Smt. P. Madhavi Devi (Judicial Member) and S. Rifaur Rahman (Accountant Member)

K.R. Sekhar and S.P. Chidambaram for the appellant.
Smt. G. aparna Rao, Departmental respresntative, for the respondent.

ORDER

The order of the Bench was delivered by

Smt. P. Madhavi Devi, J.M.- Both are assessee's appeals for the A.Ys 2007-08 and 2008-09 respectively against the final assessment order 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.

(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 encashment 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  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.

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 light 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 facts 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 26.08.2008 determining the tax demand of Rs.6,07,12,840. Thereafter, the assessee filed a revised return on 28.08.2008 declaring income of Rs.285,91,14,861 on account of the fact that the ADR expenses  were amortized and a claim of 20% of the same i.e. Rs.4,13,85,805 was made in the original return, whereas the entire expenditure of Rs.10,42,90,167 was claimed as allowable in the revised return following the decision of the Income Tax Appellate Tribunal in the case of ITW Signode India Ltd reported in (2007) 110 TTJ 170. Further, a claim of tax credit 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 Treaty wherein royalty income of $21,440,666 in 2006 was subject to 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 order, which was received only in 2009, M/s. Perlecan Pharma Pvt Ltd also got merged into the assessee w.e.f. 1.1.2006 and the said company had filed its return of income on 29.10.2007 with e-filing acknowledgment No.5091550291007 declaring loss of Rs.(-) Rs.46,04,54,630 after declaring interest income of Rs.7,37,49,337 as its business income. Other expenses in case of the company were Rs.53,38,18,411 (including expenditure u/s 35(1)(i) of Rs.52,90,32,374) and brought forward loss 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 also considered by the AO in the assessment proceedings of the merged company i.e. u/s 143(3) r.w.s.144C(1) of the Act.

5. The assessee's return was selected for scrutiny under CASS to examine the claim of deduction under Chapter VIA; (ii) u/s 10A/10B/10BA of the Act; and (iii) claim of higher rate of depreciation by a company. Further, as there was international transactions of the assessee with its AEs in excess of Rs.15.00 crores, the determination of the Arm's 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 into by the assessee with its AEs classified under 7 categories and out of these 28 transactions, interest received on loans given to the subsidiaries constitutes 5 transactions while the investment made in subsidiaries represent 4 transactions.

7. The TPO observed that the assessee adopted TNMM as the most appropriate method for analyzing the transactions 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 received on loans advanced by the assessee to its subsidiaries, the TPO 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.21,28,24,581 and the assessee was asked to furnish the information such as (i)  the loan agreements entered into by the assessee with its AE's during the financial year 2006-07 and (ii) also ledger extracts of the accounts of the AE's in the assessee's books for 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 transactions with its AEs. The TPO observed that the assessee has charged rates of interest differently on different loan accounts with its AEs and that the rates of interest charged are lower as compared to the ALP. He also observed that the loans given by the assessee to its AEs are nothing but working capital facility extended 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. Vide its reply dated 19.03.2010, the assessee also furnished a detailed working of interest charged on the loans extended to its AEs as per the books of account for the financial year 2006-07, details of which are as follows:

Associated Enterprise                                   Interest charged as per
                                                        the books (transfer
                                                        price) (in rupees)
Dr.Reddy's Laboratories Inc                                          1,04,66,613
Kunshan          Rotam      Reddy                                       2,35,311
Pharmaceutical Co. Ltd
Dr.Reddy's             Laboratories                                         23,39,623
(proprietary) Ltd
Lacok Holding Ltd                                                      8,13,92,221
Industrial Quimicas Falcon de                                         11,83,90,678
Maxico S.A. De C.V
Total                                                                 21,28,24,447

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 the CUP method and the interest that is charged between unrelated parties under similar circumstances would be the arm's length interest. The TPO was not convinced with the contention of the assessee that the approvals of the RBI for such loans or advances as well as for the interest charged is a benchmark for determination of the ALP. He followed the decision of the Tribunal at Delhi in the case of Perot Systems TSI (India) Ltd vs. DCIT reported in (2010- TIOL-ITAT -DEL) to hold that the RBI's approval does not put the seal of approval on the true character of the transaction from the perspective of T.P. regulations as the substance of the transaction has to be judged as to whether the transaction is at Arm's Length or not. Thereafter, he proceeded to consider the arm length interest rate to be the interest rate that would have been charged in similar circumstances or the interest rate that the assessee could have got by lending such money to private persons in India or interest rate the company could have got from independent third parties in India by lending such surplus money 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. Observing that the assessee's loan/advances are unrated and after considering the corporate bond market and the financial health of the subsidiary, he came to the conclusion that the interest @ 14% per annum would be reasonable and representative of the market.

 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 its objections before the DRP as objection No.1. The DRP after considering the assessee's arguments observed that an identical issue had been examined by the DRP in the assessee's own case for the A.Y 2006- 07 and that vide its order dated 30.09.2010, DRP had upheld the order of the TPO. Therefore, the DRP confirmed the order of the TPO and in accordance with the directions of the DRP, 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 reiterating the submissions made by the assessee before the authorities below, submitted that the assessee as well as the TPO have adopted the CUP as the most appropriate method to determine the ALP of the interest on the loans and advances by the assessee to its AE in different jurisdictions at varied interest rates. He agreed that identical issue had arisen in the A.Y 2006-07 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 interest rate is to be adopted for benchmarking interest on advances to foreign AEs. He also placed reliance upon the following decisions in support of his contention that LIBOR linked interest rate is to be adopted:

a) Siva Industries Ltd. Vs. Asstt. Commissioner of Income Tax, reported in (2012)145 TTJ 0497 (Chennai)

b) Northgate Technologies Ltd vs. DCIT reported in (2014) 148 ITD 433 (Hyderabad)

12. Further, he also submitted that for the A.Y 2008-09 in assessee's own case, the DRP has upheld the rate of interest at LIBOR + 2%.

