TMI Blog2018 (1) TMI 1730X X X X Extracts X X X X X X X X Extracts X X X X ..... of shares was not a normal business transaction, that he treated it as advancing of interest free loan by the assessee to the AE, that he charged notional interest not only for the year under consideration but upto the date of remittance - CIT(A) deleted addition - HELD THAT:- Purchasing the share @ 1 pound per share and selling at @ 0.8 pound per share cannot be the basis for presuming that the transaction was not a genuine transaction-especially when the valuation was as per the exchange regulations. Buying back of share at par or at higher or lower rate than the purchase price is one of the very common practice of the business world. Until and unless it is proved that such a transaction was not based on scientific basis or was against the provisions of exchange manual/regulation, it should be accepted. We find that the FAA has given a categorical finding that the TPO had not doubted the valuation. In these circumstances, we hold that there was no justification for the TPO to charge notional interest. As the order of the FAA does not suffer from any legal or factual infirmity, so, confirming the same, we decide ground No. 2 against the AO. Allocation of R D expense to the 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was available for in house trials and RD research only - HELD THAT:- We are of the opinion that matter needs further verification. Therefore, we are remitting back the issue to the file of AO for deciding the issue afresh. He is directed to afford reasonable opportunity of hearing to the assessee and after considering the case laws relied upon by the assessee before us. Ground No. 4 is partly allowed. TDS u/s 195 - Addition u/s. 40(a)(i) - AO found that the assessee was making payment to non residents on account of pilot-bio study and clinical research without deducting TDS - HELD THAT:- We find that the Tribunal vide its order [ 2012 (4) TMI 743 - ITAT has dealt the issue and decide it in favour of the assessee held assessee paid charges for testing at laboratories of CRO which used their own skills and equipments etc., to prepare the report. The Tribunal came to conclusion that there is no parting of skills or know-how by CRO and hence the service is not technical in nature, but was only a commercial service. Ground of appeal against the AO. Disallowance of weighted deduction u/s. 35(2AB) - Form 3CL was not submitted by the assessee - HELD THAT:- We find that DSRI had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HSBC Mumbai, for guarantee fee charged. The TPO asked the assessee to show cause, vide order sheet entry dt. 09/10/2010, as to why adjustment to the rates of guarantee fee should not be made in pursuance of the order of the earlier assessment year (A.Y.). After considering the submission of the assessee, the TPO observed that no party would provide guarantee without adequate consideration, that charge of guarantee fee could not be generalized, that there could not be a standard parameters for charging guarantee fee, that guarantee fee rate depended on several factors like loan transactions, tenure of loan, conditions of repayment and creditworthiness of the borrower, that quotation produced by the assessee from HSBC bank-Mumbai (@ 0.75% as bench mark) was not acceptable. Referring to his predecessor's order for A.Y. 2006-07 he used the following comparables: Taking the guarantee fee @ 208.33 bppa, he calculated the arm's length as under After receiving the order of the TPO, the AO made upward adjustment of Rs. 2.17 crores to the income of the assessee. 2.1 Aggrieved by the order of the AO, the assessee preferred an appeal before the FAA and made elaborat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the HSBC Bank, Mumbai provided quotation of 0.75% as guarantee fee, that the assessee had adopted comparable uncontrolled price as the most appropriate method to benchmark the ALP of its IT, that the quotation from HSBC, Mumbai was considered as valid comparable, that the TPO considered average guarantee fee charged by Standard Chartered Bank (3%) and FMO Netherlands (2.5%) in addition to the quotation obtained by the, that accordingly he computed guarantee fee at the rate of 2.0833%, that he computed ALP of financial guarantee at Rs. 3.40 crores, that after considering fee received by assessee, he recommended adjustment of Rs. 2.17 crores, that the FAA deleted the addition made by TPO/AO. 2.3.1 We find that in the case of Everest Kento Cylinder Ltd. (supra) the Hon'ble Bombay High Court has dealt the identical issue and had decided it against the rev. We are reproducing the question framed by the Hon'ble Court and relevant portion of the judgment, which reads as under:- ....the considerations which applied for issuance of a corporate guarantee are distinct and separate from those in a case of bank guarantee and, accordingly, the commission charged could