA AND PRAYED FOR SIMILAR DIRECTIONS DU RING THIS YEAR. 67. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD AND HAVING VERIFIED THE DRPS ORDER FOR A .Y 2008-09, WE FIND THAT THE DRP FOR THE A.Y 2008-09AT PARA 59 TO 6 1 HAS HELD AS UNDER: 59. THE PANEL HAS CONSIDERED THE SUBMISSIONS OF THE TAX PAYER. THERE IS NO DOUBT THAT ARTICLE 11 OF THE DTAA BETWEEN INDIA AND CYPRUS IS APPLICABLE. THE TAX PAYER HAS GIVEN A LOAN TO ITS SUBSIDIARY AND RECEIVED INTEREST OF RS.13.06 CRORES. THIS INTEREST INCOME IS TAXABLE UNDER ARTICLE 11 OF THE DTAA BOTH IN INDIA AND ALSO IN CYPRUS. CYPRUS DID NOT IMPOSE TAX ON THE INTEREST INCOME UNDER ITS DOMESTIC LAW AND TREATED THE INTEREST INCOME AS 'TAX INCENTIVE' FOR THE PURPOSE OF PROMOTION OF ECONOMIC DEVELOPMENT OF THAT COUNTRY. UNDER ARTICLE 25(4), THE TAX 'THAT WOULD ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 50 OF 61 HAVE BEEN PAYABLE IN CYPRUS @10% SHALL BE DEEMED TO BE THE TAX PAID UNDER ARTICLE 25(2) OF THE DTAA. HOWEVER, ARTICLE 25(2) PUTS A CAP ON THE TOTAL DEDUCTION OF TAX UNDER ARTICLE 25(2) WHICH SHALL NOT EXCEED THE TOTAL TAX PAYABLE ON INTEREST INCOME IN INDI A. FOR THE SAKE OF CLARITY ARTICLE 1 1 AND 25 ARE REPRODUCED FROM THE DTAA AS UNDER'; ARTICLE 11: INTEREST 1. INTEREST ARISING IN A CONTRACTING STATE AND PAID TO A RESIDENT OF THE OTHER CONTRACTING STATE MAY BE TAXED IN THAT OTHER STATE. 2. HOWEVER, SUCH INTEREST MAY ALSO BE TAXED IN THE CONTRACTING STATE IN WHICH IT ARISES AND ACCORDING TO THE LAWS OF THAT STATE, BUT IF THE RECIPIENT IS THE BENEFICIAL OWNER OF THE INTEREST, THE TAX SO CHARGED SHALL NOT EXCEED 10% OF THE GROSS AMOUNT OF THE INTEREST. 3 . .. 4. ........... 5. . 6. . 7. . .. ARTICLE 25: A VOIDANCE OF DOUBLE TAXATION 1. THE LAWS IN FORCE IN EITHER OF THE CONTRACTING STATE SHALL CONTINUE TO GOVERN THE TAXATION OF INCOME AND CAPITAL IN THE RESPECTIVE CONTRACTING STATE EXCEPT WHERE EXPRESS PROVISION TO THE CONTRARY IS MADE IN THIS AGREEMENT. 2. WHERE RESIDENT OF INDIA DERIVES INCOME OR OWNS CAPITAL WHICH, IN ACCORDANCE WITH THE PROVISIONS OF THIS AGREEMENT; MAY BE TAXED IN CYPRUS, INDIA ~HALL ALLOW AS A DEDUCTION FROM LAX ON THE INCOME OF THAT RESIDENT AND THE AMOUNT' EQUAL TO INCOME ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 51 OF 61 TAX PAID IN CYPRUS WHETHER DIRECTLY OR BY DEDUCTION; AND AS A DEDUCTION FROM THE TAX ON THE CAPITAL OF THAT RESIDENT AN AMOUNT EQUAL TO THE CAPITAL COX PAID IN CYPRUS. SUCH DEDUCTION IN EITHER COSTE SHALL NOT, HOWEVER, EXCEED THAT PART OF THE INCOME OR CAPITAL TAX (AS COMPUTED BEFORE THE DEDUCTION IS GIVEN) WHICH IS ATTRIBUTABLE, AS THE CASE MAY BE, TO THE INCOME OR THE CAPITAL WHICH MAY BE TAXED IN CYPRUS. 