13. The learned DR, on the other hand, supported the orders of the authorities below. Further, he submitted that if the Tribunal were to hold that the LIBOR linked interest rate is to be adopted for determining the ALP, then the rate of interest 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 dispute as regards the most appropriate method being the CUP method for determining the ALP of the interest on loans advanced by the assessee to its AEs. The assessee has charged different rates of interest for different transactions as the AEs are located in different jurisdictions. The TPO/AO has arrived at 14% per annum 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, but we do not agree with the assessee's contention thereon. The RBI approvals are on a different criteria and are for different purposes as held by the Coordinate Bench at Delhi in the case cited supra. Though, it may be one of the aspects to be considered for determination of  the ALP, it cannot by itself be considered as a bench mark or ALP. Further, we have also gone through the decisions cited (Supra) and find that in those decisions, the Tribunal has held that in case of loans/advances in foreign currency and where the transaction is an international transaction, then, the transactions would have to be considered on the commercial principles in the international market and the domestic prime earning rate would have no applicability and the international interest rate fixed being LIBOR linked interest rate comes into play. In the case of Shiva Industries Ltd (Supra), the Coordinate Bench of the Tribunal at Chennai has observed that the average of 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 than the LIBOR rate and hence no adjustment is called for. In the assessee's own case for the A.Y 2006-07 in M.A. No.217/Hyd/2013 in ITA No.1605/Hyd/2010 (Supra), the Tribunal has taken note of the LIBOR at 4.42% rate and has observed that the assessee has accepted 7% in earlier years which is equivalent to LIBOR+2%. Therefore, the Tribunal has directed the TPO to adopt 7%. For the year before us also, the facts and circumstances being similar, we direct that the TPO/AO to adopt LIBOR +2% or 7% whichever is higher as the ALP interest. The assessee's ground of appeal No.1 is therefore, treated 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  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 that the amount is worked out as per the revised AS-15 and is allowable as deduction u/s 43B(f) of the Act. The AO however, observed 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 deduction on actual payment basis u/s 43B of the Act. He observed that under Chapter IV B dealing with computation of business income, 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. Since 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 observed 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 interest 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 on actual payment basis to the employees. He, therefore, rejected the assessee's contention and proposed the adjustment in the draft assessment order. Aggrieved, the assessee preferred objection before the DRP. The DRP rejected the objection of the assessee and the AO accordingly brought it to tax in the final 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 to P&L appropriation A/c under transitional provision for leave encashment as per AS-15 is Rs.8,17,10,374, the assessee has  actually paid a sum of Rs.5,42,92,558 out of this amount during the relevant financial year and therefore, the amount disallowable is only Rs.2,74,08,816. He submitted that the assessee is following the mandatory accounting standard AS-15 and as per the same, the provision for leave encashment has to necessarily pass through the P&L appropriation a/c. He submitted that both the AO as well as the DRP have incorrectly held that the payment is made to the fund and not to the employees. He has also drawn our attention to the details of the payment made to employees, the list of which was furnished before the DRP and which 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 allowable expenditure u/s 43B(f) of the Act:

i) Elmco Elecon India Ltd vs. ADIT reported in (2013) 33 taxmann.com 476 (Ahd.Trib.)
ii) Asstt. Commissioner of Income Tax vs. Bharti Teletech Ltd reported in (2014) 46 taxmann.com 26 (Delhi.Trib).
17. The learned DR however, supported the orders of the authorities below and as regards the assessee's claim of actual payment to the employees, for factual verification of the assessee's 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 provision made for  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 representative that the disallowance was made by the Assessing Officer by invoking the provisions of clause (f) of section 43B. He submitted 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 rendered in the case of Exide Industries Ltd. v. Union of India [2007] 292 ITR 470/164 Taxman 1, disallowance of leave encashment is not justified. He submitted that in the first case, it was held by the Hon'ble apex court that leave encashment is not a contingent liability if the provision is made on some scientific basis. He also submitted that in the 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, 2001 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 the Hon'ble Calcutta High Court being arbitrary, unconscionable and de hors the Hon'ble Supreme Court decision. He submitted that in view of this judgment of the Hon'ble Calcutta High Court, disallowance made by the 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 authorities below and the judgment of the Hon'ble Calcutta High Court rendered in the case of Exide Industries Ltd. (supra). We find that the Assessing Officer has made disallowance by invoking the provisions of clause (f) of section 43B and the same was confirmed by the learned Commissioner 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 section 43B is arbitrary, unconscionable and de hors of the Hon'ble Supreme Court decision and, therefore, not valid. In view of this, clause (f) of 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. We, therefore, delete the same".

19. Further, in the case of Bharat Teletech (cited Supra), the Coordinate Bench of the Tribunal at Delhi was considering whether leave encashment is allowable on actual payment and at Para 7.1 has held as under:

 "7.1 Apropos second issue i.e. leave encashment expenses, the facts have been narrated above. We find merit in the argument of ld. Counsel for the assessee that the leave encashment though pertaining to earlier year is allowable on actual payment basis in the year of payment i.e. assessment year in question. It has not been disputed that assessee has not claimed this expenditure in earlier year. This being so, we hold that assessee is eligible for deduction of leave encashment payment u/s 43B. This ground of the assessee is allowed.

20. We find that the actual payment made by the assessee 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 debited it to the P&L appropriation a/c. As regards the sum of Rs.5,42,92,558 which is claimed to have been paid to the employees, we deem it fit and proper to remand the issue to the file of the AO for verification of the assessee's claim and if it is found to be correct, then the AO shall allow the claim of the assessee. Accordingly Ground No.2 is treated as allowed for statistical purposes.

21. As regards Ground No.3, brief facts are that in the schedule-15 of Accounts, the assessee has claimed an amount of Rs.18,16,11,000 as deferred stock compensation cost which is a notional expenditure on account of allotment of Sweat Equity Shares (ESOPs). Observing that such capital and notional expenditure is not allowable in view of the decision of the Income Tax Appellate Tribunal at Mumbai in the case of VIP 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 assessee's objections were rejected by the DRP also and the assessee is in further appeal before us. The learned Counsel for the assessee submitted this issue is now  covered in favour of the assessee by the decision of the Special Bench of the Tribunal in the case of Biocon Ltd reported in 35 Taxmann.com 335.

22. Having regard to the rival contentions and the material on record, we find that this issue is covered in favour of the assessee by the decision of the Special Bench of the Tribunal in the case of Biocon Ltd vs. DCIT (cited Supra) wherein it was held that the ESOPs discount is a deductible discount at the time of vesting of the option. The Coordinate Bench of this Tribunal at Mumbai in the assessee's own case for the A.Y 2006-07 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  decision in the case of Ranbaxy Laboratories 124 IT) 771 (Delhi) was reversed and 5.5.1.

