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TMI Blog2023 (4) TMI 1415X X X X Extracts X X X X X X X X Extracts X X X X ..... ighted deduction of INR 98,93,734/- under Section 35(2AB) of the Act. [Ground No. 2 to 2.5] (c) Disallowance of INR 2,00,201/- under section 14A of the Act. [Ground No. 3 to 3.3] (d) Addition to Book Profit under Section 115JB of the Act of the Act on account of disallowance under Section 14A of the Act amounting to INR 2,00,201/-. [Ground No. 4 to 4.3] (e) Addition to Book Profits under Section 115JB of the Act on account of disallowance of weighted deduction under Section 35(2AB) of the Act amounting to INR 98,93,734/-. [Ground No. 5] 3. Brief facts of the case are that the Appellant is a company engaged, inter alia, in manufacturing in the field of natural APIs and novel delivery systems for nutrients and active ingredients. The Appellant filed its return of income for the Assessment Year 2017-18 declaring total loss of INR 31,42,58,126/- under the normal provisions and Book Loss of INR 1,49,20,651/- under Section 115JB of the Act. Thereafter, the Appellant filed a revised return on 29/03/2019 declaring loss of INR 25,15,97,422/-. 4. The case of the Appellant was selected for scrutiny and notice under Section 142(1)/143(2) were issued to the Appellant. During the assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t had also carried out benchmarking analysis considering external TNMM as the most appropriate method. The margin of comparables as selected in transfer pricing study report of the Appellant for external TNMM on corroborative basis came to 13.54% as against margin of the Appellant which stood at 15.18%. Therefore, it was contended by the Appellant that even by adopting external TNMM the transaction of sale/export of goods by the Appellant to its AE was on arm's length basis. However, the TPO, rejected TNMM method and applied Comparable Uncontrolled Price (CUP) Method as the most appropriate method and taking the price at which products were sold by the Appellant to non-AEs the TPO applied internal CUP to determine ALP in respect of 12 products and arrived at aggregate transfer pricing adjustment of INR 16,59,51,699/-. The Appellant, in the objection filed before DRP, justified rejection of CUP method in the transfer pricing study report on the ground that the transaction between the AE and non-AE were not comparable on account of difference such as, difference in geographical location, volume of sales, currency of transaction, commission and sales promotion incurred. For the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ternational transaction. In the present assessment year, the Transfer Pricing Officer noted that the assessee has adopted transactional net margin method for determining the arms length price for export of finalised goods to the Associate Enterprises. During the course of assessment proceedings, the Transfer Pricing Officer proceeded with the same and also asked the assessee to provide an updated margin of the comparable selected. The updated margin was given to the Transfer Pricing Officer. From the computation of updated margin also, the PLI of the assessee come to 15.21% which was higher than the PLI of the two comparable companies. Hence, from this analysis of updated comparables also, the transaction was found to be at arm's length. At this juncture, the Transfer Pricing Officer changed his tracks. He observed that no verifiable data has been provided to substantiate the method used. He further held that CUP would be a more appropriate method to benchmark the sale transaction. The assessee objected to the same. In the objections, the assessee also relied upon the OECD Guidelines and the ITAT decision in the case of Welspun Zucchi Textiles Ltd. v Asstt. CIT [2014] 151 ITD 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ethod of determining of arm's length price. Now once an appropriate method for determining the arm's length price has been chosen and accepted by the Revenue consistently over a number of years, there has to be some cogent reason to make it departure from the consistent method. We do not find that any case has been made out by the Transfer Pricing Officer or the DRP that there was an error committed earlier when the TNMM method was chosen and approved. The Transfer Pricing Officer while justifying the change stated that in T.P. report assessee has benchmarked the transaction under TNMM, no verifiable data has been provided to substantiate the method used. Hence, from the above discussion, we find that no cogent reason has been pointed out by the authorities below that the TNMM method applied earlier was not in accordance with the mandate of law