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TMI Blog2025 (5) TMI 751X X X X Extracts X X X X X X X X Extracts X X X X ..... ay occurred due to a change in personnel in the tax department. The previous Joint Manager (Taxation), Ms. Parthvi Patel, had tendered her resignation effective 04.02.2022 and the new officer assumed responsibilities only on 26.09.2022. In the intervening period, due to a vacuum in the tax team and inadvertence, the filing of the appeal was missed and was discovered only upon receipt of a penalty notice on 05.01.2023. The appeal was thereafter promptly filed on 19.01.2023. 3. After considering the submissions of the learned Authorised Representative and the material placed on record including the supporting affidavit and resignation documentation, and taking into account the principle of natural justice, we are satisfied that the delay was due to a bonafide and reasonable cause. The learned Departmental Representative (DR) raised no objection for condonation of delay. Hence, the delay of 86 days is condoned, and the appeal is admitted for adjudication on merits. Brief Facts of the Case 4. The assessee company, Atul Ltd., is engaged in the business of manufacturing dyes, specialty chemicals, agrochemicals, bulk drugs, commodity chemicals, and power generation. For AY 2017-18, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er. (c) Ld. AO / DRP erred in law and on facts in confirming addition u/s 14A read with rule 8D(iii) ignoring fact that the disallowance of Rs. 8,25,900/- made by the appellant suo moto is based on scientific calculation and requires no interference. (d) Ld. AO / DRP erred in law and on facts in confirming action of AO to increase book profit u/s 115JB by Rs. 8,26,43,616/- for disallowance made u/s 14A of the Act ignoring submission of the appellant. Tax Effect: Rs. 1,76,37,470/- 3. (a) Ld. AO / DRP erred in law and on facts in confirming addition of Rs. 1,63,54,602/- u/s 35(2AB) of the Act ignoring submission of the Appellants merely on ground that this amount is not approved by DSIR in Form No. 3CL without doubting genuineness of the expenses. (b) Ld. AO erred in law and on facts in not allowing deduction of Rs. 1,63,54,602/- u/s 35(i)(iv) of the Act ignoring fact that appellant is eligible for the same. Tax Effect: Rs. 34,90,334/- 4. Ld. AO / DRP erred in law and on facts in confirming addition of Rs. 3,99,455/- of testing charges u/s 195 for non-deduction of TDS by invoking Explanation 2 to Section 9(1)(vii) of the Act considering same as "fees for technical servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 01.04.2016 and Rs. 513.52 crore as on 31.03.2017. The AO rejected the assessee's contention that no indirect expenditure was incurred for earning such exempt income and invoked Rule 8D(2)(iii), computing 1% of the average value of investments at Rs. 8,34,69,516/-, and after reducing the amount already disallowed suo motu by the assessee, made a net disallowance of Rs. 8,26,43,616/-. This amount was also added back to the book profits under section 115JB while computing minimum alternate tax. 10. The DRP, in its directions, upheld the AO's action in invoking Rule 8D(2)(iii), observing that the assessee's passive investment activity could still attract expenditure, and the disallowance made was in accordance with law. The DRP also affirmed the addition of the disallowed amount to the book profits under section 115JB. 11. During the course of hearing before us, the learned Authorised Representative (AR) took us through the paper book and referred to the extensive documentation submitted before the lower authorities. The AR submitted that the Assessing Officer as well as the DRP erred in invoking Rule 8D to compute disallowance under section 14A without recording any dissatisfact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 59 taxmann.com 1626 (Mumbai - Trib.) and Atul Ltd. [2024] 162 taxmann.com 862 (Ahmedabad - Trib.). - Rule 8D is not mandatory and cannot be applied in a mechanical or automatic manner. The Tribunal in ITC Ltd. [2024] 162 taxmann.com 734 (Kolkata - Trib.) and Shreno Ltd. [2019] 102 taxmann.com 129 (Gujarat) held that discretion vests with the AO, and Rule 8D cannot be applied unless the working of the assessee is shown to be defective. - On the MAT adjustment under section 115JB, the AR submitted that disallowance under section 14A cannot be imported into the computation of book profits unless it is debited to the profit and loss account. Reliance was placed on Atul Ltd. (supra) and Moon Star Securities Trading & Finance Co. (P) Ltd. [2024] 161 taxmann.com 158 (Delhi). 13. The AR also referred to investment analysis placed in the Paper Book which included graphical and tabular details evidencing that a large portion of investments were strategic or made in earlier years, and that no major cash outflow had occurred during the year under appeal for the purpose of earning exempt income. The total exempt income earned during the year as tabulated was Rs. 17.01 crore, and the total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plained with supporting data, including apportionment of board sitting fees, salary allocation of treasury and finance personnel, and indirect administrative expenses. It was submitted that the methodology had been consistently followed and accepted by the Department in earlier years-namely A.Ys. 2006-07, 2011-12, and 2013-14-without any enhancement to the disallowance, thereby invoking the principle of consistency. 17. The Assessing Officer, however, rejected the assessee's computation and invoked Rule 8D, computing a disallowance of Rs. 8.26 crore. The DRP upheld the same. During the course of hearing, the learned DR submitted that the Assessing Officer had recorded dissatisfaction and correctly applied Rule 8D, relying heavily on the Hon'ble Supreme Court's ruling in Maxopp Investment Ltd. [(2018) 402 ITR 640 (SC)] for the proposition that investments held for strategic purposes are not outside the purview of section 14A. On perusal of the assessment order, however, we find that there is no specific and objective recording of dissatisfaction as mandated under section 14A(2). The Assessing Officer merely proceeded on a presumption that since investments were large and strategic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 115JB(2) provides for addition of the amount of expenditure relatable to any income to which section 10 (other than provisions contained in clause 38 thereof) or section 11 or section 12 apply. In this regard, we draw support from the coordinate bench's decision in assessee's own case for A.Y. 2010-11, where in paragraphs 46 to 51, the Bench categorically noted that the provisions of section 115JB are self-contained and that disallowance made under section 14A read with Rule 8D does not automatically warrant an adjustment to the book profit unless specifically falling within the scope of Explanation 1. It is pertinent to note the decision of the Hon'ble Supreme Court in the case of Indo Rama Synthetics (I) Ltd. [2011 SCC OnLine SC 121], to understand the nature and scope encompassed in Section 115JB of the Act. Paragraph no.14 of the said decision succinctly encapsulates the position of Section 115JB in the following words: - "14. It is, thus, clear that what is ―book profit‖ has been defined and explained in the above explanation. Section 115-JB is a self-contained code. It applies notwithstanding other provisions of the Act. There is no scope for any allowances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 35(2AB), stating that the amount was not approved or certified by DSIR and, hence, not eligible for deduction. No adverse findings were recorded with respect to the genuineness of the expenditure or its nexus with the assessee's R&D activities. 