4. THE TAX PAYABLE IN A CONTRACTING STATE MENTIONED IN PARAGRAPH 2 AND PARAGRAPH 3 OF THIS ARTICLE SHALL BE DEEMED TO INCLUDE THE TAX WHICH WOULD HAVE BEEN PAYABLE BUT FOR THE TAX INCENTIVES GRANTED UNDER THE LAWS OF THE CONTRACTING STATE AND WHICH ARE DESIGNED TO PROMOTE ECONOMIC DEVELOPMENT. FOR THE PURPOSE OF PARAGRAPH 2 OF ARTICLE 10, THE AMOUNT OF TAX SHALL BE DEEMED TO BE 10 PER CENT OR 15 PER CENT, AS THE CASE MAY BE, OF THE GROSS AMOUNT OF DIVIDEND, FOR THE PURPOSE OF PARAGRAPH 2 OF ARTICLE 11, THE AMOUNT OF TAX SHALL BE DEEMED TO BE 10 PER CENT OF THE GROSS AMOUNT OF INTEREST AND FOR THE PURPOSE OF PARAGRAPH 2 OF ARTICLE 12, THE AMOUNT OF TAX SHALL BE DEEMED TO BE 15 PER CENT OF THE GROSS AMOUNT OF ROYALTIES AND FEES FOR INCLUDED SERVICES AND FOR THE PURPOSE OF PARAGRAPH 2 OF ARTICLE 13, THE AMOUNT OF TAX SHALL BE DEEMED TO BE 10 PER CENT OF THE GROSS AMOUNT OF TECHNICAL FEES. 60. UNDER THE DTAA, INDIA SHALL ALLOW AS A DEDUCTION FROM THE TAX ON THE INCOME OF THE RESIDENT, AN AMOUNT EQUAL TO THE INCOME TAX PAID IN CYPRUS WHETHER DIRECTLY OR INDIRECTLY BY WAY OF DEDUCTION. SUCH DEDUCTION, HOWEVER, SHALL NOT EXCEED THAT PART OF INCOME TAX WHICH IS ATTRIBUTABLE TO THE INCOME WHICH MAY BE TAXED IN CYPRUS. IN INDIA, FIRST, THE AO HAS TO COMPUTE THE TAX ON INTEREST INCOME AND ALLOW THE TAX ATTRIBUTABLE TO INTEREST INCOME UNDER ARTICLE 25(2) READ WITH ARTICLE 25(4) OF THE DTAA. FROM THE FACTS OF THE CASE, IT IS NOT KNOWN WHETHER TAX PAYER HAS PAID 30% TAX ON INTEREST INCOME OR CLAIMED ENTIRE ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 52 OF 61 INTEREST INCOME AS DEDUCTION U/S 108, 8018 OR 801E. IN CASE, TAX PAYER HAS PAID 30% OF TAX ON INTEREST INCOME, THEN, THE 10% TAX, WHICH IT WOULD HAVE BEEN PAID IN CYPRUS REQUIRES TO BE ALLOWED AS A DEDUCTION. 61. THE PANEL AGREES WITH THE TAX PAYER IN PRINCIPLE THAT IT IS ENTITLED FOR TAX RELIEF U/S 25 (2) OF THE DTTA ON INTEREST INCOME AT 10%. THE AO IS DIRECTED TO VERIFY WHETHER THE TAX PAYER HAS PAID TAX ON INTEREST INCOME IF SO, ALLOW THE DEDUCTION FOR TAX DEEMED TO HAVE BEEN PAID UNDER ARTICLE 25 (2) OF THE DTAA READ WITH SECTION 25(4). WITH THIS DIRECTION, THIS GROUND IS DISPOSED OF. 68. THUS, SINCE THE FACTS AND CIRCUMSTANCES BEFORE US ARE SIMILAR, WE DEEM IT FIT AND PROPER TO REMAND THE I SSUE TO THE FILE OF THE AO TO VERIFY WHETHER THE TAXPAYER HAS PAID T AX ON INTEREST INCOME IN INDIA AND IF SO, TO ALLOW THE DEDUCTION O F THE TAX ADMITTED TO HAVE BEEN PAID UNDER ARTICLE 25(2) OF T HE DTAA R.W. ARTICLE 25(4) OF THE ACT OF THE DTAA. THIS GROUND O F APPEAL IS THEREFORE, TREATED AS ALLOWED FOR STATISTICAL PURPO SES. 69. AS REGARDS GROUND NO.15, IT IS AGAINST THE OBSE RVATION OF THE DRP THAT THE