TMI Blog2018 (5) TMI 1314X X X X Extracts X X X X X X X X Extracts X X X X ..... arity of reasoning as in assessment years 2007-08 and 2008-09 had upheld the orders of authorities below in allocating head office expenses, Director s salary, etc to Daman unit and upheld the re-computation of deduction under section 80IB of the Act. - Decided against assessee Claim of deduction under section 35(2AB) - expenditure incurred on Research Development activity - whether where the facility has been recognized and necessary certification is issued by the prescribed authority, the assessee can avail the deduction in respect of expenditure incurred on in-house R D facility? - Held that:- The amendment brought in by the IT (Tenth Amendment) Rules w.e.f. 01.07.2016, wherein separate part has been inserted for certifying the amount of expenditure from year to year and the amended form No.3CL thus, lays down the procedure to be followed by the prescribed authority. Prior to the aforesaid amendment in 2016, no such procedure / methodology was prescribed. In the absence of the same, there is no merit in the order of Assessing Officer in curtailing the expenditure and consequent weighted deduction claim under section 35(2AB) on the surmise that prescribed authority has only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnal comparable companies selected by the Appellant for benchmarking the manufacturing function. 3. Inappropriate comparison of profitability between export to Associated Enterprises (AEs) segment and domestic sales segment ignoring differences in Functions, Assets and Risks (FAR), differences in products sold and comparison of controlled transactions with controlled transactions 3.1 The learned DCIT, pursuant to the directions of the learned DRP, erred in law and on the facts and in circumstances of the case in comparing segmental profitability of the Appellant i.e. between export to AEs segment and domestic sales segment ignoring product differences, differences in markets as well as differences in the functions, assets and risks (FAR). 3.2 The learned DCIT, pursuant to the directions of the learned DRP, erred in law and on facts and in circumstances of the case in comparing segmental profitability of the Appellant exports to AEs segment and domestic sales segment. This is a comparison between controlled transactions, which is against the transfer pricing regulations in India, which stipulates comparing controlled transactions with uncontrolled transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unit. 7.2 The learned DCIT pursuant to the directions of the learned DRP erred in not appreciating that the eligible unit of the Appellant was an independent unit managed independently without any interference by other divisions of the Appellant and therefore no part of the common expenses could be attributed to the said unit of the Appellant. 8. Disallowance of expenses under section 14A 8.1 The learned DCIT, pursuant to the directions of the learned DRP, erred in law and on the facts and in circumstances of the case in disallowing the expenses allegedly incurred in relation to exempt income earned by the Appellant. 9. Bad debts inadvertently not claimed in the return of income 9.1 The learned DRP erred in law and on the facts and in circumstances of the case in not directing the learned DCIT for allowing the Appellant s claim of bad debts written off which was inadvertently not claimed in the Return of income filed by the Appellant. 10. Disallowance of deduction u/s 35(2AB) of the Act 10.1 The learned DCIT pursuant to the directions of the learned DRP erred in law and on the facts and in circumstances of the case in rejecting weighted deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngth price of international transactions. The TPO in order passed under section 92CA(3) of the Act proposed an upward adjustment of ₹ 61,19,00,000/- in respect of international transactions with associated enterprises after considering the contentions raised by the assessee on account of sale of IC Engines to the associated enterprises and receipt of the procurement support services. The Assessing Officer in order passed under section 143(3) r.w.s. 144C(13) of the Act made the addition, after the objections filed by the assessee were rejected by the Dispute Resolution Panel (DRP). 6. The assessee is aggrieved by the order of Assessing Officer / TPO. The first issue which was adjudicated by the TPO was the claim of aggregation approach adopted by the assessee for benchmarking its manufacturing activities, which was rejected. The second aspect of transfer pricing issue was the most appropriate method to be applied, wherein the TPO had compared the profitability of export to associated enterprises undertaken by the assessee with domestic sales. The assessee is aggrieved by two aspects, wherein it has pointed out that because of controlled transactions, no comparison could be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Tribunal in earlier years and vide order dated 21.08.2017, the Tribunal held that while applying TNMM method, margins of assessee are to be compared with average margins of external comparable companies as per para 12, which read as under:- 12. We have perused the order of Tribunal in assessment year 2005-06 and noted the fact that the assessee had not pressed the said ground of appeal being academic in nature and hence, no adjudication was made on the said ground of appeal. However, in assessment year 2005-06, the assessee is not aggrieved by the findings of Tribunal in dismissing the plea of assessee since the issue has also become academic in nature. However, in the present appeal, after aggregation approach adopted by the assessee and accepted by the Tribunal, there may be case of certain