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2024 (9) TMI 1738 - AT - Income TaxDisallowance of claim of weighted deduction on R D expenditure - expenditure was not approved by DSIR - HELD THAT - Similar ground has already been allowed by this Tribunal for AY 2010-11 in the assessee s own case 2024 (9) TMI 1737 - ITAT CHENNAI wherein held as the assessee has 3 in-house R D facilities for undertaking scientific research duly approved by DSIR as an in-house R D centre per requirement of section 35(2AB). Deduction claimed for these approved R D centers was duly audited and certified by statutory auditors in annual report. DSIR is merely authority for approval of R D facility. Once facility is approved expenditure incurred automatically qualifies for deduction u/s.35(2AB) irrespective of DSIR approval. It is noted that the R D Facility has been approved as required by the authority i.e. DSIR. The settled position was that once facility is approved expenditure incurred in this regard qualifies for deduction u/s.35(2AB) of the Act until amendment was brought in Rule 6(7A) of the of the Income Tax Rules 1962 w.e.f. 01.07.2016 (relevant to AY 2017-18). Therefore the AO/Ld.CIT(A) erred in disallowance the weighted deduction u/s.35(2AB). Disallowance of deduction for forex loss accounted in hedge reserve - AR submitted that deduction may be allowed in the year in which forex loss is charged to P L account of the assessee and brought to our notice that similar contentions were accepted in assessee s own case for AY 2010-11 - HELD THAT - We agree with the alternate submissions of the assessee and note that in AY 2010-11 the Ld.CIT(A) has appreciated the assessee s alternate contention that there will be double disallowance of the same expenditure once in AY 2009-10 (through AO order) and the other in AY 2010-11 suo-moto by the assessee. It is noted that the assessee had moved an application before the Ld.CIT(A) to withdraw the voluntary disallowance made by it in its return for AY 2010-11 and the Ld.CIT(A) after appreciating the claim of the assessee has rightly held in order to avoid double deduction the debit to P L in AY 2010-11 was nullified by the Appellant by adding back the amount of loss in the memo of income for AY 2010-11 However the claim of deduction for AY 2009-10 was not allowed by the AO and confirmed by the CIT(A) and is pending before the ITAT. If the claim of deduction made in memo of AY 2009-10 is not allowed the Appellant s adding back of the amount in AY 2010-11 will effectively result in denying this loss of forex changes on account of revenue item. Therefore in order to mitigate the double whammy both in AY 2009- 10 (by the AO in his assessment order which has been upheld by the CIT(A)) and in AY 2010-11 (by suo-moto disallowance in return by the Appellant) the Appellant is eligible to delete the voluntary disallowance made in the return of income for AY 2010-11 which the AO is directed to allow. This ground is allowed in favour of the Appellant. However if the disallowance is deleted for A.Y. 2009-10 the AO may accordingly recalculate the loss and add the same back to the income of the appellant in this year. Disallowance u/s.14A r.w.r.8D while computing the book profits u/s.115JB of the Act - HELD THAT - We note that this issue had come up in appeal in AY 2010-11 and appeal 2024 (9) TMI 1737 - ITAT CHENNAI wherein similar grounds of appeal was raised by the assessee and this Tribunal was pleased to hold provisions relating to normal tax computation can t be imported into sec.115JB of the Act which is a separate code by itself i.e. Rule 8D computation for disallowance u/s.14A can t be used for making adjustment for computation of book profit u/s.115JB of the Act and relied on the decision of Special Bench in the case of ACIT v. Vireet Investment (P) Ltd 2017 (6) TMI 1124 - ITAT DELHI which decision has been upheld by the Hon ble Bombay High Court. TDS u/s 195 - disallowance of consultancy expenditure u/s.40(a)(ia) of the Act for non-deduction of TDS - AO disallowed the consultancy expenditure claimed by the assessee for non-deduction of TDS by observing that though the payee/non-resident provides training to the engineers of the assessee company on their individual capacity he is a Consultant who is qualified to provide managerial and professional services and in fact imparting technical knowledge to the engineers would also satisfy the condition for make available test - HELD THAT - As noted that assessee has made payment of legal fees and consultancy fees to individuals in UK USA on which assessee hasn t deducted tax at source by relying on Article-15 of the respective Tax Treaties on Independent Personal Services (IPS). Having gone through the Article-15 of the respective Tax Treaties on IPS as well as Article-13 of the DTAA with UK and Article-12 of USA we are of the view that legal and accountancy services obtained from firm/individuals are exempt from tax in India and are taxable only in UK/USA i.e. country of resident. Payment made to Singapore Entity it is noted that the assessee has paid fees for consultancy study/report on Customer Satisfaction Index on which payment the assessee hasn t deducted tax at source. According to the assessee the services doesn t meet make available test as laid down under Article-13 of the Indo Singapore DTAA. We note that the fees has been paid to the Singapore Entity for the study which they conducted on Customer Satisfaction Index and the AO hasn t pointed out that as to how the Singapore entity has made available technical knowledge or skill to the assessee i.e. how to create such study. Since the services rendered by the Singapore entity doesn t meet the make available test under the Article on fees for technical services of DTAA and the services which are covered under the Article Independent Personals Services of DTAA the CIT(A) is right to hold after examining/verifying the relevant documents (invoices CA certificate in Form 15CB) that the provisions of tax treaties applies to non-resident to the extent that they are more beneficial than provisions of the Act. Hence assessee was not required to deduct tax at source u/s.195 therefore we don t find any infirmity in the action of the Ld.CIT(A) allowing the claim made by the assessee.