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 remanded to the file of the AO with a direction to work out the deduction keeping in mind the principles laid down by the Special Bench in the above case after giving an opportunity of hearing to the assessee. Ground No.3 is thus treated as allowed for statistical purposes.

24. As regards Ground No.4, brief facts are that the assessee incurred a sum of Rs.4,22,61,559 towards the trial run expenses pertaining to the cancer drugs which was debited to the pre-operative expenses and taken to the balance sheet in the books of account for the A.Y 2007-08. However, for tax purposes, the said amount was claimed as revenue expenditure u/s 37 of the Act. The AO however, observed that the expenditure 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 assessee's objection and therefore, the AO brought it to tax and the assessee is in appeal before us.

25. The learned Counsel for the assessee reiterated the submissions made before the authorities below and submitted that the assessee, being in the business of research, 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 the continuation of the existing line of business of research and development and therefore, has to be allowed as revenue expenditure. He submitted that during the A.Y 1999-2000, similar issue had also arisen in the assessee's 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 Kline Consumer Healthcare Ltd vs. CITreported 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 business of research development and manufacture of pharmaceuticals. The process of research includes trial run of a new drug. Therefore, the assessee's experiments on a new drug cannot be said to be a new line of business. We find that during the A.Y 1999-2000, the assessee had incurred pre-operative expenses on Biotechnology Division and the AO therein had treated this expenditure as capital expenditure. The Coordinate Bench of this Tribunal in ITA  No.363/Hyd/2003 has examined the issue at length and 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 involve 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-technology 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 from 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-technology 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 business and hence allowable as revenue expenditure. It is relevant to note that expenditure 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".

28. We find that the facts in the present case are similar i.e. the expenses are for a new product in the existing diagnostic and formulation business and are not for a new business 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 order held as under:

"10. Now we may examine the expenditure under the head "Product development expenses". The details of the expenditure show that the same has been incurred for introducing and developing new products. The assessee is engaged in the business of manufacture and sale of food and health care products under a well-known brand. The expenses include development expenses for new products namely Nutirbar chocolate, Ribena soft drink, Horlicks relaunch expenses. Certainly such expenditure has the potential to improve the profitability of the assessee. However the issue to, be considered is whether the expenditure seeks to enlarge the profit-yielding capacity or it increases the efficiency 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 business of the assessee is subjected to volatility in consumer preferences, tastes and wants. The assessee is therefore required to perennially study the market and launch new varieties in its products line and meet the competition in the market. It is in this background one has to examine as to whether the impugned expenditure incurred on development, introduction and launching of newer products is an advantage in the revenue field or not. In our humble opinion the expenditure in question has merely enabled the assessee to remain competitive in the market and retain the customer preferences and/loyalty towards its brand of products. The said advantage certainly is not limited to the period under consideration but spills over to the future also. So however this is not conclusive to hold that the expenditure in question is a capital expenditure. The parity of reasoning laid down by the apex Court in the case of Empire Jute Co. Ltd. (supra) discussed by us in the earlier para is squarely applicable with respect to such expenditure also.

11. We may mention here the stand of Revenue that the development and introduction of new products create a new line  of business for the assessee and thus expenditure related thereof is to be treated as capital expenditure. On this aspect we are unable to appreciate as to how can it be said that mere development 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 assessee was in the business of manufacturing and sale of food and 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 products. Therefore it is erroneous to conclude that the assessee acquired a new line of business by merely developing and introducing new products in the existing line of business. The new products clearly relate to the same line of business that the assessee has been hitherto carrying on. Therefore, on above consideration also the plea of the assessee that the expenditure in question is a revenue expenditure deserves to be upheld".

29. Therefore, respectfully following the above decisions, we hold that the expenditure incurred by the assessee 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 Depository Shares (ADS). The AO was of the opinion that the expenditure 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. He however, held that section 35D is the specific provision under which amortization of the expenditure is allowable, if it falls within the domain of section 35D(2)(c) and meets the conditions laid down u/s 35D(3) of the Act. He observed that in the present case, it is not confirmed by the assessee that capital from the issue was raised for a specific undertaking and further that the manner of  utilization of ADS is also not clear i.e. whether the same was used for expansion of existing business or not. Therefore, he did not allow the amortization also u/s 35D of the Act. Further, 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.1,45,91,200 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 capital needs of the group and that it was for expansion of existing business and for meeting the working capital requirement. It was submitted that the expansion is an ongoing process in the company and during the year fixed assets worth Rs.2,572 million have been added by the company and a New Formulation Unit-VI, at Himachal Pradesh has been set up during this year. It was also submitted that the total issue expenses was Rs.227 million against which the assessee had recovered and adjusted Rs.125 million resulting in the net issue expenses of Rs.104 million only and therefore, the entire expenditure incurred in connection with the ADS issue meant for expansion of the existing business is allowable 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 business of the company and also in the profit making, the expenses incurred in that connection still retain the character of the capital expenditure, since the expenditure is directly related to the expansion of the capital base of the company. The DRP followed the decision of the Hon'ble Supreme Court in the cases of Punjab State Industrial Development Corporation Ltd, reported in 225 ITR 792 and Brooke Bond India Ltd, reported in 225 ITR 798 for coming to this conclusion. Further, the DRP held that the contention of the assessee that part of capital raised is used to meet working capital requirements is of no significance 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 fulfilled 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 disallowed the said claim. Against this finding of the DRP and the consequential assessment order, the assessee is in appeal before us.

