IN INCOME TAX APPELLATE TRIBUNAL K , BENCH MUMBAI BEFORE SHRI M. BALAGANESH, AM & SHRI RAVISH SOOD, JM ITA No.5651/Mum/2017 (Assessment Year :2013-14) M/s. Glenmark Pharmaceuticals Ltd., Vs. Asst. Commissioner of Glenmark House, Income Tax LTU-2, HDO Corporate Builsing 29 t h Floor, Centre -I Wing A,B,D. Sawant Marg World Trade Centre Chakala, Opp. Western Express Cuffe Parade, Highway, Andheri (East), Mumbai Mumbai 400 005 400 099 PAN/GIR No. AAACG2207L (Appellant) .. (Respondent) ITA No.5841/Mum/2017 (Assessment Year :2013-14) Asst. Commissioner of Vs. M/s. Glenmark Pharmaceuticals Ltd., Income Tax LTU-2, Glenmark House, 29 t h Floor, Centre -I HDO Corporate Builsing World Trade Centre Wing A,B,D. Sawant Marg Cuffe Parade, Chakala, Opp. Western Express Mumbai 400 005 Highway, Andheri (East), Mumbai 400 099 PAN/GIR No. AAACG2207L (Appellant) .. (Respondent) Assessee by Shri Anuj Kisnadwala Revenue by Shri Anand Mohan Date of Hearing 11/07/2019 Date of Pronouncement 21/08/2019 ORDER PER M. BALAGANESH (A.M): 2 ITA Nos.5651/Mum/2017 & 5841/Mum/2017 M/s. Glenmark Pharmaceuticals Ltd. These cross appeals in ITA Nos.5651/Mum/2017 & 5841/Mum/2017 for A.Y.2013-14 arise out of order by ld. Commissioner of Income Tax (Appeals)-56, Mumbai in appeal No.CIT(A)-56/ACIT-LTU-2/2016- 17/312-G dated 22/06/2017 (ld. CIT(A) in short) against order of assessment passed u/s.143(3) r.w.s. 144C of Income Tax Act, 1961 (hereinafter referred to as Act) dated 18/01/2017 by ld. Asst. Commissioner of Income Tax, LTU-2, Mumbai (hereinafter referred to as ld. AO). ITA No. 5651/Mum/2017 Asst Year 2013-14 Assessee Appeal 2. first issue to be decided in this appeal is as to whether, ld CITA was justified in confirming action of ld AO in disallowing weighted deduction u/s 35(2AB) in sum of Rs 8,27,97,000/- on ground that amount was not approved by DSIR, in facts and circumstances of case. 3. We have heard rival submissions and perused materials available on record including judicial pronouncements that were referred to by both parties at time of hearing before us. We find at outset, ld AO had not doubted genuineness of incurrence of this expenditure together with its purpose. This is evident from fact that ld AO had granted deduction to assessee u/s 35 of Act but had only denied weighted deduction claimed by assessee u/s 35(2AB) of Act on ground that DSIR is only authority to approve expenses made by assessee company towards scientific research and accordingly expenses thereon to extent approved by DSIR shall be eligible for weighted deduction. Therefore, ld AO observed that amount which is not approved by DSIR in sum of 3 ITA Nos.5651/Mum/2017 & 5841/Mum/2017 M/s. Glenmark Pharmaceuticals Ltd. Rs 827.97 lacs shall not be eligible for weighted deduction u/s 35(2AB) of Act. ld CITA upheld action of ld AO. We find that once facility is approved by DSIR, assessee is entitled for weighted deduction u/s 35(2AB) of Act and there is no requirement as per Act that expenses need to be approved by DSIR. In this regard, amendment has been brought in Rule 6(7A) of IT Rules with effect from 1.7.2016 that even expenses need to be approved by DSIR. Since this is applicable only from Asst Year 2017-18 onwards, same cannot be made applicable for Asst Year 2013-14. We find that this issue is no longer res integra and is covered by decision of this tribunal in case of Inventia Health Care Pvt Ltd vs DCIT in ITA No. 5350/Mum/2014 for Asst Year 2010-11 dated 26.8.2016 wherein it was held as under:- 5.1. We have further considered rival submissions of either side and perused relevant materials on record, including orders of authorities below as regards addition/disallowance made by A.O u/s 35(2AB) of Act and are unable to find ourselves to be in agreement with observations of lower authorities, to extent latter had concluded that entitlement of assessee company as regards weighted deduction u/s 35(2AB) of Act is liable to be restricted to Rs.7,37,17,242/-, i.e on basis of amount approved by Ministry of Science & Technology , as against claim of Rs. 7,50,95,242/- raised by assessee company as per its financial statements, for reason as had weighed with them, entitlement of assessee company is statutorily required to be in parity and cannot exceed amount computed on basis of figures which