27. The assessee, in its submissions before the DRP, explained that the entire expenditure pertained to scientific research undertaken in the approved in-house R&D facility and was incurred during the period for which DSIR recognition was valid. It was argued that absence of this amount in Form 3CL may be procedural or due to timing of certification, but the deduction should not be denied when the core conditions under section 35(2AB) stood satisfied. It was further emphasized that the amount was incurred wholly and exclusively for the purpose of scientific research and that DSIR has not withdrawn the approval or disputed the nature of the expenditure. The assessee also made an alternate plea that even if the weighted deduction under section 35(2AB) was not allowed, the expenditure of Rs. 1,63,54,602/- be allowed as deduction under section 35(1)(iv) read with section 35(2), which provides for 100% deduction of capital expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment order, disallowed the claim altogether by holding that it is not of capital nature without any verification or appreciation of the evidence already on record. This action is contrary to the DRP's direction and inconsistent with the factual position. Accordingly, it was submitted that the full claim of Rs. 73,20,990/- must be allowed under section 35(1)(iv). In the alternative, even if some portion is held ineligible under section 35(2AB), it must be allowed under section 35(1)(iv) at 100%, as per the express statutory scheme. 29. The learned DR relied on the assessment order and DRP directions, contending that the Assessing Officer rightly restricted the deduction under section 35(2AB) to the amount approved by the prescribed authority (DSIR) in Form 3CL. It was submitted that, as per Rule 6(7A) of the Income-tax Rules and the amended provisions of section 35(2AB) effective from 01.04.2016, the weighted deduction is allowable only to the extent approved by the DSIR. The DR emphasised that the explanatory notes to the Finance Act clearly lay down that the deduction is subject to fulfilment of prescribed conditions and approval by the competent authority. Since the DSIR e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the assessee's contentions. Section 35(1)(iv), read with section 35(2)(i), allows deduction for capital expenditure (not being expenditure on land) incurred for scientific research related to the assessee's business, even if the expenditure is not eligible for weighted deduction under section 35(2AB). This provision is substantive in nature and does not depend on approval from the DSIR or the contents of Form 3CL. 34. On a perusal of the record, we note that the assessee has furnished a detailed item-wise listing of its R&D capital assets in Annexure I to Form 3CLA (refer PB page 398), including descriptions, amounts, and dates of capitalization. The reconciliation statement provided by the assessee also demonstrates that the amount disallowed by the AO corresponds to this detailed claim. There is no material brought on record by the AO to dispute the nature or genuineness of this expenditure. The summary rejection of the claim in the final order, without any factual inquiry or contradiction of the evidence, cannot be sustained. We also note that the AO has not doubted the R&D facility itself, which was duly approved by DSIR, nor has there been any finding that the capital exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO's view that the payment amounted to "fees for technical services" taxable under section 9(1)(vii), and that the assessee had failed to deduct tax thereon. Accordingly, the final assessment order sustained the disallowance of Rs. 3,99,455/- under section 40(a)(i), forming the subject matter of Ground No. 4 in the present appeal. 38. During the course of hearing, the learned AR pointed out the detailed submission made before DRP where it was contended that the said amount represented testing charges paid to a non-resident laboratory located outside India for certification and quality testing services in respect of exported products. The services were rendered entirely outside India, and no part of such services was performed in India or involved any technical personnel deputed by the non-resident to India. The AR submitted that the payment in question did not involve any transfer of technical knowledge, experience, skill, knowhow, or processes, nor did it enable the assessee to apply such knowledge independently. The services availed were in the nature of standardised testing and certification carried out abroad for compliance with overseas client requirements and quality specif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Analytics (France) 69,170.28 2 Atul Europe Ltd. (UK) 39,494.04 3 Commodity Inspection Services BV (Netherlands) 99,952.05 4 Bioagri Laboratories Ltda. (Brazil) 1,90,839.52 Total Disallowance 3,99,455.89 42. It is the consistent case of the assessee that these testing services were rendered and utilized wholly outside India for the purpose of meeting export compliance norms of foreign jurisdictions, and therefore, in view of section 9(1)(vii)(b) of the Act, the income does not accrue or arise in India and is not chargeable to tax. Accordingly, the assessee contends that no deduction of tax at source was warranted under section 195 and hence, no disallowance under section 40(a)(i) is called for. 43. The Assessing Officer, however, held that the services fall within the scope of "fees for technical services" (FTS) as defined in Explanation 2 to section 9(1)(vii) and since the assessee is a resident, tax should have been deducted under section 195. The DRP affirmed this view relying on the reasoning that the assessee, being a resident, utilized the services for business carried out from India and thus the exception i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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