32. The learned Counsel for the assessee reiterated the assessee's submissions before the authorities below and placed reliance upon the decision of the Delhi Bench of the 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'ble 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 public offering of its American Depository Shares (ADS) shares to international investors in Nov.2006. By virtue of the said issue, the share capital has increased and securities premium a/c has also increased and the equity shares represented by the ADS carry equivalent rights with respect to voting and dividend as the  ordinary equity shares. As seen from Page 107 of the PB filed before us, such capital raised has been utilized by advancing loans to LACO Holding Ltd and APR LLC of a total amount 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 subsidiaries. Therefore, the assessee's contention that the funds raised on ADS issue have been used towards working capital requirement of the subsidiaries is not entirely correct. Further, it is also seen that the ADS issue has increased the share capital of the assessee and therefore, the capital base of the assessee company has increased. We are, therefore, in agreement with the findings of the DRP that where the expenditure has been incurred for increasing the capital base of the company, the said expenditure is capital in nature. The Hon'ble Supreme Court in the case of Punjab State Industrial Dev. Corpn Ltd (cited Supra) has clearly held that though the increase in the capital results in expansion of the capital base of the company and incidentally that would help in the business of the assessee and may also help in the profit making, the expenses incurred in that connection still retain the character of the capital and hence the expenditure is directly related to the expansion/capital base of the company. Therefore, we see no reason to interfere with the assessment order 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 furnished 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  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 the DRP ought to have verified the said expenditure before making the disallowance. In view of the same, we deem it fit and proper to remand the issue to the file of the AO for denovo consideration in accordance with the law, more particularly in view of the decision of the Delhi Bench of the Income Tax Appellate Tribunal in the case of Chinatrust Commercial Bank vs. ADIT reported in (2007) 13 SOT 485 (Del.) and also the decision of the Hon'ble Supreme 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 statistical purposes.

34. As regards Ground No.6, brief facts are that during the year, the assessee made a payment of Rs.4.00 crores to Institute of Life Sciences ('ILS') for research project and claimed deduction of this amount u/s 35(1)(ii) of the Act. The AO observed 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 since there is no such approval for ILS, the claim was proposed to be disallowed. The assessee's 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 institution engaged in research of pharmaceuticals and since the assessee is also in the same line of business, the research could benefit the assessee and therefore, the payment was made for the purpose of business. The assessee submitted that similar payment to Hinduja Hospital for  the A.Y 2003-04 was considered by the Income Tax Appellate Tribunal in ITA No.739/Hyd/2009 dated 29.10.2010 and the Tribunal has held that the payment is allowable as deduction. He also submitted that this issue is also covered by the decision of the Income Tax Appellate Tribunal in the assessee's own case for the A.Y 2006-07 wherein the Hon'ble Income Tax Appellate Tribunal has held that though the deduction u/s 35AC was not allowable, the AO was directed to examine whether the payment is allowable as revenue expenditure u/s 37(1) of the I.T. Act. The learned DR however, supported the orders of the authorities below.

35. We find that the DRP has considered the assessee's objection at length and has held that the claim of deduction u/s 35 (1)(ii) is not allowable as ILS is not an institution approved by the notification in the official gazette by the central govt. We also find that the DRP has also considered the allowability of the same as an expenditure u/s 37(1) of the Act on the grounds of commercial expediency. The DRP has observed that the payment made by the assessee is more in the nature of a donation and not a business expenditure. It was held that the assessee has not made the payment for building up any business through 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, Hyderabad and it is not under the Dr. Reddy's Laboratories brand to acquire goodwill for the assessee through its research and academic work. The DRP also held that the payment made to the Hinduja Hospital cannot be compared with the payment made by the assessee to  ILS. The assessee has relied upon the decision of the Coordinate Bench of this Tribunal at Delhi in the case of Chinatrust Commercial Bank vs. ADIT (cited Supra) for the proposition that the expenditure which is voluntarily incurred is for commercial expediency, then it is to be allowed as revenue expenditure. We find that in the assessee's own case for the A.Y 2003-04, the Coordinate Bench of this Tribunal was considering the allowability of a donation of Rs.17,67,442 made by the assessee to institution relating to medical profession like Gujarat Cancer Research Institute, Chemists & Druggists Association, Alliar International Institution for Hearing Impaired and Hinduja Hospitals etc., and the Tribunal has held that these expenditure are incurred in the course of business and cannot be said that it is not wholly and exclusively laid out for the purpose of business and is to be allowed u/s 37 of the Act. We find that 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 in 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 whether the claim is allowable u/s 37(1) of the I.T. Act.

36. We have perused the material filed before us and we find that except for stating that the payment to ILS 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 its business activities and also as to whether the results of such research are to be utilized by the assessee in any way and the purpose of the research are not brought on record. The learned DRP has held  that the ILS cannot acquire goodwill for the assessee or procure business for the assessee. The assessee has not brought on record either before the DRP or before this Tribunal as to how the assessee is being benefited in any way by the results of the research carried on by the ILS. Therefore, the commercial expediency of the donation to ILS has not been established by the assessee. In the assessee's own case for A.Y 2003-04, the Tribunal, without giving elaborate reasons, has held that the donation given to the institutions mentioned therein are incurred in the course of business and allowable u/s 37(1) of 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 allowability of the same by the Tribunal. In view of the same, we do not see any reason to interfere with the assessment order on this issue and 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 Ltd had got merged with the assessee w.e.f 1.4.99 and upon the merger, the difference between the consideration and the net worth was considered as goodwill and from the first year of merger, the assessee claimed depreciation on goodwill. It is submitted 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 reliance upon the decision of the Hon'ble Supreme Court in the case of CIT vs. Smifs Security Ltd (348 ITR 302) (S.C) wherein it has been held that goodwill is also an intangible asset eligible for depreciation thereon.