were approved by 'Prescribed authority . We are of considered view that lower authorities had absolutely misconceived and misinterpreted scope and gamut of weighted deduction contemplated u/s 35(2AB) of Act . That as per mandate of Sec. 35(2AB) of Act , eligible assessee company which incurs any expenditure on in-house research and development facility (not being expenditure in nature of cost of any land or building) as approved by prescribed authority, is entitled for deduction contemplated therein, subject to condition that it enters into agreement with prescribed authority for co-operation in such research & development facility and audit of accounts maintained for that facility, and 4 ITA Nos.5651/Mum/2017 & 5841/Mum/2017 M/s. Glenmark Pharmaceuticals Ltd. submits with Prescribed authority by 31st day of October of relevant assessment year details as regards expenditure incurred by it on in-house research and development facility, on basis of which Prescribed authority records its approval and submits details of expenditure approved to Director General (Exemptions) in Form 3CL . Thus bare perusal of Sec. 35(2AB) reveals that what is required to be approved by Prescribed authority is in-house R & D facility , and not amount of expenditure incurred by R&D approved unit . That for sake of clarity relevant extract of Sec. 35(2AB) is reproduced as under:- "Sec. 35(2AB). Where company engaged in business of .........incurs any expenditure on scientific research............on in-house research and development as approved by prescribed authority then, there shall be allowed deduction [of sum equal to one and one-half times of expenditure so incurred]. Thus in light of aforesaid clearly worded statutory provision, it stands inescapably gathered beyond any scope of doubt that Sec. 35(2AB) though postulates approval by prescribed authority of "in-house R & D facility", however same no where provides that amount of deduction shall be regulated and restricted on basis of amount approved by Prescribed authority . That our aforesaid view is fortified by order of Hon'ble Ahemdabad bench of Tribunal, in case of : ACIT Vs. Torrent Pharmaceuticals Ltd. [28 CCH 783(2009)] wherein Tribunal observing that amount of expenditure approved by Prescribed authority in Form 3CL will not have any bearing as regards allowability of weighted deduction in hands of eligible assessee company, held as under:- "Thus there was no justification in harping upon figure contained in Form 3CL as is done by Assessing Officer. provisions of Act does not contain any specific conditions for allowance of expenditure to effect that it will be restricted to that contained in Form 3CL" We find ourselves to be in agreement with aforesaid order of co- ordinate bench of Tribunal, and thus in light of our aforesaid observations set aside findings of lower authorities that entitlement of assessee company towards weighted deduction u/s 35(2AB) is liable to be restricted to extent in-house research and 5 ITA Nos.5651/Mum/2017 & 5841/Mum/2017 M/s. Glenmark Pharmaceuticals Ltd. development expenditure incurred by assessee company is approved by prescribed authority. Now, adverting to observations of CIT(A) that assessee company had failed to substantiate as to how expenses pertaining to rent, repair expenditure and legal and professional charges had been incurred in course of scientific research activities of assessee company, we are of considered view that such stray observation recorded for first time by CIT(A), without even confronting same to assessee, at threshold on said count itself is liable to be vacated. However, independent of aforesaid factual position, Ld. A.R submitted before us that as rent and repair expenditure so claimed by assessee company as forming part of eligible amount entitled for claim of deduction u/s 35(2AB) of Act , in itself pertained to premises at which research and development facility was located, as well as legal and professional charges had been incurred in course of and to facilitate scientific research, therefore said nature of expenses read in light of underlying purpose behind incurring of same, ipso facto established beyond any scope of doubt inextricable nexus of said expenses and scientific research activities of assessee company, as regards which