adjustments to be made on account of arm's length price of international transactions. In this regard, we find that the issue is covered by the order of Hon ble High Court of Delhi in Sony Ericsson Mobile Communications India Pvt. Ltd. Vs. CIT (supra), wherein vide para 91, the Hon ble High Court held that while applying TNNM method and where the transactions are interlinked an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the TPO in application of net profit to cost as PLI. The case of assessee is that where selling price of component manufactured by it derives the profitability and not the cost of components utilized for manufacturing activity, the PLI should be adopted as net profit to sales and not net profit to cost. We find merit in the plea of assessee in this regard that where the assessee is engaged in the manufacture of components and the main aim of undertaking was to sell the said components, then it is the sales which derive the profitability and not the cost of components. Accordingly, while determining the PLI, the TPO is directed to adopt net profit to sales in order to benchmark the international transactions. Hence, the ground of appeal No.7 is allowed. 15. Following the same parity of reasoning, we direct the Assessing Officer that while determining the PLI to adopt net profit to sales in order to benchmark the international transactions. 14. Similar proposition has been laid down by the Tribunal in assessee s own case relating to assessment year 2008-09 in ITA No.2417/PUN/2012, order dated 30.10.2017. 15. The issue raised vide ground of appeal No.4.1 is squarely c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. 20. The issue raised vide grounds of appeal No.7.1 and 7.2 is against the disallowance of deduction claimed under section 80IB of the Act. 21. The learned Authorized Representative for the assessee fairly pointed out that the said issue is covered against the assessee by the earlier order of Tribunal and wherein, the Tribunal following the same parity of reasoning as in assessment years 2007-08 and 2008-09 had upheld the orders of authorities below in allocating head office expenses, Director s salary, etc to Daman unit and upheld the re-computation of deduction under section 80IB of the Act. Following the same parity of reasoning, we dismiss the grounds of appeal No.7.1 and 7.2 raised by the assessee. 22. The next issue raised by the assessee vide ground of appeal No.8.1 is against disallowance of expenses under section 14A of the Act. The assessee is aggrieved by the orders of authorities below in disallowing expenses relatable to exempt income under section 14A of the Act. 23. The learned Authorized Representative for the assessee pointed out that the issue is covered by the order of Tribunal in assessee s own case relating to assessment year 2008-09. 24. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the correctness of the claim of assessee in respect of such expenditure, in relation to income, which does not form part of total income, then the Assessing Officer has to determine the amount of expenditure incurred in relation to such exempt income, in accordance with such method as may be prescribed. The first step is the satisfaction of the Assessing Officer to be recorded vis- -vis the correctness of the claim made by the assessee. The assessee had furnished the working of disallowance under Rule 8D of the Rules at ₹ 19,63,021/-. The said working was in respect of disallowance to be made under Rule 8D(iii) of the Rules. The Assessing Officer having not recorded any satisfaction as to the correctness or otherwise of the aforesaid disallowance worked out by the assessee has not fulfilled the conditions laid down in sub-section (2) to section 14A of the Act. Accordingly, there is no merit in the exercise undertaken by the Assessing Officer. The learned Authorized Representative for the assessee during the course of hearing has filed the details in respect of disallowance of expenses under section 14A of the Act at ₹ 2,80,144/- as against working filed before the Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned Departmental Representative for the Revenue on the other hand, strongly objected to the claim of assessee. 32. We have heard the rival contentions and perused the record. The issue which is raised by way of ground of appeal No.9.1 is against the claim which was not initially made in the return of income but was raised by way of letter before the Assessing Officer and even before the CIT(A) and also before us. The Assessing Officer held the said claim as not allowable relying on the ratio laid down by the Hon'ble Supreme Court in Goetze (India) Ltd. Vs. CIT (supra). The Hon ble High Court of Gujarat in CIT Vs. Arvind Mills Ltd. referring to the decision of Goetze (India) Ltd. Vs. CIT (supra) held that the Hon'ble Supreme Court while dismissing the appeal clarified that its decision was restricted to the power of Assessing Officer to entertain claim for deduction otherwise than by revised return of income and did not impinge on the powers of assessing authority under section 254 of the Act. The Hon ble High Court further went on to say that when the claim of assessee was genuine and acceptable on merits, then the same was rightly allowed by the appellate Commissioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the assessee that once R D facility was approved by the prescribed authority i.e. DSIR in form No.3CM, then the expenses incurred by the assessee have to be allowed under section 35(2AB) of the Act. The learned Authorized Representative for the assessee drew our attention to different clauses of section 35 of the Act to demonstrate that various types of approvals were to be taken under different sub-sections and what was envisaged under each