39. The learned DR however, on the other hand, supported the orders of the authorities below.

40. Having regard to the rival contentions and the material on record and respectfully following the decision of 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 weighted deduction of 150% u/s 35(2AB) in respect of expenditure on scientific research incurred by Perlecan Pharma P Ltd. The AO observed that before merger, Perlecan was a separate undertaking and each R&D undertaking needs to be approved by the DSIR in 3CL format for getting the benefit for weighted deduction. Observing that M/s Perlecan Pharma P Ltd did not have such approval, weighted deduction claim on R&D expenditure of Perlecan is not to be allowed. He therefore, disallowed 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 the assessee is in appeal before us. According to the learned Counsel for the assessee, Perlecan Pharma had engaged the assessee to  undertake contract research and the assessee while claiming deduction u/s 35(2AB), duly reduced the amount received from Perlecan. He submitted that post merger with the assessee w.e.f. 1.1.2006, the above transaction stood nullified and Perlecan became part of the assessee and therefore, the assessee claimed weighted deduction on the whole amount of R&D expenditure 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 development company jointly owned by Dr. Reddy's Laboratories Ltd and the venture capital financial institution after the discovery research activities carried out at approved in-house R&D Units of Dr. Reddy's 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 and based on the High Court order amalgamating Perlecan Pharma Ltd with the assessee herein with retrospective effect from 1.1.2006, the assessee revised its return of income, duly reversing the Perlecan credit considered in the original return and duly claimed the weighted deduction u/s 35(2AB) of the Act. It is submitted 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 of the assessee and credit in the R&D a/c shall be deleted accordingly. It is further submitted that the research activities are carried out at the approved in house R&D facility in the name of Dr. Reddy's  Laboratories & Perlecan having merged with Dr. Reddy's Laboratories, it implies that the said company is now none other than Dr. Reddy's Laboratories and since the assessee already has the approved R&D facility, no separate approval is required for the same location. R&D expenditure approved by the DSIR in Form No.3CL already included the Perlecan credit and hence there is no requirement to obtain a separate 3CL in respect of the said R&D expenditure for the said expenditure. It is submitted 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 deduction in respect of the expenditure incurred on R&D in the hands of the persons who incurs it and it is only that the relevant rules and regulations require that any income arising from R&D is to be deducted from the amount of expenditure. It is further submitted that DSIR is empowered to examine the expenditure and approve the same and the DSIR in its certificate has approved the total expenditure including the expenditure which was reimbursed by Perlecan and has not expressly disallowed Perlecan reimbursement as ineligible expenditure. It was further submitted that the certificate duly reflected the gross expenditure and also the reimbursement from Perlecan as a separate line in the certificate. Therefore, according to him, it does not mean that the DSIR has not approved the expenditure incurred by DRL to that extent. In support of these contentions, the learned Counsel for the assessee has drawn our attention to the form No.3CL for the financial year 2005-06, 2006-07 and 2007-08 respectively which is placed at Page 485 of the Paper Book filed before us.

42. The learned DR, on the other hand, supported the orders of the authorities below and submitted that the approval given by DSIR is for the R&D facility of the assessee and not the R&D of Perlecan Pharma P Ltd. Thus, according to him, the expenditure incurred by Perlecan towards research & development albeit in assessee's facility is not eligible 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 or in any business of manufacture or production of any article or thing incurs any expenditure on scientific research (not being expenditure in the nature of the cost of land or building) 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 ¼th time of the expenditure so incurred. The only dispute before us is whether the expenditure incurred by Perlecan towards research and development in the assessee's facility is eligible for deduction u/s 35(2AB) of the 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 seen that the expenditure approved by the DSIR includes a sum of Rs.1054.314 lakhs on account of Perlecan Pharma Pvt Ltd. Copy of 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 activities of the assessee. As the facility and also the expenditure has already  been approved by the relevant authority, we are of the opinion that post merger, the said expenditure cannot be reduced while allowing the deduction u/s 35(2AB) of the Act. Therefore, in our opinion, the deduction u/s 35(2AB) is allowable even on the expenditure incurred on Perlecan Pharma after 1.1.2006 i.e. the date of its merger.

44. In the result, assessee's ground of appeal No.8 is allowed.

45. As regards Ground No.9, brief facts are that during the course of the assessment proceedings, the assessee filed Form 3CL and 3CM pertaining to the 8 R&D Units. In the 3CL certificate dated 22.11.2010, the prescribed authority 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 is allowable. He observed that the total amount allowable as a deduction is Rs.31,458.23 lakhs and 150% of this amount is Rs.47,187.345 lakhs, but the assessee has claimed weighted deduction 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 the Hon'ble Karnataka High Court in the case of G.E. India Technology Centre (P) Ltd (cited Supra). Against the consequential assessment order passed disallowing the above expenditure, the assessee is in appeal before us.

46. The learned Counsel for the assessee fairly admitted that as the expenditure was not approved by the DSIR, the deduction claimed @ 150% of expenditure was not granted. He prayed that at least 100% of the deduction of Rs.3,46,51,162 should be allowed as per section 35 (D)(i) ) and 35 (1)(iv) of the Act. In support of this contention, the learned Counsel for the assessee placed reliance upon the following decisions:

i) DCIT vs. Reliance Cellulose Products Ltd reported 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 weighted deduction u/s 35(2AB) on these amounts are not clearly allowable. We find that the Coordinate Bench of this Tribunal in the cases relied upon by the learned Counsel for the assessee, has held that where the assessee was having R&D Centres which were not duly recognized by DSIR, then the assessee was entitled for deduction u/s 35(1) in respect of expenditure on scientific research and 100% deduction u/s 35(1)(iv) on capital expenditure incurred on R& D expenditure and the balance of the expenditure, if any, not approved by DSIR will have to be considered for deduction u/s 35(1) or under normal provisions, if the assessee furnishes form 3CL to  substantiate such claim. Therefore, we are of the opinion 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 the 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 reconsider the same in accordance with law. It has also been brought to our notice by the learned Counsel for the assessee that for the A.Y 2003- 04 and 2004-05, the CIT (A) has allowed deduction on clinical trials by orders dated 18.11.2013 in the appeals filed 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 trials. Ground of appeal No.9 is accordingly treated as allowed for statistical purposes.

49. As regards Ground No.10 treating the repairs and maintenance as capital expenditure, the learned Counsel for the assessee submitted that these are for small/minor assets such as plastic crates, furniture, Alkon Modular systems, Table stand, pH meter, tractor, calculator storage cupboard, etc., and the depreciation has been allowed by the AO. It is submitted that due to smallness of the amount, the assessee is not pressing this ground before us. Therefore, this ground of appeal is rejected as not pressed.

50. As regards Ground No.11, brief facts are that on examination of books of account of the assessee, the AO noticed that the assessee has debited expenditure which is purely personal in nature incurred on doctors/govt. servants  and other guests and observed that this expenditure is in the nature of travel, conveyance, lunch/dinner, gifts and compliments, and that the assessee has claimed it as business promotion expenditure. He observed that this expenditure 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 assessment order and the assessee is in appeal before us.

51. The learned Counsel for the assessee, while reiterating 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, according to him, the travel and other expenditure on account of the participation of Doctors is for bonafide business purposes of the assessee. Thus, according to him, the said expenditure is allowable as business expenditure. He also placed reliance upon the following decisions to supports of assessee's 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. Commissioner of Income Tax, (ITA No.788/Del/2015 for A.Y 2010-11 dated 24.11.2015
iv) M/s. Liva Health Care Ltd vs. ACIT (ITA No.847/M/12 & ITA No.388/M/12 (Mumbai ITAT).