no infirmity had ever been pointed out by A.O. Ld. A.R in support of his aforesaid contention placed reliance on order of coordinate bench of Tribunal in case of :- USV Ltd. Vs. DCIT, Central Circle-32, Mumbai (2012) 24 taxmann.com 218 (Mum) wherein it was held: "The repairs, rent, etc., expenditure incurred relating to R & D premises cannot form part of cost of land or building. In absence of any fact that said claim of assessee aggregating to Rs. 62,00,689/- , is not expenditure on rents, rates and taxes relating to R &D premises, we are of considered view that said expenditure has to form part of weighted deduction as per section 35(2AB) of Act" We thus in light of aforesaid facts and settled position of law, find ourselves to be in agreement with Ld. A.R and are of considered view that as aforesaid expenses had been incurred by assessee company on scientific research pertaining to its business of 6 ITA Nos.5651/Mum/2017 & 5841/Mum/2017 M/s. Glenmark Pharmaceuticals Ltd. manufacturing pharmaceutical formulations (not being expenditure in nature of cost of any land or building) on in-house research and development facility approved by prescribed authority, therefore same in absence of any fact which could go to prove that said claim of expenditure by assessee company on rent and repairs does not pertain to R &D premises, or professional and legal charges has no nexus with scientific research of assessee company, thus stands duly eligible for claim of weighted deduction u/s 35(2AB) of Act . Thus in light of our aforesaid observations, disallowance of Rs. 13,78,000/- (supra) so made by A.O is set aside, and Ground of appeal No.3 & 4 so raised by assessee company are allowed. 3.1. We find that similar views were expressed by co-ordinate bench of Pune Tribunal in case of Cummins India Ltd vs DCIT reported in (2018) 96 taxmann.com 576 (Pune Trib) dated 15.5.2018 for Asst Year 2009-10 . 3.2. We also find that Hon ble Gujarat High Court in case of CIT vs Claris Lifesciences Ltd reported in 326 ITR 251 (Guj) had also observed as under:- 8. We are in full agreement with reasoning given by Tribunal and we are of view that there is no scope for any other interpretation and since approval is granted during previous year relevant to assessment year in question, we are of view that assessee is entitled to claim weighted deduction in respect of entire expenditure incurred under section 35(2AB) of Act by assessee. 9. We are, therefore, of view that no substantial question of law arises out of order of Tribunal. This appeal is, therefore, dismissed. 3.3. Respectfully following aforesaid judicial precedents, we direct ld AO to grant weighted deduction u/s 35(2AB) of Act in sum of Rs 8,27,97,000/- to assessee. Accordingly, Ground No. 1 raised by assessee is allowed. 7 ITA Nos.5651/Mum/2017 & 5841/Mum/2017 M/s. Glenmark Pharmaceuticals Ltd. 4. last issue to be decided in this appeal is as to whether ld CITA was justified in confirming action of ld AO in disallowing expenses amounting to Rs 25,73,08,067/- u/s 37(1) of Act in facts and circumstances of case. 4.1. We have heard rival submissions and perused materials available on record including judicial pronouncements that were referred to by both parties at time of hearing before us. We find that ld AO had observed that these expenses were incurred by assessee company for providing freebies to medical practitioners and their professional associations in violation of regulations issued by Medical Council of India (MCI) which is regulatory body constituted under Medical Council Act, 1956. ld AO accordingly concluded that said expenditure was incurred for purpose which is either offence or prohibited by law. He noted that regulations issued by MCI were made effective from 10.12.2009 and subsequently CBDT had issued Circular No. 5/2012 dated 1.8.2012 . We find that ld AO had noted in his order that assessee had furnished details vide letter dated 7.12.2016 in tabular form together with relevant supporting evidences in separate Box File duly mentioning page numbers thereon, which are reproduced in pages 23 to 26 vide para 7.7 of his order. It was also pointed out by assessee before ld AO that MCI guidelines are applicable only to doctors / medical practitioners and their professional associations from