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2014 (2) TMI 1070 - AT - Income TaxAddition on account of treating the arms’ length price as nil - Held that:- When the assessee has taken a business decision of outsourcing a part of the R & D activity it is not for the department to question it - it is for the assessee to decide what is best for his business interest - The department cannot step into the shoes of a businessman and ask him to conduct his business in a particular manner or advise him what to do or not – Relying upon CIT vs. EKL Appliances Limited [2012 (4) TMI 346 - DELHI HIGH COURT] - It is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity - It is also not necessary to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years - The only condition is that the expenditure should have been incurred "wholly and exclusively" for the purpose of business and nothing more. The only thing that the TPO is required to examine is whether the payment made to AE towards reimbursement of R & D expenditure is within arm’s length - when the department is contradicting, then it is for the department to bring on record material to show that such facilities are available in India and what would be cost of research and development work with regard to this particular research work - without bringing sufficient evidence on record to prove that the transaction between the assessee and its AE is not genuine, the conclusion arrived at by the TPO/DRP that it is a sham transaction, cannot be accepted - The efforts of the TPO to justify the transaction as not genuine, the TPO has failed to examine and make necessary enquiry to find out whether the expenditure incurred towards outsourcing R & D work is within arm’s length – thus, the matter remitted back to the AO for fresh consideration. Disallowance u/s 40(a)(i) of the Act – Held that:- DRP has completely misdirected itself while coming to such conclusion - A perusal of the certificate dated 6-7-2007 clearly shows that assessee was permitted to pay an amount of Rs.20 crores to its AE towards reimbursement of expenditure incurred on assessee’s behalf without deducting tax at source – thus, no disallowance could be made u/s 40(a)(ia). Claim of Expenditure u/s 35(1)(i) of the Act - Scientific research expenditure – Whether the ACIT/DRP is justified in law in observing that the assessee company is still in the pre-commencement stage and thereby disallowing the entire scientific research expenditure incurred in India – Held that:- The finding of the Assessing Officer as well as DRP is not on the basis of cogent evidence - Assessing Officer has allowed similar expenditure claimed in the subsequent assessment year i.e. assessment year 2008-09 - section 35(1) and 35(2) of the Act also provided that both revenue expenditure as well as capital expenditure incurred towards scientific research relating to the business of the assessee is eligible for deduction - There is enough material on record to show that assessee is carrying on R & D activities – thus, it cannot be said that assessee has not commenced its business – the Assessing Officer is directed to allow the expenditure incurred in R & D activities carried out in India – Decided in favour of Assessee. Disallowance of interest on reimbursement of expenses – Held that:- The disallowance made cannot be sustained - Since it has already been held that the transaction between the assessee and its AE relating to outsourcing of research and development activity cannot be held to be a sham transaction or diversion of funds – also, it cannot be held that the amount advanced to the AE is for non-business purposes – thus, the Assessing Officer is directed to delete the addition – Decided in favour of Assessee. Interest income treated as income from other sources – Held that:- The Assessing Officer shall complete the assessment in conformity with the directions of DRP - The use of word ‘shall’ in sub-section (13) shows that it is mandatory on the part of Assessing Officer to pass the final assessment order by only implementing the directions of the DRP - an issue which is not considered in the draft assessment order and consequently was not subject matter for consideration before DRP could not be dealt with in the final assessment order – thus, the AO is directed not to treat the amount as income from other sources – Decided in favour of Assessee.
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