as above. It is settled law that res judicata does not apply to taxation proceedings but it has fairly often been held by the higher courts including by the Hon'ble Apex Court that the consistency should be maintained in the assessment proceedings. A consistently applied method can be changed only if there is a change in facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transactions were at Arm's Length. No infirmity has been pointed out by any of lower authorities in assessee's methodology. Therefore, respectfully following the earlier order of Tribunal in assessee's own case, we hold that TNMM method as adopted by the assessee was appropriate methodology and therefore, no TP adjustment would be warranted on these transactions. By deleting the same, we allow ground no.1 of the appeal." (Emphasis Supplied) 11. As noted by the DRP, the facts and circumstances in which transfer pricing addition was made during the Assessment Year 2017-18 before us are identical to those prevailing in Assessment Year 2012-13 to 2014-15. Therefore, respectfully following the above decision in the case of the Assessee, we hold that TNMM method as adopted by the Assessee was the most appropriate method for benchmarking the international transaction of sale/exports of goods. Accordingly, transfer pricing adjustment of INR 16,59,51,699/- made by the Assessing Officer is set aside, and the issue is remanded back to the file of Assessing Officer for determination of ALP of the transaction of export of finished goods by the Appellant to its AE (i.e. Omni Active Hea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Authority. Once the Research & Development Facility is approved by the Prescribed Authority, then the weighted deduction for the expenditure incurred by the Assessee has to be allowed under Section 35(2AB) of the Act. The Assessing Officer, therefore, erred in concluding that weighted deduction for Research & Development Expenditure could be allowed only when the research & development facility as well as the Research & Development Expenditure incurred by an assessee is approved by the Prescribed Authority. In this regard, he relied upon the language used in proviso to Section 35(2AB) of the Act and drew our attention to the language used in Section 35(1)(i), 35(1)(iia), 35(2A), 35(2AA) & 35(2B) of the Act. 17. Per Contra, the Ld. Departmental Representative relied upon the findings of the DRP and Assessing Officer. He submitted that the Prescribed Authority need not approve the entire expenditure claimed by the Assessee, and may, in its discretion, specify lesser amount of expenditure to be claimed by an assessee while issuing certificate in Form 3CL. Weighted deduction under Section 35(2AB) of the Act is allowable only in respect of Research & Development Expenditure approved by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontinuation thereto. Before granting the approval, the prescribed authority has to satisfy itself about the genuineness of activities and make enquiries in this regard. Under sub-section (2B) to section 35 of the Act, a company engaged in the specified business as laid there on, if it incurs expenditure on scientific research or in-house Research & Development facility also needs to be approved by the prescribed authority, is entitled to deduction, provided the same is approved by the prescribed authority. 39. Now, coming to sub-section (2AA) to section 35 of the Act, it talks about granting of approval by the prescribed authority but the approval to the expenditure being incurred 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for weighted deduction under sub-section 2AB of section 35 of the Act in part B of form No.3CL. In other words the quantification of expenditure has been prescribed vide IT (Tenth Amendment)Rules, 2016 w.e.f. 01.07.2016. Prior to this amendment, no such power was with DSIR i.e. after approval of facility. 41. Under the amended provisions, beside maintaining separate accounts of R & D facility, copy of audited accounts have to be submitted to the prescribed authority. These amendments to rules 6 and 7a are w.e.f. 01.07.2016 i.e. under the amended rules, the prescribed authority as in part A give approval of the facility and in part B quantify the expenditure eligible for deduction 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 ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bed Authority has only approved part of expenditure in Form No. 3CL. The appeal before us pertains to Assessment Year 2017-18. Therefore, as per the above decision of the Tribunal, for the assessment year before us the weighted deduction of Research & Development Expenditure would be allowed subject to, both, the facility as well as the quantum of expenditure having been approved by the Prescribed Authority since the procedure/methodology for the quantification of expenditure had been prescribed by way of amendment brought by the Income Tax (Tenth Amendment) Rules w.e.f. 01.07.2016. 