DEPARTMENT IS FREE TO INITIATE PROCEEDINGS U/S 263 OR U/S 147 OR OTHERWISE UNDER THE ACT WITH REGA RD TO THE ISSUES ON WHICH NO VARIATION IS PROPOSED, BUT THERE NEEDS TO BE AN ENHANCEMENT, WE FIND THAT THE GROUND RAISED BEFO RE US IS PREMATURE AS IT IS NOT KNOWN AS TO WHETHER THE CIT OR THE AO HAVE INITIATED PROCEEDINGS U/S 263 OR 147 AND IT IS ALSO NOT A DIRECTION, BUT AN OBSERVATION OF THE DRP. THIS GROU ND IS THEREFORE, REJECTED. ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 53 OF 61 70. AS REGARDS GROUND NO.16 REGARDING LEVY OF INTER EST U/S 234B, C & D, THIS IS CONSEQUENTIAL IN NATURE AND TH E AO IS DIRECTED TO GIVE CONSEQUENTIAL RELIEF, IF ANY TO TH E ASSESSEE IN VIEW OF OUR ORDER ABOVE. 71. AS REGARDS GROUND NO.17, IT IS GENERAL IN NATUR E AND NEEDS NO ADJUDICATION. 72. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED FOR STATISTICAL PURPOSES. ITA NO.85/HYD/2013 A.Y 2008-09 73 THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1.0 THE APPELLANT SUBMITS THAT THE LEARNED AO AND THE HON'BLE DRP HAVE ERRED IN DISALLOWING THE EXPENDITURE OF RS 20,71,25,000/- INCURRED BY THE ASSESSEE ON ESOP ON THE GROUND THAT THE EXPENDITURE ON ESOP IS NOTIONAL AND CAPITAL IN NATURE AND HENCE CANNOT BE ALLOWED AS A REVENUE EXPENDITURE. 2.0 THE APPELLANT RESPECTFULLY SUBMITS THAT THE LEARNED AO AND THE HON'BLE DRP HAVE ERRED IN DISALLOWING THE CLAIM FOR DEPRECIATION ON GOODWILL AMOUNTING TO RS. 2,63,51,132/-. THE LEARNED AO ERRED IN NOT CONSIDERING THE FACT THAT THE TREATMENT OF GOODWILL IS IN TUNE WITH AS-14 AND VARIOUS BUSINESS AND COMMERCIAL RIGHTS IN THE FORM OF BUSINESS CONTRACTS, PRODUCTS, BRANDS, NEW FORMULATIONS, NEW TECHNOLOGIES AND LICENSES ARE ACQUIRED BY THE ASSESSEE. ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 54 OF 61 3.0THE LEARNED AO AND THE HON'BLE DRP HAVE ERRED IN DISALLOWING 100% DEDUCTION ON R &D EXPENSES NOT APPROVED BY DSIR FURTHER CONSIDERING THE R&D EXPENSES AS CAPITAL EXPENDITURE WHICH MAY BE CAPITALIZED AND DEPRECIATION CLAIMED THEREON. THE LEARNED AO HAS ERRED AND THE HON'BLE DRP HAS FURTHER ERRED BY NOT ALLOWING WEIGHTED DEDUCTION ON CLINICAL EXPENSES CARRIED OUT OUTSIDE THE APPROVED R&D FACILITIES THOUGH THE ASSESSEE CONTENDED THAT EXPLANATION TO SEC 35 (2AB) CLARIFIES THAT 'EXPENDITURE ON SCIENTIFIC RESEARCH' SHALL INCLUDE EXPENDITURE INCURRED ON CLINICAL DRUG TRAIL AND PATENT FILING. THE LEARNED AO HAS ERRED AND THE HON'BLE DRP FURTHER ERRED IN DISALLOWING THE WEIGHTED DEDUCTION AVAILABLE TO THE ASSESSEE U/S 35(2AB) ON THE GROUNDS THAT THERE WAS NO SEPARATE R&D RECOGNITION FOR PERLECAN PHARMA PVT. LTD FROM DSIR FOR THE PURPOSE OF CLAIMING WEIGHTED DEDUCTION U/S35(2AB). THE HON'BLE DRP HAS ERRED IN LAW BY REJECTING THE CLAIM OF THE ASSESSEE THAT R&D EXPENDITURE BE OTHERWISE ALLOWED U/S 37 OR 35(2) (IA). 