inter alia, accepting gifts, travel facilities, hospitality , cash or monetary grants (freebies) from pharmaceutical and allied health sector industries. It was pleaded that such restrictions imposed by said MCI guidelines are not applicable to pharma companies such as assessee. We find that ld AO in para 7.9 of his order had observed that on perusal of various 8 ITA Nos.5651/Mum/2017 & 5841/Mum/2017 M/s. Glenmark Pharmaceuticals Ltd. details of expenses given by assessee with supporting documents, it could not be made out whether expenses were incurred in connection with medical practitioner or other entities as mentioned in MCI regulations. Therefore, assessee was asked to furnish details in this regard. assessee vide letter dated 7.12.2016 stated that no expenses were incurred which are covered in MCI regulations and hence there are no further details to be submitted in that regard. ld AO observed that assessee had not furnished details of expenses in nature of freebies and gifts etc incurred in relation to in-house medical practitioners. We find that ld AO on perusal of various details submitted by assessee came to conclusion that there are certain expenses made to medical practitioners which are liable to be disallowed u/s 37(1) of Act in view of MCI guidelines and CBDT circular no. 5/2012. He observed that in Asst Year 2011-12, assessee had incurred sales promotion expenses of Rs 15.3 crores out of total turnover of Rs 1162.94 crores which worked out to 1.32% and accordingly he applied same 1.32% on current year turnover and disallowed sum of Rs 25,73,08,067/- as expenses incurred towards freebies and gifts to medical practitioners on estimated basis and disallowed same u/s 37(1) of Act. 4.2. We find that ld CITA observed that CBDT Circular No. 5/2012 was dated 1.8.2012 and accordingly applicable for Asst Year 2013-14 and hence upheld action of ld AO. 4.3. We find that ld AR submitted that MCI regulations are applicable only for medical practitioners and cannot be made applicable to pharma companies such as assessee and it was also submitted that receiving of gifts by doctors is prohibited by MCI guidelines, giving of 9 ITA Nos.5651/Mum/2017 & 5841/Mum/2017 M/s. Glenmark Pharmaceuticals Ltd. such gifts by pharma companies is not prohibited by law. It was submitted that giving of small gifts bearing company logo to doctors does not tantamount to giving gifts to doctors but it is regarded as advertisement expenses. As regards sponsoring doctors for conferences and extending hospitality, pharmaceutical companies have been sponsoring practicing doctors to attend prestigious conferences so that they gather contemporary knowledge about management of certain illness / disease and learn about newer therapies. Reliance was placed by ld AR on decision of this tribunal in case of Aristo Pharmaceuticals Pvt Ltd vs ACIT in ITA Nos. 6680/Mum/2012 ; 5553/Mum/2014 ; 5479/Mum/2015 ; 6129/Mum/2014 ; 5167/Mum/2015 & 5747/Mum/2015 for Asst Years 2005-06 , 2009-10 , 2011-12 and 2012- 13 dated 26.7.2018 . We find that co-ordiante bench of this tribunal in case of DCIT vs PHL Pharma P Ltd reported in (2017) 49 CCH 124 (Mum Trib) had held that validity of circular in backdrop of enlargement of scope of MCI regulations is not applicable to pharmaceutical companies and moreover there is no enabling provisions either under Income Tax Act or under Indian Medical Council Regulations . We find that MCI guidelines cannot decide allowability or otherwise of expenditure in hands of drug manufacturing companies or individuals other than doctors under Act. In any case, we find that ld AO had only made adhoc disallowance by applying 1.32% on turnover to have been incurred towards freebies, gifts. This, in our considered opinion, cannot be sustained in eyes of law, more particularly when assessee had given complete details of expenses together with supporting evidences before ld AO. We find that ld AO had not identified fact as to whether any expenses was incurred during year towards freebies, gifts etc given to medical practitioners. Hence disallowance of expenses u/s 37(1) of Act 10 ITA Nos.5651/Mum/2017 & 5841/Mum/2017 M/s. Glenmark Pharmaceuticals Ltd. deserves to be deleted on that count also apart from various judicial precedents. We are also informed that MCI had filed affidavit before Hon ble Delhi High Court that their guidelines are applicable only to doctors and not to others in Max Hospital case during their writ proceedings. In view of our aforesaid observations, we hold that no disallowance of expenses could be made in instant case by applying MCI guidelines which are applicable only to doctors and not to pharma companies such as assessee herein. Accordingly, alternate ground raised by assessee vide Ground No. 2(b) does not deserve any adjudication. Hence Ground No. 2 raised by assessee is allowed. 