52. We find that this issue had arisen in the assessee's own case for the earlier A.Ys and the Tribunal has considered 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 various 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 erroneously 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 various 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 During the year the assessee has incurred expenditure towards sales promotion which comprise of Business promotion expenditure, gifts and compliments, local doctors meet expenses, individual doctor service. 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 incurred in the course of the business of the assessee.

11.2 This issue was a recurring one having been considered 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 stated to be payments to the Doctors, hospitals in cash amount and also like gifts. The contention of the assessee was that this expenditure was incurred wholly and exclusively for the purpose of business, whereas AO/DRP was of the opinion that the assessee cannot explain said payments as related to business. Similar issue was examined by Assessing Officer 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. Likewise the expenditure of gifts and compliments and other expenditure of similar nature was  also not allowed in the order of ITAT (supra). Respectfully following, we uphold the order of AO/DRP on various expenditures.

11.2 With regard to Local Doctor meet expenditure it was submitted that expenditure was incurred on doctors for provision of various gifts in individual capacity including gifts, tickets, sponsorship etc. It was contended that this was for business promotional expenses which are to be allowed as revenue expenditure. In assessment year A.Y.2003-04, this issue was set aside to the file of Assessing Officer 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 direct Assessing Officer to examine the nature of expenditure and whether the same can be allowed as incurred for the purpose of business. Accordingly, issue was set aside to the file of Assessing Officer to examine and decide afresh. To that extent, assessee's ground is allowed for statistical purposes.

11.3 Individual doctors services: On the reason that assessee incurred these expenses towards individual doctors and payment 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 of the expenditure was self vouched and are unverifiable in nature and disallowance made was to the extent of Rs.8,84,41,258/-. This issue was considered by ITAT in the order supra as under :

"42 The next is with regard to disallowance of individual doctor's meet expenses at Rs.3,20,97,763/-. This expenditure includes sponsorship of doctors' travel from states to attend the conference 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 disallowed 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 disallow 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 only 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 expenditure which is not  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 code of ethics is applicable and so expenditure incurred on the doctors can be considered as unethical. The Assessing Officer is also directed 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 considered partly allowed for statistical purposes.

53. Respectfully following the same, we set aside the issue to the file of the AO with a similar direction to verify 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 purposes.

54. As regards Ground No.12, brief facts are that on examination of payments made by the assessee for the technical services received by it, the AO noticed that some payments 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 head are taxable in the source country and therefore, TDS u/s 195 was to be done. He therefore, proposed to disallow the same u/s 40(a)(i) of the Act. The assessee raised its objection before the DRP and the DRP examined the DTAA's with respective countries for the reasons for non deduction of TDS and directed the AO to verify the nature of the payments in the cases of M/s. Ablon Ltd Pharma LLC, Industrial Quionicas Falcon & M/s. Squire & M/s Hector, while in the case of Aclario Pharma Development, USA, the DRP observed that the expenditure is not for clinical trials and therefore, according to him, there is a clear sharing of experiences or skill as revealed from the invoice which mentions 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 and therefore, there is no requirement to withhold tax. It is submitted that this issue is covered in favour of the assessee by the decision of the ITAT in assessee's own case reported in (2013) 35 taxmann.com 339.

56. The learned DR, however, supported the orders of the authorities below.

57. Having regard to the rival contentions and the material on record, we find that in the assessee's 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 the provisions of the Income-tax Act read with DTAA with USA and Canada, which are almost similar, we have no reason to differ from the order of the CIT(A). Even though the Assessing Officer considered that the payments were made by way of 'fee for technical services' as per Article 12 of the DTAA, the same is taxable in the source country only if such services make  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 with the regulations therein and the CROs who are experts in this field were only conducting studies and submitting the reports in relation thereto. They are neither transfer of technical 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 benefit out of the said services in USA and assessee was only getting a report in respect of field study on its behalf, which would help it in getting registered with the Regulatory Authority. Since there is no making available of technical skill, knowledge or expertise or plans or designs in the present case, the amounts paid by the assessee do not fall under Article 12, but come within the purview of Article 7 of the DTAA. Therefore, the amounts paid are to be considered as business receipts of the said CROs and since they do not have any PE in India on which aspect there is no dispute, there is no need to deduct tax at source. Similar issue was analysed and considered by the AAR in the case of Anapharm INC (supra), which is one of the recipients 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 service provider should also make his technical knowledge, experience, skill, know-how etc., known to the recipient of the service so as to equip him to, independently perform the technical function himself in future, without the help of the service provider. In other words, payment of consideration would be regarded as 'fee for technical/included services' only if the twin test of rendering services and making technical knowledge available at the same time is satisfied. In the present case, the applicant renders bioanalytical services which, no doubt, are very sophisticated in nature, but the applicant does not reveal to its clients as to how it conducts those tests or the inputs that have gone 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 in question are highly technical in nature will not make a difference. In its affidavit the applicant affirms that only final results, 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 been nor will they ever be transferred, assigned or handed over to 5 or any  other Indian client. From the perusal of the relevant agreements, no provision is found which would entitle the clients to know the details of the analytical methods and procedures employed by the applicant in carrying out the bioequivalence tests. The only doubt cast by c1. 15 of the agreement with 5 is cleared by S's statement that the said clause which was part of standard format was never given effect to. It seems to be inapplicable also having regard to the actual modalities of the transaction as set out in the application. Then agreement with R says that R shall be the owner of the tested samples and test compounds. Further, the applicant will store tested samples and test compounds for three months and make these available to the client at the expiry of that period. Handing over tested samples and test compounds cannot be equated with making technology, know-how, etc., available to R. The agreement also states that R shall be the owner of all intellectual property rights resulting from the services. This would mean that, if on the basis of these results, the client is able to acquire patent or other intellectual property rights in respect of new generic drugs developed by it, then the applicant shall not claim any interest whatsoever 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 intellectual 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 any insight as to how a new drug could be developed. In the light of the above discussion interpreting the expression 'make available', it follows that c1. (b) of art. 12(4) relied upon by the Revenue does not come into play and the services in question cannot be considered to be "fees for included service" within the meaning of this provision. The second limb of cl. (b) refers to "development and transfer of a technical plan or technical design". Obviously, that has no application here. The applicant uses its experience and skill itself in conducting the bioequivalence tests, and provides only the final report containing conclusions, to the client. The information concerning scientific or commercial experience of the applicant or relating to the method, procedure or protocol used in conducting bioequivalence tests is not being imparted to the pharmaceutical companies and the consideration is not paid for that purpose. On the basis of the final report, the pharmaceutical companies will not be able to find out what method, procedure  or protocol was used in conducting the tests. Moreover, the test reports are drug specific. Hence the material furnished by the applicant will not in any way help the customers to facilitate further research and development of new drugs as contended by the Revenue. As such, the fees received by the applicant are to be treated as business income and not royalty income. Since the applicant is in the business of providing bio-analytical services to various pharmaceutical companies, the consideration received by it from them would be its business income. In view 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 has denied the existence of any PE here and there is nothing on record to indicate anything to the contrary. On the facts stated, the existence of PE in India cannot be inferred also. It 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 nature of 'business profits' under art. 7 and the same is not taxable in India as the applicant does not have a PE situated in this country.-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 final results to its Indian clients by using highly sophisticated bio-analytical know-how, without providing any access whatsoever to the clients to such know-how, fee received by it is business income and not fee for technical/included services or royalty and applicant having no PE in India, such income would not be taxable in India by virtue of relevant provisions of DTAA between India and Canada".

