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TMI Blog2018 (5) TMI 1683X X X X Extracts X X X X X X X X Extracts X X X X ..... ence under Section 92CA of the Income Tax Act, 1961 (in short 'the Act') was made to the Transfer Pricing Officer (TPO) for determination of the Arm's Length Price (ALP) thereof. The TPO vide order under Section 92CA of the Act dt.31.10.2011 has not recommended any TP Adjustment to the ALP of the international transactions entered into by the assessee. The assessment was concluded under Section 143(3) of the Act vide order dt.30.12.2011 wherein the assessee's income was determined at Rs. 491,99,25,041 in view of the following additions / disallowances :- i) Interest attributable Rs.4,98,00,000 ii) Disallowance u/s.14A r.w. Rule 8D Rs.91,99,658 iii) Warranty Expenses & Provision Rs.44,63,000 iv) R&D Expenditure Rs.1,32,44,186 v) Royalty Rs.91,06,005 2.2 Aggrieved by the order of assessment dt.30.12.2011 for Assessment Year 2008-09, the assessee filed an appeal before the CIT (Appeals) - III, Bangalore. The learned CIT (Appeals) disposed the appeal vide the impugned order dt.14.2.2014 allowing the assessee partial relief. 3.1 Both revenue and the assessee, being aggrieved by the order of the CIT (Appeals) - III, Bangalore dt.14.2.2014 for Assessment Year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT (A), having regard to the facts in Appellants case that the entire Investments were out of own funds, erred in holding that sum of Rs. 36,57,621/- is attributable towards interest expenditure in earning exempt income. 7. That the learned CIT(A) ought to have held that the expenditure towards interest in earning Exempt Income is Rs. Nil, having regard to the fact that the entire Investments by the Appellant were out of own funds. 8. That the CIT(A) erred on facts in stating that the Average Value of Investments was Rs. 1,331.05 Crores (on Page 9 of her order), while the correct Average Value of Investments was Rs. 105.07 Crores (i.e 157.05+53.09 divided by 2) and consequently erred in upholding the disallowance of Rs. 35,57,621/- as interest attributable towards Investments out of borrowed funds. 9. The CIT(A) erred in upholding disallowance of Rs. 52,53,500/- under Rule 8D(2)(iii), while the correct amount of expenditure was only Rs. 73,976/- having regard to facts in Appellant's case. 10. Each of the above grounds are without prejudice to one another. 11. The appellant carves leave to add, amend or alter any of the grounds herein. 12. For these and other ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly considered the issue. The main contention of the appellant is that the appellant has acquired only tangible assets and no intangible assets or rights had been acquired. The contention of the AO is that the appellant by this R&D process had acquired substantial rights as covered by Sec 43(4)(ii) of the Act. The AO examined the processes involved in the R&D to find that new processes, products and patents arose as a result of the research, as detailed in a report sent by the appellant to the Ministry, and-as reflected in the application for patents under the Patents Act of 1970. On the other hand, the appellant's contention is that the expenses claimed relate to prosecution of scientific research and the provision of facilities for such prosecution and not for the acquisition of right in or arising out of scientific research. From the above, it can be seen that the basic arguments of the appellant company are that the R&D process resulted in certain tangible assets and details of the expenditure had been duly provided to the AO. It is also argued that once the R&D facility is approved by the Ministry, the deduction u/s 35(2AB) cannot be denied. The appellant's interpreta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee incurred expenditure of Rs. 2,91,97,333 towards acquisition of tangible assets for its in-house R&D facility for carrying out scientific research, the details of which are listed at page 3 of paper book. 4.3.2 It is submitted that when the Assessing Officer visited and inspected the assessee's factory premises at Jamshedpur, he required a copy of the report submitted by the assessee to the DSIR, New Delhi which were made available to him. It is contended that, while no queries were raised by the Assessing Officer when R&D facilities and activities were shown to him by Managing Director, The Chief Design and Development Engineer (R&D) and AGM (R&D), the Assessing Officer's finding in the order of assessment, that the assessee has not been able to substantiate that the aforesaid expenditure on in-house scientific research is related to the assessee's business, is clearly erroneous. It is reiterated that the said expenditure on in-house scientific research is related to the assessee's business and not for any other purposes. It is further contended that the Assessing Officer's view, that the aforesaid expenditure on in-house R&D facility resulted in the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... search" as per the provisions of Sec. 43(4)(ii) of the Act and particularly the exclusion to the definition given in clause (ii) to subsection (4) of Sec. 43 of the Act which states that scientific research expenditure excludes ".......... Any expenditure incurred in the acquisition of rights in, on arising out of, scientific research." The contention of the assessee is that the expenditure incurred by it on in-house R&D for improvement and upgrading of products manufactured in the course of its business, does not fall under the exclusion clause provided in Sec. 43(4)(ii) of the Act and is therefore eligible for deduction under Section 35(1)(iv) of the Act. Per contra, Revenue is of the view that expenditure incurred on in-house R&D also needs to be excluded from the definition of "scientific research" since it leads to acquisition of rights in or arising out of 'scientific research'. 