4.0 THE LEARNED AO AND THE HON'BLE DRP HAVE ERRED IN DISALLOWING THE CLAIM OF RS 13,32,168 IN RESPECT OF PAYMENTS FOR U/S 195. 5.0 THE LEARNED AO AND THE HON'BLE DRP HAVE ERRED IN TREATING THE MAINTENANCE COST AMOUNTING TO RS. RS.5,38,43,017 AS CAPITAL IN NATURE. 6.0 THE LEARNED AO AND THE HON'BLE DRP HAVE ERRED IN DISALLOWING CERTAIN EXPENDITURE TOWARDS INDIVIDUAL DOCTOR SERVICES AND LOCAL DOCTORS MEET AMOUNTING TO RS.28,48,14,126/- AS PERSONAL EXPENSES OF DOCTORS AND OTHER GUESTS UNRELATED TO BUSINESS. THE ASSESSEE RESPECTFULLY SUBMIT THAT THE EXPENDITURE IS INCURRED IN THE ORDINARY COURSE OF BUSINESS AND HENCE HAVE BEEN ALLOWED. ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 55 OF 61 7.0 THE LEARNED AO AND THE HON'BLE DRP HAVE ERRED IN APPORTIONING CORPORATE OVERHEADS TO THE RESPECTIVE COMPUTATIONS FOR EXEMPTION/DEDUCTION ALLOWABLE U/S 10B, 80IB AND 80 IC UNITS. 8.0THE LEARNED TPO AND THE HON'BLE DRP HAVE ERRED IN NOT CONSIDERING THE FACT THAT THE LOAN TO WHOLLY OWNED SUBSIDIARY LACKS RISK EXPOSURE AND HENCE SHOULD NOT HAVE RULED THAT LIBOR+2% IS AN ARM'S LENGTH INTEREST RATE. 74. WE FIND THAT GROUND NO.1 IS SIMILAR TO GROUND O F APPEAL NO.3 IN ASSESSEES APPEAL FOR THE A.Y 2007-08 AND FOR THE DETAILED REASONS GIVEN THEREIN BY THE ABOVE ORDER O F EVEN DATED, THIS GROUND OF APPEAL IS ALLOWED. 75. GROUND NO.2 IS SIMILAR TO GROUND OF APPEAL NO.7 IN ASSESSEES APPEAL FOR THE A.Y 2007-08 AND FOR THE DE TAILED REASONS GIVEN THERE BY THE ORDER OF EVEN DATED, THIS GROUND OF APPEAL IS ALLOWED. 76. GROUND OF APPEAL NO.3 IS SIMILAR TO THE ASSESSE ES GROUND OF APPEAL NO.09 IN THE ASSESSEES APPEAL FOR THE A.Y 2007- 08 AND FOR THE DETAILED REASONS GIVEN THEREIN, THIS GROUND OF APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. 77. GROUND OF APPEAL NO.4 IS SIMILAR TO THE ASSESSE ES GROUND OF APPEAL NO.12 FOR THE A.Y 2007-08 AND EXCEP T THAT THE PAYEE HEREIN IS IN UK AND THE INDIA UK DTAA DOES NO T INCLUDE MAKE AVAILABLE CLAUSE, THE OTHER FACTS ARE SIMILA R. THEREFORE, FOR THE DETAILS REASONS GIVEN THEREIN, THIS GROUND OF A PPEAL IS ALLOWED. ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 56 OF 61 78. AS REGARDS GROUND OF APPEAL NO.5 , BRIEF FACTS ARE THAT SOME OF THE ITEMS OF EXPENDITURE CHARGED TO P&L A/ C WERE CAPITAL IN NATURE. AO FOUND THAT ERP ITEMS ARE ALSO TREATED AS REVENUE BY THE ASSESSEE WHEREAS THEY WERE COMPUTERIZED TOOLS. OUT OF THE TOTAL EXPENDITURE OF RS.5,38,43,017, THE AO ALLOWED DEPRECIATION OF RS.2,79,40,775 AND DISALLOWED THE BALANCE OF RS. 2,59,02,242. AGAINST TREATING THIS EXPENDITURE AS CAPITAL IN NAT