not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 101, that the rate of interest had to be applied at 5.07 per annum from Espharma - Germany. The same rate of in the took as benchmark in view of geographical location. Accordingly he calculated rate of interest as under:- After receiving the order of TPO, the AO made upward adjustment of Rs. 72.13 lakhs under the head buy-back shares by WEL. 3.1 Aggrieved by the order of the AO, the assessee preferred an appeal before the FAA and made elaborate submissions. After considering the available material, he held that the TPO held that buy back of shares was a sham transaction, that he considered the same to be a loan transaction, that the TPO further held that interest rate of 5.07% was reasonable rate for charging interest for the transaction, that the TPO had not disputed the valuation of shares either at the time of acquisition of sales by the assessee or at the time of the sale of shares, that the shares were valued by professionals as per the exchange control legislation, that restructuring of business investment in subsidiaries or disinvestment from subsidiaries was a common business activity of multinational entities, that the disputed transaction was related to buy bac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as no justification for the TPO to charge notional interest. As the order of the FAA does not suffer from any legal or factual infirmity, so, confirming the same, we decide ground No. 2 against the AO. 4. Ground No. 3 deals with allocation of R D expense to the 80-IB and 80-IC qualifying units. It was brought to our notice that identical issue was decided by the Tribunal against the AO while adjudicating the appeal for the A.Y. 2005-06 (ITA/7383/M/2010 dated 13/04/2012). We are reproducing the relevant portion of the order and it reads as under: 10. Ground No. 1: regarding allocation of R D expenses and interest expenses to units eligible for deduction U/s. 80 IB, is covered in favour of the assessee by the order of the Tribunal in the assessee's own case for the assessment year 2001-02, 2002-03 and 2003-04 of IT 3991/M/2005 the Tribunal has at para No. 14 of this order held as follows: After considering the submissions and perusing other material on record, WE found that the assessee deserves to succeed in this ground. WE have noted that the assessee is claiming deduction on account of R D for last so many years and they were not disturbed neither any disal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, allocation of the proportionate expenses at the end of the Assessing Officer, in our considered view were not justified. The CIT(A) was also not justified in confirming the action of the Assessing Officer. In case of Ponds India Ltd., decided in the Tribunal vide its order dt. 28-05-2002 has held as under: The next issue is with reference to the claim of deduction Under Sections 80HH and 80-I by considering part of the head-office expenses in working out the profit of the industrial unit. The head office of any industry, which has units spread over at various places, monitors the requirements of finances and such other actions that are necessary in running of the unit as such. These are administrative expenses though related and relatable to the various units and also be said to be expenditure incurred in the general management of the business as such. From this stand point of view. We are of the opinion that the assessee was justified in making the claim that the head office expenses should not be treated as incurred on any unit on any proportion, namely turnover or any other basis. WE accordingly uphold the claim of the assessee . In the case of Vanaz Engin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gly, we set aside the order of lower authorities on this issue and the Assessing Officer is directed to re-compute the deduction accordingly . Respectfully following the same we uphold the order of the CIT (A) on the issue and dismiss this ground of appeal. Considering the above, ground No. 3 is decided against the AO. 5. Next ground of appeal is about allowing the claim of weighted deduction, made by the assessee u/s. 35(2AB) of the Act. In order to examine the correctness of the claim necessary details of expenses, incurred by the assessee for in-house scientific research, were obtained by the AO. He observed that the deduction u/s. 35 was already available to the assessee in respect of expenditure on scientific research, that deduction u/s. 35(2AB) was introduced with a very specific purpose i.e., to promote in-house research and development, that if deduction @ 150% was to be allowed on expenditure outside the assessee's unit the whole purpose of giving incentive would be defeated, that the assessee had not carried out any clinical trials/bio-studies, that it had not created any infrastructure/facility, that all trials/studies were conducted through third parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted by the assessee. It was stated that assessee had made the application to the prescribe authority in time. 6.1 It was brought to our notice that other appeal filed by the AO is about the same issue. Therefore, we would deal with the issue of Form No. 3CL in later part of our order. 