1. ISSUES PRESENTED and CONSIDERED
The Tribunal considered the following core legal questions: - Whether the assessee is entitled to weighted deduction under section 35(2AB) of the Income Tax Act on R&D expenditure incurred in in-house R&D facilities not specifically quantified or approved by the Department of Scientific and Industrial Research (DSIR) for the Assessment Year (AY) 2011-12. - Whether the forex loss accounted in hedge reserve on forward contracts relating to forecasted revenue transactions qualifies for deduction under section 37 of the Income Tax Act in AY 2011-12. - Whether disallowance under section 14A read with Rule 8D for expenditure incurred in relation to exempt income is applicable while computing book profits under section 115JB. - Whether depreciation and maintenance costs of aircrafts claimed by the assessee are allowable. - Whether depreciation on UPS should be allowed at 60% as claimed or restricted to 15% as per the AO's view. - Whether consultancy expenditure paid to non-residents without deduction of tax at source (TDS) under section 40(a)(ia) is disallowable, especially when the payments are governed by Double Taxation Avoidance Agreements (DTAA) and whether the services rendered satisfy the "make available" test under the relevant DTAA provisions. - Whether disallowance of wealth tax expenditure under section 40(a)(ii) is justified. 2. ISSUE-WISE DETAILED ANALYSIS Weighted Deduction on R&D Expenditure (Section 35(2AB)) The Tribunal examined the claim of weighted deduction on R&D expenditure amounting to Rs. 23,13,53,553/- which was disallowed by the AO on the ground that the expenditure was not approved or quantified by DSIR. The legal framework involves section 35(2AB) of the Income Tax Act, which allows weighted deduction for expenditure incurred on scientific research in approved in-house R&D facilities. The DSIR is the prescribed authority for approval of such facilities. The Tribunal relied on its earlier decision in the assessee's own case for AY 2010-11, where it was held that once the in-house R&D facility is approved by DSIR, the expenditure incurred qualifies for weighted deduction regardless of separate approval or quantification of the expenditure by DSIR. The Tribunal further referred to the ruling in the case of M/s. Sundaram Fasteners Ltd., which clarified that prior to the amendment in Rule 6(7A) of the Income Tax Rules effective from 01.07.2016 (relevant from AY 2017-18 onwards), DSIR's role was limited to approving the facility and not quantifying the expenditure. Hence, disallowance of weighted deduction on the ground of non-approval of expenditure by DSIR was unsustainable for AY 2011-12. The Tribunal applied this precedent mutatis mutandis and directed the AO to allow the weighted deduction on the entire R&D expenditure claimed. Deduction of Forex Loss Accounted in Hedge Reserve The AO disallowed forex loss of Rs. 1,63,39,984/- arising from forward contracts related to forecasted transactions which had not crystallized during the year, holding that under section 37 only expenses actually incurred during the year are allowable, and since the underlying transactions had not occurred, the loss was not allowable. The assessee contended that such unrealized forex loss on revenue items accounted in hedge reserve is eligible for deduction either in the year of accounting or alternatively in the year when the underlying transaction crystallizes and is accounted in profit and loss account. The assessee also pointed to a similar acceptance of this approach for AY 2010-11 by the CIT(A). The Tribunal noted that the AO's disallowance for AY 2011-12 was in line with the AO's and CIT(A)'s orders for AY 2009-10 and 2010-11, which were under appeal. The Tribunal referred to the CIT(A)'s reasoning in AY 2010-11 that denying deduction in AY 2011-12 when the loss is debited to P&L, while also disallowing it in AY 2009-10 when the loss was claimed in the memo of income, would result in double disallowance. Accordingly, the Tribunal directed that deduction be allowed in the year when the underlying transaction actually crystallizes and the forex loss is debited to profit and loss account, subject to verification by the AO. Disallowance under Section 14A read with Rule 8D for Book Profit Computation under Section 115JB The assessee challenged