12. We agree with the above opinion expressed by the AAR 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 confirmed and the grounds raised by the Revenue in these appeals are rejected".

58. Facts and circumstances in the case before us being similar, respectfully following the decision of the Coordinate Bench in the assessee's own case, we allow this ground of appeal.

59. As regards Ground No.13, brief facts are that the assessee claimed deduction u/s 10B of the Act for one Unit at Bajpally and another unit at Paidi Bhimavaram. During the assessment proceedings, assessee filed the copy of the Board of Industries only in the case of Bajpally Unit and for the other Unit, no such ratification letter was filed. Therefore, the AO allowed deduction u/s 10B for Bajpalli Unit only. The assessee 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 issued by the Commissioner under the delegated authority of Board of Industries. The assessee placed reliance upon the decision of the Tribunal at Delhi in the case of DCIT vs. Valliant Communication Ltd in ITA No.2706/Del/2008. Further, the assessee also filed a letter dated 10.06.2011 from the Asstt. .Development Commissioner VSEZ stating that the Board of approvals rectified the approval dated 21.02.2003 vide letter No.14/1/2011-EOU dated 18.1.2011. The DRP taking the note of the approval/rectification by the Board of Industries held that the assessee is entitled for the deduction u/s 10B of the Act with regard to Paidi Bhimavaram project, but however, directed 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.

60. The learned Counsel for the assessee stated that the DRP by allocating the corporate overheads to the eligible units, has enhanced the draft assessment, though it does not have the power to consider the issues which are not proposed in the draft assessment order. In support of this contention, he placed reliance upon the decision of the Hon'ble Karnataka High Court in the case of GE India Technology Centre P Ltd vs. DRP (338 ITR 416 (Kar.). He also drew our attention to the provisions of section 114C(6) of the Act in support of this contention. Without 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 from undertaking is eligible for deduction and the 10B unit is independently functional with separate/identified set of employees and therefore, expenses which are not directly related to the undertaking 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(Bom.)
c) Tide Water Oil Co. (India) Ltd vs. CIT (353 ITR 300(Cal.)
d) Income Tax Appellate Tribunal's order in assessee's own case reported in (2014) 30 ITR (Trib.) 434.
e) CIT vs. Hindustan Unilever Ltd (2014) 42 taxmann.com 132 (Mad).
61. Without prejudice to the above contention, the assessee prayed that the expenses are to be allocated to the respective units by taking the note of the expenditure for allocation.

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 their turnover.

63. Having regard to the rival contentions and the material on record, we find that in the assessee's own case for the A.Y 2006-07, the Coordinate Bench of this Tribunal at Mumbai has considered this issue at Para 12.5 and following the decision of the assessee's 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 relevant paragraphs are reproduced hereunder:

"12.4 Without prejudice to the above, it was further contended that, the A.O while computing the corporate Overhead, has considered corporate expenditure including finance charges, but has failed to consider interest income and gain on foreign exchange fluctuations which are also attributable to corporate activities only. Hence while computing corporate Overhead 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 allocable.

12.5 We have considered the issue. This issue was discussed by ITAT in assessment year 2003-04 in assessee's own case 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 the Tribunal in the case of Wipro GE Medical System Ltd. cited supra and wherein it was held that the assessee is rightly having allocated indirect expenses to the two units according to the wages and other expenses 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 opinion, in the absence of identifying the expenditure of the export division, there is no basis other than allocating the total indirect cost on the basis of  turnover. Accordingly, we direct Assessing Officer to apportion the expenditure on the basis of turnover of various units. The issue is set aside to the file of Assessing Officer for fresh consideration."

12.6 Respectfully following the above, in this year also the matter is set aside to AO to re-examine the claim on similar lines. Accordingly, ground is allowed for statistical purposes".

64. The learned Counsel for the assessee submitted that it is only the net expenditure and not the gross expenditure which should be allocated amongst all the Units. We agree with the contention of the assessee and direct the AO to allocate the only net expenditure of the corporate entity amongst all the units on the basis of the turnover. Thus, the alternate contention of the assessee is allowed.

65. As regards Ground No.14, brief facts are that the 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 incentives 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 Cyprus vide Article 25, provides for tax credit in India with respect to taxes withheld/levied in Cyprus on the interest amount and not withstanding that no tax has in fact, been withheld as mentioned above, Article 25(4) specifically provides that with respect to interest, taxes that are leviable in accordance with Article 11(2) shall be deemed to be the tax eligible for tax credit in accordance with the Article 25.Based on the above article, the assessee  claimed tax credit @ 10% on gross amount on tax received from Cyprus amounting to Rs.8,13,92,220. The assessee also filed a copy of the TDS certificate issued by the Canara Bank to this effect. The DRP observed that the contracting state in Cyprus did not levy any tax and therefore, the provisions of section 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 reiterating the above submissions, submitted that this issue is covered in favour of the assessee as the DRP for the A.Y 2008-09 has issued directions that the tax credit is to be allowed, if the interest was taxed in India and prayed for similar directions during this year.

67. Having regard to the rival contentions and the material on record and having verified the DRP's order for A.Y 2008-09, we find that the DRP for the A.Y 2008-09at Para 59 to 61 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  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 11 and 25are 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  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  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 issue to the file of the AO to verify whether the taxpayer has paid tax on interest income in India and if so, to allow the deduction of the tax admitted to have been paid under Article 25(2) of the DTAA r.w. article 25(4) of the Act of the DTAA. This ground of appeal is therefore, treated as allowed for statistical purposes.