7. Ground No. 6 deals with deleting the addition of Rs. 5.55 crores, made by AO u/s. 40(a)(i) of the Act. During the assessment proceedings, the AO found that the assessee was making payment to non residents on account of pilot-bio study and clinical research, that it had not deducted tax at source before making payment. He directed assessee to file details in that regard and asked it as to why the expenditure should not be disallowed u/s. 40(a)(i) of the Act. After considering the submission of the assessee, he held that issue of deducting tax at source had to be decided by the international taxation division, that in the AYs. 2005-06 and 2006-07, the AO of international taxation had passed order u/s. 201 of the Act and 201(1A), that the assessee was treated as an assessee in default. Referring to those orders, he made a disallowance of Rs. 5,55,47,000/- u/s. 40(a) of the Act. 7.1 Befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... units. As per the provisions of section 35(2AB) in-house R D facility has to be approved by the prescribed authority i.e. govt. of India Ministry of Science and Technology, DSIR. At the time of assessment the assessee had not received approval from DSIR, so, the AO asked the assessee to explain as to why deduction claimed by it should not be disallowed. After considering the submission of the assessee, dtd. 16/11/2009, the AO disallowed claim made by the assessee u/s. 35(2AB). Vide its letter dt. 15/12/2012 the assessee filed an application for rectification u/s. 154 of the Act and requested him to allow the deduction. However, the AO rejecting the application and held that no mistake was apparent from record. 8.1 Aggrieved by the order of the AO, the assessee filed appeal before the FAA and made elaborate submissions. After considering the available material, the FAA held that for claiming deduction the approval of the prescribed authority, in the Form No. 3CL was required to be enclosed with the return of income, that the assessee had applied for such approval, that till date of assessment order it did not receive the approval from prescribed authority, that AO had disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cord. ......... During the year under consideration, the assessee claimed research and development expenditure u/s. 35(2AB) of the Act, relating to its in-house division, amounting to Rs. 16,41,80,309/-. The assessee claimed weighted deduction u/s. 35(2AB) of the Act @ 150% of the capital expenses of Rs. 3,76,48,919/- and revenue expenses of Rs. 7,18,04,620/-. The ld. Assessing Officer disallowed the claimed deduction on the plea that the assessee did not submit the approval from the prescribed authority. On appeal, before the ld. Commissioner of Income tax (Appeals), the issue was decided in favour of the assessee. The relevant finding/conclusion is reproduced hereunder for ready reference from the impugned order. I have considered the facts of the case and submission of the assessee. It was beyond the control of the assessee to file Form No. 3CL, because it is issued by the Secretary, DSIR, Government of India and it was not issued till the time of assessment order i.e. 30/12/2011 because Form No. 3CL is dated 30/03/2012, a copy of which has been filed as per Form No. 3CL and Form No. 3CM, assessee is eligible for weighted deduction u/s. 35(2AB). Therefore, A.O. is directed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pected to be too technical rather is to take practical approach under the facts narrated hereinabove, because, it was beyond the control of the assessee to direct the authority to submit the prescribed form on Form No. 3CL to the Department. Section 35(2AB) of the Act, nowhere suggest that the date of approval of research and development facility will be cut off date for eligibility of weighted deduction under this section on expenses incurred from that date onwards; Once facility is approved, entire expenditure so incurred on development of research and development facility has to be allowed for such weighted deduction u/s. 35(2AB) of the Act and thus it would be sufficient to hold that assessee has fulfilled the conditions as laid down in the section. Even otherwise, the ld. Commissioner of Income tax (Appeals) directed the Assessing Officer to verify the Form No. 3 CM and 3CL and then allowed weighted deduction, as claimed by the assessee. We find no infirmity in the conclusion and the direction in the impugned order. It is affirmed. Considering the above, we decide Effective Ground of appeal against the AO. As a result, ITA/5557/Mum/2012 is partly allowed and ITA/4156/M ..... 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