5. In result, appeal of assessee is allowed. ITA No. 5841/Mum/2017 Asst Year 2013-14 Revenue Appeal 6. only issue to be decided in this appeal of revenue is as to whether ld CITA was justified in deleting adjustment made on account of comfort guarantee by holding that these guarantee involve no cost and hardly any risk to guarantor in facts and circumstances of case. 6.1. We have heard rival submissions and perused materials available on record including judicial pronouncements relied upon by both parties before us at time of hearing. assessee is engaged in business of manufacturing and marketing pharmaceutical products and related research and development activities. assessee is ultimate holding company of Glenmark Group. During financial year 2012-13, assessee issued financial guarantees to its subsidiaries for purpose of availing factoring facilities 11 ITA Nos.5651/Mum/2017 & 5841/Mum/2017 M/s. Glenmark Pharmaceuticals Ltd. from banks in relation to sale of receivables. receivables are sold by said AEs to meet their working capital requirements and need for short term funds. AEs sell receivables upto guaranteed amount to third party banks for which , it receives adjusted value of invoice minus margin minus structuring fees. In event of default by third party customers, bank will have full recourse to AEs to repurchase receivables thereby making good default. In event that AEs are not able to repurchase same, assessee shall be required to make good default. following are list of factoring facilities guaranteed by assessee on behalf of its various AEs:- Glenmark Russia has taken facility of USD 36million from Citibank N.A., Bahrain; GFL Brazil has taken facility of USD 18.5 million from Citibank S.A., Brazil; Glenmark Pharmaceuticals S.R.L., Romania has taken facility of USD 5 million from Citibank N. A., Bahrain; Glenmark Distributors SP z.o.o., Poland has taken facility of USD 10.5 million from Citibank N. A., Bahrain; Glenmark SRO, Czech Republic has taken facility of USD 6 million from Citibank N. A., Bahrain; and Glenmark Pharmaceuticals SK, s.r.o., Slovak Republic has taken facility of USD 1 million from Citibank N.A., Bahrain. 6.2. It is not in dispute that assessee had charged guarantee commission fee of 1% on guarantees issued. ld AR stated that AE have primary risk in respect of default by third party 12 ITA Nos.5651/Mum/2017 & 5841/Mum/2017 M/s. Glenmark Pharmaceuticals Ltd. customers and accordingly undertake default risk and that assessee would be liable for payment of receivables in case of default by third party customers and AEs to extent assets of AEs are not sufficient to meet outstanding liability. Accordingly, he stated that assessee herein bears limited default risk. He also argued that as AEs have access to fund, they are able to expand size of operations which in turn expands reach of Glenmark Group on those markets. In event, assessee did not issue such guarantee for factoring services and AEs were not able to access funds, then assessee would have to directly or through its holding company, infuse funds into AEs for meeting their working capital requirements through equity or loans. In case if assessee had not issued guarantees to banks, then bank would have to evaluate creditworthiness of underlying receivables. This process is cumbersome and time consuming process which may delay access to funds. In order to simplify process, assessee issued guarantee on behalf of AEs. Actually this being shareholder function , there is no need to even charge guarantee commission fee from AEs. Whereas assessee had actually charged 1% from its AEs and accordingly same had to be accepted at ALP. We find that ld TPO did not agree to these contentions of assessee and determined