69. As regards Ground No.15, it is against the observation of the DRP that the Department is free to initiate proceedings u/s 263 or u/s 147 or otherwise under the Act with regard to the issues on which no variation is proposed, but there needs to be an enhancement, we find that the ground raised before 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 ground is therefore, rejected.

70. As regards Ground No.16 regarding levy of interest u/s 234B, C & D, this is consequential in nature and the AO is directed to give consequential relief, if any to the assessee in view of our order above.

71. As regards Ground No.17, it is general in nature and needs no adjudication.
72. In the result, assessee's appeal is partly allowed 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.

 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.

 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 of appeal No.3 in assessee's appeal for the A.Y 2007-08 and for the detailed reasons given therein by the above order of even dated, this ground of appeal is allowed.

75. Ground No.2 is similar to ground of appeal No.7 in assessee's appeal for the A.Y 2007-08 and for the detailed 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 assessee's ground of appeal No.09 in the assessee's 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 assessee's ground of appeal No.12 for the A.Y 2007-08 and except that the payee herein is in UK and the India UK DTAA does not include 'make available' clause, the other facts are similar. Therefore, for the details reasons given therein, this ground of appeal is allowed.

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 nature, the assessee is in appeal before us. According to the learned Counsel for the assessee, the ERP implementation expenses are 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 treated 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 authorities 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 Coordinate Bench of the Tribunal in the case of Glaxo Smith Kline Consumer Healthcare Ltd vs. CIT (cited Supra). For the purpose of clarity and ready reference, the relevant paras are reproduced hereunder:

"43.1 We have considered the rival submissions carefully. In so far as the factual aspect of the matter is concerned, details of the expenditure in question amounting to Rs.

3,77,65,412 have been placed in the paper book at pp. 60  to 62. The assessee has implemented a new ERP package for recording of manufacturing and accounting transactions, i.e. in the field of financial and commercial activities. At p. 62 of the paper book and also as noted by the lower authorities, the new package is with regard to the recording of transactions in the field of accounting and finance, commercial transactions (i.e. sale and purchase order management, inventory management etc.). In order to implement, the new ERP system, the assessee claims to have incurred the impugned expenditure. The details of the expenditure reveal that the majority of heads of expenses are relating to salaries, employees' travelling cost, other routine business expenditure like postage, stationery, employees' training seminars, consultancy expenses etc. The first aspect is that the expenditures in question by itself do not result in acquisition of any asset in the hands of the assessee. The impugned expenditure also is not related to the actual acquisition of the ERP package and on this count, even 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 the assessee.

44. We have considered the nature of the expenditure 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 products. The activity pertaining to accounting, finance, recording of transactions relating to sales/purchases, inventories etc. are all secondary and assist in the furtherance of the main business objective of the assessee i.e. manufacturing. These secondary activities are necessary 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 recording of activities of accounting, finance, inventory management, processing of purchases, sales etc. would enable the assessee to be more efficient and profitable in carrying out its main business activity of manufacturing. What we are trying to emphasize is that where the assessee incurs expenditure to further improve and upgrade its manner of recording of accounting, finance arid other related 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 add to the capital apparatus of the assessee. It merely enables the assessee to take management decisions more efficiently.

 Therefore, the resultant benefits, in the shape of carrying on business more efficiently and smoothly, cannot be said to be an advantage accruing in the capital field. We have already referred in our earlier paras to the decision 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 attracted as a capital expenditure. In fact the advantage is in the Revenue field as it facilitates the assessee to carry 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 ERP package, the assessee seeks to carry on such activities more smoothly, efficiently and meaningfully so as to 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 efficiently and smoothly.

45. With this background we may now look at the break 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 expenditure fits the bill except in relation to the expenditure voice telecom circuit Rs. 19,86,581 and data/telecom circuit 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 implementation of the new ERP package, are revenue expenditures, insofar as it relates to the aforesaid two expenditures, we deem it fit and proper to direct the AO to ascertain their nature and thereafter decide the issue. For this limited purpose, we hereby set aside the order of the CIT(A) and restore the matter to the AO to carry out the aforesaid exercise. The assessee shall provide the necessary details to the AO and also justify that the same was of revenue nature in consonance with our discussion in the aforesaid paras.

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 record by the Revenue to controvert the said factual position. Therefore, even on the principles of consistency which 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 decisions of the Tribunal in the cases of Escorts Ltd. (supra) and 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 factual 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 fact the expenditure related to outright acquisition of the software in the case of Escorts Ltd. (supra). It was under such circumstances that the Tribunal concluded in the case of Escorts Ltd. (supra) that the expenditure resulted in acquisition of an asset in the hands of the assessee. To the similar effect is the decision of the Tribunal in the case of Maruti Udyog Ltd. (supra). Thus, the decisions in Maruti Udyog Ltd. (supra) and Escorts Ltd. (supra) cannot be applied in the instant case as the factual position stands on a different footing. In the instant case, as we have seen earlier, the impugned expenditure is 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 ground the assessee succeeds to the above extent".

Thus, such amount spent on implementation of ERP package 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 be for facilitating  the assessee to carry on the business of the assessee effectively and hence is revenue in nature.

82. As regards the expenditure on furniture, the details of such furniture is not placed on record and therefore, 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 the ERP implementation charges and the laying of road be treated as revenue expenditure, the issue of the nature of expenditure on furniture only is set aside to the file of the AO for denovo consideration.

83. This ground is therefore, treated as partly allowed for statistical purposes.

84. Ground of appeal No.6 is similar to the assessee's ground of appeal No.11 for the A.Y 2007-08 and for the detailed reasons given therein, this ground of appeal is remitted to the file of the AO with similar directions

85. Ground of Appeal No.7 is similar to the assessee's ground of appeal No.13 for the A.Y 2007-08. In view of the reasons given therein, this ground of appeal is also treated as allowed for statistical purposes with similar direction.

86. Ground of appeal No.8 is similar to the assessee's ground of appeal No.1 for the A.Y 2007-08 for the detailed reasons given therein, this ground of appeal is allowed.

87. In the result, assessee's appeal for the A.Ys 2007-08& 2008-09 are partly allowed.

The order pronounced in the open court on 2nd January, 2017.