4.5.2 We find that this very issue on similar facts has been considered and adjudicated in favour of the assessee and against Revenue by a co-ordinate bench of this Tribunal in the case of Tejhas Networks Ltd. (supra) wherein it followed the decision of the Hon'ble Karnataka High Court in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above question of law at para 9 of its order which is extracted hereunder :- " 9. It is the specific case of the Revenue that, the amount of Rs. 10.82 Crores spent by the assessee in acquiring an intellectual property is capitalized in the books. Now further amount of Rs. 9,27,34,277 is spent in developing and improving the said product. Therefore, the expenditure on further development of software which is treated as a capital in nature, is also capital in nature. This development is on account of scientific research. The evidence on record shows most of the money is spent towards cost of the employees, who had developed the product "Talisma Enterprise 2.5", multi channel customer relationship management solution, which provides sales, marketing, services, human resources and finance through the medium of e-mail, chat, wireless, fax, phone, etc. to the end users. Therefore, the expenditure in respect of the scientific research, even if it is capital in nature as it was incurred in relation to the business carried on by the assessee under section 35(1)(iv) of the Act, the said expenditure is to be deducted. That is what the Appellate Authority as well as the Tribunal have held. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fic research. The learned CIT(A) has proceeded on the basis that if the assessee carries out scientific research and is able to obtain IPRs on such research, then he was free to commercially use such IPRs and this is the reason why there is a prohibition u/s.43(4)(ii) of the Act so as to exclude expenditure incurred in the acquisition of rights in or arising out of scientific research. In our view, the aforesaid approach of the authorities below is not correct. The expenditure that is sought to be excluded u/s.43(4)(ii) of the Act is an expenditure which the assessee incurs in acquiring rights in or arising out of scientific research already done by somebody. It is possible that the assessee without carrying out any scientific research, acquires rights in scientific research, arising out of scientific research done by somebody else and claims cost of acquisition of such rights as expenditure on scientific research. It is this kind of expenditure that is sought to be excluded u/s. 43(4)(ii) of the Act in its exclusion clause as " expenditure incurred in acquiring rights in, or arising out of scientific research." It is such type of expenditure carried out by somebody else and such r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is to be accepted, then the benefit sought to be conferred by the provisions of Sec. 35(1)(iv) of the Act would virtually be denied in all cases by invoking the exclusion clause in Sec. 43(4)(ii) of the Act. Such a consequence would never have been intended by the Legislature. As already stated, the object behind the provisions of Sec. 35 of the Act is to encourage scientific research. Therefore, respectfully following the decision of the Hon'ble Karnataka High Court in the case of Talisma Corpn (P) Ltd. (supra) and of the co-ordinate bench of this Tribunal in the case of Tejas Networks Ltd. (supra), and in the facts and circumstances of the case, we are of the view and direct the Assessing Officer to allow the deduction claimed by the assessee under Section 35(1)(iv) of the Act on account of expenditure incurred on in-house R&D facility of the assessee. Consequently, grounds 1 to 5 of assessee's appeal are allowed. 5. Ground Nos.6 to 9 - Disallowance u/s. 14A of the Act. 5.1 In these grounds (supra), the assessee assails the decision of the learned CIT (Appeals) in holding that an amount of Rs. 36,57,021 is attributable towards interest expenditure incurred on earning ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficient to cover the assessee's investments during the year in both fixed assets of approx. Rs. 117 Crores and approx. Rs. 104 Crores in shares, mutual funds, etc. Before us, Revenue has not been able to contradict the aforesaid factual position. In view of the facts and circumstances of the case as discussed above, it is clearly established that the assessee had sufficient interest free own funds to cover the investments in shares, mutual funds, etc. that generated the exempt dividend and therefore no disallowance under Rule 8D(2)(ii) is called for. We, therefore, direct the Assessing Officer to delete the disallowance of Rs. 36,57,621 sustained by the learned CIT (Appeals). 5.2.3 In respect of the disallowance of an amount of Rs. 52,53,500 under Rule 8D(2)(iii) upheld by the learned CIT (Appeals), the learned Authorised Representative drew the attention of the Bench to schedule 4 of the assessee's Balance Sheet (copy at page 6 of paper book) to show that the learned CIT (Appeals) at para 5.2 of the impugned order had erroneously taken the figure of average investment of the assessee at Rs. 1331.05 Crores; whereas the average figure ought to be Rs. 105.07 Crores (i.e. Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X
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