URE, THE ASSESSEE IS IN APPEAL BEFORE US. ACCORDING TO THE L EARNED COUNSEL FOR THE ASSESSEE, THE ERP IMPLEMENTATION EXPENSES A RE REVENUE IN NATURE AS HELD BY THE TRIBUNAL IN THE CASE OF GLAXO SMITH KLINE CONSUMER HEALTHCARE LTD VS. CIT REPORTED IN 112 TTJ 94. FURTHER, IT WAS ALSO SUBMITTED THE OTHER EXPENSES TR EATED AS CAPITAL BY THE AO ARE ON PURCHASE OF FURNITURE AND LAYING OF ROAD AND THAT THIS DISALLOWANCE ALSO IS NOT SUSTAINABLE. 79. THE LEARNED DR SUPPORTED THE ORDERS OF THE AUTH ORITIES BELOW. 80. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THE NATURE OF THE EXPENSES ON ERP IMPLEMENTATION HAS BEEN HELD TO BE REVENUE BY THE C OORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF GLAXO SMITH KL INE CONSUMER HEALTHCARE LTD VS. CIT (CITED SUPRA). FOR THE PURPOS E OF CLARITY AND READY REFERENCE, THE RELEVANT PARAS ARE REPRODU CED HEREUNDER: 43.1 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREF ULLY. IN SO FAR AS THE FACTUAL ASPECT OF THE MATTER IS CO NCERNED, DETAILS OF THE EXPENDITURE IN QUESTION AMOUNTING TO RS. 3,77,65,412 HAVE BEEN PLACED IN THE PAPER BOOK AT P P. 60 ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 57 OF 61 TO 62. THE ASSESSEE HAS IMPLEMENTED A NEW ERP PACKA GE FOR RECORDING OF MANUFACTURING AND ACCOUNTING TRANSACTIONS, I.E. IN THE FIELD OF FINANCIAL AND CO MMERCIAL ACTIVITIES. AT P. 62 OF THE PAPER BOOK AND ALSO AS NOTED BY THE LOWER AUTHORITIES, THE NEW PACKAGE IS WITH REGA RD TO THE RECORDING OF TRANSACTIONS IN THE FIELD OF ACCOU NTING AND FINANCE, COMMERCIAL TRANSACTIONS (I.E. SALE AND PURCHASE ORDER MANAGEMENT, INVENTORY MANAGEMENT ETC.). IN ORDER TO IMPLEMENT, THE NEW ERP SYSTEM, T HE ASSESSEE CLAIMS TO HAVE INCURRED THE IMPUGNED EXPENDITURE. THE DETAILS OF THE EXPENDITURE REVEAL THAT THE MAJORITY OF HEADS OF EXPENSES ARE RELATING TO SALAR IES, EMPLOYEES' TRAVELLING COST, OTHER ROUTINE BUSINESS EXPENDITURE LIKE POSTAGE, STATIONERY, EMPLOYEES' TR AINING SEMINARS, CONSULTANCY EXPENSES ETC. THE FIRST ASPEC T IS THAT THE EXPENDITURES IN QUESTION BY ITSELF DO NOT RESULT IN ACQUISITION OF ANY ASSET IN THE HANDS OF THE ASSESS EE. THE IMPUGNED EXPENDITURE ALSO IS NOT RELATED TO THE ACT UAL ACQUISITION OF THE ERP PACKAGE AND ON THIS COUNT, E VEN THE AO DOES NOT DISPUTE THE FACTUAL SITUATION. THE STAND OF THE AO FOR TREATING THE EXPENDITURE, AS CAPITAL IS THAT THE SAID EXPENDITURE HAS BROUGHT ENDURING BENEFITS TO T HE ASSESSEE. 