21. In this regard, it would be pertinent to refer to the provisions contained in amended Rule 6, as applicable to the assessment year before us. Rule 6(4) provides that an application for obtaining approval under Section 35(2AB) of the Act is required to be filed in Form 3CK. Rule 6(5A) provides that in case the Prescribed Authority is satisfied that the conditions specified Section 35(2AB) of the Act and Rule 6 are satisfied, the Prescribed Authority shall pass in order in writing in Form 3CM. One of the conditions prescribed in Rule 6(7A) for grant to approval for expenditure under Section 35(2AB) i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and audit thereof and furnishing of reports in such manner as may be prescribed' was substituted. The aforesaid amendment to Clause 3 of Section 35(2AB) of the Act, thus, mandated the assessee to furnish the relevant information in the form of a report in prescribed Form No. 3CLA as a pre-condition to claiming deduction under Clause (1) of Section 35(2AB) of the Act. 22. On examining the various Clauses of Section 35(2AB) of the Act, both, prior to, and post amendments, we find that the amendments were made in the provisions contained in Section 35(2AB) of the Act, as well as amendments in the corresponding Rule 6 and the change in the requirement to file/furnish the prescribed forms, it becomes clear that amendments/changes were made to put in place a framework for approval of the in-house research and development expenditure in addition to the approval for the in-house research and development facility as has been concluded by the Tribunal in the case of Cummins India Ltd. (supra). In our view, the amendments made to the provisions of Section 35(2AB) and Rule 6 clearly being out the legislative intent to allow deduction for expenditure approved by the Prescribed Authority. Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Year 2012-13, and therefore, disallowance of INR 2,00,201/- was made by the Assessing Officer in the Final Assessment Order. 26. Being aggrieved, the Appellant has preferred appeal on this issue before us. 27. We have considered the rival submissions and perused the material on record. The DRP had rejected the objections of the Appellant by following the order of DRP for the Assessment Year 2012-13. We find that the Tribunal has, while deciding identical issue in the appeal for the Assessment Year 2012-13 (ITA No. 1844 & 1845/Mum2022), held as under: "36. On this issue, the Assessing Officer noted that the assessee company has invested in shares to the tune of Rs.2,42,85,000/-. He noted that no disallowance u/s. 14A has been done. He rejected the assessee's submission that the assessee has not earned any exempt dividend income by placing reliance upon the ITAT decision in the case of Cheminvest Ltd. v. ITO [2009] 121 ITD 318 (Delhi) (SB). The Assessing Officer proceeded to apply Rule 8D and made the disallowance of Rs.7,41,654/-. 37. Against the above order, the assessee filed objection before the TRP and the DRP granted part relief directing as under: 8.8 In view of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Appellant are allowed. 29. Ground No. 4 to 4.3 are directed against the addition to Book Profit under Section 115JB of the Act on account of disallowance under Section 14A of the Act amounting to INR 2,00,201/. Since we have deleted the disallowance of INR 2,00,201/- made under Section 14A of the Act while computing income under the normal provisions of the Act, the question of making addition of the same while computing book profits under Section 115JB of the Act does not arise. Accordingly, addition of INR 2,00,201/- made by the Assessing Officer while computing the Book Profits under Section 115JB of the Act is deleted. Assessing Officer directed to compute the amount of disallowance under Section 14A of the Act to be added to the Book Profits in terms of Section 115JB of the Act read with Explanation 1(f) thereto as per the decision of the Special Bench of the Tribunal in the case of Assistant Commissioner of Income Tax, Circle 17(1), Delhi vs. Vireet Investments Ltd.[2017] 58 ITR(T) 313 (Delhi - Trib.) (SB)/[2017] on the basis of audited financial statements of the Appellant. In terms of the aforesaid, Ground No. 4 to 4.3 raised by the Appellant are allowed for statistic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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