of the section, then the same has to be read and applied for. Where the law wanted the expenditure to be approved by prescribed authority, then the same was expressly provided as in section 35(1)(i) of the Act and in section 35(2B) of the Act. However, for the purpose of section 35(2AB) of the Act, it is provided that facility is to be approved and not the expenditure. Our attention was also drawn to the Memorandum explaining the Finance Bill, 1997 and Notes on clauses when section 35(2AB) of the Act was inserted, where it was stated that deduction was available to companies having in-house R D facility, approved for the purpose of section by the prescribed authority. The learned Authorized Representative for the assessee thereafter, took ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such question will have to be referred by the Board to the prescribed authority. He thus, stressed that for claiming weighted deduction under section 35(2AB) of the Act, it is the facility and not the expenditure in form No.3CL which has to be approved by the prescribed authority. The facility in the case of assessee has been approved by the DSIR in form No.3CM and hence, the assessee was eligible to claim the deduction under section 35(2AB) of the Act. 36. The learned Departmental Representative for the Revenue relying on the orders of authorities below, placed reliance on the ratio laid down by the Hon ble High Court of Karnataka in Tejas Networks Ltd. Vs. DCIT (supra). He further pointed out that the decision in Sun Pharmaceutical Industries Ltd. Vs. Pr.CIT (supra) was vis- -vis power of the Commissioner under section 263 of the Act and hence, was not applicable. He stressed that under Rule 6 of the Rules, the prescribed authority had to look into expenditure on scientific research. He further pointed out that though improvement in rules has come later but earlier when it was prescribed to submit the details to prescribed authority, then it was incumbent upon the prescribed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d is missing under the said section. Similar is the position in sub-section (2A). Further in sub-section (2AB), it is provided that facility has to be approved by the prescribed authority, then there shall be allowed deduction of expenditure incurred whether 100%, 150% or 200% as prescribed from time to time. Clause (2) to section 35 of the Act provides that no deduction shall be allowed in respect of expenditure mentioned in clause (1) under any provisions of the Act. Clause (3) further lays down that no company shall be entitled for deduction under clause (1) unless it enters into agreement with prescribed authority for co-operation in such R D facility. The Finance Act, 2015 w.e.f. 01.04.2016 has substituted and provided that facility has to fulfill such condition with regard to maintenance of accounts and audit thereof and for audit of accounts maintained for that facility. 40. Under Rule 6 of Income Tax Rules, 1962 (in short the Rules), the prescribed authority for expenditure on scientific research under various sub- clauses has been identified. As per Rule 6(1B) of the Rules for the purpose of sub-section 2AB of section 35 of the Act, the prescribed authority shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 35(2AB) of the Act. 42. The issue which is raised before us relates to pre-amended provisions and question is where the facility has been approved by the prescribed authority, can the deduction be denied to the assessee under section 35(2AB) of the Act for non issue of form No.3CL by the said prescribed authority or the power is with the Assessing Officer to look into the nature of expenditure to be allowed as weighted deduction under section 35(2AB) of the Act. The first issue which arises is the recognition of facility by the prescribed authority as provided in section 35(2AB) of the Act. 43. The Hon ble High Court of Gujarat in CIT Vs. Claris Lifesciences Ltd. (2010) 326 ITR 251 (Guj) have held that weighted deduction is to be allowed under section 35(2AB) of the Act after the establishment of facility. However, section does not mention any cutoff date or particular date for eligibility to claim deduction. The Hon ble High Court held as under:- 8. The Tribunal has considered the submissions made on behalf of the assessee and took the view that section speaks of: (i) development of facility; (ii) incurring of expenditure by the assessee for dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... andan Vikas (India) Ltd. (2011) 335 ITR 117 (Del) on similar issue of weighted deduction under section 35(2AB) of the Act held that the condition precedent was the certificate from DSIR, but the date of certificate was not important, where the objective was to encourage research and development by the business enterprises in India. In the facts before the Hon ble High Court of Delhi, the assessee had approached DSIR vide application dated 10.01.2015. The DSIR vide letter dated 23.02.2006 granted recognition to in-house research and development facility of assessee. Further, vide letter dated 18.09.2006, DSIR granted approval for the expenses incurred by the company on in-house research and development facility in the prescribed form No.3CM. The Assessing Officer in that case refused to accord the benefit of aforesaid provision on the ground that recognition and approval was given by DSIR in the next assessment year. The Tribunal allowed the claim of assessee relying on the decision of the Hon ble High Court of Gujarat in CIT Vs. Claris Lifesciences Ltd. (supra). The Hon ble High Court of Delhi taking note of the decision of the Hon ble High Court of Gujarat observed that it has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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