44. WE HAVE CONSIDERED THE NATURE OF THE EXPENDITUR E INCURRED AND THE RESULTANT BENEFITS TO THE ASSESSEE . EVIDENTLY THE BUSINESS OF THE ASSESSEE IS TO CARRY ON MANUFACTURE AND SALE OF FOOD AND HEALTHCARE PRODUCT S. THE ACTIVITY PERTAINING TO ACCOUNTING, FINANCE, REC ORDING OF TRANSACTIONS RELATING TO SALES/PURCHASES, INVENT ORIES ETC. ARE ALL SECONDARY AND ASSIST IN THE FURTHERANC E OF THE MAIN BUSINESS OBJECTIVE OF THE ASSESSEE I.E. MANUFACTURING. THESE SECONDARY ACTIVITIES ARE NECES SARY AS 'AIDS' OR 'TOOLS' OF MANAGEMENT SO AS TO ENABLE THE ASSESSEE TO ACCURATELY AND CORRECTLY ASCERTAIN THE TRUE STATE OF AFFAIRS. AN EFFICIENT AND RELIABLE RECORDI NG OF ACTIVITIES OF ACCOUNTING, FINANCE, INVENTORY MANAGE MENT, PROCESSING OF PURCHASES, SALES ETC. WOULD ENABLE TH E ASSESSEE TO BE MORE EFFICIENT AND PROFITABLE IN CAR RYING OUT ITS MAIN BUSINESS ACTIVITY OF MANUFACTURING. WH AT WE ARE TRYING TO EMPHASIZE IS THAT WHERE THE ASSESSEE INCURS EXPENDITURE TO FURTHER IMPROVE AND UPGRADE ITS MANN ER OF RECORDING OF ACCOUNTING, FINANCE ARID OTHER RELA TED TRANSACTIONS, IT DOES HAVE AN IMPACT ON GENERATION OF INCOME SINCE THE ASSESSEE ACQUIRES IMPROVED INPUTS TO TAKE BUSINESS DECISIONS. SO HOWEVER, IT DOES NOT AD D TO THE CAPITAL APPARATUS OF THE ASSESSEE. IT MERELY ENABLE S THE ASSESSEE TO TAKE MANAGEMENT DECISIONS MORE EFFICIEN TLY. ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 58 OF 61 THEREFORE, THE RESULTANT BENEFITS, IN THE SHAPE OF CARRYING ON BUSINESS MORE EFFICIENTLY AND SMOOTHLY, CANNOT B E SAID TO BE AN ADVANTAGE ACCRUING IN THE CAPITAL FIELD. W E HAVE ALREADY REFERRED IN OUR EARLIER PARAS TO THE DECISI ON OF THE APEX COURT IN THE CASE OF EMPIRE JUTE CO. LTD. (SUPRA) IN THIS REGARD AND AGAIN REITERATE THAT THE TEST OF 'ENDURING BENEFIT' MAY NOT BE APPLICABLE UNDER ALL CIRCUMSTANCES. FOR INSTANCE, AS WE HAVE SEEN IN THE INSTANT CASE, THERE DOES NOT FLOW ANY ADVANTAGE IN THE CAPITAL FIELD AND THUS THE EXPENDITURE CANNOT BE AT TRACTED AS A CAPITAL EXPENDITURE. IN FACT THE ADVANTAGE IS IN THE REVENUE FIELD AS IT FACILITATES THE ASSESSEE TO CAR RY ON ITS BUSINESS EFFICIENTLY AND SMOOTHLY. AT THIS POINT IT IS ALSO PERTINENT TO MENTION THAT EVEN PRIOR TO THE IMPLEMENTATION OF THE NEW ERP PACKAGE, THE ASSESSEE HAS BEEN CARRYING ON THE IMPUGNED ACTIVITIES. THE ONLY CHANGE IS THAT WITH THE IMPLEMENTATION OF THE NEW E RP PACKAGE, THE ASSESSEE SEEKS TO CARRY ON SUCH ACTIVI TIES MORE SMOOTHLY, EFFICIENTLY AND MEANINGFULLY SO AS T O ENABLE THE ASSESSEE TO TAKE BUSINESS DECISIONS. THE EXPENDITURE IN QUESTION IS MERELY INCURRED ON IMPLEMENTATION OF THE NEW PACKAGE. THEREFORE, OUR INFERENCE THAT THE IMPUGNED EXPENDITURE HAS ONLY ENABLED THE ASSESSEE TO CARRY ON ITS BUSINESS EFFIC IENTLY AND SMOOTHLY. 