ALP of said transaction to be at 1.5% on total financial / comfort guarantees given by assessee for availing factoring services and after reducing guarantee fee charged by assessee, he made adjustment to ALP at Rs 1,41,16,043/-. We find that ld CITA by placing reliance on decision of Hon ble High Court and Tribunal in various cases held that charging of guarantee fee at 0.5% should be accepted to be at ALP. Moreover, in Asst Years 2010-11 to 2012-13, ld CITA had followed tribunal order for Asst Year 2008-09 in assessee s own case and accepted 13 ITA Nos.5651/Mum/2017 & 5841/Mum/2017 M/s. Glenmark Pharmaceuticals Ltd. rate charged by assessee in earlier years and addition made by ld TPO was deleted by ld CITA. Accordingly, ld CITA held that since assessee had charged already guarantee fee at 1% from its AEs which is more than rate approved by tribunal in its own case for Asst Years 2008-09 and 2009-10, no adjustment need to be made on account of guarantee fees. 6.3. We find that decision of this tribunal in assessee s own case for Asst Year 2008-09 was approved by Hon ble Jurisdictional High Court in case of CIT vs Glenmark Pharmaceuticals Ltd reported in 398 ITR 439 (Bom) wherein question raised before Hon ble Court and decision rendered thereon are as under:- Whether on facts and in circumstances of case and in law Tribunal is justified in deleting addition of Rs.11,51,24,333/- to income of Assessee Company made by Assessing Officer on account of guarantee commission chargeable to its Associate Enterprises? 3. Regarding question no.(i): (a) We note that impugned order of Tribunal while allowing assessee's appeal holding that Arms Length Price of Corporate Guarantee cannot be determined on basis of comparison with Bank Guarantee and relied upon decision of its Co-ordinate bench in case of Everest Kento Cylinder Ltd. v. Dy. CIT [2013] 34 taxmann.com 19 (Mum. - Trib.). Mr. Suresh Kumar, learned counsel appearing for Revenue very fairly states that being aggrieved with above order in M/s. Everest Kento Cylinders Ltd., Revenue had filed appeal to this Court raising identical issue viz. CIT v. Everest Kento Cylinders Ltd. [2015] 378 ITR 57/232 Taxman 307/58 taxmann.com 254 (Bom.). By order dated May 8, 2015, above appeal was not entertained. (b) As no distinction in facts and/or law has been shown to us in this appeal which would warrant taking different view on this very issue from that taken by this Court in Everest Kento Cylinders Ltd. (supra), we follow same. (c) Accordingly, question no.(i) as proposed does not give rise to any substantial question of law for reasons indicated in our order dated 8th May, 2015 in Everest Kento Cylinders Ltd. (supra). Therefore not entertained. 14 ITA Nos.5651/Mum/2017 & 5841/Mum/2017 M/s. Glenmark Pharmaceuticals Ltd. 6.4. We find that this decision of Hon ble Bombay High Court was approved and affirmed by Honble Supreme Court in Civil Appeal No. 12632/2017 dated 11.12.2018 wherein it was held that in so far as question no. (i) is concerned, we have perused order of learned Tribunal and order of High Court affirming view taken by learned Tribunal. On such consideration, we find that question no. 1 has been rightly decided by High Court in favour of Assessee and against Revenue. same would, therefore, not require reopening in this appeal. 6.5. Hence respectfully following same, guarantee fee charged by assessee at 1% from its AEs should be considered at ALP and no adjustment thereon is warranted in facts and circumstances of case. Hence we hold that ld CITA had rightly deleted adjustment to ALP and rightly granted relief to assessee, which does not require any interference. Accordingly, Grounds raised by revenue are dismissed. 7. In result, appeal of assessee is allowed and appeal of revenue is dismissed. Order pronounced in open court on this 21/08/2019 Sd/- Sd/- (RAVISH SOOD) (M.BALAGANESH) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated 21/08/2019 15 ITA Nos.5651/Mum/2017 & 5841/Mum/2017 M/s. Glenmark Pharmaceuticals Ltd. KARUNA, sr.ps Copy of Order forwarded to : 1. Appellant 2. Respondent. 3. CIT(A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. //True Copy// BY ORDER, (Asstt. Registrar) ITAT, Mumbai Glenmark Pharmaceuticals Ltd. v. Asst. Commissioner of Income-tax LTU-2, Mumbai