disallowance of Rs. 11,21,078/- under section 14A read with Rule 8D while computing book profits under section 115JB. The Tribunal relied on its earlier decision in the assessee's own case for AY 2010-11, where it was held that the provisions applicable to normal tax computation cannot be imported into the special code under section 115JB. The Special Bench decision in ACIT v. Vireet Investment (P) Ltd., upheld by Bombay High Court, was relied upon to hold that Rule 8D disallowance is not applicable for computation of book profits under section 115JB. Accordingly, the Tribunal allowed this ground in favour of the assessee. Disallowance of Wealth Tax Expenditure under Section 40(a)(ii) This ground was not pressed by the assessee and was dismissed. Depreciation and Maintenance Cost of Aircrafts The Revenue challenged allowance of depreciation and maintenance cost of aircrafts. The Tribunal noted that the same issue had been considered in the Revenue's appeal for AY 2010-11 and was remanded to the AO for verification and passing of orders consistent with Tribunal's order for AY 2007-08 and 2008-09. The Tribunal accordingly set aside the issue to the AO for fresh adjudication after hearing the assessee. Depreciation on UPS at 60% instead of 15% The Revenue challenged the allowance of depreciation on UPS at 60%, contending it should be restricted to 15% as per AO's view. The Tribunal held that this issue was already decided in the Revenue's appeal for AY 2010-11, where depreciation at 60% was allowed as UPS is part of computer accessories. The Tribunal dismissed this ground of appeal. Disallowance of Consultancy Expenditure under Section 40(a)(ia) for Non-Deduction of TDS The AO disallowed consultancy expenditure of Rs. 1,54,53,119/- for failure to deduct TDS on payments made to non-resident consultants, holding that the services provided satisfied the "make available" test under the relevant DTAA provisions, and no certificate under section 195 was obtained. The assessee contended that the payments were not taxable in India under the beneficial provisions of the applicable DTAAs, and hence no TDS was deductible. The assessee relied on invoices, CA certificates in Form 15CB, and the fact that the services did not "make available" technical knowledge or skill as per the DTAA definitions. The Tribunal examined payments made to entities in UK, Singapore, and USA:
The Tribunal held that the services rendered were exempt from tax in India under the relevant DTAA provisions and that the assessee was not required to deduct TDS under section 195. It emphasized the settled principle that provisions of tax treaties apply to non-residents to the extent that they are more beneficial than the provisions of the Act. The Tribunal found no infirmity in the CIT(A)'s order allowing the claim of the assessee and dismissed the Revenue's appeal on this ground. 3. SIGNIFICANT HOLDINGS On weighted deduction for R&D expenditure, the Tribunal held: "Once the in-house R&D facility is approved by DSIR, the expenditure incurred automatically qualifies for deduction u/s.35(2AB), irrespective of DSIR's quantification or approval of the amount of expenditure, until the amendment brought in Rule 6(7A) w.e.f. 01.07.2016." This principle preserves the entitlement of weighted deduction based on facility approval rather than expenditure quantification. On forex loss deduction, the Tribunal stated: "Deduction for forex loss on forward contracts relating to forecasted revenue transactions should be allowed in the year when the underlying transaction actually crystallizes and is accounted in profit and loss account, to avoid double disallowance." On disallowance under section 14A for book profit computation, the Tribunal observed: "Provisions relating to normal tax computation cannot be imported into section 115JB, which is a separate code. Rule 8D disallowance for expenditure relating to exempt income is not applicable for computation of book profits under section 115JB." On consultancy expenditure and TDS, the Tribunal held: "No TDS is required under section 195 on payments to non-residents where the services do not satisfy the 'make available' test under the relevant DTAA provisions, and the services are taxable only in the country of residence." Final determinations:
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