45. WITH THIS BACKGROUND WE MAY NOW LOOK AT THE BRE AK UP OF THE EXPENDITURE AS PER THE DETAILS PLACED AT PP. 60 TO 61 OF THE PAPER BOOK. WE HAVE PERUSED THE SAME AND FIND THAT AS PER THE DETAILS ON RECORD, THE ENTIRE EXPEN DITURE FITS THE BILL EXCEPT IN RELATION TO THE EXPENDITURE VOICE TELECOM CIRCUIT RS. 19,86,581 AND DATA/TELECOM CIRC UIT USAGE RS. 69,16,888. WITH RESPECT TO THE AFORESAID TWO EXPENSES THERE IS NO SPECIFIC DISCUSSION EITHER IN THE ORDERS OF THE LOWER AUTHORITIES OR EVEN BEFORE US; TO GAUGE ITS NATURE. THEREFORE, WHILE IN PRINCIPLE, WE UPHOLD THE STAND OF THE ASSESSEE THAT THE EXPENDITURES OF THE NATURE WHICH HAVE BEEN INCURRED IN THE IMPLEMENTATI ON OF THE NEW ERP PACKAGE, ARE REVENUE EXPENDITURES, INSOFAR AS IT RELATES TO THE AFORESAID TWO EXPENDIT URES, WE DEEM IT FIT AND PROPER TO DIRECT THE AO TO ASCERTAI N THEIR NATURE AND THEREAFTER DECIDE THE ISSUE. FOR THIS LI MITED PURPOSE, WE HEREBY SET ASIDE THE ORDER OF THE CIT(A ) AND RESTORE THE MATTER TO THE AO TO CARRY OUT THE AFORE SAID EXERCISE. THE ASSESSEE SHALL PROVIDE THE NECESSARY DETAILS TO THE AO AND ALSO JUSTIFY THAT THE SAME WAS OF REV ENUE NATURE IN CONSONANCE WITH OUR DISCUSSION IN THE AFO RESAID PARAS. ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 59 OF 61 46. BEFORE PARTING WE MAY ALSO MAKE A MENTION THAT THE AO HIMSELF HAS ACCEPTED SIMILAR EXPENDITURE IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR AS REVENUE IN NATURE. THE PLEA OF THE ASSESSEE ON THIS ASPECT WAS BEFORE THE AO AS WELL AS BEFORE THE CIT(A). WE DO NOT FIND ANY REBUTTAL IN THE ORDERS OF LOWER AUTHORITIES ON THIS ISSUE. EVEN BEFORE US, NO ARGUMENTS OR ANY MATERIAL WHATSOEVER HAS BEEN ATTEMPTED TO BE BROUGHT ON RECO RD BY THE REVENUE TO CONTROVERT THE SAID FACTUAL POSIT ION. THEREFORE, EVEN ON THE PRINCIPLES OF CONSISTENCY WH ICH HAVE BEEN LAID DOWN BY THE APEX COURT IN THE CASE OF RADHASWAMI SATSANG V. CIT , THE CLAIM OF THE ASSESSEE IS SUSTAINABLE. 47. WE MAY NOW CONSIDER THE RELIANCE PLACED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE ON THE DECISION S OF THE TRIBUNAL IN THE CASES OF ESCORTS LTD. (SUPRA) A ND MARUTI UDYOG LTD. (SUPRA) IN SUPPORT OF THE CASE OF THE REVENUE. WE HAVE CAREFULLY PERUSED THE SAID TWO DECISIONS. WE FIND THAT IN BOTH THE DECISIONS THE F ACTUAL POSITION STOOD ON A DIFFERENT FOOTING. IN BOTH THE CASES, ON FACTS, THE TRIBUNAL CAME TO THE CONCLUSION THAT THE NATURE OF EXPENDITURE INVOLVED WAS CAPITAL IN NATURE. IN F ACT THE EXPENDITURE RELATED TO OUTRIGHT ACQUISITION OF THE SOFTWARE IN THE CASE OF ESCORTS LTD. (SUPRA). IT WA S UNDER SUCH CIRCUMSTANCES THAT THE TRIBUNAL CONCLUDED IN T HE CASE OF ESCORTS LTD. (SUPRA) THAT THE EXPENDITURE R ESULTED IN ACQUISITION OF AN ASSET IN THE HANDS OF THE ASSE SSEE. TO THE SIMILAR EFFECT IS THE DECISION OF THE TRIBUNAL IN THE CASE OF MARUTI UDYOG LTD. (SUPRA). THUS, THE DECISIONS I N MARUTI UDYOG LTD. (SUPRA) AND ESCORTS LTD. (SUPRA) CANNOT BE APPLIED IN THE INSTANT CASE AS THE FACTUA L POSITION STANDS ON A DIFFERENT FOOTING. IN THE INST ANT CASE, AS WE HAVE SEEN EARLIER, THE IMPUGNED EXPENDITURE I S NOT FOR ACQUISITION OF AN ERP PACKAGE BUT IS CLAIMED TO BE MERELY FOR IMPLEMENTATION OF THE ERP PACKAGE. 48. IN VIEW OF THE AFORESAID DISCUSSION, ON THIS GR OUND THE ASSESSEE SUCCEEDS TO THE ABOVE EXTENT . THUS, SUCH AMOUNT SPENT ON IMPLEMENTATION OF ERP PA CKAGE IMPLEMENTATION IS REVENUE IN NATURE. 81. AS REGARDS THE LAYING OF ROAD, THOUGH IT GIVES ENDURING BENEFIT TO THE ASSESSEE, WE FIND THAT IT CAN ONLY B E FOR FACILITATING ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 60 OF 61 THE ASSESSEE TO CARRY ON THE BUSINESS OF THE ASSESS EE EFFECTIVELY AND HENCE IS REVENUE IN NATURE. 82. AS REGARDS THE EXPENDITURE ON FURNITURE, THE DE TAILS OF SUCH FURNITURE IS NOT PLACED ON RECORD AND THEREFOR E, IT IS NOT POSSIBLE TO GIVE ANY FINDING ON THE NATURE OF SUCH EXPENDITURE. FURTHER, THE BREAKUP OF EXPENDITURE OF ROADS AS WELL AS FURNITURE IS ALSO NOT GIVEN. THEREFORE, WITH A FINDING THAT T HE ERP IMPLEMENTATION CHARGES AND THE LAYING OF ROAD BE TR EATED AS REVENUE EXPENDITURE, THE ISSUE OF THE NATURE OF EXP ENDITURE ON FURNITURE ONLY IS SET ASIDE TO THE FILE OF THE AO F OR DENOVO CONSIDERATION. 83. THIS GROUND IS THEREFORE, TREATED AS PARTLY ALL OWED FOR STATISTICAL PURPOSES. 84. GROUND OF APPEAL NO.6 IS SIMILAR TO THE ASSESSE ES GROUND OF APPEAL NO.11 FOR THE A.Y 2007-08 AND FOR T HE DETAILED REASONS GIVEN THEREIN, THIS GROUND OF APPEAL IS REM ITTED TO THE FILE OF THE AO WITH SIMILAR DIRECTIONS 85. GROUND OF APPEAL NO.7 IS SIMILAR TO THE ASSESSE ES GROUND OF APPEAL NO.13 FOR THE A.Y 2007-08. IN VIEW OF THE REASONS GIVEN THEREIN, THIS GROUND OF APPEAL IS ALS O TREATED AS ALLOWED FOR STATISTICAL PURPOSES WITH SIMILAR DIREC TION. 86. GROUND OF APPEAL NO.8 IS SIMILAR TO THE ASSESSE ES GROUND OF APPEAL NO.1 FOR THE A.Y 2007-08 FOR THE DE TAILED REASONS GIVEN THEREIN, THIS GROUND OF APPEAL IS ALLOWED. ITA NO 2229 OF 2011 AND 85 OF 2013 DR REDDY'S LAB LTD HYDERABAD PAGE 61 OF 61 87. IN THE RESULT, ASSESSEES APPEAL FOR THE A.YS 20 07-08& 2008-09 ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 2 ND JANUARY, 2017. SD/- SD/- (S.RIFAUR RAHMAN) ACCOUNTANT MEMBER (P. MADHAVI DEVI) JUDICIAL MEMBER HYDERABAD, DATED 2 ND JANUARY, 2017 VINODAN/SPS COPY TO: 1 DR. REDDYS LABORATORIES LTD, 8-2-337 ROAD NO.3, BANJARA HILLS, HYDERABAD 500034 2 ADDL. CIT, CIRCLE 1(2) 4 TH FLOOR, AAYAKAR BHAVAN, HYDERABAD 3 D.R.P. HYDERABAD 4 CIT (INTERNATIONAL TAXATION) IT TOWERS, 10-2-3 AC GUARDS, HYDERABAD 50004 5 CIT 5 HYDERABAD 500004 6 THE DR, ITAT HYDERABAD 7 GUARD FILE BY ORDER